Our So-Called Foreign Policy: A Narrow-Minded Wake-Up Call on China’s Tech Drive

Tags

artificial intelligence, Barack Obama, budget, China, mercantilism, National Science Foundation, Our So-Called Foreign Policy, research and development, technology, technology transfer, Trade, trade surpluses, Trump

“#SMH” (Shaking My Head) is one of my favorite Twitter hashtags, and it’s the perfect reaction to a new post on FOREIGNPOLICY.com on the growing technological challenge being posed to the United States by China, and on its frightening national security implications. The post has me shaking my head, and should have you shaking yours, because for all the useful information it contains on this critical subject, it completely misses the much bigger, much more important picture. And it misses it because the authors are so transparently determined to lionize former President Obama’s record in this regard, and vilify President Trump’s – though few of the facts warrant this conclusion.

The post is useful mainly for calling attention to China’s intensifying effort to establish global superiority in artificial intelligence, and to the Trump administration’s budget policies, which look oblivious to China’s efforts because they don’t provide adequate resources for federal research efforts capable of keeping the United States ahead.

I say “look” because the budget situation may not be as dire as strongly suggested by the authors. Specifically, it’s true that the administration has proposed cutting funding for the National Science Foundation’s artificial intelligence programs by 10 percent. At the same time, as made clear by the source they relied on, “the proposed budget does call for more spending on defense research and some supercomputing.”

Much more misleading is the post’s portrayal of the Obama administration as nothing less than Churchillian in sounding the tocsin. After all, the Obama reports the authors cite as evidence of his foresight on the subject came out at the very end of his presidency. At least as important, they gloss over major non-budgetary developments crucial to understanding China’s progress.

As they themselves admit, for instance, Chinese tech companies have established presences in Silicon Valley because they believe that “by rotating Chinese staff to Silicon Valley and American staff to Chinese campuses, they can accelerate the timeline for reaching parity with the United States in AI technology and depth of talent.” Under whose administration do the authors believe this practice started? And why do they think the Chinese were confident they were so free to proceed?

Also completely ignored: Throughout his presidency, Mr. Obama did absolutely nothing as American companies continued their longstanding efforts to transfer advanced technologies to Chinese partners voluntarily, or were forced to share this knowhow due to Chinese threats to shut them out of its market. Nor did he move to prevent these firms from investing in Chinese companies working on tech products and services with clear defense implications, or to help them cope with Beijing’s demands that they pony up or else.

And let’s not forget: The Obama administration made only the most token efforts to combat the predatory Chinese practices that enabled Beijing to amass immense trade surpluses with the United States; therefore to further fuel the growth of its market and make it that much more difficult for American companies to resist tech extortion demands; and to finance its own multi-billion technology development efforts with these handsome trade profits. Indeed, Mr. Obama staunchly opposed Congressional efforts to punish China for its most important mercantile policy:  currency manipulation.  

So I share the authors’ view that federal research and development efforts have been crucial to establishing America’s intertwined global technology and military leadership, and their hope that President Trump will reject the conservative anti-government dogma that justifies virtually every type of budget cut outside traditional defense or law enforcement spending. But the idea that America’s approach to the Chinese tech challenged was remotely up to snuff before Mr. Trump’s election not only fails the test of historical accuracy. It has blinded them to all the other policy changes needed to ensure that the United States stays Number One.

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(What’s Left of) Our Economy: Mixed Results from a Deep, Dynamic Dive into U.S.-China Trade Figures

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advanced manufacturing, China, commodities, exports, high value manufacturing, imports, manufacturing, Trade, trade balances, Trade Deficits, trade surpluses, {What's Left of) Our Economy

On Tuesday, RealityChek performed its first deep dive into the U.S.-China trade figures for the first half of 2017, and how they compare with the performance of the January-to-June, 2016 period. Today. It goes dynamic, looking through that same, detailed industry-by-industry lens which sectors have seen the biggest improvements and worst deteriorations in their exports to and imports from China, and in their trade balances with the PRC.

The same technical considerations that applied to Tuesday’s static figures apply to those below. The categories presented are from the federal government’s prime system for slicing and dicing the U.S. economy: the North American Industry Classification System (NAICS). And the level of detail is NAICS’ most granular – the six-digit level. It’s especially revealing because it does the best job of distinguishing between finished goods and parts and components and other inputs for these goods – which matters greatly because so much international trade is conducted in these intermediates. Because of data limitations, however, the aerospace results shown below are five-digit statistics, which combine finished goods and their parts and components.

In addition, because services trade statistics come out so much later than goods trade statistics, only the latter are presented here.

Finally, because today’s emphasis is on rates of change, I’ve confined my research to the top 50 industries for all the metrics examined below, in order to prevent the results from being distorted by big percentage increases or decreases for sectors with very low export, import, and trade balance numbers. Fortunately, because U.S. trade is so highly concentrated, the top 50 lists are highly representative of the nation’s trade as a whole.

To begin, here are the fastest growing U.S. merchandise exports to China between the first half of last year and the first half of this year:

1. Crude oil & natural gas: +3,250.25 percent

2. Wheat: +251.29 percent

3. Primary smelted non-ferrous metals: +194.76 percent

4. Cotton: +149.26 percent

5. Miscellaneous engine equipment: +72.10 percent

6. Liquid natural gas: +66.23 percent

7. Petroleum refinery products: +58.41 percent

8. Motor vehicle transmission & power train parts: +52.84

9. Plastics and rubber industry machinery: +45.41 percent

10. Pharmaceuticals: +45.25 percent

Although four of the ten items are high-value manufactures, which generate outsized benefits for the American economy in terms of high wage job creation, productivity growth, and innovation, they dominate the bottom of this list. And their growth rates are considerably lower than those for the commodities and low-value products so prominent at the top of the list.

Encouragingly, though, the China list is a higher-value list than that for U.S. merchandise exports as a whole (presented right below). And by and large, the advance manufactures sectors above are increasing their exports to China much faster than the leaders worldwide are increasing their exports globally.

1. Non-anthracite coal & petroleum gases: +180.9 percent

2. Crude oil & natural gas: +109.0 percent

3. Cotton: +89.9 percent

4. Liquid natural gas: +62.4 percent

5. Semiconductor manufacturing equipment: +58.2 percent

6. Primary smelted non-ferrous metals: +54.0 percent

7. Soybeans: +27.6 percent

8. Petroleum refinery products: +26.1 percent

9. Motor vehicle engines & engine parts: +19.2 percent

10. Corn: +18.7 percent

Now for the goods categories that performed worst in boosting their exports to China:

1. Industrial valves: -32.46 percent

2. Miscellaneous grains: -30.76 percent

3. Broadcast & wireless communications equipment: -20.89 percent

4. Electricity measuring & testing instruments: -20.48 percent

5. Telecomms equipment: -17.58 percent

7. Aerospace: -10.74 percent

8. Photo films, plates, paper & chemicals: -7.9 percent

9. Irradiation apparatus: -4.87 percent

10. Semiconductors & related devices: -2.67 percent

Worrisomely, this list is completely dominated by advanced manufactures. What about the worst performing U.S. global export sectors?  Here they are:

1. Medicinal & botanical drugs & vitamins: -25.4 percent

2. Turbines & turbine generator sets: -15.1 percent

3. Computer parts: -9.4 percent

4. Autos and light trucks: -8.3 percent

5. Telecomms equipment: -6.6 percent

6. Electricity measuring & test instruments: -5.9 percent

7. Aerospace: -4.0 percent (5-digit, due to reporting limits)

7. Surgical and medical instruments: -1.1 percent

8. Electro-medical apparatus: -0.9 percent

9. Industrial valves: -0.1 percent

9. Computers: -0.1 percent

10. Surgical appliances & supplies: +0.2 percent

10. Analytical laboratory instruments: +0.2 percent

There’s considerable overlap between this list and the China list. But whereas the China export winners generally are increasing their sales to China much faster than the best global export performers are increasing their worldwide sales, the biggest China export losers are seeing bigger sales declines than the biggest worldwide export losers.

Next let’s look at those merchandise sectors whose trade balances with China improved the most from January-June, 2016 to January-June, 2017. These trade balance figures matter decisively, of course, because standard economic theory holds that countries that trade products most successfully will become the countries that make these products most successfully. That’s how trade is supposed to create the most efficient possible global patterns of production. In this list, the industries marked with asterisks are those whose trade deficit with China decreased:

1. Semiconductors & related devices: $190 million deficit to $615 million surplus

2. Crude oil & natural gas: +3,250.38 percent

3. Non-anthracite coal & petroleum gases: 1,537.71 percent

4. Niscellaneous metal ores: +807.54 percent

5. Smelted non-ferrous metals: +519.07 percent

6. Wheat: +251.43 percent

7. Cotton: +149.26 percent

8. Treated wood products: +139.62 percent

9. Miscellaneous women & girls’ outerwear: +131.72 percent*

10. Heavy-duty trucks & chassis: +105.11 percent

Here are the goods sectors that have improved their global trade balances the most on a year-to-date basis:

1. Primary smelted non-ferrous metals: $5.00 billion deficit to $0.76 billion surplus

2. Relays and industrial controls: $1.27 billion deficit to $2.26 billion surplus

3. Semiconductors: $1.48 billion deficit to $1.01 billion surplus

4. Non-costume jewelry: +574.44 percent

5. Drawn/rolled/extruded miscellaneous non-ferrous metals: +305.69 percent

6. Miscellaneous basic inorganic chemicals: +300.00 percent

7. Non-anthracite coal and petroleum gases: +224.29 percent

8. Medicinal and botanical drugs and vitamins: +104.35 percent

9. Cotton: +91.09 percent

10. Semiconductor manufacturing equipment: +64.82 percent

Both lists are pretty evenly split between higher value and lower value sectors, which looks like a wash for America’s global competitiveness.

The list of America’s fastest growing goods imports from China features mostly manufactured products as well, but few would be characterized as cutting edge:

1. Switchgear & switchboard apparatus: +278.27 percent

2. Printed circuit assemblies: +49.98 percent

3. Aluminum sheet, plates, and foils: +39.64 percent

4. Goods returned from Canada: +28.75 percent

5. Broadcast & wireless communications equipment: +26.74 percent

6. Miscellaneous basic organic chemicals: +23.42 percent

7. Miscellaneous special classification provisions: +22.62 percent

8. Lighting equipment: +18.83 percent

9. Telecomms equipment: +18.20 percent

10. Miscellaneous manufactures: +16.85 percent

And here’s the global counterpart of this list:

1. Switchgear and switchboard apparatus: +174.3 percent

2. Crude oil and natural gas: +53.7 percent

3. Printed circuit assemblies: +44.2 percent

4. Iron and steel: +41.3 percent

5. Primary aluminum: +38.6 percent

6. Non-diagnostic biological products: +29.4 percent

7. Petroleum refinery products: +22.2 percent

8. Miscellaneous non-citrus fruits: +20.8 percent

9. Motors and generators: +13.7 percent

10. Lighting equipment: +12.7 percent

10. Surgical appliances and supplies: +12.7 percent

According to my count, both lists are comprised mainly of high-value products (six for the China imports and seven for the global imports). More important, both import lists contain more high value products than the lists of fastest-growing American exports to China and worldwide.

Interestingly, the list of sectors where imports from China have fallen fastest contains lots of low-value goods, along with electronics ranging from consumer sectors to semiconductors. Moreover, in every one of the sectors, these imports from China have fallen faster than U.S. imports worldwide (indicated inside parentheses), strongly indicating that America-based businesses have been changing their sourcing practices.:

1. Miscellaneous women & girls’ outerwear: -56.72 percent (-51.5 percent)

2. Tires & tire parts: -30.04 percent (-0.9 percent)

3. Semiconductors & related devices: -29.28 percent (-6.4 percent)

4. Computer parts: -19.17 percent (-12.3 percent)

5. Women & girls blouses & shirts: -19.02 percent (-12.1 percent)

6. Audio & video equipment: -14.95 percent (-5.3 percent)

7. Computer storage devices: -12.31 percent (-3.1 percent)

8. Miscellaneous footwear: -8.24 percent (-4.9 percent)

9. Women & girls’ dresses: -6.71 percent (-1.9 percent)

10. Men’s footwear (non-athletic): -4.45 percent (-0.5 percent)

How does this list compare with that of those U.S. global goods imports with the slowest growth rates between the first six months of last year and the first six months of this year? Here’s that list:

1. Medicinal and botanical drugs and vitamins: -39.4 percent

2. Computer parts: -12.3 percent

3. Women’s and girls’ blouses/shirts: -12.1 percent

4. Primary smelted non-ferrous metals: -8.8 percent

5. Men’s and boys non-work shirt shirts: -8.3 percent

6. Non-costume jewelry: -6.7 percent

7. Semiconductors and related devices: -6.4 percent

8. Audio and video equipment: -5.3 percent

9. Jewelers materials/lapidary work: -4.1 percent

10. Aerospace products: -3.4 percent

Both lists look like oddly mixed bags. But whereas the China list contains just one industry widely considered to be crucial to America’s economic future, along with its national security (semiconductors), the global list includes aerospace along with semiconductors.

Finally, where have America’s fastest-growing merchandise trade deficits with China been? The list below shows a highly diverse mix of industries. The asterisked sectors are those in which trade surpluses have decreased:

1. Switchgear & switchboard apparatus: +365.30 percent

2. Malt & beer: +80.29 percent*

3. Electricity measuring & testing instruments: +71.39 percent*

4. Primary smelted & refined copper: +56.71 percent*

5. Printed circuit assemblies: +49.75 percent

6. Industrial valves: +43.72 percent

7. Plastic floor coverings: +42.55 percent

8. Miscellaneous grains: +30.82 percent

9. Broadcast & wireless communications equipment: +29.14 percent

10. Goods returned from Canada: +28.75 percent

In terms of manufacturing, and advanced manufacturing, sectors versus lower-value sectors, this China list looks slightly less worrisome in competitiveness terms than the global list below:

1. Non-diagnostic biological products: +856.00 percent.

2. Switchboard and switchgear apparatus: +437.35 percent

3. Oil and gas field machinery and equipment: +130.00 percent

4. Iron and steel: +76.25 percent

5. Surgical appliances and supplies: +71.55 percent

6. Printed circuit assemblies: +47.08 percent

7. Crude oil and natural gas: +45.30 percent

8. Primary aluminum: +42.73 percent

9. Turbines and turbine generator sets: +39.46 percent

10. Copper and nickel ores: +35.96 percent

Needless to say, over longer periods of time, China has significantly closed the competitiveness gap with the United States, and has done so faster than the rest of the world. Over the last year, however, these trade data indicate that China has gained little, if any, ground, by either measure. Holding the competitiveness line, vis-a-vis China or vis-a-vis other trade competitors, is certainly a better performance than the United States generally has registered recently. But it’s doubtful whether many Americans would agree that it’s good enough.    

(What’s Left of) Our Economy: NAFTA’s Been a Bust for U.S. Agriculture

Tags

Agricultural Policy Analysis Center, agriculture, Canada, Daryll E. Ray, free trade agreements, Harwood D. Schaffer, Mexico, NAFTA, North American Free Trade Agreement, Trade, Trade Deficits, trade surpluses, University of Tennessee, {What's Left of) Our Economy

Few beliefs about the North American Free Trade Agreement (NAFTA) are more solidly entrenched than the conviction that the deal has been a slam dunk winner for American farmers. Perhaps the most important believer now? President Trump. Last spring, he acknowledged that he shelved his plan to scrap the agreement after his Agriculture Secretary showed him data indicating that an American withdrawal would hammer many of the states and counties that voted him into the White House.

There’s just one major problem – the data say otherwise. Indeed, according to the U.S. International Trade Commission’s invaluable Trade Dataweb interactive database, American agriculture runs a sizable trade deficit with Canada and Mexico combined, and the gap has ballooned during the deal’s lifetime. Moreover, the statistics make clear that Washington’s trade policies overall have done nothing to bolster the U.S. farm sector’s international fortunes – at best.

The best apples-to-apples (no pun intended!) data date from 1997 – when the U.S. government began using the North American Industry Classification System (NAICS) as its main tool for slicing and dicing the American economy analytically. And although NAFTA went into effect at the beginning of 1994, the post-1997 figures represent a nearly complete data set.

In 1997, U.S. agriculture ran a trade deficit with its NAFTA partners of just under $877 million. By last year, the shortfall had swollen to nearly $6.77 billion. Mexico has been the big problem; during this period, American farm trade across the southern border deterioriated from a surplus of just under $353 million to a deficit of more $5.83 billion. The U.S. agriculture trade performance with Canada has actually improved, with its deficit shrinking from 1997 to 2016 from $1.22 billion to $940 million. Still, American agriculture is in deficit with its northern neighbor all the same.

But maybe as bad as these numbers are, American farm trade under NAFTA has fared better than American farm trade globally? Unfortunately, there’s no evidence for that proposition, either. Between 1997 and 2016, the U.S. worldwide agriculture trade balance worsened also. But it actually worsened less – with a surplus that shrank from $15.79 billion to $10.79 billion – than the balance with the NAFTA partners.

Surely, however, America’s other free trade agreements have more than compensated for the NAFTA-related losses? If only. According to the Trade Dataweb, in 1997, the United States ran a trade deficit with these countries of $1.99 billion. By 2016, this figure had soared to $8.91 billion. That’s about as bad a record as NAFTA farm trade has compiled.

Of course, American agriculture is a large sector of the economy. (Although it’s not that large: In current dollar value-added terms, it only represented 0.86 percent of the gross domestic product in 2016. Manufacturing, by contrast, comprised 11.71 percent.) Moreover, trade performance has varied greatly by specific crop or product.

For example, between 1997 and 2016, the American corn trade surplus with Mexico skyrocketed more than seven-fold, to just under $2.60 billion. The soybean surplus jumped nearly ten-fold, to $1.02 billion. And major gains have also been recorded in non-poultry meat, poultry, wheat, dried and condensed dairy products, and many other sectors. With Canada, the big U.S. agriculture winners have been mainly fruits and vegetables, as well as wines and spirits.

The big agriculture losers in Mexico trade have been – interestingly – fruits and vegetables, along with liquor and beer. With Canada, sectors with big or big and rapidly rising surpluses have been led by miscellaneous oil seeds products where the deficit has soared more than seven-fold, to $2.27 billion), followed by fish of all kinds (where the trade gap has more than tripled, to $1.34 billion), cattle, and frozen fruits, juices, and vegetables.

Overall, though, the message sent by the data could not be clearer: The idea that NAFTA has been a bonanza for U.S. agriculture needs to be put out to pasture. And far from adopting a “don’t rock the boat” posture, it’s high time for the Trump administration to start identifying fixes.

P.S. I was first alerted to these adverse trends in U.S. farm trade by the excellent research of Harwood D. Schaffer and Daryll E. Ray of the Agricultural Policy Analysis Center at the University of Tennessee.

(What’s Left of) Our Economy: Which Sectors are America’s Biggest Trade Winners and Losers?

Tags

commmodities, exports, imports, manufactures, Trade, trade balances, Trade Deficits, trade surpluses, {What's Left of) Our Economy

Welcome to installment two of RealityChek‘s deep dive into new U.S. data that enable us to compare the economy’s merchandise trade performance during the first half of this year with that of the first half of last year. Yesterday, we reviewed America’s biggest goods exporters and importers, and trade deficit and trade surplus sectors – all on a stand-still basis. Today, we’ll look at the fastest and slowest merchandise export and import growers over the last year, and the sectors whose trade balances have improved or worsened to the greatest extents.

Because the subject today is rates of change, and in order to avoid results distorted by unusually small numbers (e.g., the ease with which big percentage changes in a given indicator are resulting from the use of unusually modest base figures), the following lists are drawn from larger lists of the top 50 goods industries in these performance categories. And fortunately, because U.S. imports and exports are relatively highly concentrated, drawing the line at the top 50 costs almost nothing in terms of creating a very representative sample.

Also, as was the case yesterday, these industry categories examined here are those drawn from the six-digit level of the North American Industry Classification System (NAICS), the federal government’s main system for slicing and dicing the economy. The one exception: aerospace. Because of data limitations in that sector, the five-digit data, which combine final products and their parts and components, are presented.

Let’s start with the ten goods industries whose exports, measured in value terms, grew fastest between the first half of last year and the first half of this year, along with the growth rates:

1. Non-anthracite coal & petroleum gases: +180.9 percent

2. Crude oil & natural gas: +109.0 percent

3. Cotton: +89.9 percent

4. LNG: +62.4 percent

5. Semiconductor manufacturing equipment: +58.2 percent

6. Primary smelted non-ferrous metals: +54.0 percent

7. Soybeans: +27.6 percent

8. Petroleum refinery products: +26.1 percent

9. Motor vehicle engines & engine parts: +19.2 percent

10. Corn: +18.7 percent

As is clear, five of these ten sectors are commodity sectors, which add relatively little value to the economy. Two more are industries where relatively little processing, and thus value-adding, takes place (liquid natural gas and the smelted metals). Only three could be considered high value manufactures – the types of industries that historically have made outsized contributions in terms of productivity growth and innovation, and that tend to pay high wages.

Here are the ten industries with the worst export performances on a year-to-date basis:

1. Medicinal & botanical drugs & vitamins: -25.4 percent

2. Turbines & turbine generator sets: -15.1 percent

3. Computer parts: -9.4 percent

4. Autos and light trucks: -8.3 percent

5. Telecomms equipment: -6.6 percent

6. Electricity measuring & test instruments: -5.9 percent

7. Aerospace: -4.0 percent (5-digit, due to reporting limits)

7. Surgical and medical instruments: -1.1 percent

8. Electro-medical apparatus: -0.9 percent

9. Industrial valves: -0.1 percent

9. Computers: -0.1 percent

10. Surgical appliances & supplies: +0.2 percent

10. Analytical laboratory instruments: +0.2 percent

As should be obvious, every single sector here belongs in the high-value manufactures category.

Now for the industries that saw the fastest import growth between the first six months of 2016 and the first six months of this year:

1. Switchgear and switchboard apparatus: +174.3 percent

2. Crude oil and natural gas: +53.7 percent

3. Printed circuit assemblies: +44.2 percent

4. Iron and steel: +41.3 percent

5. Primary aluminum: +38.6 percent

6. Non-diagnostic biological products: +29.4 percent

7. Petroleum refinery products: +22.2 percent

8. Miscellaneous non-citrus fruits: +20.8 percent

9. Motors and generators: +13.7 percent

10. Lighting equipment: +12.7 percent

10. Surgical appliances and supplies: +12.7 percent

This group, too is dominated by high-value industries. And look at those numbers for steel and aluminum, two sectors where the Trump administration has been talking about imposing national security related tariffs

The list of sectors with the worst import growth – indeed, where imports have declined the most – is much more of a mixed bag:

1. Medicinal and botanical drugs and vitamins: -39.4 percent

2. Computer parts: -12.3 percent

3. Women’s and girl’s blouses/shirts: -12.1 percent

4. Primary smelted non-ferrous metals: -8.8 percent

5. Men’s and boys non-work shirt shirts: -8.3 percent

6. Non-costume jewelry: -6.7 percent

7. Semiconductors and related devices: -6.4 percent

8. Audio and video equipment: -5.3 percent

9. Jewelers materials/lapidary work: -4.1 percent

10. Aerospace products: -3.4 percent

Now for the trade balance figures. Remember, they’re especially important because economic theory tells us they’re strong indicators of which industries the United States trades most successfully – and therefore which industries have the brightest futures.

Here are the ten sectors where the trade balance has shown the greatest improvement from the first half of 2016 to the first half of 2017. They’re presented in percentage terms except where deficits have turned into surpluses :

1. Primary smelted non-ferrous metals: $5.00 billion deficit to $0.76 billion surplus

2. Relays and industrial controls: $1.27 billion deficit to $2.26 billion surplus

3. Semiconductors: $1.48 billion deficit to $1.01 billion surplus

4. Non-costume jewelry: +574.44 percent

5. Drawn/rolled/extruded miscellaneous non-ferrous metals: +305.69 percent

6. Miscellaneous basic inorganic chemicals: +300.00 percent

7. Non-anthracite coal and petroleum gases: +224.29 percent

8. Medicinal and botanical drugs and vitamins: +104.35 percent

9. Cotton: +91.09 percent

10. Semiconductor manufacturing equipment: +64.82 percent

Encouragingly, high value manufacturing is pretty well represented here.

And now for those sectors that experienced the worst deterioration in their trade balances.

1. Non-diagnostic biological products: +856.00 percent.

2. Switchboard and switchgear apparatus: +437.35 percent

3. Oil and gas field machinery and equipment: +130.00 percent

4. Iron and steel: +76.25 percent

5. Surgical appliances and supplies: +71.55 percent

6. Printed circuit assemblies: +47.08 percent

7. Crude oil and natural gas: +45.30 percent

8. Primary aluminum: +42.73 percent

9. Turbines and turbine generator sets: +39.46 percent

10. Copper and nickel ores: +35.96 percent

High-value manufactures are well represented here, too – and this list, too, includes steel and aluminum. At the same time, these rates of deterioration are generally smaller than the rates of improvement in the sectors where trade balances changed for the better. So that’s an encouraging development as well.

Of course, whenever “trade” comes up, the word “China” usually isn’t far behind, especially since the Trump administration just announced it was beginning a process that could lead to tariffs on Chinese goods in response to Beijing’s practice of forcing companies to hand over at least some of their best technology in exchange for the privilege of doing business in the vast Chinese market, and to the more conventional intellectual property theft that’s still SOP in the PRC. So tomorrow, RealityChek takes a deep dive into U.S.-China goods trade.

(What’s Left of) Our Economy: Into the (Crucial!) Weeds on America’s Trade Performance

Tags

comparative advantage, exports, imports, manufacturing, Trade, trade balances, Trade Deficits, trade surpluses, {What's Left of) Our Economy

The U.S. International Trade Commission has finally added the June American trade statistics to its wonderful Trade Dataweb, an invaluable database and search engine. So now it’s possible to view in needed detail the nation’s trade performance for the first half of 2017, and the first groups of these figures is presented below.

Just so you’ll know exactly what you’re seeing, these are results according to the most granular level of the North American Industry Classification System (NAICS), the federal government’s main system for slicing and dicing industry-specific economic data. I like this six-digit level because it draws the greatest number of distinctions between final manufactured products and the parts and components of these products. This distinction is critical because the rapid growth in recent decades of global supply chains (i.e., the rapid growth of American production offshoring) means that a large percentage of U.S. and global trade consists of trade in these manufacturing inputs.

Another technical note: Because trade data for major aerospace products aren’t made public in order to protect corporate information considered proprietary, the six-digit NAICS results in this sector are unreliable, and the five-digit level data are being used.

So here are the nation’s top ten goods exports for the first half of this year, and how their performance has changed in dollar terms since the first half of 2016:

1. Aerospace: -4.0 percent

2. Petroleum refinery products: +26.1 percent

3. Autos & light trucks: -8.5 percent

4. Special classification provisions: +9.7 percent

5. Semiconductors & related devices: +4.7 percent

6. Miscellaneous auto parts: +1.4 percent

7. Miscellaneous basic organic chemicals: +3.7 percent

8. Pharmaceuticals: +3.9 percent

9. Plastics materials & resins: +6.3 percent

10. Primary smelted non-ferrous metals: +54.0 percent

It’s an encouraging list because most of these products are high-value manufactures, which historically have been very productive, still create lots of high-wage jobs, and incorporate lots of innovation. At the same time, these export growth rates seem pretty meh.

Here is a similar list of the top ten goods import categories and how their levels have changed on a year-to-date basis:

1. Autos & light trucks: +4.5 percent

2. Crude oil & natural gas: +53.7 percent

3. Pharmaceuticals: +2.3 percent

4. Goods returned from Canada: +4.3 percent

5. Broadcast & wireless communications equipment: +10.3 percent

6. Computers: +6.2 percent

7. Telecomms equip: +8.2 percent

8. Aerospace products: -3.4 percent

9. Petroleum refinery products: +22.2 percent

10. Semiconductors & related devices: -6.4 percent

This looks like a higher value list, and the growth rates seem somewhat higher. So that appears less bullish.

The real test of trade performance, though, has to do with trade balances. For the theory of comparative advantage that’s at the heart of modern thinking and policy in the trade field tells us that economies that trade goods and services most successfully (as indicated by surpluses) will wind up as the most successful producers of those goods. Conversely, economies that trade goods and services least successfully will wind up as the least successful producers of those goods. How else could unfettered trade flows create an optimal global division of labor – which is supposed to be their prime economic virtue according to mainstream economics?

So here are the ten goods sectors that wracked up the biggest trade surpluses in the first half of this year, and how those balances compare with the first-half 2016 figures:

1. Aerospace products: -2.03 percent

2. Petroleum refinery products: +33.11 percent

3. Plastics materials & resins: +4.73 percent

4. Soybeans: +28.21 percent

5. Other special classification provns: +7.13 percent

6. Corn: +20.26 percent

7. Waste & scrap: -7.82 percent

8. LNG: +56.54 percent

9. Semiconductor machinery: +64.73 percent

10. Non-anthracite coal & natural gases: +223.22 percent

If you recognize the outsize economic value of manufacturing, this is a less encouraging list, since fully half the products are commodities. Nor is the growth rate of the surpluses in these manufacturing sectors impressive except for semiconductor production equipment and petroleum refinery products.

And here’s the trade balance flip side: the sectors with the top ten U.S. goods trade deficits and their rates of change:

1. Autos & light trucks: +10.64 percent

2. Crude oil & nat gas: +45.31 percent

3. Goods returned from Canada: +4.25 percent

4. Computers: +1.16 percent

5. Broadcast & wireless communications equip.: +11.06 percent

6. Telecomms equipment: +19.10 percent

7. Printed circuit assemblies: +47.12 percent

8. Audio & video equipment: -11.50 percent

9. Institutional furniture: +8.56 percent

10. Iron & steel: +76.28 percent

This list is full of high-value manufactures – so that should be a concern. Ditto for the growth rates, which are mainly well into the double-digits. And check out the number for steel — a sector that’s been making headlines because of the Trump administration’s consideration of national security-related tariffs.  

Coming up tomorrow: the best and worst export and import growers, and the sectors with the most rapidly improving and the most rapidly worsening trade balances.

(What’s Left of) Our Economy: Where Trump Deserves High, Low, and “Incomplete” Marks on Germany Trade

Tags

advanced manufacturing, automotive, commodities, comparative advantage, Financial Crisis, Germany, Global Imbalances, Great Recession, innovation, manufacturing, productivity, Trade, Trade Deficits, trade surpluses, Trump, {What's Left of) Our Economy

As I’ve suggested, President Trump has big, valid points to make about Germany’s auto trade with the United States. Not only does America run an enormous deficit with Germany in vehicles and parts, but claims that Germany deserves great praise from Washington because it makes so many vehicles in the United States are completely unjustified. For they overlook its companies’ very low levels of U.S. content and only very modest improvement on this score. That is, German vehicles are overwhelmingly screwed together in the United States, and therefore add much much less value to the American economy than autos made with domestic parts.

The trouble is that America’s troubles with German trade policies greatly transcend the automotive industry and, to a great extent, Germany. I’ve previously written that there’s a fundamental problem that both the administration and it’s critics are missing:  Germany’s economy, like China’s and many others around the world, is simply not structured in such a way as to make mutually beneficial trade with the United States possible.

But there’s another big U.S.-Germany trade issue that needs highlighting, along with a major danger that Bonn’s approach to trade is creating for the entire world – at least in the medium or long-term.

That other U.S. Germany trade problem has to do with the makeup of bilateral commerce. If you look at the nature of what the United States trades most successfully with Germany and vice versa, you find that the former category contains a mix of high value manufactures and commodities, while the latter is dominated by advanced industrial goods. Here are lists of the sectors in which America last year ran its biggest trade surpluses and deficits with Germany. (To the surplus list should be added – prominently – aircraft, which are not counted accurately in the U.S. International Trade Commission database I’m relying on.)

Top ten U.S. trade surpluses with Germany: 

glass products 

tree nuts 

soybeans 

computers 

non-costume jewelry 

non-anthracite coal & petroleum gases 

fin-fish products

computer parts 

surgical appliances and supplies 

pulp mill products 

 

Top ten US deficits with Germany

autos and light trucks 

pharmaceuticals

goods returned from Canada 

motor vehicle transmissions and transmission parts

aircraft engines and engine parts

construction machinery

miscellaneous general purpose machinery 

miscellaneous basic org chemicals 

miscellaneous engine equipment 

motor vehicle parts

These results are disturbing because, contrary to the superficial conventional wisdom, if you take seriously standard trade theory and its core concept of comparative advantage, sectoral trade balances matter tremendously. For the main idea behind the freest possible international trade is structuring the world economy so as to enable those countries most proficient at producing various goods and services to dominate their output. So surpluses and deficits in different industries show which countries are passing and failing this test – and thus which countries look likely eventually to control worldwide supplies of the sophisticated goods that create so many high wage jobs and foster so much innovation and productivity growth.

Since the U.S.-Germany data aren’t U.S.-global data, in theory they could be anomalies. In other words, Americans could be doing better with the world as a whole, and therefore, the nation’s prospects in high value industries could be a lot brighter. Unfortunately, that’s not the case at all. The makeup of U.S.-Germany trade isn’t terribly different from the makeup of U.S. global trade, in that America’s trade winners are, again, a mix of commodities and high value goods (again, including aircraft), and its losers are nearly all advanced sectors.

Top ten US surpluses globally

petroleum refinery prods

soybeans

special classification goods

plastics materials andcresins

waste and scrap

corn

liquid natural gas

semicaonductor manufacturing equipment

non-poultry meat products

turbines and turbine generator sets

 

Top ten US deficits globally

autos and light trucks

crude oil and natural gas

goods returned from Canada

broadcast and wireless communications equipment

computers

pharmaceutical products

telecommunications equipment

audio and video equipment

aircraft engines and engine parts

games, toys, and children’s vehicles

Yet Germany also is contributing significantly to a major trade-related threat that threatens the entire world, not just the United States. I’ve repeatedly spotlighted blue chip academic research concluding that unprecedented global imbalances centered on American trade shortfalls were instrumental in setting the stage for the last global financial crisis and the painful recession that followed. Worse, evidence keeps accumulating that international commerce is becoming worrisomely lopsided again, and that Germany’s overall international surpluses – currently the world’s largest – have generated much of the problem.

Indeed, a valuable reminder came in this morning’s Washington Post:

“[G]ermany is one of a number of countries, including China, Japan, and South Korea that are now saving far more than they are either consuming or investing….At some point, the world will be unable to absorb the capital surpluses of Germany, China and others, leading to another painful correction that might undermine the liberal order.”

Interestingly, Germany itself has indirectly acknowledged these risks, and hinted that it recognizes some responsibility to get the surpluses down. Unfortunately, Berlin has demonstrated few signs of following through. So although some of President Trump’s focus on the German trade issue seems off target, it’s also clear that the sense of urgency he’s brought to the issue, from both an American and global standpoint, is not only appropriate, but necessary.

Our So-Called Foreign Policy: A Genuinely 21st Century Approach to Asia

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alliances, allies, Asia, China, Cold War, coupling, defense spending, East Asia-Pacific, extended deterrence, free-riding, Japan, Lifezette.com, North Korea, nuclear weapons, Our So-Called Foreign Policy, South Korea, Trade, trade surpluses, Trump, Xi JInPing

Yesterday in a piece for Lifezette.com, I argued that President Trump should ignore the advice he seems to be getting from his more establishmentarian advisers, and from conventional thinkers outside his administration, and focus on economics and not security when he meets Chinese leader Xi Jinping starting tomorrow.

Today, I’d like to spell out some of the assumptions about America’s priorities in the East Asia-Pacific (EAP) region that lead to these conclusions – and why genuinely bringing America’s grand strategy in the region into the twenty-first century is essential to reduce the nation’s vulnerability to nuclear attack and to strengthening its economy.

First, as I’ve long maintained, since the Cold War has been over for nearly three decades, the geopolitical basis for the current American approach to the EAP has simply disappeared. Until 1990, Washington provided a nuclear umbrella for the region and set up alliances for two main reasons. First, the United States was determined to keep Asia’s vast economic power and potential out of communist hands. Second, America resolved to prevent Japan from needing to conduct an independent foreign policy – which U.S. leaders believed would lead to its rearmament and likely reversion to 1930s- and ’40s-style militarism.

Since 1990, America’s goals have remained essentially the same, but one of the rationales shifted. Preventing Japanese rearmament was still (secretly) treated as an imperative. But with the Soviet threat gone and China increasingly integrated into the world economy, the United States began justifying its continued military presence as essential for buttressing the stability needed to keep the region’s economically dynamic countries functioning as major cogs of an increasingly close-knit global trade and investment system. Also reinforcing regional stability would be the continuing protection of South Korea from its bellicose northern neighbor.

The most dangerous problem with this approach is that, although it arguably made sense from the U.S. standpoint when America’s main actual and potential rivals in the region either had no nuclear weapons (North Korea), or vastly inferior and relatively primitive nuclear forces (China), it has become ever more suicidal more recently. For whereas once Washington could credibly brandish a nuclear threat to keep powerful enemy conventional forces at bay while incurring almost no risk of nuclear retaliation against the American homeland, the Chinese and even North Korean have now made major progress towards fielding nuclear weapons both capable of reaching American shores and of surviving U.S. nuclear attacks. As a result, they can now place American cities in mortal danger.

To modify a common Cold War-era saying, Washington has promised to sacrifice Los Angeles in order to save Seoul and/or Tokyo. Has anyone explained to the American people why this potential tradeoff is remotely acceptable – or even sane? Quite the contrary. A literally suicidal strategy keeps getting dressed up in terms that sound either comfortingly technical and abstract (like “extended deterrence”) or even warm and fuzzy (like “coupling”).

Indeed, the latter phrase, upon examination, reveals what has now become by far the least forgivable aspect of American strategy given current nuclear circumstances: The “coupling” of America’s security to its allies’ security was designed to force the United States to risk nuclear attack to protect Japan and South Korea. This aim was accomplished mainly by stationing major American forces right along the North-South Korea border – the Demilitarized Zone – to ensure that they would die during a North Korean invasion and thereby give an American president no real choice but to respond with nukes. The presence of the U.S. Seventh Fleet in Japanese bases and on patrol through regional waters serves the same purpose. That is, the United States surrendered one of the paramount goals of genuine national security since the Atomic Age began – the power to choose whether to involve itself in a nuclear war, or to avoid one. And Washington stubbornly clings to this strategy even though the nuclear landscape has been decisively transformed.

Two related developments make Washington’s acceptance of this risk even less acceptable. First, America’s Asian allies have become more than capable of defending themselves from their enemies. Yet even South Korea, with a possibly deranged dictatorship for a neighbor, has understandably decided to rely on American blood and treasure for its security, and skimped on its military spending. And although Japan has increased its own defense budget and capabilities significantly in recent years, its far greater economic power still justifies the label “free rider.”

Second, precisely because current nuclear circumstances make the American defense guarantee so literally non-credible despite the coupling strategy, the likelihood of Japan and South Korea acquiring nuclear weapons for their own defense rises with each new North Korean missile test and each new Chinese thrust into the South or East China Seas. In other words, if that train hasn’t already left the station, its engines are firing up.

There is, however, an immense silver lining that the supremely unconventional President Trump – unlike many of his advisers – should be quick to recognize: Because the Cold War threats are gone, and because the whole of the EAP relies so heavily on net exports – especially to the United States – for its growth, America no longer needs to worry about a foreign power controlling the region politically.

This development is of course most relevant to America’s China strategy. It means that even if Beijing established unquestioned hegemony in its backyard, China and all of its supposed new vassals would still desperately need to access the U.S. market. The flip side of this proposition is just as crucial: America’s paramount interests in the EAP are economic – ensuring adequate access to Asian markets, and safeguarding American domestic businesses and their employees from predatory Asian trade practices. Further, the best way to achieve these goals is by wielding economic, not military, power.

A U.S. China and Asia policy reflecting these trends – and other generally ignored regional realities that increasingly have been staring obtuse establishment analysts in the face – would make for a dramatically different agenda for this week’s China summit than has apparently been laid out. For example, President Trump has indicated that he will press China’s Xi harder to use his leverage on North Korea to curb or even end the latter’s nuclear weapons program, threaten to attack the North militarily if China doesn’t step up, but ease up on trade pressure if Beijing goes with the American Korea program.

Far better would be for Mr. Trump to recognize that this position raises the prospect of accepting continued Chinese trade predation as long as China even holds out the prospect of providing a North Korea assist; that even if North Korea’s nuclear weapons can’t hit American territory yet, a war with its regime could terribly bloody America’s conventional forces in the Pacific along with allied civilian populations; and that whatever nuclear threat to the United States faces from the North stems not from any intrinsic desire to attack America, but from continued U.S. military involvement in a decades-long Korean civil war that has only been suspended since 1953.

Modernized American priorities would enable the president eventually to tell his Chinese counterpart that the United States is greatly lowering its military profile in Korea, and that however China decides to deal with its dangerously predictable neighbor will be fine with Washington. But since both the Chinese and especially American allies would need time to prepare for this transition, and since a premature announcement would only embolden North Korea, Mr. Trump should simply downplay the subject at the summit, convey these messages privately as soon as Xi leaves, and let the transition begin before going public. A similar approach should be taken toward territorial disputes in the East and South China seas.

Having freed himself to focus on trade and other economic issues, the President should tack away from the conventional wisdom in this sphere, too. Specifically, he should acknowledge that the main lesson of long years of U.S. China trade diplomacy is that there’s no longer any point in negotiating trade agreement with Beijing. The Chinese record of breaking their promises is too long, and even an administration determined to monitor and enforce trade deals would face a formidable challenge in keeping track of conditions in China’s gargantuan industrial complex.

Instead, Mr. Trump should keep the discussion general and thank Mr. Xi for coming such a long way. Then once all the photo-op moments are finished, and he’s departed, the administration should develop a list of Chinese goods that represent especially egregious examples of trade predation (either in the Chinese market or the U.S. market, and impose unilateral tariffs on them. The president should specify that the list will keep growing until he receives reliable information that the Chinese have not only dropped trade barriers, but have compiled a serious track record of keeping them low – which will of course take several years to demonstrate. He should make clear that his own administration will be judge, jury, and court of appeals for any Chinese claims of compliance. And he should then let Mr. Xi know that he’s looking forward to their next meeting – and would of course be happy to come to Beijing.

(What’s Left of) Our Economy: Latest Trade Deficit Scuffles Still Missing Lessons of 2008

Tags

bubbles, finance, Financial Crisis, free trade agreements, G20, Germany, Global Imbalances, investment, Japan, manufacturing, offshoring, tax reform, Trade, Trade Deficits, trade policy, trade surpluses, Trump, Wall Street, {What's Left of) Our Economy

Roughly ten years after it broke out, it’s still incredibly rare to see economists or pundits link U.S. and resulting global trade imbalances with the financial crisis. So I’m always thrilled – as I tweeted this past week – to see it ever happen. All the same, even this insightful column by Reuters’ Edward Hadas simply dances around the crucial link between these imbalances and American trade policies, and in particular, their offshoring-friendly nature.

In a March 15 essay, Hadas commented on the German (and other countries’) trade surpluses that have attracted such attention this past week for two main reasons: German Chancellor Angela Merkel’s first-ever meeting with President Trump, and a conclave taking place at the same time of the finance chiefs of the world’s 20 leading economies (the so-called G20). The author’s main contention is indisputable as far as it goes. According to Hadas, the real problem with these imbalances is financial:

“The euros, pounds and dollars which Germany, Korea et al accumulate inevitably land in the global financial system. There would be no problem – only gains all round – if these monies funded valuable infrastructure, productive factories and other assets which can generate a reasonable economic return.

“Too often, though, though, the extra currency winds up supporting counterproductive finance. It backs ultimately ruinous property speculation, lends support to chronically weak governments, encourages unsustainable consumer spending and destabilises developing economies, not to mention enriching banks and bankers and stimulating corruption. A typical example: the recycled dollars from the U.S. trade deficit helped fund the American housing bubble whose pop created the 2008 crisis.”

But what Hadas – and so many others – fail to do is explain adequately why deficit countries (like the United States) make such dangerously shortsighted choices with their windfalls. Three main (and not mutually exclusive) reasons have been served up. First, financial systems in the deficit countries (especially the United States, which runs the biggest deficits) have over-rewarded uses of capital that produce the fastest possible payoffs, and under-reward longer-term projects. The result is too much investment that encourages speculation, financial monkey business, and simple consumption, and too little investment that builds factories and laboratories and funds other activities that create wealth more slowly, but on a more sustainable basis.

Second, such irresponsible uses of capital have become practically inevitable if only because the deficits have been so enormous, and so much money has become available. When anything is in such abundance, and therefore costs so little, most economists would agree that there’s little reason to use it carefully. After all, it looks like a sure bet that more of that thing at very attractive prices will be readily available.

A somewhat different version of this argument has to do with what economists call “moral hazard.” It argues that the American financial system used over-abundant money so recklessly at least partly because investors felt certain that they’d get bailed out of most or all of their mistakes by government. So why not take maximum advantage of what seems to be a “heads, we win; tails, we lose” proposition?

The third explanation for the irresponsible use of resources focuses on the consumption-heavy nature of the economies of the deficit countries. (This argument also tends to note that the surplus countries frequently try to limit and even depress consumption.) The more capital they take in, in other words, the more such spending (as opposed to productive investment) is likeliest to result either because such behavior is encouraged by government, because a “live for today” has been produced by that country’s culture, or because of some combination of the two.

Whenever something as a big as a global financial crisis strikes, many culprits are responsible. And all of the above explanations should be taken very seriously (along with others, like lax financial regulation). But what Hadas and all the rest continue to miss is how the world trade system, national trade policies, and the trade flows they have fostered have actively fostered in deficit countries like the United States a neglect of productive activities like manufacturing (which is so heavily traded).

Specifically, as Washington in the 1990s and 2000s signed more and more trade agreements structured to encourage multinational companies from all over the world to supply U.S. consumers from locations in super low-cost and virtually unregulated developing countries like China and Mexico, American leaders and other elites (e.g., in the media) naturally sought to rationalize their decisions by spreading the message that sectors of the economy like manufacturing (and the income loss produced by the accelerated offshoring that rippled throughout so much of the Main Street economy) could be neglected with impunity. And the administration of George W. Bush (along with Congress of course) and the Federal Reserve chaired by Alan Greenspan underwrote America’s spendthrift ways with big budget deficits and ultra-low interest rates, respectively.

Even worse, these destructive trends fed on themselves. The more offshoring seemed to pay off, and the more domestic manufacturing operations looked like losing — or at least anachronistic — propositions, the less interested financiers became in investing in them. So the amount of productive activity on which to use incoming capital to start with began shriveling. And the less productive activity available to sustain Main Street living standards responsibly (i.e., mainly through earnings), the greater the political establishment needed to prop up those living standards by providing more easy money — at least if it wanted to stay in power while maintaining the offshoring status quo.

Ironically, even though Hadas emphasizes regulation as the answer to global imbalances, his particular focus has big trade implications:

“Regulation can do more than strengthen bank capital ratios. It can reform the system, so trade surplus funds are not directed to economically counterproductive uses. That will be tough, both politically and practically. But it should be easier – and will be far more helpful – to solidify finance than to try to change the national characters of Germany or Korea.”

I’m all in favor of channeling the use of trade surplus funds by deficit countries into productive activity. In fact, I strongly support requiring such uses by U.S. multinational companies if much-discussed tax reform finally succeeds in persuading them to bring home the vast amounts of earnings they’re currently stashing abroad to avoid paying higher U.S. corporate rates. 

But this requirement needs to be accompanied by (at the very least) strong measures to keep out foreign-made goods that benefit from predatory trade practices like dumping, subsidization, and intellectual property theft. Otherwise, foreign competitors will be able to keep undercutting their domestic American competition in the U.S. market, and these new productive investments will fail. It’s also entirely likely, however, that more sweeping trade curbs will be needed – to offset the scale economy disadvantages created by U.S.-based firms’ inability to sell into so many important markets and their rivals’ ability to sell freely in their home countries and the United States.

And this is in fact where recognition is needed that the trade problem created by American policy concerns not simply inducements to offshore, but the coddling of protectionism in high income countries like Japan and Germany.

The bottom line: As indicated in a post last week, the United States may have to accept that even reasonably balanced foreign trade is not achievable with competitors holding radically different economic priorities (as I argued last week was precisely the case with Germany), and that reducing trade flows is a more than acceptable price to pay for preventing financial crises caused by imbalanced trade. When you add in America’s great capacity for much more self-sufficiency in a wide range of manufactured good, that seems like a more than acceptable trade-off to me. More important, it’s where the Trump administration, admittedly in fits and starts, could be leading us.

(What’s Left of) Our Economy: TPP Defenses are Turning Downright Farcical

Tags

Asia, China, export-led growth, Harvard Business Review, Pankaj Ghemawat, TPP, Trade, trade surpluses, Trans-Pacific Partnership, Trump, {What's Left of) Our Economy

It’s always embarrassing when your brain stops working. (And we’ve all had those moments.) It’s especially embarrassing when it happens in public, and it’s downright humiliating when you make your living with that brain – and you have a title like “ Global Professor of Management and Strategy and Director of the Center for the Globalization of Education and Management at the New York University Stern School of Business.” Not to mention “Anselmo Rubiralta Professor of Global Strategy at IESE Business School in Spain.”

So if I was Pankaj Ghemawat, I’d be furious that the Harvard Business Review has just shared on Twitter an absolutely jaw-dropping example of brain freeze – his December article titled, “If Trump Abandons the TPP, China Will Be the Biggest Winner.”

Like way too many other backers of the Trans-Pacific Partnership that’s been just killed off by President Trump, Ghemawat seems completely unaware of some basic facts about TPP’s relationship with China. Like the fact that, even though the deal was widely touted as a means of containing the PRC’s rising economic, political, and military power, the negotiators gave Beijing a wide open back door into the new free trade zone. How? By permitting large numbers of manufactured products to be sold in TPP countries duty-free even if they contained high levels of Chinese content.

As a result, China would not only enjoy many of the benefits of TPP membership without incurring any of the obligations. Worse, it would reap these economic rewards without arousing the attention of economic interests struggling against often predatory Chinese competition.

But unlike most TPP supporters who have focused on the supposed China angle, Ghemawat has introduced an argument that is not simply lame, but transparently so.

It has to do with with this map he included in his piece.

 

Its purpose is illustrating Ghemawat’s claim that Mr. Trump’s decision to pull the TPP plug is a big win for China by showing which countries trade most with the United States, and which countries trade most with China. According to the author, the map shows that “The U.S. leads in a few places, particularly in the more proximate parts of the Americas, but China leads more broadly.” Even more worrisome (allegedly), “Extrapolations indicate that by 2025, the Chinese sphere of trade leadership will extend even farther, with the U.S. forecast to lead only in the part of the Americas that is north of the equator.”

But if Ghemawat’s brain really was working when making these claims, it seemed to have convinced him that the countries taking up the most land area are the most important economically and strategically. To which the most respectful reply is, “You can’t be serious!”

After all, think just for a minute about all those geographically enormous regions where trade with China is dominant, or where the Chinese lead. Much of it is sub-Saharan Africa, which is economically inert. Much of the rest is Russia and Eastern Europe – no great prizes economically. The same goes, in spades, for South America.  

Three major economies are indeed on this list: Australia, Brazil, and Japan. But the first two are mainly raw materials suppliers to Chinese manufacturing. They also compete with American farmers and ranchers for global markets, but the last thing they want to do is to start buying lots in the way of U.S. agricultural products.

As for Japan, it’s obviously extremely wealthy. Indeed, it’s the world’s third largest single national economy (behind the United States and China). But it’s been growing very slowly, at best, for many years, and its markets are hermetically sealed both in agriculture and industry. And much of its trade with China consists of sending the PRC parts and components of advanced manufactures that the Chinese assemble into final products and then export – often to the United States.

Further, the same goes for most of the other important Asian countries where China holds the trade lead that so impresses Ghemawat. Sorely inadequate American trade data makes presenting precise numbers impossible, but how else can it be explained that nearly every economy in the region runs hefty trade surpluses with the United States?

Finally, it’s vitally important to remember this export orientation when thinking about the one country on earth where China trade dominates, according to the author’s map: China itself. Exports – and more specifically, amassing trade surpluses – have long been and remain crucial to China’s growth, and in turn to its political stability. And the United States is a big part of this picture. Even China’s own (often dubious) economic data reveal that nearly half of its annual trade surplus is run with America.

China is an important market for U.S. exports as well. But as with its Asian neighbors, it’s a much smaller final consumption market because so many U.S. sales to the PRC also are parts of components of finished goods that then get sent abroad – frequently right back to the United States. And even the deeply misleading aggregate trade data make clear that in absolute terms, the Chinese market is incidental to the American economy, and even more so to its growth.

Karl Marx, who was wrong on a great deal, once famously wrote that, “History repeats itself, first as tragedy, second as farce.” Ghemawat’s article is strong evidence that TPP defenses (and lamentations) are well into the second stage.

(What’s Left of) Our Economy: Trump’s Globalization Promises are Already Producing Victories

Tags

Canada, China, Digitimes, H1B visas, Immigration, India, Infosys, Mexico, NAFTA, Reuters, Taiwan, Trade, Trade Deficits, trade surpluses, trade wars, Trump, {What's Left of) Our Economy

America’s political and media establishments keep warning of the disastrous consequences of President-elect Donald Trump’s vow to conduct international economic policy by in effect telling U.S. competitor countries and offshoring multinational companies to “Jump.” And rather than responding indignantly by promising to resist or retaliate and touch off a series of international trade wars and other conflicts, businesses in these countries keep responding by in effect asking “How high?”

As a result, they keep adding to the already copious body of evidence indicating that the United States boasts more than enough leverage (thanks to the matchless power of its market) to achieve better terms of trade unilaterally. Here are two of the latest examples.

Yesterday, the reliable Taiwanese technology publication Digitimes reported that “US-based high-tech enterprises are expected to reduce their reliance on data centers abroad and add ones in the US.” In addition, the Digitimes piece quoted a Taiwanese tech magnate speculating – reasonably – that tech companies (like his) that have already built significant manufacturing capacity in the United States will have advantages over more foreign-centric competitors – who will “have to evaluate the feasibility of shifting factories from Mexico or other areas to the US….”

Meanwhile, on Sunday, Reuters quoted the COO of the Indian tech services giant Infosys as stating that because they expect Mr. Trump to curb significantly the visa programs that enable American tech companies to replace U.S. workers with low-paid imported Indian counterparts, companies such as his will “speed up acquisitions in the United States and recruit more heavily from college campuses there.”

Specifically, according to this Indian executive, “We have to accelerate hiring of locals if they are available, and start recruiting freshers from universities [in the United States].”

Previously, it should be noted, both Canada and Mexico announced in the wake of the Trump victory that they would indeed be willing to renegotiate or “discuss” NAFTA.

China may still apparently believe it can bluff Mr. Trump. But good luck to Beijing and its still export-heavy economic growth strategy if it thinks it can find foreign markets to substitute for America’s, with which it ran a $367 billion goods trade surplus last year. Good luck also to China’s efforts to maintain political stability if, as likely, declaring a trade war on such a crucial foreign customer raises unemployment.

America’s economic competitors are fully aware that its enormous trade surpluses have fueled much of their own, and global, growth for decades. The biggest change on this front represented by Trump’s election is that now a U.S. president clearly understands – and has been publicly touting – this indisputable reality as well.  In otherwise, for the first time in decades, America is led by someone well versed in “the art of the deal.”