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

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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

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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

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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.”   

(What’s Left of) Our Economy: Krugman’s Trade Confusion

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Alfred E. Eckes, allies, China, Europe, export-led growth, foreign policy, Great Depression, Japan, Mexico, New York Times, Paul Krugman, Russia, Smoot-Hawley Tariff, South Korea, tariffs, Trade, trade surpluses, {What's Left of) Our Economy

You have to hand it to Paul Krugman. Who else but the New York Times columnist and Nobel Prize-winning economist could contribute to one of the hoariest myths surrounding American trade policy, and then turn around and debunk another vital canard? And all within a week!

Two days ago, Krugman repeated a common but wildly off-base talking point long used by trade cheerleaders when he wrote that a trade critic who won the U.S. presidency “would find it very hard to do anything much about globalization — not because it’s technically or economically impossible, but because the moment he looked into actually tearing up existing trade agreements the diplomatic, foreign-policy costs would be overwhelmingly obvious.”

Fears of significant foreign blowback have always been comical from an economic standpoint because so much of the rest of the world has depended on so much of its growth for so long on amassing trade surpluses with the United States. Endlessly voiced fears of “trade wars” endlessly ignore how self-destructive it would be for these foreign trade powers to engage in protracted economic conflict with their best customer.

The contention about diplomatic costs is no more serious. Of course, the Chinese would complain. But since the trillions of dollars of surpluses Beijing has racked up with America have so lavishly helped finance China’s military buildup, any trade overhaul could only enhance U.S. national security.

America’s allies would grouse also. But since most are in fact protectorates that would struggle – at best – to defend themselves without U.S. military support, which ones are likely to hit back at Washington? The Europeans, who worry about mounting Russian ambitions, but whose continued flirtation with recession is bound to keep restraining already inadequate spending? The Japanese and South Koreans, who face a Chinese adversary at least as powerful, and comparably dismal economic outlooks? And how much meaningful diplomatic retaliation could be expected from low-income, export-dependent Mexico, which more than two decades after the North American Free Trade Agreement went into effect still relies on the American market for 80 percent of its foreign goods sales?

Much more convincing was Krugman’s post five days earlier, which took on the Smoot-Hawley fallacy. As the author noted, a mainstay of the case for current trade policies is the belief that any interference with trade flows will start the U.S. and world economies down the slippery slope toward recessions. And as he has also noted, the American Smoot-Hawley tariff is widely blamed for triggering or deepening the Great Depression of the 1930s (and, he could have mentioned, the political and military horrors that followed).

So kudos to Krugman for pointing out that “trade fell a lot between 1929 and 1933, but that was almost entirely a consequence of the Depression, not a cause,” and for spotlighting research making clear that “Trade actually fell faster during the early stages of the 2008 Great Recession than it did after 1929.” Incidentally, much more data debunking the standard Smoot-Hawley claims can be found in this scholarly history of U.S. trade policy by Ohio University’s Alfred E. Eckes.

Neither of these Krugman posts proves (wittingly or not) that big changes in America’s longstanding trade strategies are essential. But if it’s this easy to shred arguments this central to the trade status quo for so many decades, it’s time to start wondering what’s left of the case for standing pat.

 

(What’s Left of) Our Economy: The Text Showcases TPP’s Real Flaws

Tags

China, currency manipulation, dispute resolution, enforcement, environmental standards, exports, imports, labor standards, Obama, protectionism, rules of origin, state-owned enterprises, TPP, Trade, Trade Deficits, trade surpluses, Trans-Pacific Partnership, Treasury Department, World Trade Organization, WTO, {What's Left of) Our Economy

The release this morning of the Trans-Pacific Partnership trade deal (TPP) text means that the Obama administration has kept at least one of its promises in connection with the Pacific Rim agreement: The public has gained the ability to review every single provision in detail within a month of the deal’s signing in Atlanta, Georgia.

Nonetheless, when it comes to evaluating the TPP, the devil is not in the details, and never has been – for all the sweat expended by government officials and industry lobbyists from the 12 signatory countries on even the most arcane aspects of rules of origin, tariff rates and elimination schedules, copyright protections, labor and environmental standards, and the like. All the while, there have been only been two remotely possible exceptions – the agreement’s provisions for dispute resolution, and for determining which goods will actually be eligible for the agreement’s trade breaks.

Re dispute resolution, which is obviously crucial to any agreement’s effectiveness but which has been generally ignored in the TPP debate, the text’s release simply confirms what has always been utterly predictable: This system mirrors the kangaroo court arrangements of the World Trade Organization (WTO) – whose creation has done virtually nothing to prevent the U.S. economy’s victimization from predatory foreign trade practices. As a result, the claim of President Obama and other supporters that the agreement will create a huge, increasingly integrated market governed by U.S.-friendly, free-market-oriented rules should be recognized as the most naive imaginable fantasy.

Re rules of origin, the text confirms numerous press reports that the TPP’s benefits will extend to many products whose content comes from outside the new trade zone – which makes a mockery of the notions that currently excluded countries like China need to join in order to enjoy TPP’s benefits, and that the agreement’s conclusion therefore creates powerful incentives for such non-signatories to adopt the TPP’s high standards,

The TPP dispute-resolution process unveiled in the text demonstrates that the vast majority of member states, whose prosperity depends heavily on maximizing net exports and thus racking up trade surpluses, will gain major new guarantees of unfettered access to America’s much more open market. As with the WTO, a crucial effect of the TPP – and raison d’etre – is to narrow greatly the United States’ internationally accepted legal authority to respond unilaterally to the types of mercantilism in which most TPP countries, notably gigantic Japan, specialize.

Moreover, as with the WTO, despite the paramount importance of the U.S. market, the TPP’s dispute-resolution and rule-making systems grant no special role for America. Even though its economy represents nearly two-thirds of the new total TPP market, its influence under the agreement is simply equal to that of much smaller, and indeed tiny, economies.

Worse, just as with the WTO, the TPP’s one-country/one-vote arrangement will enable the majority of the signatories to game the system and work cooperatively to further their joint goal of ensuring that the U.S. market remains much wider open to their goods and services than the reverse. In other words, like the WTO, and all other international organizations, the TPP will be fundamentally a political organization, not a legal-juridical arrangement, and America’s negotiating strategy has in effect defined its inevitable politics out of existence.

Consequently, whatever market-opening and playing-field language the TPP text contains, turning these words into significantly new, more equitable trade realities is a chimera. For the vast majority of TPP members will be determined – and empowered through their ability to interpret rules and influence verdicts – to ensure the opposite. These countries will be working overtime, and successfully, to prevent TPP dispute-resolution panels from handing down decisions against one that could serve as precedents against all of the others, and the larger organization from writing rules, that could be used to undermine their mercantile national economic structures and strategies.

Understanding the TPP’s protectionist-friendly structure in particular debunks U.S. claims that it will foster meaningful progress toward ending or even disciplining currency manipulation. According to the U.S. Treasury Department, an agreement on this practice among the twelve signatories – which, revealingly, isn’t even in the actual TPP text – “sets a new high standard on exchange rate policies and unfair currency practices for trade agreements.”

But believing this proposition amounts to believing that countries with long protectionist histories, like Japan and Malaysia, are OK with launching efforts that eventually will forever prevent them from using a device for creating decisive price advantages for all the goods they trade in markets around the world. What is it that is known about such economies that convinces anyone that such changes of heart have taken place?

In addition, the rules of origin laid out in the final text make clear that nothing could be easier for non-signatories, like China, to enjoy many crucial advantages of TPP membership. After all, thousands of manufactured goods will be eligible for duty-free or duty-lighter treatment in TPP markets even if most of their content comes from non-TPP members. Given the pervasive global reality of industrial supply chains passing through many countries both in the TPP and outside, this is a Pacific-sized loophole.

The text’s release also should remind Congress, the public, and the media that even if the TPP’s deck wasn’t organizationally stacked against the United States, its measures to prevent abuses of workers and the environment, and the operations of state-owned enterprises, from being used for competitive advantage, are utterly unenforceable from a simple logistical and administrative standpoint.

As I have repeatedly pointed out, the factory complexes of even relatively small TPP economies dwarf the capacity of the U.S. government to monitor their labor and environmental practices systematically. And in many TPP economies, the lines between public and private sector are blurry enough, and bureaucracies opaque and skilled enough at concealing information, to render wishful thinking any confidence that these systems can be transformed.

It’s equally fanciful to suppose that even the TPP’s minimalist origin rules can be effectively enforced, either. How many million American bureaucrats would be required to open how many containers of goods coming into U.S. ports to ensure compliance? And how many more would be needed to find out whether boxes of Chinese-produced goods marked “Made in Malaysia” or “Made in Japan” really are?

All along, the effort to negotiate the TPP, and the debate generated by the deal, have reflected the American delusion that signatures on a piece of paper prove that economies that have been largely closed and centrally commanded for decades have genuinely decided to mend their ways. It’s been a delusion shared by both agreement supporters (who contend that they’ve accomplished this aim) and opponents (who insist that this goal can be achieved with better language).

As a result, even the TPP’s defeat in Congress may not guarantee that American trade policy will get off its failed, export- and negotiations-obsessed track, and focus on what the United States has much more control over – access to its own one-of-a-kind market and the leverage it creates to establish more equitable and sustainable terms of trade unilaterally. But the right kind of TPP debate could still provide an invaluable learning opportunity – and start the process of turning America’s approach to trade into an engine of domestic growth and job creation, rather than of offshoring, higher trade deficits, and (even) slower recovery.      

(What’s Left of) Our Economy: Data Details Suggest Obama’s Got the Wrong Trade Strategy

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Census Bureau, economic growth, exports, free trade deals, imports, Obama, recovery, Trade, trade agreements, Trade Deficits, trade surpluses, U.S. International Trade Commission, {What's Left of) Our Economy

Since it will be months at best till a new trade agreement comes before Congress, trade policy has almost disappeared as a subject for mainstream media coverage and commentary. More’s the pity, since the details of the latest set of U.S. Government trade figures strongly indicate that President Obama keeps missing a great opportunity to energize the still-phlegmatic American recovery. His key mistake: emphasizing export growth.

Thanks to the U.S. International Trade Commission’s terrific interactive trade flow database, anyone wonky enough to want to play with it can see why restricting imports is a much better bet for faster U.S. growth – and therefore job creation.

The proverbial view from 30,000 feet provides support for the export focus – and the related view that the strong U.S. dollar lately is inflicting the most damage on that side of the trade ledger. For these data, let’s use the Census figures from that bureau’s latest monthly report on American exports and imports. And let’s zero in on manufacturing, since oil trade has almost nothing to do with trade policy decisions, and since the prices of raw materials have been so depressed in recent months. Those price changes dramatically influence detailed trade data for these products, because such figures don’t factor in inflation or disinflation.

The Census statistics make clear that, from the first six months of 2014 through the first six months of 2015, U.S. manufactures imports were indeed up – by 2.85 percent. But exports of industrial goods dropped by a considerably greater 4.61 percent. In other words, score one for the export-oriented. A closer look, however, reveals the first cracks in the case for emphasizing overseas sales: Because import flows are so much greater, their increase amounted to about $26.5 billion, while the export decrease totaled only about $17 billion.

And the further down you drill, the better import curbs look. Consider this exercise. I looked at the 2014-15 trade flows and balances for the 20 categories of manufactured goods that produced the biggest export numbers during that period. Not surprisingly, they include major industries like aerospace, semiconductors, organic chemicals, plastics and resins, pharmaceutical ingredients, construction equipment, telecommunications gear, and surgical and medical equipment. Perhaps somewhat more surprisingly, this group also includes autos, auto parts, computer parts, and steel.

Over the past year, ten of these sectors saw their trade balances worsen, and ten saw them improve. Remember that when trade balances get better (whether via expanding surpluses or shrinking deficits) America’s growth speeds up. When surpluses decrease or deficits increase, growth slows down. More to that exports vs imports point, exports fell year-on-year for 12 of these 20 sectors and rose for eight, while imports rose for 15 and fell for five. That alone is a tantalizing sign that even America’s biggest export winners also face powerful foreign competition for their home market. At least as revealing, this competition has persisted even though U.S. growth has been weak, and should be at least slowing the rise of imports.

Even more interesting, of the 15 cases in which imports rose, they increased by double-digit percentages in four instances, and by near-double digits in three more. Yet of the 12 cases in which exports decreased, only three did so by double-digit percentages and only one other was near that ballpark. These results clearly point to stronger import flows.

It’s true that, as suggested above, because imports so greatly exceed exports in America’s manufacturing trade, looking at percentage moves can mislead. In fact, of these 20 leading export winners, 13 were still running trade deficits as of the mid-point of this year. (More encouragingly, nine of these gaps had narrowed.) But that statistical reality seems trumped (no pun intended) by a truth that even trade and export cheerleaders will always be hard-pressed to deny even in the best of economic times: The United States will never be able to open foreign markets nearly as easily as it can control its own.

(What’s Left of) Our Economy: Can Greece Ever Bounce Back?

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Asia, Austan Goolbee, competitiveness, currency, devaluation, education, European Union, Eurozone, exports, Gary P. Pisano, Greece, Harvard Business School, human capital, industrial commons, manufacturing, Marc Champion, productivity, recovery, savings, technology, trade surpluses, Willy C. Shih, {What's Left of) Our Economy

Trying to cover the Greece crisis is the analytical equivalent of driving through a very small town. If you blink, you might miss the latest development. So rather than try to keep up with each new twist and turn, let’s look at the most important economic question raised by the country’s predicament: Is there any hope for a return to decent, healthy growth rates?

The textbook economics conventional wisdom seems to be Yes, albeit with great difficulty. I’m a lot less sure, for reasons that reveal many fundamental flaws with textbook economics – mainly its inability to eliminate political, social, and cultural differences.

That conventional wisdom was recently summed up by the University of Chicago’s Austan Goolsbee, who served as President Obama’s chief White House economist. As Goolsbee told the Washington Post, Greece’s main problem is a woeful lack of price competitiveness. Its costs to produce goods and provide services – and especially its labor costs – are way too high, and its productivity and quality levels are way too low to give its businesses much hope of outselling foreign rivals. In other words, unless you ignored economics completely, or there was simply no choice (as with many personal services), you’d have to be an idiot to Buy Greek in most cases.

Goolsbee proceeded to note that countries in this situation can generally at least hope to gain competitiveness by devaluing their currencies. This step makes the price of anything turned out by the devaluing country cheaper than foreign counterparts (all else, like productivity, equal). But since Greece is a member of the Eurozone, it lacks this option. Its price gap can only be closed if enough of its fellow Eurozone members stoke inflation in their own economies, or if it boosts its own productivity by slashing wages (and/or in principle other business costs, like excessive regulations).

But let’s say Greece takes one of these two basic roads. Does anyone honestly think it will start winning in global markets, or even its home market, even once a respectable stretch of time passes? If so, they shouldn’t. To begin understanding why, let’s recall that Greece got into its mess in the first place largely because a big macro-economic prediction failed. Specifically, Greece’s entry into the European Union (in 1981, long before the Eurozone currency area was born in 1999) didn’t bring nearly enough durable convergence with its more prosperous and better run neighbors.

As required, Greece brought its laws and standards in line with the new European norms. And it made non-trivial economic progress – particularly after it began receiving huge injections of foreign aid. But that’s about where convergence worthy of the name stopped. Bloomberg’s Marc Champion tells the story well. Unlike most of the rest of the European Union, Greece collectively took the money and ran, embarking on a huge spending and stealing (literally) spree rather than investing in productive activity. The Euro’s creation wound up simply giving Greece many more resources to waste, as it enabled Greeks to borrow at the kinds of low rates much more appropriate for a much better-run economy. And for good measure, Greek governments for years lied massively about the nation’s finances – with a helping hand from Wall Street.

That is, Greece squandered nearly all the economic opportunities that macro-economics had predicted from its membership in Europe because – like the rest of the currency union in particular – it was free to remain largely autonomous politically. In every way other than economic, Greece was free to remain Greece, and too much of that identity had become a formula for profligacy.

But just as macro-economics can’t come close to adequately explaining Greece’s descent into economic degeneracy, it struggles at best to illuminate a plausible path to real recovery. For Greece needs much more than competitive prices to return to some semblance of economic viability. It needs a reliable legal and regulatory environment, to persuade domestic capital to stay home for productive use and to persuade foreign capital to give it a chance. Even if it had noteworthy natural comparative advantages in any sectors other than some farm products that are hardly staples, it would need the kind of scale that few of its extractive and especially manufacturing industries boast.

And to achieve that end, it would need what Harvard Business School professors Gary P. Pisano and Willy C. Shih and Samuel P. Pisano have called an industrial commons – the “R&D know-how, advanced process development and engineering skills, and manufacturing competencies” needed to produce the high value products and services upon which first world living standards ultimately depend. Countries without these capabilities are doomed to lengthy servitude in what’s called the low-value ghetto – simple, labor-intensive activity that pays very low wages, fosters very little learning or innovation, and, by the way, is an awfully crowded neighborhood in today’s global economy.

As numerous Asian countries have demonstrated, the low-value ghetto can be left behind by economic strategies that (to simplify a bit) successfully encourage very high rates of domestic saving and a laser-like focus on quality education that can create the wherewithal needed to advance up the value and skills ladder. In some cases, such progress has been able to start attracting – and effectively absorb – the foreign capital and knowhow that can provide a vital boost. Does that sound like spendaholic Greece today? Of course, as the Asian experience also demonstrates, it’s also essential to have a robustly growing global economy that can accommodate ever greater exports and indeed trade surpluses. Does that sound like the wheezing global economy today?

Greece does boast formidable human capital – just take a look at the math, science, and engineering faculties of any number of major American colleges and universities. That suggests potential in fields like software development, as well as lower value tech work like call centers (which are much likelier to create significant job opportunities). The country’s geography also suggests continuing possibilities in logistics (which is why shipping has always been strong).

But it’s precisely these kinds of changes that will have to begin and take hold for Greece to escape basket-case status. If they don’t, expect to keep hearing nonsense on the order of “If enough wealthy Germans and other Europeans would just take more vacations there, Greece’s problems would be solved.” That may make macro-economists feel good, but it represents a cruel hoax on Greece.

Following Up: Trade Data Undermine China’s Great Power Claims

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Asian Infrastructure Investment Bank, China, emerging markets, export-led growth, exports, Following Up, International Monetary Fund, Trade, trade surpluses

The economic data published by China’s government has always struck most observers as kind of funny – and not in the “ha, ha” sense. And Beijing’s last few batches of trade figures have been no exception. Still, through all the bizarre seasonal adjustments that China claims to make at this time of year in order to account for its lunar new year holiday, and for all its other well-established statistical shenanigans, shines one key point: Contrary to endless predictions that China is shifting its economic model to domestic demand-led growth, it’s clear that the PRC is actually getting more dependent on exports, and especially net exports (trade surpluses).

As I noted in this January post, although in recent years, exports as a share of China’s gross domestic product (GDP) have fallen , China’s growth rates have fallen faster. So although there’s less growth nowadays, more of it has been generated by overseas sales.

At that point, we were still waiting for the final 2014 China trade numbers. Now we have them. The country’s trade surplus shot up just under 67 percent from 2013 levels – from $227.55 billion to $379.53 billion. Exports grew from $2.21 trillion to $2.34 trillion. But growth slowed from 7.7 percent to 7.4 percent – the worst pace in 24 years.

The trend, moreover, has only intensified during the first quarter of this year. China’s trade surplus has shot up from $16.58 billion between January-March, 2014 to $123.68 billion during the January-March period this year. That’s 7.5-fold growth! Exports are actually down quarter to quarter, by 2.71 percent, from $528.35 to $514.02 billion. But imports fell off the cliff. Even more revealing: The first quarter growth data, set to come out tomorrow, are forecast to be about seven percent – below even the multi-decade low hit for the full year last year.

This heightening export dependence is especially important when you think about the recent debates about whether the world needs to accommodate the rise of China as-is, or insist on better behavior before endorsing, for example, its new Asia infrastructure bank or its demands for more influence in existing international institutions (which have also been made by other so-called emerging market countries). Because it’s a powerful reminder that, despite all the hype about the admittedly stunning progress it’s made on so many fronts, China still needs the rest of the world – and especially the wide open, gargantuan U.S. market – much more than the world needs China.