(What’s Left of) Our Economy: Another U.S. Trade Deal that Puts America Last

Tags

apparel, CAFTA, Central America, Central Anerica Free Trade Agreement, dispute resolution, Dominican Republic, DR-CAFTA, free trade agreements, Guatemala, labor rights, legalism, offshoring, Trade, trade law, {What's Left of) Our Economy

To get a good idea of one of the biggest, and most neglected, failings of U.S. trade policy, look no farther than America’s near-neighbors in Central America. For earlier this month, a development on the labor rights front made clear the America Last approach Washington has taken toward the ways that disputes are handled under various trade agreements the United States has signed – in this case, the deal with six Central American countries plus the Dominican Republic (DR-CAFTA).

On June 14, an arbitration panel established by the dispute resolution chapter of the DR-CAFTA treaty ruled against the United States and for Guatemala in a long-running quarrel between the two signatories over labor rights practices in the latter. On the face of it, it’s hard to take seriously the arbiters’ conclusion that Guatemala indeed is not enforcing its own labor laws ostensibly aimed at safeguarding workers’ rights, but that this failure hasn’t affected bilateral trade flows. After all, in a world where its major industrial export industry – apparel – has to compete on price with super-low wage garment giants like China, Vietnam, and Bangladesh, keeping wages down is essential to the Guatemalan apparel sector’s very survival.

But the fundamental problem with this situation has nothing to do with the merits of the case. It has to do with the structure of the dispute-resolution process set up by the DR-CAFTA treaty, which is basically the same as that set up by all U.S. bilateral and regional free trade deals. Simply put, it bears absolutely no resemblance to economic or policy realities.

Two especially important and related points to keep in mind: First, when the DR-CAFTA deal was ratified by Congress, in 2005, the combined economies of all six Central American countries proper only equaled the output of New Haven, Connecticut. Adding the Dominican Republican barely moved this needle. Because of this gargantuan size disparity, access to the American economy was clearly the paramount prize in this arrangement, and the non-U.S. signatories needed the deal much more than did the United States.

Second, largely as a result, the DR-CAFTA deal was less an example of trade policy than of economic development policy. Yes, cheerleaders for the agreement talked of opening exciting new markets for American domestic producers – talk belied by the micro nature of Central American and Dominican markets). And yes, they spoke of enhancing the competitiveness of the American textile industry – claims belied by the impossibility that the pact could overcome the advantages of the Asian apparel giants). But at bottom, the deal was a foreign aid program for the region.

Leave aside its clear failure to achieve meaningful “democracy, economic reform, and regional integration” – at least if you believe even a fraction of countless news reports of out-of-control lawlessness and violence in Central America. Given the non-U.S. signatories’ desperate need for any American help they could get, why on earth would Washington permit the treaty to create a system for choosing arbitration panels – which have the last say in determining a dispute’s winner and loser – that treats the United States and the other DR-CAFTA countries as legal equals?

One answer is that the agreement – like many other U.S. trade deals – was actually intended to foster offshoring, not open foreign markets. So the multinational companies that have dominated the American trade policymaking process for so long made sure that dispute resolution aimed first and foremost to prevent the United States from limiting its imports from their Central American and Dominican factories for any reason. And given the absence of significant consumption markets in the region, that observation seems compelling.

But the so-far-standard U.S. approach to dispute-resolution in trade also typifies a legalistic worldview that contrasts sharply with global realities even in an economic sphere where, for numerous reasons, it’s still completely inappropriate. In fact, this legalism is likelier to undermine American interests than serve them.

Principally, the prevalence tariff and non-tariff barriers to both trade and investment, along with various other predatory practices, shows that the consensus on acceptable economic behavior needed for a genuine legal system to function adequately simply does not exist in fact. Ditto for the great majority of economies that rely heavily on amassing net exports to generate growth. As a result, international commerce is anything but the positive-sum arena portrayed by politicians and academics. So any arrangements meant to negate national power are bound to handcuff the United States. Worse, they handcuff America needlessly.

Perhaps one day, the worldwide consensus needed for a genuine, legitimate system of trade law will emerge. Until it does, however, the United States should capitalize on the leverage it enjoys as the world’s most open major trading power and market of last resort, and sign trade agreements that establish it as judge, jury, and court of appeals for whatever disputes arise. There’s no better place to start than scrapping the artificial – and indeed forced – egalitarianism of the DR-CAFTA trade agreement.

Im-Politic: How I Scooped The Times on Trump and Nationalism 25 Years Ago

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America First, Democrats, elites, environmentalists, foreign policy, globalism, globalization, Im-Politic, Immigration, internationalism, interventionism, middle class, minoriites, nationalism, politics, Populism, Republicans, sovereignty, The National Interest, The New York Times, Thomas Edsall, Trade, Trump, working class

However conceited it sounds, it really is time – again – 🙂 to pat myself on the back. This morning’s New York Times featured a long analysis by contributor Thomas Edsall titled “The End of Left and Right as We Knew Them.” The main thesis (as per a quote from the director of the “International Institutions and Global Governance Program” at the Council on Foreign Relations):

“The most salient political division today is not between conservatives and liberals in the United States or social democrats in the United Kingdom and France, but between nationalists and globalists.”

Edsall himself elaborates:

“By now it has become quite clear that conservative parties in Europe and the United States have been gaining strength from white voters who have been mobilized around issues related to nationalism — resistance to open borders and to third-world immigration. … On the liberal side, the Democratic Party and the center-left European parties have been allied in favor of globalization, if we define globalization as receptivity to open borders, the expansion of local and nationalistic perspectives and support for a less rigid social order and for liberal cultural, immigration and trade policies.”

Moreover, at the heart of these new divisions are class distinctions: The nationalists on both sides of the Atlantic are likeliest to be relatively poor and relatively uneducated – although Edsall does present research findings showing – unconvincingly in my view – that classic “racial resentment, more than economic anxiety, influenced the [U.S.} presidential election.”

Yet the author also unmistakably believes that the left “In recent decades…both in Europe and in the United States [has] begun to include and reflect the views of large numbers of well-educated elites — relatively affluent knowledge or creative class workers….” Indeed, he coins a nice phrase: “The rise of the affluent left.”

So what does this have to do with yours truly? Plenty. Because nearly 25 years ago, I predicted the development of exactly the same trend. My forecast came in an article for the journal The National Interest that was called (wait for it) “Beyond Left and Right” – and it got a fair amount of media attention from both liberals and conservatives. (The National Interest itself is on the right end of the spectrum.) 

Unfortunately, I haven’t been able to find versions on-line that aren’t behind pay walls, but here are a few excerpts from a dog-eared xerox:

“…a new underlying fault line [replacing the old left-right divisions] is already emerging in American foreign policy, dividing what might best be called nationalists and internationalists. In terms of American diplomacy, this new alignment will pit a generic model of foreign policy-making that long predates the Cold War – one based at bottom…on the belief that international activism itself is the key to American security and prosperity – against a rival approach…whose supreme goal is consolidating American military and economic strength, and enhancing America’s freedom of action. In the realm of economic policy, those who argue that the nation-state, as an economic player, is obsolete or dangerous will vie with those convinced of its continuing relevance and legitimacy. In electoral politics, sharp differences in economic interests and cultural outlooks will produce a widening rift between business, professional,and government elites on the one hand, and wage-earners on the other. The issue of class, in other words, is re-emerging in American politics.”

I added that these divisions were arising from “the different impact of world economic trends on different classes” and were producing “a foreign policy debate [that] increasingly pits social and economic classes against each other, focusing on the questions of who pays the costs and who incurs most of the risks involved in competing economic and security policies.

“Polls repeatedly show that the best educated and wealthiest Americans are the staunchest internationalists on both security and economic issues. The surveys also show strong support for internationalist policies to be lacking nearly everywhere else on the social spectrum. “

And there’s more. I wrote that “At the mass public level,” the nationalist faction would be comprised of “blue collar union members, white collar middle managers and small businessmen from the Perotista ranks; family- and community-oriented immigrants; and grassroots environmental activists.”

As for their rivals, “The social base of internationalism would include many big multinational businesses and their upper level managers, financiers, professionals, and retailers. Journalists and the rest of the mass media, as well as academics, also tend to support an idealistic globalism. Other members of a new internationalist coalition might include minorities whose fear of cultural conservative nationalists outweighs their qualms about job-destroying internationalist free-trade economics, and affluent, mainstream environmentalists.”

And there was more on the role of the media: “Much of what they lack in numbers, the internationalists would make up for in money, influence, and the aura of respectability that their media allies will continue to provide.”

What would happen to liberal and conservative internationalists in the process? The former

“may wind up permanently alienating labor, minorities, and the white-collar middle class whether they intend to or not – and lose their identity as champions of the underdog and as agents of progressive change in the process. Internationalists of the Right will face similar problems. Without offering their voters something more than NAFTA, the continuing “creative destruction” of their jobs, endless foreign interventions, and Marilyn Quayle’s definition of family values, it is difficult to see them avoiding George [H.W.] Bush’s political fate.”

For good measure, I added that if they do crystallize, the resulting new coalitions are likely to be “less inclined to compromise than their predecessors….”

Clearly, I didn’t get everything right. But I’m kind of amazed at how many developments I absolutely nailed. Further, we’re only a few months into the Trump era. In other words, the American political realignment I anticipated still probably has a long ways to go.

(What’s Left of) Our Economy: Why Ag Fears Mustn’t Drive Trump’s NAFTA Revamp

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agriculture, automotive, exports, imports, Jacob Bunge, manufacturing, Mexico, NAFTA, North American Free Trade Agreement, offshoring, The Wall Street Journal, Trade, Trade Deficits, Trump, {What's Left of) Our Economy

You have to hand it to the American agriculture industry: It has great lobbyists and public relations flacks. Just look at the job they’ve done convincing the Trump administration to pay special attention to the farm sector’s concerns when renegotiating the North American Free Trade Agreement (NAFTA) with Mexico and Canada. And as made clear by The Wall Street Journal today, they’re keeping the pressure on in an effort to convince the president that the United States doesn’t hold such overwhelming leverage in these talks with Mexico in particular.

No one can blame ag from doing its job. But maybe the press could do a somewhat better job of providing valuable context, as the Journal article today simply didn’t?

It’s indeed noteworthy, as The Journal‘s Jacob Bunge reported, that American farm exports to Mexico have fallen so far this year, especially given that Mexico is the third largest foreign market for these goods. Moreover, it does look like the drop stems at least partly from Mexico’s search for alternatives to U.S. suppliers in order to create NAFTA revamp bargaining chips.

But a broader examination of bilateral trade flows shows that, however important, agriculture doesn’t deserve pride of place in America’s trade negotiations – with Mexico or any other countries. First of all, according to the U.S. Bureau of Economic Analysis, last year, agriculture (along with forestry, fishing, and hunting) comprised 0.9 percent of the American economy on a value-added basis. Manufacturing represented 11.7 percent.

Last year, moreover, manufactures exports (of $1.05127 trillion) topped agricultural exports ($134.88 billion) by a factor of nearly eight. It’s true that agriculture ran a trade surplus and manufacturing an immense deficit. But the former – about $20 billion – was hardly an economic game-changer, and that was especially so considering the nearly $862 billion scale of the latter.

U.S.-Mexico trade tells a similar story: According to The Journal, 2016 saw America sell $18 billion worth of agricultural products to Mexico. Manufacturing exports were about eight times as great: just over $143 billion.

But there are some big problems with these manufacturing exports. For example, they’re much more than offset by U.S. manufactures imports from Mexico. In fact, since 2009 (the year the current recovery began), this bilateral trade deficit has risen more than twice as fast (by 125 percent) than that with China (52.56 percent).

Moreover, Trump is right about much of this imbalance resulting from NAFTA-induced American production offshoring to Mexico that aims to sell back into the United States. That’s had much to do with the 1990-2013 drop in the United States’ share of North American light vehicle production from 78 to 64 percent, and the rise in Mexico’s share from six to 19 percent. That’s also had much to do with the more than tripling of the U.S. bilateral trade deficit in autos and light trucks since NAFTA’s signing.

In fact, in the first eleven months of 2016, Mexico exported nearly 80 percent of the 3.22 million autos it produced, and fully 77 percent of them were sent north of the border.

As a result, auto industry leaders have plainly stated that without the unfettered access NAFTA provides to the American market, and without the incentives to produce in super-cheap and largely unregulated Mexico created by the treaty, most of their auto investment in Mexico would lose its raison d’etre.

No one is calling for neglecting America’s farm sector during the NAFTA renegotiation. But the outsized role played by manufacturing, and manufacturing trade deficits in regional trade, along with manufacturing’s historic role as the United States’ productivity growth and innovation leader, couldn’t make clearer that letting ag export fears dominate this economic diplomacy would be a classic case of letting the tail wag the dog.

Our So-Called Foreign Policy: At the WTO, Europe Claims a Right to Free Ride

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Airbus, alliances, Boeing, Charles Dickens, Defense Department, EU, European Union, foreign policy establishment, free-riding, NATO, North Atlantic treaty Organization, Our So-Called Foreign Policy, subsidies, Trade, trade law, Trump, World Trade Organization, WTO

Charles Dickens famously observed that the law can be an idiot. Last week’s World Trade Organization (WTO) ruling on U.S. and European Union (EU) aerospace subsidies reminds that American alliance policy can be idiotic – and in a key respect has been for decades. The fault here lies not with the WTO – which is hardly beyond criticism. Instead, the problem entails an American approach to international security relationships that continues a decades-long record of enabling brazen free-riding even under the current U.S. administration – which so far has decried this practice only rhetorically.

Interestingly, the WTO decision last Friday looks like a big win for American aerospace giant Boeing and a big loss for its EU rival Airbus. The trade body ruled as still illegal only one of the original 28 subsidies provided Boeing by Washington state and the federal government that were challenged by Airbus. According to Airbus, the WTO agreed with its allegation that some of the other 27 means of Boeing support were subsidies, but Boeing says that since the ruling determined that these payments had not harmed Airbus, they can remain in place. Airbus disagrees, so expect more litigation.

But here’s what’s completely outrageous. Some of the subsidies Airbus successfully challenged – at least on paper so far – were U.S. Defense Department subsidies. It’s jaw-dropping enough to recognize that Airbus gets military support, too. What’s worse is that so much of the Pentagon money handed over to Boeing (and other defense contractors) has been spent on weapons and other military systems that the United States would not need at all or in such quantity either if Washington hadn’t taken on any role in protecting Europe for decades, or if the Europeans bore anything like an appropriate burden for the own defense.

And don’t forget: For decades, even most U.S. Presidents and other foreign policy establishmentarians who have assign supreme value to continuing current transatlantic security arrangements agree that too many European members of the North Atlantic Treaty Organization (NATO) have been shirking. Talk about biting the hand that shields you.

It’s important, however, to keep in mind who’s mainly to blame. It’s clear that the Europeans deserve no high marks for either gratitude or loyalty. But it’s also clear that their actions can be reasonably portrayed as legitimate efforts to maximize their own self interests – reflecting the equally reasonable judgment that these gambits long have been good bets to succeed.

What the American public needs to ask is (a) why their leaders have handled alliance relationships so ineptly as to have created expectations of free-riding that the WTO case shows are now seen as nothing less than a right to free-ride; and (b) whether the avowedly transactional Trump administration will view the EU defense subsidy charges as a long overdue opportunity to say enough’s enough.

(What’s Left of) Our Economy: Being Tom Friedman Means Never Having to Say You’re Sorry About China Trade

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China, Mainstream Media, protectionism, pundits, The New York Times, Thomas Friedman, Trade, World Trade Organization, WTO, {What's Left of) Our Economy

Uber-pundit Thomas Friedman’s New York Times column this week about China demonstrated both that “better late than never” may not always be true, and that there’s precious little accountability in the Mainstream Media. Too bad he performed both vital tasks completely unwittingly?

As he traveled through China recently, Friedman told us, his conviction grew that, as President Trump has been charging, “China is not playing fair on trade and has grown in some areas at the expense of U.S. and European workers….” Moreover, he adds, this China challenge “needs to be addressed — now.”

Continued Friedman: “The core problem, U.S. and European business leaders based in China explained, is that when the U.S. allowed China to join the World Trade Organization in 2001 and gain much less restricted access to our markets, we gave China the right to keep protecting parts of its market — because it was a ‘developing economy.’ The assumption was that as China reformed and become more of our equal, its trade barriers and government aid to Chinese companies would melt away.

“They did not.”

And Friedman did a pretty good job of summarizing what RealityChek regulars and so many others have known for years – that China’s mercantilism became considerably worse.

The author ended his piece with a (sort of) ringing call for action: “China needs to know that some people who disagree with everything else Trump stands for — and who value a strong U.S.-China relationship — might just support Trump’s idea for a border-adjustment tax on imports to level the playing field.”

But Friedman also included this kicker: According to someone he called “the smartest person I know inside China on trade (who will have to go nameless),” such actions “if anything… may be too late.”

As the author’s reaction – “Ouch!” – suggests, there’s a distinct possibility that his source is right about the consequences of waiting sixteen years to grapple seriously with China’s predatory practices.

But here’s what Friedman didn’t tell you: One of the folks who pushed vigorously for the boneheaded American WTO decision was none other than Thomas Friedman! As he wrote in 2000, opponents of China’s admission, like U.S. labor unions, were “head-in-the-sand” protectionists. Nor did Friedman seem to think much of fears that “China’s entry into the WTO will make it a more formidable geopolitical rival to the United States.”

Instead, he confidently wrote that “to say that [admission] will hurt the cause of democratization in China or that it won’t help create more islands from which Chinese democrats can operate and more tools by which they can communicate, is to speak utter nonsense.”

Interestingly, by 2011, Friedman seemed to be having important second thoughts about China’s reformist intentions. But he still doggedly opposed meaningful actions to neutralize Beijing’s currency manipulation, for example, with tariffs.

Since no one likes to admit mistakes – especially whoppers – I can certainly understand Friedman’s failure to report his enthusiasm for a China trade strategy he now recognizes as a titanic failure. Much less clear is why so much of the rest of the Mainstream Media – and especially news talk shows who view him as a globalization oracle – keep giving him a pass.

(What’s Left of) Our Economy: April’s U.S. Trade Figures Sure Weren’t Winners

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China, economic growth, exports, GDP, Germany, gross domestic product, high tech goods, imports, Made in Washington trade deficit, manufacturing, non-oil goods trade deficit, Trade, trade deficit, {What's Left of) Our Economy

Since last Friday was one of those days when both the U.S. jobs figures and trade figures were released the same morning, and since I was traveling that day, I didn’t get a chance to report on the latter as promptly as usual. But that doesn’t mean the trade figures should be overlooked! Here’s a quick rundown of the high- (or low-) lights, which cover the month of April:

>The combined goods and services U.S. trade deficit rose by 5.15 percent on month, from $45.28 billion to $47.62 billion. But for a change, the big news in this total trade shortfall category was in the revision for the March gap – it was upgraded from an initially reported $43.71 billion. That’s a ginormous 3.61 percent.

>Total exports fell sequentially in April by 0.25 percent, from $191.46 billion to $190.98 billion, and total imports increased from $236.74 billion to $238.59 billion, or 0.78 percent.

>And quite naturally, the March revisions were substantial, too. That month’s combined export total was upgraded by 0.25 percent, and the much larger combined import total revised up by 0.87 percent.

>Also disturbing about the new trade figures: They show that for the first four months of this year, the total trade deficit is up by 13.43 percent on a year-to-date basis. That’s more than four times as fast as the total economy grew between the first quarter of last year and the first quarter of this year (4.08 percent – both these figures are in pre-inflation dollars).

>With Germany’s trade policies in the Trump administration’s cross-hairs and therefore in the news, it’s noteworthy that the U.S. merchandise shortfall with Germany grew sequentially by 5.43 percent, to $5.48 billion in April. That’s the highest monthly total since last August’s $6.05 billion.

>U.S. goods imports from Germany fell by 4.11 percent sequentially, but America’s goods exports sank on month by 15.34 percent.

> At the same time, the Germany goods deficit is down by 5.24 percent year-to-date.

>Of America’s other major trade partners, only the merchandise deficit with China increased significantly on month – from $24.58 billion to $27.63 billion, or 12.42 percent.

>U.S. goods exports to China advanced by 2.22 percent, but imports rose by 9.55 percent.

>The U.S. merchandise trade deficit with China is 4.21 percent larger in the first four months of this year than it was the first four months of last year.

>The April manufacturing trade deficit of $70.31 billion was just 0.79 percent higher than March’s $69.76 billion. Manufactures exports were off by 7.91 percent sequentially, while the much greater amount of imports fell by just 4.27 percent.

>Year to date, the manufacturing trade deficit looks set to establish yet another annual record. At $276.12 billion, it’s already running 6.20 percent ahead of last year’s pace.

>For the first four months of this year, manufacturing exports are up by 3.44 percent, but imports are 4.64 percent higher.

>The story is even worse in high tech goods. The trade shortfall actual dipped by 0.49 percent on month in April – from $6.07 to $6.04 billion. Exports were 8.28 percent lower than in March, and imports were off by 7.01 percent.

>Year-to-date, however, the high tech trade gap is up by 36.69 percent – from $18.37 billion to $25.11 billion. Exports have inched up by 0.25 percent, but imports are 5.42 percent higher.

>The U.S. trade deficit in oil fell by a sharp 35.56 percent sequentially in April, from $8.43 billion to $5.43 billion – the lowest monthly total since last September ($5.13 billion).

>But the April non-oil goods deficit of $61.71 billion was 9.22 percent higher than March’s $56.50 billion. It was also the highest monthly total for this shortfall – which is heavily influenced by U.S. trade agreements and other trade policy decisions – since March, 2015’s $61.74 billion (the highest monthly figure in a data series that goes back to 1992).

>Moreover, in real terms, the April non-oil goods deficit climbed 7.62 percent on month, to $62.04 billion. That’s also the highest total since March, 2015’s $62.80 billion (which was another all-time high).

>Since the headline U.S. government data on changes in the gross domestic product (GDP) are adjusted for inflation, this lofty figure for the real non-oil goods deficit indicates that this Made in Washington shortfall’s growth will drag on economic growth in the second quarter of this year.

Making News: A New USAToday Op-Ed – & More!

Tags

automation, climate change, Germany, Jobs, Lifezette.com, Making News, manufacturing, Paris climate accord, Trade, Trump, USAToday

I’m pleased to announce the publication of my latest op-ed article – a piece that appears in USAToday this morning on President Trump’s criticisms of Germany’s trade policies. Here’s the link.

Incidentally, the article ran as a rejoinder to an unsigned USAToday editorial on the subject that also was published today.  The paper’s editors have been using this “pro-con” format for many years, and I think they deserve great credit for seeking out viewspoints with which they disagree.

In addition, a June 1 post on Lifezette.com included my (skeptical) opinions about claims that Mr. Trump’s withdrawal from the Paris climate change accord will cede global leadership on the issue to China.

Moreover, a May 25 Lifezette article quoted me on a new study finding that trade and offshoring have been responsible for much more manufacturing job loss lately than automation.

And keep checking in with RealityChek for news of upcoming and recent media appearances and other developments.

 

 

(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.

(What’s Left of) Our Economy: Modest Trade Improvement Helps Lift U.S. Growth a Bit

Tags

exports, GDP, Great Recession, gross domestic product, imports, Made in Washington trade deficit, real GDP, real trade deficit, recovery, Trade, trade deficit, {What's Left of) Our Economy

The government’s first revision of first quarter gross domestic product (GDP) figures showed that the inflation-adjusted trade deficit shrank slightly more than originally reported on a sequential basis, and therefore boosted growth by fractionally more (0.13 percentage points rather than 0.07 percentage points). Nonetheless, the quarter-to-quarter positive swing in trade’s growth role (1.95 percentage points) now matches the biggest such change since the fourth quarter of 2010. The $599.9 billion quarterly real trade still represented the second biggest quarterly total since the $623.7 billion run up in the first quarter of 2008, just after the last recession officially began.

The new GDP figures show all of the major categories of after-inflation exports and imports still at new quarterly records, with the former generally fractionally higher and the latter generally fractionally lower. (Services exports were the exception.) The cumulative growth drag created by the real trade deficit’s increase during the current, historically feeble economic recovery shrank from 9.70 percent in the advance first quarter GDP read to 9.32 percent. Separate Census data show that the Made in Washington trade drag declined in the first quarter as well, but at 21.26 percent still represented nearly $533 billion in foregone real output.

Here are the trade highlights from this morning’s GDP report:

>The government’s second look at first quarter U.S. gross domestic product (GDP) showed that a slightly smaller real trade deficit than previously reported made a slightly larger contribution to inflation-adjusted growth.

>The new $599.99 billion annualized trade deficit number (down from the previously reported $605 billion) means that the shortfall shrank sequentially by 0.84 percent. As a result, trade’s absolute boost to growth (0.13 percentage points) was larger than the 0.07 percentage point figure reported last month.

>Moreover, the quarterly positive swing in the trade’s growth role from the fourth quarter of last year (when it subtracted 1.82 percentage points) grew to 1.95 percentage points – matching the biggest such total since the fourth quarter of 2010.

>At the same time, this quarterly trade gap was still the second largest since the $623.7 billion deficit registered in the first quarter of 2008, as the economy was just starting to succumb to the Great Recession.

>All categories of exports and imports tracked in the real GDP figures remained at new quarterly records in the first quarter, with all export totals except for services exports rising modestly, and all import totals falling modestly.

>Combined annualized goods and services exports in the first quarter were upgraded from $2.1675 trillion to $2.168 trillion – 1.43 percent higher than the fourth quarter’s level. The previous quarterly all-time high had been $2.1620 trillion annualized, set in the third quarter of last year.

>The goods export total was revised up from $1.4828 trillion to 1.4832 trillion – an increase of 2.04 percent over the fourth quarter. The previous record of $1.4792 trillion was also set in third quarter, 2016.

>Services exports remained unchanged at $685.8 billion annualized – and still topped the previous record of $684 billion record set in the first quarter of 2015.

>Total annualized first quarter imports were pegged at $2.7679 trillion – a bit lower than the previously reported $2.7703 trillion level, and 0.93 percent higher than the fourth quarter total. The new first quarter level still bested the previous $2.7424 billion record of that fourth quarter.

>Goods imports also were revised down fractionally, from $2.2797 trillion to $2.2782 trillion. That still represented a 1.03 percent increase over the fourth quarter level of $2.2549 trillion – the previous record.

>Services imports were reported last month at their eighth straight quarterly record., and they remained so in today’ report. But the previous $488.3 billion figure was revised down to $487.4 billion – a 0.47 percent sequential increase.

>According to these new GDP figures, the trade drag on the current, historically weak, economic recovery was smaller in the first quarter than previously estimated. The 9.70 percent figure was revised down to 9.32 percent – somewhat lower than the fourth quarter’s 9.71 percent. The new data mean that the economy has grown by $233.6 billion less in real terms during the recovery due to the increase in the real trade deficit.

>The trade drag created by the Made in Washington deficit is still more than twice as great, according to the GDP data and separate figures compiled by the Census Bureau. But it, too, has been slightly downgraded.

>This deficit strips out U.S. trade in oil (which is rarely the subject of trade deals or related policy decisions) and services (where liberalization has made relatively little progress). The growth of the remaining real non-oil goods deficit during the current recovery has slowed cumulative inflation adjusted growth by fully 21.26 percent.

>That’s down from the 21.67 percent growth loss that could be calculated from the previous GDP report, but it will means that the growth of this policy-influenced trade deficit has cost the U.S. economy $532.9 billion in cumulative inflation-adjusted production during this recovery.

(What’s Left of) Our Economy: The Alternative Facts Behind America’s China Trade Policy

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alternative facts, Bill Clinton, Charlene Barshefsky, China, exports, imports, Long Yongtu, manufacturing, offshoring, services, The Wall Street Journal, Trade, trade law, U.S. Trade Representative, USTR, World Trade Organization, WTO, {What's Left of) Our Economy

After reading her interview with The Wall Street Journal, it’s hard to tell whether Clinton-era chief U.S. negotiator Charlene Barshefsky is mainly clueless or mainly arrogant. In other words, is Barshefsky oblivious to how badly she (and colleagues) botched the challenge of admitting China into the World Trade Organization (WTO)? Or is she confident that the bipartisan American economic policy establishment remains so strongly wed to this epic failure that her reputation and current cushy job as a leading trade lawyer won’t suffer in the slightest even when it’s scope is made unmistakable?

Most disturbing, nothing could be clearer from the interview – in which she was joined by one of her former top Chinese counterparts – that her views on the WTO deal and those of Beijing are as close, as the Chinese like to say, “as lips and teeth.” The only significant difference: then Chinese vice commerce minister Long Yongtu denies that his country’s economic reform efforts have gone off the rails in recent years. Barshefsky insists that China “has stopped the process of economic reform and opening and that, instead, has put in place a spate of measures that are zero sum. They’re highly mercantilist and discriminate against U.S. and foreign companies.”

That’s nice to hear. But this claim also underscores how completely blindsided Barshefsky, the rest of the Clinton administration, and the rest of the powers-that-be in American government, business, and academe were by an about-face in a country with a recent history of political instability and course changes, and no record of viewing trade as a positive-sum game or economic openness as a crucial objective in and of itself.

Barshefsky also demonstrates her belief that the phony promises that fueled the Clinton administration’s successful drive to secure China’s WTO entry still hold water – at least with the high and mighty. For example, according to Barshefksy, “The U.S. didn’t alter its trade regime, nor did any other country alter its trade regime. As in any WTO negotiation, it is the acceding country that needs to reform its economy.” But as she surely knows, WTO membership won for China substantial immunity from the national trade law system the United States historically had used to safeguard its legitimate trade interests unilaterally. Once China entered the WTO, Washington’s internationally recognized responses to China’s predatory trade practices largely depended on the assent of the WTO membership – which has been numerically dominated by economies that were major users of Chinese style protectionism.

Barshefsky continues to claim that the safeguards she negotiated with China were adequate to protect domestic industries – at least temporarily – from surges of Chinese imports. The only problem, she contends, is that these mechanisms were “”almost never used.” What Barshefksy omitted, however, was that the big U.S.-based multinational manufacturers that lobbied so lavishly and successfully on behalf of China’s entry were also offshoring production and jobs like crazy to China largely to supply the America market much more cheaply. Limiting America’s imports from China, especially from factories with which they were linked, was the last thing they wanted.

According to Barshefsky, the post-WTO ballooning of the U.S. goods trade deficit with China can be brushed aside because “we have a substantial services surplus with China.” It’s too bad she didn’t provide any numbers, but not at all surprising – since that surplus last year was only about a tenth as big ($37.4 billion) as the merchandise shortfall ($347 billion). Moreover, the manufacturing-heavy nature of this merchandise deficit – which is increasingly comprised of advanced manufactures – should concern all Americans.

And finally, Barshefsky repeated the widely expressed canard that “the trade deficit is a function of macroeconomic factors. Principally, the difference between what Americans save, which is nada, and investment, which is plentiful.” But the relationship between national trade balances and savings rates is simply a mathematical identity – which by definition says “nada” about causation. Indeed, there are plenty of reasons to suppose that, the more the trade deficit grows, the lower the savings rate is bound to become.

Yet interviewing Barshefsky has at least performed one public service. It reminds Americans that alternative facts began shaping the nation’s politics and policy long before the last presidential election.