Our So-Called Foreign Policy: If You Think the Chinese Spy Balloon Incident is Weird…

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Biden, Biden administration, CFIUS, China, Chinese spy balloon, Committee on Foreign Investment in the United States, espionage, foreign investment, Fufeng Group, Grand Forks, Grand Forks Air Force Base, North Dakota, Our So-Called Foreign Policy, Treasury Department, U.S. Air Force

However bizarre you think President Biden’s handling of the Chinese spy balloon was, another recent episode in U.S.-China relations could well top it for weirdness. Indeed, it raises the question of whether the administration will fall into a puzzling pattern of commendably tough and smart trade and tech transfer policies toward the People’s Republic while overlooking grave espionage threats.

Not that the spy balloon thing wasn’t plenty strange enough. I mean, the U.S. government found out that this Chinese surveillance craft entered U.S. airspace in Alaska nearly a week ago. (The New York Times has put together this handy-dandy timeline.) It let it float southward over the Canadian border and pass over numerous American strategic sites for days. It first explained its failure even to try shooting it down by citing fears about the debris harming civilians on the ground – when the target was drifting over virtually unpopulated regions. And it finally acted only after the balloon clearly had ample time both to snap pictures of key locations and send them back to China.

But in late 2021, an arguably stranger tale began. That’s when a Chinese agricultural entity (remember – no organization in China deserves the label “business” or “company” because in China’s state-dominated economy, all such groupings are either directly or indirectly controlled by the Chinese regime) announced plans to build a corn milling facility just outside Grand Forks, North Dakota.

Most state and local leaders welcomed the plan as a big jobs and growth boon. But there was this problem: The facility would be located 12 miles from a major U.S Air Force base.

Now you’d think that since the Biden administration deems China as America’s most dangerous strategic adversary, this prospective Chinese investment – from something called Fufeng Group Ltd. – would be vetoed immediately. And this expectation logically would be even stronger because in August, 2018, Washington’s authority to reject potentially threatening foreign projects was broadened to include purchases of real estate. In February, 2020, regulations issued by the Trump Treasury Department came into force that listed facilities, including military installations, near which such transactions could (but not must) be prohibited.

Yet the Grand Forks base never made the list. And it stayed off the list even after September, 2022, when a Biden Executive Order “reflecting the evolving national security threat landscape and underscoring the critical role of the Committee on Foreign Investment in the United States in responding to new and emerging threats and vulnerabilities in the context of foreign investment,” elaborated and expanded “on the existing list of factors that CFIUS considers, as appropriate, when reviewing transactions for national security risks, and describes potential national security implications in key areas.” 

As a result, when critics started protesting about the national security implications of these Chinese plans, CFIUS decided (after three months) that it lacked jurisdiction in the Grand Forks matter.

And there the controversy presumably would have ended. Except that on January 27, in response to concerns expressed by North Dakota’s two Republican Senators, Assistant Secretary of the Air Force Andrew Hunter stated that

“Grand Forks Air Force Base is the center of military activities related to both air and space operations. While CFIUS [the Treasury-chaired inter-agency task force charged with scrutinizing proposed foreign investments with national security implications] concluded that it did not have jurisdiction, the [Air Force] Department’s view is unambiguous: the proposed project presents a significant threat to nationa security with both near- and long-term risks of significant impacts to our operations in the area.”

And the base’s website makes it easy to see why. It explains that Grand Forks is headquarters of

“The 319th Reconnaissance Wing [which] provides a decisional advantage to our warfighters and national leaders through support of our Nation’s Global Hawk High Altitude ISR [Intelligence, Suveilllance and Reconnaissance] mission. Ensures strategic command and control through the operation of the Nation’s High Frequency Global Communication System.  Affords Combatant Commanders mission-ready Airmen anytime, anywhere. Provides airmen and families of the Grand Forks AFB team, to include geographically separated units, with responsive, tailored, and mission-focused support.”

In addition,

“Communication professionals with the 319th Communication Squadron maintain one of two high-frequency global communications systems in the Air Force, offering 24/7 global continuity for command and control in support of the Department of Defense, Executive Branch of the U.S. Government and Department of Homeland Security.”

But China’s intentions of building…anything…anywhere close to Grand Forks? Nothing to see here, according to Treasury and its task force.

To be fair, Treasury’s “What, Me Worry?” attitude toward national security ever since the task force – the Committee on Foreign Investment in the United States – and the screening process it’s supposed to operate was created in 1975.

At the same time, back then, and in the following decades, the main controversy surrounding CFIUS was whether it should be warier of proposed investments by American allies like Japan or Persian Gulf oil producers because critics (like me) argued that they could threaten the economic and technological foundations of U.S. national security.

Today, the China challenge obviously combines these economic and technological considerations with out-and-out military threats.

Fortunately, in the North Dakota case, Grand Forks’ mayor has reversed his stance and declared he will ask the City Council to deny the Chinese building permits. But clearly, these decisions can’t be left up to state and local officials. If President Biden is really determined to counter China with the comprehensive approach that’s needed, he’ll revamp CFIUS by removing Treasury from the driver’s seat, expand the list of strategic facilities near which Chinese and other foreign investments can be banned. And respond promptly the next time a spy craft from China, or anywhere else, violates American air space.

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(What’s Left of) Our Economy: Why the Trump-ers (So Far) Aren’t Wrong About the Dollar

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bubbles, consumption, currency, debt, dollar, exchange rates, finance, Financial Crisis, growth, inflation, investment, protectionism, Steve Mnuchin, Trade, Treasury Department, Trump, {What's Left of) Our Economy

The economics, finance, and business worlds are kind of up in arms over U.S. Treasury Secretary Steve Mnuchin’s suggestion earlier this week that a weaker U.S. dollar would be good for the American economy.

I say “kind of up in arms” because Mnuchin’s remarks were more nuanced than generally reported; because financial markets in particular seem to be on steroids and have barely reacted; and because he took pains afterwards to profess his confidence that, despite its recent falling value, nothing fundamental had changed to undermine the greenback’s historic appeal to investors. Indeed, just a little while ago, President Trump stated that he “ultimately” wants to see a strong dollar. 

I say “up in arms” to some extent because, the President’s newest words notwithstanding, no American Treasury Secretary has ever said anything remotely like this in public for decades; because Mnuchin’s original words looked suspiciously consistent with what the establishments in these interconnected economic worlds abhor as the Trump administration’s protectionist instincts on trade policy (because all else equal, a weak dollar promotes U.S. exports and curbs U.S. imports); and because dollar strength (and the big U.S. trade deficits it’s encouraged) has long been a cornerstone of the global economy, and a major growth engine for the numerous countries that rely on selling to Americans to promote their own output and employment. (Hence many of them fiddle around with their own currencies’ values to make sure they can sustain these strategies.) Many strong dollar proponents also claim that a weaker American currency could dangerously stoke inflation (especially by boosting import prices) and deter investment inflows into the United States.

But two crucial points are Missing in Action in the tumult sparked by Mnuchin’s remarks. One should be obvious but can’t be repeated often enough, especially in these current overwrought times: You can have too much and too little of a good thing. An overly weak dollar would cause major problems for the U.S. economy. So would an overly strong dollar. Therefore, the key is not to assume either extreme (especially in the absence of any evidence that they’re around the corner) but to figure out a dollar level that achieves the best combination of benefits.

The second has been much less much widely recognized even in calmer periods, but it’s closely related to my longstanding point about the importance of the quality of American growth. As I’ve written frequently, growth based largely on production and the growing incomes it generates place the economy on the soundest foundation. This approach may not always produce the fastest growth, but it fosters the growth that tends to last longest, and that’s least likely to inflate bubbles that then collapse into economic and financial crises).

Such disasters, as we should have learned, stem from growth largely based on borrowing and consuming – i.e., on shopping sprees that eventually can’t be paid for responsibly, and can only continue by racking up enormous debts. And other than legitimate (though clearly overblown nowadays) concerns about inflation, that’s a main reason why folks in finance – and everyone on their payroll in the U.S. government and the rest of Washington – like the strongest possible dollar. Until the merry-go-round stops, they make tons of money by lending to those borrowers.

Here’s where the dollar’s value comes in. A strong-ish greenback tends to result in that borrowing and consuming brand of growth. A weak-ish dollar tends to result in the healthier kind of growth. And as indicated by this chart showing the change in the dollar’s value (also called the exchange rate) against other currencies, only looked at over the shortest possible period could the dollar nowadays be called weak or even weakening. Over a much longer period, it’s obviously still well in “strong territory.” 

And it’s no coincidence, as I’ve also written, that although the U.S. economy seems to be making some slight progress toward creating healthier growth, it still has way too long a way to go – especially given that the current recovery from the crises and the painful recession that followed is now more than eight years old.

The lessons, then, look clear. If you only care about the fastest growth possible regardless of its makeup or the longer-term consequences, and/or if you think finance should be the dominant part of the American economy, you’ll join the chorus of critics scolding Mnuchin for even hinting that some further dollar decline wouldn’t be a disaster for the nation. If you’d like the economy to steer clear of near-meltdowns like the one experienced just about a decade ago, you’ll be applauding what still looks like a subtle call from him for a somewhat weaker dollar.

Following Up: More on the Price of Economic Dependence

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Andrea Wong, Bloomberg, Cincinnati Zoo, Cold War, debt, defense manufacturing, Donald Trump, energy, energy independence, Following Up, gorilla, Harambe, Middle East, oil, oil embargo, OPEC, Richard M. Nixon, Saudi Arabia, Stephen Hawking, Treasury Department, William E. Simon

Especially given some genuinely clownish performances over the last 24 hours, it’s a great pleasure – and relief – to report that not all journalists think it’s newsworthy what Donald Trump thinks of the Cincinnati Zoo gorilla shooting, or what physics giant Stephen Hawking thinks of the presumptive Republican presidential nominee.

For instance, there’s Bloomberg news’ Andrea Wong, who’s just written a terrific story about decades of American financial relations with Saudi Arabia that vividly portrays the risks the country runs when it develops heavy dependencies on imports of crucial products – in this case, oil. It nicely reinforces the message of Saturday’s post about the blind spot Americans too often display when it comes to safeguarding their economic independence.

At the same time, a careful reading of the Bloomberg piece strongly indicates that much of the vulnerability and weakness U.S. officials perceived during that 1970s period when the crucial bilateral decisions were made were just that – perceptions. Even worse, they were arguably perceptions that were seriously off base, and the underlying potential problems were entirely avoidable.

Setting the stage skillfully, Wong makes clear that American leaders could be forgiven for not exactly feeling like world leaders when they launched a far-reaching initiative to keep Saudi money flowing into U.S. government coffers: The Arab members of the Organization of Petroleum Exporting Countries (OPEC), the global oil cartel, had embargoed sales to the United States in response to America’s military aid to Israel during the Middle East war of the previous year. Oil prices had quadrupled. As a result, “Inflation soared, the stock market crashed, and the U.S. economy was in a tailspin.”

Wong might have added that American politics and government was in turmoil as well. In July, 1974, when a Treasury Department team was sent on a crucial mission to Saudi Arabia (as part of a larger Middle East and Europe trip), Richard M. Nixon’s impeachment and removal from the presidency was barely a month away.

In Wong’s words, the mission’s assignment was to “neutralize crude oil as an economic weapon and find a way to persuade a hostile kingdom to finance America’s widening deficit with its new-found petrodollar wealth. And…Nixon made clear there was simply no coming back empty-handed. Failure would not only jeopardize America’s financial health but could also give the Soviet Union an opening to make further inroads into the Arab world.”

To complicate the task further, the United States wasn’t the only country seeking special favors from the Saudis: “Many of America’s allies, including the U.K. and Japan, were also deeply dependent on Saudi oil and quietly vying to get the kingdom to reinvest money back into their own economies. “

Yet the delegation, headed by Secretary William E. Simon, succeeded. The Saudis resumed supplying the United States with oil and plowed most of their proceeds back into U.S. Treasury debt, which enabled America to keep living beyond its means. (I know – this is a dubious benefit at best.) In return, the United States greatly stepped up sales of arms and military equipment to the Saudis, agreed to keep the scale of their Treasury holdings secret, and even gave the kingdom special access to the Treasury market. Moreover, Washington agreed (until this month) to the key condition that the Saudi Treasury holdings not be made public when the Department issued its monthly reports on foreign owners of U.S. government debt.

So it seems like the oil-rich Saudis said “Jump” and an oil-addicted America answered “How high?”, right? Not so fast. For example, Wong’s account shows that Simon didn’t enter the negotiations convinced he had a fatally weak hand. In fact, the former Goldman Sachs bond whiz “understood the appeal of U.S. government debt and how to sell the Saudis on the idea that America was the safest place to park their petrodollar.”

The arms sales angle also worked in Simon’s favor – in two ways. First, American weapons generally speaking were the world’s best. Second, the Saudis didn’t have a serious option of turning to the former Soviet Union, the closest competitor to the United States in military technology. Dealing with the atheistic Soviets could have stabilized the fundamentalist Saudi theocracy as much as disclosure that its financial support for the U.S. economy was in theory indirectly helping America pay for its own arms sales to Israel – the fear behind the Saudis’ insistence on keeping their Treasury purchases secret.

In addition, as poorly as the U.S. economy was performing in the mid-1970s, in part because it still supplied much of its own demand for oil, it was in far better shape than the Europeans and Japanese. They were far more dependent on Middle East producers, and therefore were paying much higher relative oil import bills. The real lesson here: The United States all along possessed the potential to prevent the Saudis and other foreign oil producers from even appearing to gain a stranglehold over the American economy. Its real and perceived vulnerability stemmed from neglectful policies, not geological realities.

Fast forward to today, and the energy and Middle East pictures have changed dramatically. Most important, America’s reliance on the region’s oil supplies has been greatly reduced by its own domestic energy production revolution, and influential Saudis have been revealed as not only staunch Cold War allies, but as major supporters and enablers of the the kind of Islamic terrorism that resulted in the September 11 attacks and that continues roiling the Middle East – and claiming American lives – today.

As a result, even though the Saudis remain important holders of American debt and assets, and therefore remain as significant props for U.S. economic activity, their leverage over the United States has clearly diminished since the height of their petro-power. At the same time, other forms of American economic dependency have reached worrisome levels – notably for many advanced manufactures, including those used in military systems. And these dependencies, too, result from neglectful policies, not industrial realities.

In this third decade of the post-Cold War era, with the subpar U.S. economy continuing to outperform most major competitors, it seems inconceivable that a future president would send his or her Treasury Secretary abroad to stave off the prospect of blackmail. But a few years before Simon actually left to meet with the Saudis, I strongly doubt that he or President Nixon could have imagined undertaking and ordering this mission, either.

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

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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: New Body Blows for Three Major China Currency and Economy Myths

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Australia, Canada, China, Congress, currency, currency manipulation, devaluation, dollar, export-led growth, Federal Reserve, infrastructure, Jack Lew, Janet Yellen, New Zealand, purchasing power parity, The New York Times, The Wall Street Journal, TPP, Trade, Trans-Pacific Partnership, Treasury Department, {What's Left of) Our Economy

For all the intensive and wide-ranging media coverage of China’s yuan devaluation just over a week ago, three crucial aspects with big implications for Sino-American trade relations and for President Obama’s Trans-Pacific Partnership (TPP) have been neglected.

First, compelling new evidence has emerged that China’s currency move does indeed represent manipulation to achieve advantages in trade – a conclusion that the U.S. Treasury Department has long balked at reaching in its Congressionally mandated reports on foreign exchange rate policies. Of course, Treasury has for years called the yuan undervalued. But it’s excused Beijing of the currency manipulation charge by (most recently) citing the yuan’s “real progress” in appreciating in real terms versus the dollar and China’s reduced intervention in foreign exchange markets.

Treasury, however, will be hard pressed to explain away The New York Times‘ disclosure earlier this week that:

“In a little-noted [July] advisory to government agencies, [China’s] cabinet said it was essential to fix the export problem, and the currency had to be part of the solution….Soon after, the Communist Party leaders issued a statement also urging action on exports. It all set the stage for the currency devaluation last week that resulted in the biggest drop in the renminbi since 1994. The cabinet’s call to action: The country needed to give the currency more flexibility and to reinvigorate exports. If officials did not act, China risked deeper turmoil at home, threatening the stability of the government.”

In other words, the entire top Chinese leadership – not just the Ministry of Commerce, which has explicitly championed a cheap yuan as an export booster frequently in the past – is now on record as having supported a deliberately weakened yuan in order to improve China’s global price competitiveness. What else do American authorities need to make the manipulation accusation officially?

More important, because a Treasury manipulation finding does not, contrary to the conventional wisdom, require any policy follow up, how can supporters of the TPP now justify the agreement’s failure to incorporate effective curbs on such exchange-rate protectionism? During Congress’ recent debate, lawmakers who opposed such measures, along with the administration, insisted that TPP currency sanctions could backfire against the United States because they could be legitimately used to counter any currency effects of the easy money policies of America’s Federal Reserve.  So did Fed Chair Janet Yellen herself, along with Treasury Secretary Jack Lew.

Now, however, it couldn’t be clearer that trade-related currency devaluations having nothing to do with monetary policy are a clear and present danger to the U.S. economy. It’s true, as I’ve noted, that even strong currency language in the Pacific Rim trade deal would not automatically amount to solving the problem, since many other first round and follow-on TPP countries have powerful incentives to retain a currency manipulation arrow in their policy quiver. But at the very least, it’s no longer possible to argue that TPP currency provisions inevitably create a dangerous downside for the United States. And however unlikely, an upside can’t be completely ruled out. The case for unilateral American responses, which the president also adamantly opposes, just got a lot stronger, too. 

Second, new data challenges the claims of administration and other opponents of any currency curbs that the yuan undervaluation problem is steadily solving itself thanks to China’s voluntary actions. Yes, the International Monetary Fund in April declared that the yuan is now appropriately valued. But exactly the opposite conclusion looks more accurate upon bringing into the picture one widely accepted tool for dealing with analytical complications arising from the often dramatically differing price levels among economies – especially those at different stages of economic development.

Thus according to Purchasing Power Parity methodology, the yuan is still more than 40 percent undervalued versus the dollar. Not far behind is the Japan’s yen. And the currencies of three other first-round TPP countries – Australia, Canada, and New Zealand – also supposedly belong in this category.

Finally, even more new data debunks another major argument against strong currency manipulation actions – the contention that China is shifting dramatically from an export-led growth model to a demand-led blueprint. Optimists on this score typically cite figures showing much faster growth in investment in China than in exports. But yesterday, an important Wall Street Journal piece featured an insight regarding the makeup of China’s economy and growth that decision-makers and analysts urgently need to understand: Properly measuring the importance of exports to China requires counting much more than the country’s total overseas sales or even its trade and current account surpluses. It requires counting all the infrastructure spending on all of the roads, bridges, ports, airports, and other projects that are needed to support exports, and that have been one of China’s major competitive strengths.

Figures reported by Journal correspondent Greg Ip show that, when the export sector is properly defined, its contribution to China’s growth is down since 2010, but “still remarkable amid slower growth in its trading partners and a higher yuan.” In the process, he supported a point that I’ve been making for several years. On top of this finding, data I’ve previously spotlighted shows that, given its overall growth slowdown and expanding trade surpluses, China has been getting even more export-oriented lately.

A China that’s unmistakably manipulating its currency and increasingly export-heavy, and a yuan whose value remains massively distorted by Beijing don’t of course guarantee that Congress will start expressing big second thoughts about endorsing President Obama’s TPP and China trade status quos. But they do mean that lawmakers will be even shorter than usual of reasons not to.      

(What’s Left of) Our Economy: Treasury’s Lew Exposes Fast Track as a Sham

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Congress, currency manipulation, fast track, Jack Lew, monetary policy, Obama, Senate Finance Committee, TPA, TPP, Trade, Trade Promotion Authority, Trans-Pacific Partnership, Treasury Department, {What's Left of) Our Economy

For someone supposed to be a political whiz due to staff experience on Capitol Hill, Treasury Secretary Jack Lew sure has been acting like a political bungler in explaining to Congress why strong currency manipulation sanctions don’t belong in trade deals like President Obama’s proposed Trans-Pacific Partnership (TPP).

In his April 21 letter to the Senate Finance Committee, Lew both fatally undermined both the president’s insistence that the fast track bill gives Congress meaningful influence on U.S. trade negotiations, and Washington’s (feeble) efforts to end protectionist exchange rate policies abroad.

Lew’s letter, after all, emphasized two arguments. He claimed, “all of the partners consulted have made clear that they will not support the introduction of enforceable currency provisions in the context of trade agreements, and specifically, the TPP.” And he pointed to the administration’s “serious concern that in any trade negotiation other countries would insist that an enforceable currency provision be designed so it could be used to challenge legitimate U.S. monetary policy, an outcome we would find unacceptable.“

Lew’s first point amounts to an admission that Congress can put all the negotiating instructions it wants to in a fast track bill, but that the administration will ignore them if the other TPP countries (or any other countries talking trade with Washington) say they oppose them. Of course, this position not only tells lawmakers they’re kidding themselves. It also tells America’s interlocutors that they have the whip hand in trade talks.

Lew’s second point needlessly hands foreign governments an all-purpose excuse to stonewall Washington’s efforts to eliminate “unfair and inappropriate currency polices [that] have hurt our workers and firms,” as he has labeled them. For now his counterparts need only claim that these measures are no different from America’s own monetary easing.

Especially weird about this Lew argument is that, assuming it’s serious, his own efforts to end these foreign exchange rate policies logically have to be based on a belief that they are clearly different from the Federal Reserve’s moves. Rather than strengthen foreign governments’ positions, why doesn’t he tell Congress, the American people, and U.S. trade rivals what these distinctions are, and urge American lawmakers to add to his bargaining power by linking countermeasures to the trade talks?

One likely answer: Despite official protestations to the contrary, President Obama is ready to accept a bad TPP trade deal over no deal at all. Consequently, Congress has been put squarely on the spot. A senior U.S. official has now openly admitted that its instructions are pointless, and that Mr. Obama’s position on lawmakers’ currency concerns is a matter of choice, not necessity. What better reasons to end the sham of TPP and fast tracking its approval once and for all?

(What’s Left of) Our Economy: New Obama Report (Unwittingly) Shows Why Trade Deals Need Currency Manipulation Bans

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China, currency, currency manipulation, Eurozone, exchange rates, Financial Crisis, free trade agreements, Global Imbalances, gross domestic product, Japan, Korea, KORUS, Malaysia, New Normal, Obama, recovery, Singapore, Taiwan, TPP, Trans-Atlantic Trade and Investment Partnership, Trans-Pacific Partnership, Treasury Department, {What's Left of) Our Economy

U.S. leaders keep showing us that they remain “The Gang That Can’t Think Straight” when it comes to international economic policy. Just look at yesterday’s Treasury Department report on exchange rate policies around the world – the department’s biannual assessment of whether America’s trade competitors are artificially keeping their currencies low to reap trade advantages. No countries were officially accused of this form of protectionism, but several had a Treasury finger wagged their way, including recent free trade agreement partner South Korea.

According to the report, although the Koreans have made international promises to refrain from competitive devaluations, the “sustained” rise in Seoul’s reserves and the country’s net forward position “indicates that they have intervened on net to resist won appreciation.” For good measure, Treasury noted Korea’s rising goods trade surplus with the United States and a July, 2014 International Monetary Fund judgment that the won “remains undervalued.”

In other words, Korea isn’t manipulating, but it looks suspiciously close. As a result, “Treasury has intensified its engagement with Korea on these issues. We have made clear that the Korean authorities should reduce foreign exchange intervention, limiting it to the exceptional circumstance of disorderly market conditions, and allow the won to appreciate further.”

Of course, here’s the rub: Seoul is completely free for all intents and purposes to ignore this “engagement.” For Korea’s currency interventions may clash with the international obligations it’s assumed (as in the World Trade Organization and the International Monetary Fund). But they don’t flout the only such commitment that could plausibly be enforced – that trade deal (KORUS) with the United States. After all, consistent with Washington’s reigning bipartisan consensus (especially between the last two presidents, and apparently now including Fed chair Janet Yellen), that enforceable currency manipulation bans don’t belong in trade deals, KORUS ignored the issue.

This gaping and damaging (by Treasury’s own admission) disconnect has big future implications as well. The president also staunchly opposes including an enforceable currency manipulation ban in the Trans-Pacific Partnership (TPP) trade agreement he’s seeking. This deal would already include countries widely accused of past manipulation: Japan (chided in the new Treasury report for its heavy reliance on yen weakening monetary policies to boost growth), Malaysia, and Singapore. Among likely follow-on countries: leading exchange-rate protectionist China, Korea, and Taiwan (which also just came onto Treasury’s manipulation radar).

Nor is the problem confined to East Asia, in the administration’s own view. President Obama is pursuing a lower-profile trade agreement with the European Union – even though Treasury’s report charges the Eurozone with a Japan-like easy money-led growth policy.

To be sure, the new Obama Treasury Department report doesn’t flag these or any other foreign currency policies as significant direct threats to America’s welfare – even though the rising trade deficits to which they contribute subtract from the gross domestic product’s expansion at a time when the nation remains growth-starved. But it does emphasize the potential for major indirect harm, warning that the world economy is once more becoming overly reliant on the United States as an engine of demand, and that “Doing so will not lead to a pattern of strong, sustainable and balanced global growth….” It should have added “and indeed helped set the stage for the last financial crisis and sorely inadequate New Normal that’s emerged in its wake.”

At the same time, the administration keeps insisting that new trade deals with net export-led regions will not only help speed up the historically weak U.S. recovery, but spur greater world-wide growth, too. Instead, as its own new foreign currency report makes painfully clear, it’s much likelier that if this approach to globalization succeeds:

>The United States will be more closely integrated than ever with economies determined to grow at its expense.

>It will have virtually no internationally authorized way to respond effectively.

>Therefore, slow-growth, lousy wages, surging debts, and greater financial instability will mark its future – if it’s lucky enough to avoid a new crash.

(What’s Left of) Our Economy: Is Obama’s Trade Agenda Based on Currency Lies?

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(What's Left of) the Economy, currency manipulation, easing, fast track, G20, Jack Lew, Michael Froman, monetary policy, Obama, TPA, TPP, Trade, Trade Promotion Authority, Trans-Pacific Partnership, Treasury Department, U.S. Trade Representative

If President Obama’s request for fast track trade negotiating authority and his proposed Trans-Pacific Partnership (TPP) trade deals are indeed in trouble in Congress over currency manipulation, he should blame his own administration’s deserved lack of credibility on this critical issue. In recent weeks, overwhelming evidence for two major falsehoods has emerged.

First, Treasury Secretary Jack Lew recently stated that the administration is “working with [Congress] to figure out if there is something that can be accomplished in the context of our trade agreements that is consistent with our overall strategy of bilateral and multilateral engagement.” Yet the president himself reportedly told a January gathering of House Democrats that “adding currency rules into the TPP would be too complicated and could sink the talks, which are nearing completion.”

Second, the Treasury’s own role in handling currency manipulation seems to have been badly misrepresented. U.S. Trade Representative Michael Froman has often told Congress – and most recently in late January – that Lew “had the lead in currency issues ‘at this point’ and was raising them bilaterally and in international groups such as the Group of Seven and the International Monetary Fund.”

But the Treasury Secretary had his latest chance in international groups and clearly punted. Despite Lew’s participation, last week’s meeting of G20 finance ministers and central bank chiefs in Turkey wound up issuing a communique that repeated a pledge to “stick to our previous exchange rate commitments and will resist protectionism” but that also strongly endorsed the kinds of recent monetary easing policies that inevitably have depreciated currencies.

In fact, on the eve of the G20 meeting, a “senior Treasury official” told the Financial Times that “The fact that the European Central Bank, and others around the world, have moved aggressively to loosen monetary policy was broadly positive, even if it helped fuel renewed concerns over “’currency misalignments.’”

Before another step is taken by any U.S. official or legislator on trade deals or trade promotion authority, these glaring inconsistencies need to be cleared up – under oath. If they’re not, some formal perjury investigations should be able to get the job done.

Following Up: All Looks Clear on America’s Foreign Borrowing Front

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bonds, China, credit, debt, fixed income, Following Up, foreign holdings, Treasury Department, yields

What kind of a cockamamie time is 4 PM to release economic data? That’s when the Treasury Department normally puts out its new figures on foreign holdings of U.S. government debt. Whatever the reason, the October statistics came out late yesterday afternoon, and show a second straight month of downward drift in these stockpiles – which the historical data reveal hasn’t happened since last year, when they fell for four straight months (between April and July). China’s holdings fell for the second straight month, too, and reached their lowest level since last February.

Last month, I expressed some concern that foreigners’ willingness to lend to Americans might be waning a bit. But this new data spotlight more encouraging aspects of the picture (that is, if humongous levels of national indebtedness don’t bother you). They usefully remind how far the nation and world are from even the beginnings of any de-dollarization of the global economy, and how strongly U.S. investors still influence both exchange rates and America’s borrowing costs.

Despite the decline in overall foreign Treasury debt holdings, the October level of $6.0589 trillion was still the third highest on record. Foreign governments – including central banks – reduced their holdings for a second straight month as well, which hadn’t been done since June-August, 2013. But half of the latest 0.38 percent monthly dip was offset by an increase in private foreign investors’ Treasury holdings.

Moreover, global credit markets as a whole displayed no reluctance whatever to lend the U.S. government cheap money. Quite the contrary: From September 30 to October 31, the yield on the benchmark 10-year Treasury note sank from 2.51 percent to 2.33 percent. Today, it’s below 2.10 percent. It’s true that much of this “generosity” reflects the U.S. economy’s widely noticed status as the cleanest shirt in an increasingly filthy global laundry basket, but that’s the universe in which investors operate. Until that global macro landscape changes significantly, expect foreign Treasury stockpiles to hold pretty steady – at the very worst.

(What’s Left of) Our Economy: Foreigners’ Still Keep the Faith in King Dollar

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BRICS, China, currency, dollar, Federal Reserve, foreign exchange, interest rates, national debt, Treasuries, Treasury Department, {What's Left of) Our Economy

It wouldn’t be right to let much more time pass before reporting on the new numbers from the Treasury Department showing how much in the way of U.S. government debt is held by foreigners, including by foreign central banks and other arms of foreign governments.

These monthly data sets are closely followed by finance geeks and some trade specialists because they shed light on critical economic questions (mainly, how much longer the rest of the world will keep on funding America’s habit of living beyond its means) and national security questions (how much influence over U.S. politics and policy might be wielded by creditors whose primary interests are not the well-being of the American people).

That economic question has loomed especially large because even though most outstanding debt is held by Americans themselves, there’s legitimate concern that foreign lenders own than enough to affect interest rates. More specifically, many American leaders and analysts have worried that overseas interests may tire of lending ever more money to an economy that keeps going ever deeper into the red, and will at least start demanding more compensation (i.e., higher rates) for the greater risk they’re being asked to assume.

That kind of tightening would almost certainly slow an already historically sluggish U.S. recovery. Yet if the Federal Reserve held rates steady and simply printed more money to fill the gap, the U.S. dollar could start weakening dangerously, and inflation in America could genuinely take off.

The good news contained in the new Treasury figures is that foreign lenders are more than happy to let Americans’ consumption party continue. Of course, if you’re worried that profligacy can’t indefinitely serve as a national business model, and that continuing huge U.S. international deficits keep threatening to trigger a repeat of the last global financial crisis, that’s also the bad news.

As of August, total foreign holdings of America’s official debt bounced back from a July dip to hit an all-time high of just over $6.066 trillion. Foreign government holdings kept rising month to month, too, and also hit a new record – just over $4.157 trillion.

The figures on some individual countries’ U.S. official debt holdings are noteworthy, too. China is now America’s biggest foreign creditor, which is worrisome in part because of its increasingly aggressive foreign policy in the East Asia Pacific region. It bought $4.8 billion in American government debt in August and raised its holdings to just under $1.270 trillion. That’s below the monthly record Chinese lending hit of nearly $1.317 trillion in November, 2013, but not very far below. In fact, this lending has remained around $1.270 trillion ever since. So there doesn’t seem to be much evidence that Beijing’s stated desire to see its yuan assume a more important role as an international reserve vis-a-vis the dollar is leading it to unload greenbacks.

France has bitterly complained about the dollar’s global predominance for decades, including recently. But France’s dollar holdings also rose in August after dipping in July, and are up more than 13.60 percent since last August.  The BRICS countries (Brazil, Russia, China, India, and South Africa) say they’re so upset about the dollar’s “hegemony” that they’ve formed their own development bank. But as a group, the non-Chinese members steadily keep buying dollars, too.

If there has been a valid reason for concern about foreign dollar buying, it comes from taking a longer perspective. Since March, foreigners’ overall U.S. Debt holdings have increased an average of 6.18 percent year on year. That’s a bit less than the 6.71 percent average for the comparable 2012-13 year-on-year increases. But it’s less than half the 12.74 percent average from 2011-2012.

At the same time, clearly U.S. investors have more than stepped in, and helped keep U.S. Treasury yields low. Moreover, these new August figures precede September and October, when global worries about rising geopolitical tensions and slowing growth in China and Europe in particular triggered a major flight into dollars that pushed the exchange rate way up and interest rates another leg down. Unless foreign investors almost completely avoided the temptations of the dollar’s well established safe haven status, expect the next few sets of monthly Treasury figures to show their dollar holdings strongly on the rise again.