(What’s Left of) Our Economy: Beware the Fear-Mongering on the Trump Tariffs

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Bloomberg, border adjustment tax, China, inflation, manufacturing, metals, overcapacity, productivity, real value-added, steel, tariffs, trade law, Trump, U.S. Business and Industry Council, value-added taxes, {What's Left of) Our Economy

Well, there can’t be any doubt about it now. President Trump’s trade policy course changes – and especially his determination hike U.S. tariffs – are already harming American manufacturers and the broader economy. After all, this Bloomberg News post just told us so. Except if you examine it carefully, and add a little common sense info, there’s no reason to believe any of these claims – especially for the manufacturing sector.

According to this Bloomberg report, “Confidence gauges spanning small businesses, factories and the public at large are coming off the boil as U.S. tariffs on imported metals — along with threats and counterthreats over Chinese goods — roil the stock market and cast a cloud over what was otherwise a bright economic outlook.”

Manufacturers reportedly face especially serious threats:

“The Philadelphia Fed’s index of business activity six months from now dropped 7.2 points to 40.7 in April, the lowest level since July. Earlier this week, a similar report from the New York Fed showed its future business conditions index registered the steepest one-month drop since the Sept. 11 terrorist attacks. Meantime, factories in both regions are reporting rising prices.”

And Bloomberg conveniently provided a chart displaying these reported “rising costs amid tariffs on imported metals.”

But the chart, and related macroeconomic data, actually represent compelling evidence that metals prices so far have had no discernible impact on U.S. manufacturing’s fortunes. Consider the following:

As the chart shows, the prices paid by inputs for factories in the Northeast sank significantly between 2014 and 2015. Steel prices fell especially sharply (largely because the Chinese government was fueling a massive global glut in this metal).

And according to official U.S. data, how did American domestic manufacturing fare? It grew in real value-added terms ( a measure of output preferred by many economists) by all of 0.90 percent.

The following year, according to the chart, prices these factories reported paying stayed very low, but began rising. Steel prices rebounded significantly, too. Manufacturing’s real value-added growth that year? About half the 2014-15 rate – 0.47 percent.

Those factory prices rose even faster the following year, and steel prices kept increasing. But the impact on America’s domestic manufacturing wasn’t exactly catastrophic. In fact, its annual real value-added growth nearly quadrupled – to 1.89 percent.

How on earth could this be? How about this as a starting point for an answer? Prices of steel or any other inputs aren’t the only influences on business performance. And they’re probably not the most important. For example, demand (aka “customers”) matter, too. In the United States, when those metals prices were dropping sharply between 2014 and 2015, price-adjusted economic growth turned in a solid 2.90 percent growth. The following year, when metals prices stayed unusually low, the real economic growth rate halved. And guess what also nearly halved? Manufacturing’s real value-added increase.

Even more interesting – between 2016 and 2017, when metals prices kept bouncing back, manufacturing’s real value-added jumped. Maybe in part because the economy’s overall growth rate increased by more than 50 percent, to 2.30 percent?

Looking at global growth (i.e., including foreign customers) yields similar conclusions. During that 2014-15 year of greatly reduced metals prices, pretty good U.S. growth but lousy manufacturing growth, the International Monetary Fund tells us that the global economy expanded by (a pretty poor) 3.10 percent. Chances are that feeble growth didn’t help America’s manufacturers, many of whom make much of their money by exporting.

Global growth only picked up to 3.20 percent the following year, but America’s growth tanked. The latter, then, seems to have mattered more to domestic manufacturers, as their own expansion rate fell by 50 percent. Between 2016 and 2017, however, when both the U.S. expansion and the global expansion sped up (the latter to 3.80 percent), American  manufacturing’s growth experienced that impressive takeoff. 

Now it’s true that the Trump metals tariffs could inflict greater harm on U.S. domestic manufacturers going forward, as they could impose on metals-users new costs that come on top of whatever global prices they need to pay at a given moment.  Nonetheless, it’s not like industry is exactly helpless to respond. For instance, it could start improving its productivity performance – which has been lousy on balance during this economic recovery. More productive sectors and companies of course can pass on input price increases without charging their customers more – and thereby undercutting their competitiveness.

At the same time, the metal-users’ loud complaints about the Trump tariffs point to a longstanding weakness of U.S. trade policy and especially the related body of trade law that the President has needed to rely on so far because the chief executive’s unilateral tariff-imposing authority is so limited. Because the trade law system, like U.S.-style legal systems generally, springs into action only when a specific complaint from private business is filed, its remedies are confined to that industry’s predicament. Not even the few trade cases initiated by the Obama administration or even the Trump administration have changed this pattern. (The sweeping tariffs on China sought in the President’s Section 301 intellectual property-centered action have come closest.) The tendency of such narrow-bore measures to enable foreign trade rivals to respond with divide-and-conquer tactics shows that two improvements should be made.

First, as proposed by my previous organization, the U.S. Business and Industry Council, industry-specific tariffs approved by the trade law system should be accompanied by similar protection for the “downstream” (i.e., user) industries. As a result, they would be much less likely to be victimized in the American market, anyway, by foreign competitors not saddled with higher input prices. 

Second, and even better, the administration should revive the Border Adjustment Tax that was part of the tax reform plan initially introduced by the House of Representatives’ Republican leaders. This measure, which would have worked much like the foreign Value-Added Taxes (VATs) used by most trading economies, would not only have provided the equivalent of protective tariffs for all U.S. goods and services facing import competition.  It would have boosted the competitiveness of all American exports in all foreign markets by providing the equivalent of a subsidy.   

Although President Trump initially (and weirdly) was cool to the Border Adjustment Tax, reportedly more recently he’s been changing his tune. Adopting this plan in particular could solve most of the economic as well as the political problems currently threatening his trade policies. 

 

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Following Up: More on the Trump Tariffs

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aluminum, Australia, Canada, David J. Lynch, Defense Department, defense manufacturing base, downstream industries, European Union, Following Up, George W. Bush, Gordon Hanson, James Mattis, Kentucky, manufacturing, Mitch McConnell, multiplier, Paul Krugman, Paul Ryan, steel, steel-consuming industries, tariffs, terrorism, The New York Times, Trade, Trump, U.S. Business and Industry Council, United Kingdom, Washington Post, Wisconsin

I could spend all day today rebutting ignorant, biased, and simply inane commentary on President Trump’s Thursday announcement that stiff tariffs will be imposed on U.S. imports of steel and aluminum (along with watching the plethora of college hoops on TV today!). Instead, I’ll offer some follow-on thoughts to the tariff talking points I posted yesterday.

>The European Union in particular seems outraged by the Trump decision, and has threatened to retaliate with tariffs on its own on a wide range of products, including some from Wisconsin and Kentucky. These of course happen to be the home states of House Speaker Paul Ryan and Senate Majority Leader Mitch McConnell. It’s an understandable, and certainly clever, impulse, and in 2003, something like it succeeded in convincing former President George W. Bush to lift steel tariffs he had imposed 18 months earlier.

Of course, Bush 43 was no Trump. He was a committed free trader and globalist, and/or agent of of America’s powerful corporate offshoring lobby. But here’s something that needs to be considered by Messrs Ryan, McConnell, and other lawmakers at whom the Europeans or other powers may take aim: What if, shortly after September 11, Osama Bin Laden had threatened to destroy major targets in their home states or districts unless the United States withdrew militarily from Afghanistan and left him alone. Would the affected legislators have run to the White House to plead for an abandonment in the war on terror? Not likely.

I know that war and economics are different (although given the importance of economic strength as a source of military strength and overall national success, the similarities and overlap are widely overlooked). But don’t doubt for a minute that American politicians’ reactions to these European threats will be watched closely in all the world’s capitals, and that signs of weakness will be factored into foreign decisions to abide by or violate current trade agreements at the U.S.’ expense, or take other measures to gain advantage in their own, American, or third-country markets that clash with free market and free trade norms.

So here’s hoping that American Members of Congress and Senators will show some backbone, and make clear to the nation’s trade partners that they won’t permit themselves and the country at large to be hanged separately.

>Speaking of hanging separately, quite naturally, U.S. steel- and aluminum-consuming industries are concerned that their global competitiveness will be harmed if they’re forced to use more domestic metal in their products. They need to keep two considerations in mind. First, if foreign governments are permitted by Washington’s inaction to dump major American industries like aluminum and steel out of existence, consuming sectors would be next in line. 

Second, there is indeed no inherent reason to make the consuming industries pay any penalty at all. When I was at the U.S. Business and Industry Council, which represented many steel-consuming companies and industry groups, we persuaded them that the best solution would be tariff protection for them as well. The tariff complaints coming from such sectors today reveals that the Trump administration hasn’t put this possibility on the table. That’s a major missed opportunity, and the President should realize that such offers not only can build support for the steel and aluminum tariffs. They can also expand the constituency for broader America First trade policies. (New Trump statements on possible auto tariffs make clear exactly the types of steps needed, although as is usually the case, they work best when applied across-the-board.)   

>Speaking of missed opportunities, here’s another (big) one – the handling of some allied countries’ indignation about being treated as threats to America’s national security because of their steel and/or aluminum shipments. In several major cases, these complaints could have been prevented had the administration recognized that Australia, Canada, and the United Kingdom are defined by American law as part of the nation’s defense “technology and industrial base.”

I’m not necessarily a supporter of this policy, but since it exists, these countries have an entirely legitimate point regarding their possible inclusion in the metals’ tariff regime. And the Trump administration should have explained to them that they were of course being exempted. Moreover, the Defense Department should have told the rest of the administration about the legal and legislative situation. Yet Pentagon chief James Mattis’ memo to his administration colleagues outlining his department’s position on the tariffs never mentioned it.

Not that these allied countries are entirely blameless for the row. They could have raised the issue when the prospect of sweeping U.S. tariffs was first raised. But all indications are that they preferred to grandstand.

>As should now be expected, the media coverage of the tariff controversy has often veered off into economics and policy La-La Land. Two of the funniest examples I’ve seen so far (and they’re nearly identical): criticizing the announced tariffs because they only boast the potential of bringing back high-value manufacturing to the United States instead of lots of industrial jobs.

Think I’m kidding? Here’s Washington Post correspondent David J. Lynch: “If tariffs prompt companies to move production back to the United States, they would likely opt for highly automated plants that require fewer workers. Trump’s tariffs ‘would bring back 21st-century factories where we lost 20th-century factories,” [economist Gordon] Hanson said this week at the National Association for Business Economics conference in Washington.”

Here’s no less than Nobel Prize-winning economist and New York Times columnist Paul M. Krugman: “[T]he tariffs now being proposed would boost capital-intensive industries that employ relatively few workers per dollar of sales; these tariffs would, if anything, further tilt the distribution of income against labor.”

What both authors are somehow missing is how manufacturing is valuable for much more than high wage employment. It’s long been the nation’s leader in productivity growth. It generates nearly 69 percent of private sector American spending on research and development. And don’t forget its high employment and output multipliers – which mean that each dollar of manufacturing output punches far above its weight in generation production and jobs elsewhere in the economy.

That last point is particularly relevant to Krugman’s claim about labor’s low share of national incomes. The manufacturing employment multiplier tells us that adding to industry in America – including capital-intensive industry – will promote employment in related sectors like logistics, plus revitalize the retail and other service sectors of the towns and cities and counties where the new factories are built. Those jobs may not pay as well as the manufacturing jobs lost. But they’re sure better than the economic death that often results when communities lose their factories.

Im-Politic: Why I’m Not a Think Tank Hypocrite

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business groups, Clyde V. Prestowitz, Economic Strategy Institute, Google, idea laundering, Im-Politic, John B. Judis, Jr., manufacturers, New America Foundation, The New Republic, think tanks, Trade, U.S. Business and Industry Council, USBIC Educational Foundation

Freelance journalist and author John B. Judis is a long-time professional friend. He’s also a pioneer in the study of think tanks and how they’ve added to the corruption of America’s policy-making process, especially in Washington, D.C., where so many of them are headquartered and concentrate their efforts.

So it’s with a double dose of regret that I write this dual-purpose post – which will aim to explain why he’s recently done me a not-trivial injustice in describing me and my relationship with the think tank complex, and in the process contributed to the mis-impression that all organizations that seek to influence policy are alike in their basics.

The problem was created last week in John’s otherwise insightful New Republic article on the uproar kicked up by the news last month that the New America Foundation think tank fired a prominent researcher (and his entire team at a particular program) because their work had begun threatened to antagonize a major donor to the Foundation – Google. You can read my take on this super-revealing incident here.

Because his work on the subject has been so important, I was initially pleased to see John cover the controversy, and even more pleased that he decided to quote me. Unfortunately, he mysteriously decided to use the passage (from that above RealityChek post) in a decidedly and unjustly unflattering way. As John wrote:

“The controversy over New America…has prompted hand-wringing among Washington’s policy community, but some of it seems self-serving. ‘Slowly, and not so surely, the American media is waking up to the pervasiveness of corporate corruption of the nation’s think tank complex,’ wrote Alan Tonelson, who did research for decades at the Business and Industrial Council, which got much of its funds from Roger Milliken and Milliken & Co.”

I don’t think I’m being overly sensitive in believing that this paragraph insinuates that I’m a hypocrite. That is, I’d belonged to that Think Tank World for decades, and now that it’s becoming fashionable, have decided to bite the hand that fed me.

What John didn’t seem to realize is that the work for my former long-time employer that he refers to was done for a business group, not a think tank. As a result, whereas I’ve criticized think tanks for their lack of transparency regarding their (corporate) funders, and accused them of “idea laundering” (that is, issuing materials that push the special interest agendas of their funders while garbing them in quasi-academic raiment), the U.S. Business and Industry Council (USBIC) can’t fairly be accused of this practice even it had been a think tank because its orientation has always been obvious from its name.

Unlike the case with the Brookings Institution or the Center for Strategic and International Studies or the Heritage Foundation or the Carnegie Endowment or the Peterson Institute, when a policymaker or journalist received some information from USBIC, it couldn’t have been clearer that it represented a particular perspective, rather than the work of some disinterested scholar esconced in a ivory tower.

Of course, we tried to be as accurate as possible – both because we were confident enough in the substance behind our viewpoints that we felt no need to exaggerate or soft-pedal or leave out context when such tactics might have strengthened our case, and because those who depart from the conventional wisdom nearly always receive greater and harsher scrutiny than those who stay comfortably inside it.

Moreover, we spent countless hours trying to publicize exactly who we were – an association of smaller manufacturers who had largely rejected an offshoring business model and sought to oppose its nurturing by government trade policies. The reason? We wanted to make sure that our audiences knew that not all businesses or manufacturers favored such policies.

In addition, because the organization wasn’t a household name, whenever we identified ourselves as authors of an article written for an outside publication, we included a brief description of USBIC – something on the order of “an association of small, mainly family-owned, domestically focused manufacturers.” The same went for whenever we were interviewed for an article or broadcast segment. And if we’d been given more space, we’d have been happy to go into more detail.

Now, to be completely accurate, I was employed by the Council’s think tank wing – which we called the USBIC Educational Foundation. And that doesn’t look like a terribly transparent name at first glance. But only at first glance, since even the most casual research effort will reveal the connection. 

Moreover, as with the Council, when the Foundation marketed materials and speakers (like me), it was made completely clear that the very purpose was to represent the views of this distinctive group of manufacturers. In other words, that was the point. I only wish we had been more successful in debunking the stereotype of all industrial companies as footloose multinationals that roamed the world in search of the lowest labor and other costs, heedless or uncaring about the impact on the domestic U.S. economy.

Much the same holds for the organization I worked for previously – the Economic Strategy Institute (ESI). Although the name was less transparent than USBIC’s, from the very start, founder Clyde V. Prestowitz, Jr. strove tirelessly to publicize ESI’s corporate backers, and for a reason very similar to USBIC’s – he wanted to inform policymakers and journalists that not all industries and companies that dissented from an orthodox free trade line were “losers” that were simply seeking government protection from superior competitors. Nothing made that point more clearly that noting that many of ESI’s supporters (like Intel and Motorola) were leaders in the world’s most advanced industries.

Indeed, John might have mentioned that I wound up leaving ESI after a few years precisely because these donors changed their tune on trade issues for various reasons – and unfortunately, the Institute for the most part changed with them, along with venturing into new areas. I was fortunate to find a more like-minded group in the form of USBIC precisely because the Standard Operating Procedure of the donor community have always ensured that organizations analyzing these international economic issues in unconventional ways would be few and far between.

As a result, the tale above should also make embarrassingly obvious that if an author like John wanted to use a policy analyst as an example of opportunistic tut-tutting about the system that long supported him and his family, I was anything but that guy. In that vein (as is clear from the above link), John might have mentioned that I have written about the practice of idea-laundering for more than ten years.

So I hope that John keeps training his eye on the think tank world and the troubling role it plays in the national policy and political worlds. I just hope that his next offerings make their points more carefully and precisely.

(What’s Left of) Our Economy: New Lows for Mainstream Media Coverage of Trade & Manufacturing

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Don Lee, exports, imports, intermediate goods, Mainstream Media, manufacturing, media, MSM, National Foreign Trade Council, offshoring lobby, producer goods, The Los Angeles Times, The New York Times, Trade, U.S. Business and Industry Council, William Reinsch, {What's Left of) Our Economy

Everyone, no matter what their views on trade and related economic issues, agrees that reviving the U.S. domestic manufacturing sector represents a major challenge. What everyone needs to agree on is that the goal will never be reached as long as the Mainstream Media keeps presenting views on the subject that are as silly as they are downright ignorant. If you think I’m exaggerating, consider these two recent examples.

The first came in a piece by a team of New York Times reporters earlier this month. According to headline on the December 2 article, “Trump’s Tough Trade Talk Could Damage American Factories.” The reason?

“[M]any existing American manufacturing jobs depend heavily on access to a broad array of goods drawn from a global supply chain — fabrics, chemicals, electronics and other parts. …Mr. Trump’s signature trade promise [steep tariff hikes], one ostensibly aimed at protecting American jobs, may well deliver the reverse: It risks making successful American manufacturers more vulnerable by raising their costs. It would unleash havoc on the global supply chain, prompting some multinationals to leave the United States and shift manufacturing to countries where they can be assured of buying components at the lowest prices.”

To be sure, this article suffers numerous flaws. For instance, what’s the “U.S.-made product” it uses as its signature example of globalization-related trends that (one must logically assume) are being portrayed as beneficial for American industry? A movie seat chair comprised of two-thirds imported parts by value. Talk about a formula for a hollowed out manufacturing base!

But the main problem is with the authors’ apparent belief that these parts and components and materials (often called intermediate or producer goods) must be imported because they’re either not made in America, or can’t be made in America at all, or at competitive prices.

Nothing could be further from the truth. In fact, a huge percentage of American manufacturing output consists precisely of these products. It’s hard to know exactly how big because of shortcomings in U.S. data collection. But the U.S. Census Bureau’s monthly trade figures show that, on a pre-inflation basis, America’s goods exports for the first 10 months of this year have totaled just over $1.2 trillion. Of those, nearly 62.5 percent consisted of “capital goods” and “industrial supplies” – i.e., intermediate goods. (See Exhibit 6 in this release.)

But such exports are surely far greater, because the Census figures don’t break out the numbers for auto parts.

Similar problems plague American manufacturing output numbers, but also leave no doubt about the prominence of intermediate goods in the U.S. industrial complex. They show that, in 2014 (the last year for which detailed data are available), American manufacturing’s pre-inflation production was slightly more than $2 trillion. Of this amount, nearly 37.5 percent consists of products clearly identifiable as intermediate goods (like machinery, metals, and chemicals).

But again, due to data shortcomings, it’s difficult to tease out other leading intermediates – including not only auto parts but semiconductors and other electronics components and electrical equipment. (These figures are calculated from the “GDP by State” interactive tables in this section of the Commerce Department Bureau of Economic Affairs website, which includes national totals.)

So the claim that Trump-ian tariffs would eviscerate domestic manufacturing by cutting off American industry’s access to imported producer goods completely ignores the potentially greatly positive impact of stimulating demand for the nation’s immense (remaining) domestic producer goods complex.

The second example is even nuttier. In a December 12 piece, Los Angeles Times reporter Don Lee quoted an attack on tariffs from William Reinsch, identified as a “distinguished fellow at the nonpartisan Stimson Center.” That’s a big problem right there, as what Lee didn’t mention is that for 15 years, Reinsch was president of the National Foreign Trade Council, a pillar of Washington’s corporate offshoring lobby.

Yet it was Reinsch’s actual statement – and Lee’s apparent failure to see its fatal flaw – that was the real eye-opener. According to Lee, one of Reinsch’s main objections to tariffs broadly is that “We may assemble more stuff here, but we’ll export less because they’ll be more expensive. We’re going to be losing market share. Ultimately, the cost is jobs.”

Of course, as shown by that aforementioned New York Times article, too much American manufacturing already consist of “assembly.” More important, however, is that it seemingly hasn’t occurred to Reinsch or to Lee that the United States is running immense trade deficits overall, and especially in manufacturing. In other words, all else equal, the potential gains of producing “more stuff here” (and Reinsch never explains why it would be restricted to assembly) vastly outweigh the losses from exporting less.

Outsized domestic gains are even likelier because the United States has much more control over its own market and access to it than over foreign markets. Nor do Reinsch and Lee seem to know that the nation has been losing major market share even in advanced manufacturing industries for many years, as documented by several reports of mine issued by the U.S. Business and Industry Council. Here’s the latest.

President-elect Trump’s trade policy proposals are anything beyond controversy, and a thoroughgoing debate over the best globalization approach for the U.S. economy would be a long overdue and welcome development. Sadly, these two articles make clear that too much of the Mainstream Media remain far from making valuable contributions.