(What’s Left of) Our Economy: Why Trump’s Solid Trade Record Survives the Lousy New U.S. Trade Report

Tags

automotive, Boeing, CCP Virus, cell phones, civilian aircraft, coronavirus, COVID 19, Made in Washington trade deficit, manufacturing, manufacturing trade deficit, non-oil goods deficit, shutdowns, tariffs, trade deficit, trade war, Trump, U.S. International Trade Commission, Wuhan virus, {What's Left of) Our Economy

This is how bad this morning’s official US. trade figures (for July) looked at first glance for folks like me – who value trade deficit reduction, and believe that trade policies like President Trump’s can make a real difference: When I began examining the data, even though I kept telling myself, “It’s only one month’s worth of statistics,” I scarcely knew what to despair about most.

Yet the “at first glance” point matters a lot. Because when you dig into the weeds, you’ll find plenty of evidence making clear that much of the deterioration had nothing to do with trade policy at all. And the evidence comes in two tables in these monthly trade reports on which I usually pass: Exhibit 7 and Exhibit 8. They cover U.S. exports and imports of goods “by End-Use Category and Commodity” and they provide the report’s most detailed picture of which areas of the economy have performed best and worst trade-wise during the month covered.

They’re not as detailed as those available from the U.S. International Trade Commission’s interactive search engine, but that database isn’t yet updated, so let’s go with what we have to begin seeing exactly where the biggest goods trade deficit increases came in July. (Goods trade, also called merchandise trade, makes up the bulk of U.S. trade flows, and it’s relatively unaffected by the policy decisions made by Washington – including by trade-minded Presidents like Donald Trump – mainly because international negotiations to deal with barriers in these sectors are still in pretty early stages)

Again, from the 30,000-foot level, the July results look terrible. The goods trade shortfall hit $80.91 billion – $9.26 billion, or 12.92 percent, higher than the June figure of $71.65 billion (which mercifully was revised down slightly). That increase proportionately is dwarfed by the record 31.60 jump of March, 1993. But that nearly 18-year old all-time high can be disregarded pretty easily, both because the law of small numbers is at work here (i.e., when you’re dealing with small absolute numbers, relatively small absolute changes can result in outsized percentage changes), and because back in those days, U.S. trade flows were heavily affected by oil trade – another sector of the economy rarely subject to trade policy decisions.

So what mainly accounted for that $9.26 billion merchandise import surge? First of all, we know that more than all of it ($9.94 billion) came in non-oil goods trade. As known by RealityChek regulars, those are the trade flows most heavily influenced by U.S. trade policy. So this increase in the “Made in Washington” deficit seems to reflect badly on decisions made in Washington. Drilling down a little deeper, manufacturing emerges as an even bigger culprit. Its $89.15 billion June trade gap ballooned to $104.63 billion in July – a rise of $15.48 billion. Not so incidentally, that manufacturing trade deficit is the worst ever in U.S. history, eclipsing the $101.65 billion recorded for October, 2018.

Nearly as interesting, though: China trade – where the President has been fighting a war – was not the biggest problem, as the manufacturing-dominated goods gap with the People’s Republic rose by just $3.22 billion. And neither the 11.35 percent on-month increase nor the $31.62 billion total goods gap was anywhere close to a record. 

So we’re back to manufacturing, and figuring out where the big deficit widening took place. Here’s where Exibits 7 and 8 matter.

What they tell us is that the monthly worsening of the merchandise trade deficit was highly concentrated in a handful of industries, and that these latest developments either have little or nothing to do with the Trump tariffs, or actually  demonstrate their effectiveness in widely overlooked ways.

Most relevant of all here is the automotive sector. Between June and July, the deficit in vehicles and parts combined increased by just under $3.20 billion. That represents more than a fifth of the sequential worsening of the manufacturing trade deficit, and nearly a third of the difference in the non-oil goods deficit. But the problem says little about the Trump trade policies, and a great deal about the reopening of U.S. automotive sector in late spring and early summer after the CCP Virus led to its almost complete shutdown in March and April.

From May through July, total American automotive production nearly tripled in real terms, according to the Federal Reserve’s industrial production reports. So it’s no surprise that since production in this industry is so globalized, and thus so many of its parts and materials (and the parts of the parts) are still imported, its trade deficit ballooned, too.

Then there are cell phones. Between June and July, the trade deficit here rose by just under $1.44 billion – 9.30 percent of the increase in the manufacturing deficit, and 14.48 percent of the problem in non-oil goods.

The cell phone category in the monthly trade releases also includes “other household goods” – one of the reasons I don’t love these numbers like I love those available from the International Trade Commission. But it’s reasonable to suppose that most of these goods are cell phones, and that most of these are coming from China – with which the Trump administration of course has been fighting a trade war.

As observed on RealityChek last month, however, Mr. Trump decided not to tariff them. So although cell phone imports indicate that the trade war is incomplete, they certainly don’t show that tariffs don’t work. If anything, they underscore what can happen when they’re missing.

A third major source of the deterioration shown in the new trade report is the civilian aircraft industry – where a surplus of $575 million in June became a $1.50 billion deficit in July. That’s a trade balance worsening of nearly $2.08 billion. In other words, this development alone accounts for 13.44 percent of the lousy July manufacturing trade results and 20.93 percent of the woes in non-oil goods trade flows.

Aircraft’s problems, however, have nothing to do with U.S. trade policy, and everything to with Boeing’s safety failures, which have led to big production shutdowns.

Add up the trade performances of these categories, and together they account for fully 43.38 percent of the manufacturing trade deficit’s increase between June and July, and a whopping 67.57 percent of the monthly rise in the non-oil deficit.

Combine these findings with a U.S. economic recovery that so far has been faster than the bouncebacks of many of its leading trade partners (except, notably, for export-heavy China) and the discouraging July trade figures don’t look nearly so discouraging.

Mission accomplished, then, for the Trump administration? Hardly? But the July trade report is far from a conclusive sign of failure, either. In fact, it leaves any fair-minded evaluation of the Trump trade record pretty much where it’s been since the CCP Virus arrived – deserving of solid grades before the bug arrived, and an incomplete during the completely abnormal times we’ve experienced since then.

(What’s Left of) Our Economy: Behind the Recent Surge in U.S. Imports from China

Tags

Apple Inc., CCP Virus, China, coronavirus, COVID 19, imports, recession, shutdown, tariffs, Trade, trade war, Trump, U.S. International Trade Commission, Wuhan virus, {What's Left of) Our Economy

Well, this took longer than I expected. When I put up my post on the latest official U.S. monthly trade figures (for May), I noted that American goods imports from China kept growing robustly despite the CCP Virus-induced downturn of the overall U.S. economy and the stiff Trump tariffs remaining on the overwhelming share of products Americans buy from China.

As I observed, these results begged the question of what the heck was being bought, and I promised to provide the answer as soon as possible. But it wasn’t until yesterday that I found online the detailed U.S. International Trade Commission (USITC) I needed to keep my word.

Three important conclusions can be drawn. First, the big increases in these merchandise imports from China are highly concentrated in a handful of industries. Second, there’s a strong case to be made that tariffs really can affect import flows when they’re high enough. And third, largely as a result, the biggest U.S. corporate beneficiary by far has been Apple Inc.

To review, the overall data, between January of this year and May, U.S. goods imports from China have risen by 9.97 percent. Given that America’s total non-oil imports (the best global comparison with imports from China) fell by 14.48 percent during that period, that’s stunning enough.

It’s true that merchandise imports from China itself were still 20.11 percent lower during the first five of this year than during the comparable period last year. That’s nearly twice as much as the 10.35 percent decrease in all U.S. non-oil imports, so it’s not like China is still laughing all the way to the bank due to its sales to the United States. But that increase from January through May this year is still puzzling.

Less puzzling – but still puzzling – is the huge disparity between China import numbers from February (when they bottomed) through May, and those for U.S. non-oil imports as a whole. The former jumped 60.43 percent, while the latter fell by 12.09 percent.

After all, the 31.45 percent drop in U.S. goods imports from China between January and February (when Beijing shut down most of its economy in order to containt the virus) was much greater than the 2.72 percent decrease that month for all America’s non-oil imports. At the same time, products made in the rest of the world didn’t face the kinds of Trump tariffs imposed on most goods from China.

Since the CCP Virus is still (deeply) depressing the U.S. economy while China’s recovery (including its export-heavy industries) seems well underway, it will be months at best until it will be possible to see normal bilateral trade flows again.

What does come through loud and clear, though, is the dominance of just a few sectors in these trade flow shifts. In January, for example, the top four categories of U.S. purchases from China (according to the U.S. government’s North American Industry Classification System) were (in descending order) computers; broadcast and wireless communications equipment (the grouping that include cell phones); miscellaneous textile products; miscellaneous plastics products. They made up a hefty share of the total of $33.281 billion worth of goods Americans bought from China that month – just under 24 percent.

But in February, when the Chinese shutdown took hold and U.S. goods imports from the People’s Republic crash dove by 31.45 percent – to $22.813 billion – the four aforementioned goods categories accounted for nearly 34 percent of the decrease.

February saw the start of that powerful four-month, 60.43 percent leap in total U.S. merchandise imports from China. The top fours share of that bounceback? Fully 63.57 percent. That was more than three times their share of total February U.S. imports from China.

For now, Apple and the tariff treatment of its products go far toward explaining what resilience China’s sales to the United States have shown. The evidence is found in the data from three categories of imports from China – computers, broadcast and wireless communications equipment, and computer parts (which happen to be the fifth biggest category of U.S. goods imports from China). Apple’s monster-selling Chinese-made products of course figure prominently in all these groupings.

The widespread China shutdown – including of all Apple-related factories – was clearly responsible for U.S. imports of these products sinking by 47.79 percent. This nosedive was steeper than that for U.S. imports from all goods from China, and of course steeper than that for total U.S. non-oil goods imports. But the February-through-May comeback staged by these goods was epic – just short of 156 percent. As a result, whereas U.S. imports of all merchandise from China in May were up over the January total by the 9.97 percent mentioned above, for the three electronics-related categories combined, they were more than a third higher.

Just as interesting: although on a January-May basis, all U.S. goods imports are down this year so far by the 20.11 percent mentioned above, for the three electronics categories, they’re off by somewhat less – 16.06 percent.

And what do tariffs have to do with all this? Lots. Because lots of Apple’s Chinese-made final products, and Chinese-made parts and components for the Apple products that are assembled in the United States have been exempted from tariffs altogether.

In other words, if you’re interested in figuring out whether tariffs work, it’s important not only to know what happens to imports when they’re present, but also when they’re not allowed to work at all.

(What’s Left of) Our Economy: A Big China Mystery Inside the Latest U.S. Trade Figures

Tags

China, exports, goods trade, imports, merchandise trade, non-oil goods trade deficit, Trade, trade deficit, U.S. International Trade Commission, {What's Left of) Our Economy

The big mystery about yesterday’s monthly U.S. trade report (for May) concerns China. Specifically, why are imports from the People’s Republic streaming into the American economy again, considering the stiff, sweeping tariffs on hundreds of billions of dollars worth of Chinese-made goods destined for U.S. markets, and of course the continuing troubles faced by the U.S. economy from the CCP Virus?

I won’t be able to provide a detailed answer till sometime next week – when I expect the U.S. International Trade Commission to post the data on its website. But I can say right now that these imports were great enough account for more than all of the blame for $4.85 billion (9.74 percent) sequential widening of the overall U.S. trade gap in May.

That combined goods and services trade shortfall hit $54.60 billion – its highest level since October, 2008’s $60.88 billion. And back then, more than half that overall trade deficit was oil. In May, the United States ran an oil trade surplus – as it’s done since last fall.

Moreover, the overall May U.S. goods trade deficit (also known as the merchandise deficit) of $76.06 billion was the biggest such total since December, 2018’s $80.21 billion –and represented a $4.24 billion (5.90 percent) increase from April’s levels.

The specific China goods numbers? The bilateral trade gap widened by $4.49 billion (19.99 percent) sequentially in May – a figure 92.58 percent as big as the entire monthly U.S. trade deficit increase and, as mentioned above, greater than the monthly increase in the merchandise shortfall. In other words, as the goods trade deficit from everywhere else in toto fell during May, it rose from China. (Of course, because the U.S. trades with so many different countries, this doesn’t mean that goods trade shortfalls fell with every one of them other than China. But overall, the non-China goods trade gap narrowed.)

And the role of merchandise imports was as crucial as it is puzzling. U.S. goods imports from China rose on month in May by $5.53 billion (or 17.79 percent). So they alone exceeded the $4.85 billion sequential increase in the overall trade deficit and the $4.24 billion rise in the goods deficit.

Even weirder – goods imports from China were up in May while overall imports and global goods imports were down (by 0.88 percent and by 0.76 percent, respectively).

Despite the widening of the merchandise trade gap with China, U.S. goods exports to the People’s Republic improved on month in May – by $1.04 billion, to $9.64 billion. That’s not terribly surprising, since all indications are that China’s economy began recovering sooner than America’s from its own CCP Virus-induced shutdown. In fact, that monthly merchandise export total is the highest since last November’s $10.10 billion – meaning that those U.S. sales are back in their range for the whole of last year, before the virus broke out in China.

But was the U.S. economy rebounding strongly enough in May to explain easily a resumption of buying from China that also brought goods imports back to their highest level since November, and well inside their range, too, for all of last year? That’s hard to accept, if only because overall U.S. goods imports remain significantly depressed from last year’s levels, and because of those Trump tariffs. Such bewilderment seems justified even given that in recent years, May has been a month during which merchandise imports from China have risen strongly. After all, this wasn’t a normal May.

It’s true that on a year-to-date basis through May, U.S. goods imports from China in 2020 are down 15.90 percent – more than the 12.60 percent drop for goods imports total (but not that much more). The difference is somewhat greater with the 10.35 percent decrease in January-May total U.S. non-oil goods imports – which are a better global comparison with China goods imports, since China doesn’t sell oil to the United States.

It’s also true that the United States’ merchandise deficit with China through May of this year has shrunk much faster (24.58 percent) than its overall global goods deficit (7.78 percent) and much, much faster than its global non-oil goods deficit (2.34 percent). But it’s true as well that a non-trivial amount of this progress has reversed itself this month (as well as in April).

And that’s why I’ll get you the detailed answer to the “what are these China imports” question ASAP.

(What’s Left of) Our Economy: The CCP Virus is Also Killing the Economic Case for Free Trade

Tags

CCP Virus, China, corona virus, COVID 19, economics, economists, free trade, GDP, Goldman Sachs, gross domestic product, health security, inflation-adjusted output, intellectual property theft, Morningstar, offshoring lobby, Oxford Economics, Trade, U.S. International Trade Commission, U.S.-China Business Council, USITC, World Trade Organization, WTO, Wuhan virus, {What's Left of) Our Economy

In a nutshell, the mainstream economics case for the freest possible flows of international trade holds that, whatever losses may be suffered by individual parts of the economy and their workers, overall national (and global) wealth will grow – and that that’s an unmistakable good. A logical follow-on is also important: Since overall wealth increases, so does the capacity to compensate those who have lost out from trade expansion.

True, this compensation may not be dispensed. But don’t blame greater trade, most economists would insist (with not inconsiderable justification). Instead, blame national political systems or societies that fail to take advantage.

Let’s assume all these claims for the economic case (as opposed to the longstanding national security or emerging health security cases) for free trade are true. It’s noteworthy, then, that it looks like they’ve been blown out of the water by the almost certain impact of the CCP Virus emergency on the U.S. economy. At least there’s now an impressive case that trade expansion with China, anyway, has started reducing the nation’s GDP (gross domestic product – the standard measure of the economy’s size).

After all, the virus originally broke out in China, and spread to the United States because of the mushrooming of economic ties between the two countries that freer trade and commerce with the People’s Republic has produced. Some might counter that virus impact has nothing to do with trade expansion with China per se, and instead is due to the disease itself. But given the evidence that China is pandemic prone (arguably because of safety and hygiene standards that remain dreadful throughout the country despite its phenomenal recent economic progress, along with its regime’s obsession with secrecy), and the related likelihood that this problem won’t go away, it’s getting harder and harder to argue that the bilateral trade and investment boom and pandemic threats have nothing to do with each others. In other words, it’s at least reasonable to contend that rising pandemic threats have been an integral feature of freer trade and broader commerce with China.

For some specific numbers (uncertain as they inevitably remain), let’s look at a recent examination of the CCP Virus’ likely economic impact from the investment research and analysis firm Morningstar. Its take on the subject is worth highlighting because it’s the most bullish I’ve seen,

According to Morningstar, the virus’ spread as such is going to reduce the U.S. economy’s size by five percent this year in inflation-adjusted terms (the most closely followed GDP figures). That would amount to a loss of nearly $954 billion. The firm doesn’t explicitly quantify the long-term hit to the U.S. economy. But based on its assessment of the long- and short-term tolls on the global economy, and its belief that these short-term losses in percentage terms will be about half those for the United States itself, it appears that Morningstar expects the inflation-adjusted GDP losses to be some two percent. Using 2019 as the pre-virus baseline, that adds up to $381.46 billion during the (unspecified) first year of long-term effects. But since the economy would be in growth mode by then (although from a lower starting point), the yearly losses in absolute terms would grow each year, since they would represent some two percent of an ever larger pie as long as they lasted.

And remember – these forecasts are on the optimistic end. Another financial firm, Goldman Sachs, anticipates that this year, real U.S. GDP will plunge by as much as 3.8 percent this year. If correct, the national output shrinkage would be nearly $725 billion. (Unlike Morningstar, Goldman doesn’t isolate the specific CCP Virus share of these losses, but if its methodology is comparable, it could top $1 trillion.)

So those are (admittedly ballpark) figures for China trade-related losses for the whole economy. Have the claimed or estimated economic gains been greater? Not even close.

During the late-1990s, when it appeared likely that China would enter the World Trade Organization (WTO), and therefore trigger a surge in its trade with the United States and the entire world, Congress asked the U.S. International Trade Commission (USITC) to model the economic effects of the kinds of major tariff cuts to which China would agree. In its 1999 report, the Commission forecast a “minor” lift to real GDP – meaning an ongoing boost of less than 0.05 percent annually on an ongoing basis.

In 1999, that would’ve meant a $63 billion constant dollar GDP gain for the first year following China’s entry

To be sure, the USITC also tried to estimate the impact of the elimination of the multitude of non-tariff barriers China has long thrown up to the outside world – rules and regulations, often developed and carried out in secret, that can block or slow the growth of imports more effectively than tariffs. The Commission’s findings suggested that success on this crucial front – also predicted by supporters of China’s WTO entry – would double the U.S. GDP gains produced by expected tariff cuts. If correct, the ongoing American yearly output increase would be 0.10 percent of after-inflation GDP, or $126 billion, in the first year after these reforms were made.

Because of subsequent GDP growth, these annual gains would increase in absolute terms, and over the nearly two decades between China’s year-end 2001 WTO entry and today, could easily total trillions annually.

But many of these China tariff and especially China non-tariff barrier promises are still unkept, as even the Obama administration – a strong supporter of U.S. participation in the WTO – admitted in its final report to Congress on the subject. Maybe that’s why the private economic research firm Oxford Economics (in a study for the U.S.-China Business Council, a major pillar of the U.S. corporate Offshoring Lobby) pegged the annual GDP gains of U.S. business with China at $216 billion as of early 2017. That’s not much of a compounding gain.

Moreover, consistent with Offshoring Lobby practices, the Oxford report completely ignores the economic impact of U.S. imports from China – which have greatly exceeded exports for decades. And since China’s WTO entry through last year, the growth of the goods trade deficit has been a vigorous 235.36 percent. Nor did I see anything in its study about China’s massive theft of U.S.-owned intellectual property. Estimates vary, but even these China pollyannas admit it could amount to $600 billion each year. 

As with pandemics, you could argue that intellectual property theft’s growth isn’t a built-in feature of trade with China or any other country.  But since China has been far more theft-prone than it’s been pandemic-prone, and since its thieving ways were well known to Washington as WTO entry was being orchestrated, these costs clearly belong in the “costs of free trade” category – at least with China.      

Finally, of course, these purely economic arguments for free trade overlook non-economic arguments for trade curbs and national self-sufficiency that have always been compelling and that the virus outbreak has now turned into slam-dunk winners. Think “national security” and “healthcare security” – unless you’re thrilled with America’s current dependence on foreign sources of vital medicines, their building blocks, and medical devices.

Predictions understandably are abounding the the CCP Virus emergency will change some lasting behaviors and ideas nationally and globally. If the above, arguably realistic, view of the economic case is correct, free trade practice and ideology belong near the top of this list.

(What’s Left of) Our Economy: Were the US Washing Machine Tariffs Really Failures?

Tags

consumers, Federal Reserve, General Electric, imports, jobs multiplier, large residential washers, LRWs, manufacturing jobs, metals tariffs, safeguard tariffs, South Korea, tariff-rate quota, tariffs, U.S. International Trade Commission, University of Chicago, USITC, washing machines, Whirlpool, {What's Left of) Our Economy

It’s as close to a slam dunk conclusion as can be – at least according to economists, think tank hacks, and Mainstream Media journalists: The early 2018 U.S. tariffs on large household laundry machines have been a dismal failure.

Or have they been?

The levies belong in a category different from those of the main Trump administration trade-limiting measures because they were first mandated by an independent federal agency (the U.S. International Trade Commission, or USITC) via a long-standing legal process.  And they’ve been panned for supercharging costs for consumers, and padding the profits of the domestic industry to extents that dwarfed the new production and jobs they fostered. (Here’s a typical example of the press’ evaluation, drawing on equally typical research from the venerable University of Chicago and the even venerable-er Federal Reserve.)

What has gone oddly unreported has been the verdict rendered by the USITC – which came out in August. Sure, the agency is grading itself. At the same time, it’s privy to the most authoritative data (taken from the domestic and foreign companies involved themselves), and it’s surely worth noting that the Commission paints a significantly different , and brighter, picture.

The tariffs, put in place in February, 2018, affected the nation’s total global imports of these products, but mainly impacted such “large residential washers” (LRWs) from China, Mexico, South Korea, Thailand, and Vietnam – the biggest foreign suppliers to the U.S. market. The duties’ aim: stemming a sudden surge of LRWs that injure U.S.-based manufacturers. But they don’t shelter the domestic industry forever.

After three years – the amount of time the Commission has determined these domestic manufacturers need to adjust – they’re phased out for both the final products and many of the parts covered in the “safeguard order.” In addition, consistent with their surge focus, they only apply to imports above a certain level of units – a trade curb known as a “tariff-rate quota.” In all, moreover, the ultimate objective is to give victim industries time to adjust and then stand on their own two feet. That’s why detailed adjustment plans are a condition of receiving tariff relief.

To some extent, the USITC’s judgment doesn’t contrast dramatically different from that of the tariffs’ critics. Both noted (in the Commission’s words) “generally increased prices” and “decreased imports.” The Commission, though reported some developments generally missed by the critics (especially “some improvement in the financial performance of continuously operating [domestic] producers,” and market share gains for these companies) and some given decidedly short shrift (“increased production by two new U.S. producers” – both of whose owners come from South Korea, undoubtedly because the option of supplying the American market through exports was sharply limited).

The Commission didn’t address one of the critics’ most compelling points – that the new U.S. jobs were created at a cost to consumers (via the higher prices they’ve paid) of a whopping $817,000 per job. But the University of Chicago/Federal Reserve study actually conceded that this number might be an exaggeration, since manufacturing jobs (like all jobs) create a “multiplier effect” – that is, they foster additional employment in related industries ranging from suppliers of inputs to transportation, packaging, and warehousing services. What these researchers didn’t mention is that manufacturing’s jobs multiplier is unusually high.

Moreover, like virtually all scholars of trade, tariffs, and employment, the Chicago/Fed team neglected other benefits of manufacturing job creation (and prevention of further manufacturing job loss). These include:

>avoiding the wage losses suffered by displaced manufacturing workers who find work in lower-paid industries (an especially important consideration given today’s very low overall unemployment rates)

>avoiding the revenue losses incurred by these workers’ communities and the economy as a whole due to reductions in their taxable income;

>avoiding the increased pressure on social programs required to serve employees who can’t find new jobs – which encompass not only unemployment compensation but spending that seeks to address the pathologies that often follow working class Americans’ deteriorating personal finances, like divorce, delinquency, alcoholism, and opioid and other drug use, not to mention higher mortality;

>and the costs incurred by local businesses because of worker-customers who can no longer afford as many of their products and services, which of course reduces business’ own taxable income and additionally crimps public finance at all levels. (See, e.g., this highly cited study.)

The USITC report, moreover, shed light on another big reason that the costs-per-manufacturing-job-saved might be exaggerated: Not all of the increased costs of the tariff-ed products are due to the tariffs. In particular, the Commission listed no less than 14 factors other than import competition (and the tariffs placed on these goods) that affect the prices of LRWs. They range from raw materials, transportation, and energy costs to competition levels from substitute and between domestic producers, U.S.-based production capacity, productivity changes, labor contracts, and state and local government incentives, and demand levels at home and abroad (because all the U.S.- and foreign-owned manufacturers sell all over the world). The USITC then proceeded to ask producers, importers, and purchasers (retailers) to rate the importance of these factors on prices since the tariffs’ imposition in February, 2018.

The answers were reported in table III-26, and import competition levels were anything but dominant. Indeed, their importance consistently was rated by all three stakeholder as lower or no greater than that not only of raw materials costs (higher due to entirely separate tariffs on metals that were imposed by the Trump administration) but of energy costs, domestic production capacity (surely limited over time by the previous import flood), the allocation of this production capacity to other products, productivity levels, labor agreements, transportation and delivery costs, and domestic demand levels.

And adding to the case for reducing the costs per job figure: According to the official U.S. Bureau of Labor Statistics figures, after jumping by 16.31 percent from the February, 2018 onset of the tariffs through that November, they’ve since fallen by 9.73 percent (through September).

In fact, this development leads to a major point completely missed by the tariffs’ critics. As also indicated by the phaseout schedule and the linkage of the tariffs to the submission of adjustment blueprints, the levies were never intended to produce instant results, or to furnish crutches forever. The USITC describes the implementation of these plans starting on p. IV-5 and, more revealing, presents the evaluations of the retailers – who are bound to be the most demanding judges.

The reviews are mixed, but varying numbers of these companies stated that the two domestic recipients of the tariff relief – Whirlpool and General Electric – introduced new products (the most commonly cited improvement), upgraded product quality, expanded marketing campaigns, bettered their customer service, and taken other positive steps (Table IV-2).

Will these measures prove sufficient? Even after the tariffs come off, definitive answers will prove elusive, because as made clear, the LRW trade policy picture contains so many moving parts. What does look definitive, however, is that so far, the critics have engaged in a flawed rush to judgment.

 

 

(What’s Left of) Our Economy: A New North American Trade Study’s Crucial Footnote

Tags

automotive, Canada, Center for Automotive Research, Mexico, NAFTA, North American Free Trade Agreement, regional content, rules of origin, tariffs, trade bloc, Trump, U.S. International Trade Commission, U.S.-Mexico-Canada Agreement, USITC, USMCA, {What's Left of) Our Economy

That was some footnote Commissioner Jason E. Kearns apparently insisted be inserted into the U.S. International Trade Commission’s (USITC) recent report on the economic impact of the Trump administration’s attempt to rewrite the North American Free Trade Agreement (NAFTA). In fact, it contains the key to giving this Congressionally mandated study of the U.S.-Mexico-Canada Agreement (USMCA) a passing or failing grade. And a special bonus – it indicates why all three countries should have followed my advice and turned North America into a genuine trade bloc.

The particular Kearns-related footnote I’m talking about (number 66, on p. 57) dealt with the USITC’s analysis of one of the most controversial (and in my view, most promising) provisions of the new framework for North American trade – which has been signed by the continent’s three governments but not yet ratified by any of their legislatures. It’s the agreement’s attempts to restructure automotive industry trade among the signatories. These proposed new arrangements matter greatly because trade in vehicles and parts represents such a big share of overall North American trade (more than 20 percent of America’s total goods trade with Canada and Mexico, according to this study).

In brief, at the Trump administration’s instigation, USMCA increases the share of a vehicle’s content that needs to be made somewhere inside the free trade zone in order to qualify for tariff-free treatment, and includes other measures aimed at curbing and even reversing the movement of U.S.-owned auto production and the related jobs from the United States to much lower wage and overall lower cost Mexico, along with the resulting flows of Mexican-assembled vehicles and parts into the American market.

The USITC concluded that although the new NAFTA would produce slight benefits for the American economy overall, including for domestic U.S. manufacturing, the new content measures (called “rules of origin,” or “ROO” for short) themselves would drag on overall economic performance. In fact, they would even slightly depress U.S. vehicle production, not increase it.

As always the case with such projections, these conclusions are based on numerous assumptions, and as almost always the case, at least some of these assumptions can be pretty dodgy. Two that I have special problems with: First, when it comes to auto parts, the USTIC only examines only trade and investment in engines and transmissions; and second, the Commission doesn’t take into the jobs multiplier of vehicle and parts manufacturing.

These assumptions surely skew the conclusions to the downside because, as important as engines and transmissions are, the report itself acknowledges that other parts nowadays represent about 37 percent of total domestic parts output; and because the auto industry’s multiplier effect is really high. Indeed, according to a 2015 report by the Center for Automotive Research, for each American job created in domestic auto or light truck manufacturing, seven other jobs are created in the rest of the economy. That finding is significant because the Center has claimed that the new origin rules would exact exorbitant costs, and because it gets significant funding from an auto industry that has expressed major reservations about them.

But much more fundamental issues are raised by that footnote 66, especially considering these questionable assumptions. Here it is in full:

“Commissioner Kearns notes that, as described above, the model appears to suggest that the trade restrictiveness of a ROO is inversely related to its positive impact on the U.S. economy. Carried to its logical conclusion, this would appear to suggest that the best ROO is a very weak or nonexistent ROO. In turn, this would result in other countries, which do not incur any obligations to import U.S. products, obtaining unilateral, duty-free access to the U.S. market. If, on the other hand, we were to compute an ROO that optimizes regional content while recognizing that there may be slack in the economy, we may estimate a gain to the overall economy from the automotive ROO.”

Kearns first observation not only makes perfect sense. It’s the only sensible macro-conclusion that can be drawn about rules of origin. Because their complete absence (the counter-factual the Commission seems to have ignored) would indeed permit non-North American producers to reap all the gains generated by the USMCA (mainly, unfettered access to the immense continental market) without incurring any of the obligations. That’s supposed to result in a net plus for the American economy, the predominant market prize in North America?

The second observation is even more interesting. It notes that much more stringent rules (those that would “optimize regional content”) could be expected to leave the overall economy better off than the current rules. And as I’ve observed, the low tariff penalties (2.5 percent) imposed on non-North American auto producers for ignoring the origin rules are guaranteed to minimize the gains they produce. Therefore, much higher tariff penalties – which would approximate those commonly associated with trade blocs aimed at minimizing imports – would come closest to maximizing that what the USITC calls “the gain to the economy from the automotive ROO.”

President Trump claims that an “America First” approach to trade policy distinguishes him sharply from his predecessors. Footnote 66 in the USTIC report makes as possible that a genuine “North America First” strategy would have best advanced that goal – and that in this case, anyway, there was no reward for timidity.

(What’s Left of) Our Economy: The August U.S. Trade Report – All Soybeans Edition!

Tags

agriculture, Census Bureau, China, exports, farming, intellectual property theft, soybeans, tech, Trade, trade war, Trump, U.S. Department of Agriculture, U.S. International Trade Commission, USDA, USITC, {What's Left of) Our Economy

This belated report on last Friday’s U.S. trade figures (for August) focuses on soybeans for what should be glaringly obvious reasons. They make up by far the most important sector of the American economy, and any President, like Donald Trump, who risks its well-being for a trifling objective like preventing China’s domination of the world’s industries of the future – via rampant intellectual property theft, extortion, and other predatory practices – must have rocks in his head.

OK, I’m now pulling my tongue from my cheek. But given the massive coverage of U.S. soybean farmers’ woes resulting from Chinese retaliatory tariffs that are ruining their sales in their biggest foreign market by far, it seems appropriate to see what the numbers say. Especially because so far, they’re showing nothing close to a trade-led Soy-Mageddon for American growers.

The latest Census report pegs the August year-to-date current dollar soybeans exports increase at a robust 39.16 percent (from $13.10 billion to $18.75 billion). I’d like to provide the comps for the previous years, but they don’t seem to be terribly consistent with each other.

This rapid growth could well reflect the export front-loading in advance of expected tariffs that’s been widely reported. (For a compelling contrarian view, see here.) As a result, it could disappear completely, or even shift into reverse during the rest of the year. But if soybeans exports do tank between now and year-end, no one would be more surprised than the analysts at the U.S. Department of Agriculture (USDA). They keep raising their full-year 2018 export forecasts (measured in quantity, not value, terms). So why are prices so weak? Largely because even though they professed to be worried about China tariffs, America’s farmers just kept planting ever more soybeans. And planting. And planting. In fact, this year’s harvest is expected to be the biggest ever.

And speaking of the Agriculture Department, the soybeans story doesn’t end with the Census reports data. Why not? Because they differ dramatically from those calculable from the U.S. International Trade Commission’s (USITC) interactive Trade Dataweb search engine. And since the USITC statistics are the ones used by USDA, they’re worth looking at, too.

These year-to-date figures only go up to July so far, but they don’t point to any tariffs-led Soy-Mageddon, either. As with the Census data, the numbers are in current dollars, and rates of change are to their right:

2016:  $10.062 billion (+25.67 percent)

2017:  $9.076 billion (-10.86 percent)

2018:  $8.452 billion (-6.87 percent)

So yes, soybeans exports are down this year, according to the USITC. But they fell during the same period last year too – at a faster rate, even though no China tariffs or threats thereof were on the horizon. Moreover, prices this year have been falling faster than in years past for various reasons – including the actual and threatened tariffs, but as made clear above, not solely because of them.

As mentioned, these USITC figures don’t adjust for these changing prices. But the Commission helpfully provides quantity numbers as well. Here they are for the same seven-month time period, in metric tons, along with the percentage changes:

2016:  20,113 (+9.96 percent)

2017:  22,366 (+11.20 percent)

2018:  24,635 (+10.14 percent)

That is, adjusted for falling prices, soybeans exports have been rising a little more slowly this year than last, but faster than in 2016. And the rates of increase haven’t changed markedly. 

Farming is a tough business, and with a genuine U.S.-China trade war having broken out, with no end in sight, no one can legitimately blame American soybean producers for feeling nervous about the fallout.  But the evidence keeps getting clearer and clearer that, even in the mixed U.S. economy, supply and demand still play a big role in determining prices, and that soybean growers jacked up the supply enormously in recent years. If they want to get out of their current fix, they’d do well to stop complaining so much about the Trump tariffs and start getting that message.

(What’s Left of) Our Economy: Where’s the (Trump Tariff-Created) Consumer Price Inflation?

Tags

Best Buy, Breitbart.com, canned goods, consumers, inflation, John Carney, tariffs, Trade, Trump, U.S. International Trade Commission, washing machines, Wilbur Ross, {What's Left of) Our Economy

Have you been shopping for any Labor Day bargains this weekend? If not, you might check out the deals on washing machines. Or just wait a little longer and you could save even more money.

Why on earth am I giving out this kind of consumer advice? Because in recent months, data pointing to soaring prices for these appliances were repeatedly touted as proof that the kinds of tariffs slapped on these goods early in the year – and representative of the trade policy approach generally favored by President Trump – would backfire on American consumers and seriously weaken the consumption-driven U.S. economy.

The tariffs on large residential washing machines went into effect in January, when President Trump approved a recommendation from the U.S. International Trade Commission (USITC)– an independent federal agency – to use such measures to counter a surge of these appliances that threatened the viability of domestic producers. (In this way, they did not result from trade diplomacy being conducted by the administration aimed at reworking existing trade deals like the North American Free Agreement or allegedly lopsided relationships like U.S.-China trade.)

But although prices for these appliances have shot up, advertising for dishwashers that’s appeared this weekend indicates that more powerful countervailing economic trends – trends that, incidentally, have hardly been secrets – will quickly begin bringing them back to earth. Specifically, as I’ve noted, despite moving into its tenth year, the current American economic recovery has been too weak, wages and incomes have been too stagnant, and consumers have been too cautious to permit such prices to stick for any serious length of time.

As a result, I wasn’t at all surprised to see Best Buy, a pretty typical appliance retailer, offer the following specials:

>A Whirlpool model marked down from $474.99 to $349.99. (More than 25 percent off.) Whirlpool, incidentally, was the plaintiff in the USITC trade law case that resulted in the tariffs;

>A KitchenAid machine being discounted by nearly 18 percent from its $1,034.99 list price – on top of free installation;

>Two Samsung washers being offered for more than 18 percent less than their $674.99 list price.

>An LG model on sale for $749.99 – nearly 17 percent below its $899.99 list prices.

And P.S. All these offers entail a price match guarantee, as well as “open box” versions of these products that can be had for much, much less.

And don’t think for a minute that washing machines are the only tariff-ed product for which price predictions are looking awfully Chicken Little-ish. Right after President Trump made his initial announcement of tariffs on steel and aluminum imports, Commerce Secretary Wilbur Ross was widely ridiculed for going onto CNBC and using cans of soup as props to argue that the levies would only marginally impact the prices of these goods. Moreover, canned goods producers strongly disagreed.

Yet as reported last week by Breitbart.com‘s John Carney, the latest official inflation figures show that, as of July, the prices of a variety of canned goods – from soup to fruit – have actually fallen year-on-year. Canned beer and vegetables did get more expensive, but by a mere 1.40 percent – much less so than the overall 2.40 percent rate of inflation. And the prices of other metals-using products, like cars and trucks and auto parts, were up just fractionally at best.

I’ve noted previously that there are any number of valid arguments that can be raised against the Trump trade policies. And no one has a perfectly clear crystal ball. But with the predicted effects on employment, output, investment, and now consumer prices so far not coming close to panning out, it’s now clear that the tariff opponents are rapidly running out of arguments.

(What’s Left of) Our Economy: So You Think There’s Free Trade in Steel?

Tags

China, overcapacity, steel, subsidies, tariffs, Trade, transshipment, Trump, U.S. Commerce Department, U.S. International Trade Commission, World Steel Association, World Trade Organization, WTO, {What's Left of) Our Economy

If there’s anyone out there who honestly believes that global steel trade has anything to do with free trade or free markets, and that many of America’s leading trade partners other than China are directly or indirectly complicit in rigging this commerce against the United States, here’s some data you need to see.

And P.S. – notwithstanding their own efforts to keep government- subsidized Chinese metals out of their markets, and the lip service they pay to the idea of cooperating to cut China’s massive overcapacity, the number of countries whose steel industries in particular have been doing just fine all the same should make clear why World Trade Organization (WTO) and other multilateral actions can’t possibly address the underlying problem of the Chinese state-sponsored glut. At least not until via tariffs or similar measures, Washington makes clear that the economies, who comprise the vast majority of WTO members, can no longer abet the Chinese with impunity.

First, let’s look at the percentage of world steel output by country (or political grouping, in the case of the European Union), and how it’s changed recently. These are volume figures from the World Steel Association for the world’s leading steel producers:

         2010                                                   January, 2018

US:    7.46                                                           4.89

China:   42.62                                                    48.05

EU 27: 12.18                                                    10.32*

Japan:   7.73                                                        6.48

South Korea:   4.12                                             4.39

India:   4.82                                                         6.47

Vietnam:   0.30                                                    0.76

Taiwan:   1.39                                                      1.41

Turkey:   2.06                                                      2.28

Brazil:   2.32                                                        2.06

Russia:   4.48                                                       4.09

Thailand:   0.29                                                    0.30

Canada:   0.92                                                      0.82

Mexico:   1.18                                                      1.16

Argentina:   0.36                                                  0.25

South Africa:   0.54                                             0.41

Egypt:   0.47                                                        0.47

Australia:   0.51                                                   0.35

* The January, 2018 figures are for 28 European Union countries.

What leaps out from these statistics: Except for Australia, the country that has lost the greatest percentage of global output share by far during this period has been the United States. And everyone else has either gained or pretty much held their own. Anyone care to explain this development by arguing that the United States has the world’s least competitive major steel sector? By a mile?

Next let’s take a look at changes in steel-producing countries’ exports to the United States over the last year. In and of themselves, they don’t prove that these economies are transshipping steel to the American market to help Beijing evade recent U.S. tariffs on Chinese steel, or that they have been responding to their own China steel problems by ramping up their exports to the United States. But the size and suddenness of these export increases is certainly noteworthy. In particular, it’s kind of amazing how much surge capability these figures make clear is apparently possessed by smallish countries.

Here’s how America’s steel imports have increased by volume in percentage terms from some important steel producers between the third quarter of 2016 and the third quarter of 2017, according to the U.S. Commerce Department’s latest figures:

global total: +19.56

China: -5.0

India: +209.0

Russia: +64

Taiwan: +36

Thailand: +274

South Africa +68

United Arab Emirates +98

Many of the value figures, drawn from the U.S. International Trade Commission, are even more striking. (These numbers cover iron and steel products and their percentage increases between full-year, 2016 and full-year, 2017.) Some of these percentage increases reflect the “law of small numbers” – the ease with which modest increases in absolute terms can generate big relative increases when the baseline is low.

But all of the below countries sold at least $13 million worth of iron and steel products to the United States in 2017. Also, all of the below increases followed sizable, and some cases enormous, decreases between 2015 and 2016, when overall U.S. imports fell by 25.7 percent. And this list leaves out countries whose iron and steel exports to the United States grew in both years, but ramped up rapidly in 2017. The main examples are Indonesia, the Dominican Republic, Kazakhstan, and Peru.

World: 35.6

China: 15.2

EU 28: 19.4

Japan: 1.6

South Korea: 21.2

India: 88.8

Taiwan: 33.1

Brazil: 51.8

Russia: 98.1

Australia: 65.4

Thailand: 213.7

Canada: 26.6

Mexico: 27.4

Argentina: 198.6

Albania: 583.5

Bahrain: 26,148.1

Belarus: 116.9

Colombia: 96.6

Georgia: 57.0

Guatemala: 430.1

New Caledonia: 70.7

New Zealand: 64.8

Oman: 81.1

Pakistan: 41.1

Peru: 127.4

Philippines: 147.1

Saudi Arabia: 794.5

Ukraine :111.1

United Arab Emirates: 123.7

Zimbabwe: 376.1

These data paint a compelling picture of the world’s leading steel producers complaining endlessly about the distortions created by China’s state-created global steel glut – to the point of creating a special multilateral forum for addressing the issue – but playing footsie with the Chinese behind the scenes at American steel producers’ expense. Which places a heavy burden of proof on opponents of President Trump’s response to explain how this situation bears any resemblance to free trade, and why broad-based tariffs aren’t an absolutely essential response.

(What’s Left of) Our Economy: Trade Myths That…Aren’t

Tags

chemicals, China, competitiveness, consumer electronics, Employment, gross domestic product, inflation-adjusted growth, machinery, Matt O'Brien, recovery, Robert Samuelson, Trade, Trade Deficits, U.S. International Trade Commission, Washington Post, {What's Left of) Our Economy

To say it’s been a bad week at the Washington Post for trade policy coverage and commentary would be a gross understatement. As I pointed out over the weekend, columnist Colbert King on Sunday tried to sell the contemptible idea that many critics of job- and wage-killing American immigration and even trade policies are motivated by racism. Yesterday, no one at the Post sank nearly that low, but the economic ignorance put on full display by two of its leading lights was nearly as depressing.

First came the latest offering by economics columnist Robert Samuelson, describing as “myths” the claims that “Persistent U.S. trade deficits reflect recent free trade agreements” and that “The large trade deficit ($540 billion in 2015) is an important cause of the U.S. economy’s slow growth.”

It seems that Samuelson isn’t familiar with the Census Bureau’s data on America’s non-petroleum goods trade flows. These measure imports and export flows that strip out oil trade (which hasn’t been an issue in trade negotiations and, until recently, in any aspect of trade policy) and services trade (where trade agreements have made only modest liberalization progress.)

As a result, these non-petroleum numbers present the trade flows that are heavily influenced by not only trade deals but by related policy decisions like dealing (or ignoring) currency manipulation. And the Census data show that since the onset of the recovery, it’s up from As made clear by my new article for Marketwatch.com, it jumped from $263.78 billion after inflation on an annualized basis to $681.74 billion in the fourth quarter of last year.

Early in his article, Samuelson attributes this trend to the dollar’s existential strength, but in his conclusion, he also blames policy mistakes – specifically, Washington’s failure to “police” currency manipulation and illegal subsidies. So it seems that this myth is far from mythical.

And as made clear by my Marketwatch.com piece, this strong recovery-era non-oil trade deficit rebound has slowed the growth rate of the current sluggish expansion by more than $400 billion in inflation-adjusted terms. The absolute numbers involved, as suggested by Samuelson, are indeed smallish compared with the size of the U.S. economy (currently $16.46 trillion in constant dollars).

But in calculating the trade deficit’s impact on growth, that’s not the number that counts. What matters is the growth itself, which since the recovery began in the middle of 2009 has been a bit less than $2.1 trillion. So that $400-plus billion trade deficit growth figure amounts to a nearly 20 percent slice – which sure sounds like it deserves adjectives bigger than the “modest” used by Samuelson. In fact, had the real non-oil goods deficit simply remained stable during the recovery, last year’s American inflation-adjusted growth would have been just over three percent, not just under 2.40 percent. That rate of expansion – the U.S. post-World War II norm – hasn’t been achieved in a decade.

Comparably uninformed was Matt O’Brien’s post the same day contending that the threat China’s economic rise has posed to American employment and wages “is slowly starting to go away.” O’Brien cites by-now familiar claims that China’s cost advantage over the United States is quickly vanishing, largely because the PRC ostensibly faces a labor shortage after decades of glut.

I’ve already poked numerous holes in the “overpriced China” meme; if you’re curious, start with this post. But what’s also missed by O’Brien – and so many others – is the threat posed by surging Chinese competitiveness in capital- and technology-intensive industries where labor costs by definition are secondary. It’s easy to measure this rising competitiveness by examining the detailed U.S.-China trade data put out by the U.S. International Trade Commission. And for numbers showing astonishing catch-up – and more – there’s no need to go back to 2001, when China was admitted to the World Trade Organization. Even developments since 2009, the start of the current American recovery, have been stunning.

Here are how America’s trade balances with China in major advanced manufacturing industries have worsened from that point through the end of last year in pre-inflation dollars):

telecommunications equipment: 160.68 percent

farm machinery and equipment: 65.32 percent

construction equipment: $33 million surplus to $953 million deficit

search, detection and navigation instruments: 65.82 percent

semiconductors: 407.85 percent

iron and steel: 34.50 percent

relays and industrial controls: 182.42 percent

ball and roller bearings: 265.62 percent

turbines and turbine generator sets: 62.41 percent

electro-medical equipment: 313.40 percent

metal-cutting machine tools: $118.71 million surplus to $3.68 million deficit

plastics materials and resins: 20.87 percent

And P.S. to O’Brien: These sectors remain very important American employers.

Not that encouraging data is lacking. Here, for example, are some representative high value manufacturing sectors where the U.S. trade balance with China improved between 2009 and 2015, and the size of the improvement:

semiconductor manufacturing equipment: 297.66 percent

pharmaceutical preparation: 483,530 percent (not a misprint!)

analytical laboratory instruments: 106.18 percent

electricity measuring and testing devices: 528.43 percent

surgical and medical instruments: $90.44 million deficit to $248.80 million surplus

metal-forming machine tools: 75.68 percent

aerospace: 195.10 percent

One further problem, though, is that with the prominent exception of aerospace, the trade numbers of the worsening sectors are much bigger than those of the improving sectors. So surely the employment numbers are bigger, too.

Indeed, if you move out to broader manufacturing groupings, you find rapidly deteriorating American competitiveness in areas far removed from widely acknowledged Chinese areas of advantage like smart phones and other consumer electronics products, as well as electronics components. For instance, in non-electrical machinery, the U.S. bilateral deficit has risen by nearly 147 percent since 2009, and in chemicals, a $2-plus billion surplus is now a $468 million deficit. Curiously, the former have been described in the Wall Street Journal as “global champions” and the latter was thought destined for a huge competitiveness boost from cratering prices for natural gas, a key feedstock.

There may of course still be plenty of facts and figures to marshal on behalf of the case that American workers and voters have little to fear from and lots of reasons to support current trade policies. But if these two Post pieces are any indication, supporters of these strategies will need to work much harder to find them.