(What’s Left of) Our Economy: So You Think Trade is an Engine of Productivity Growth?

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economics, economists, European Central Bank, exports, free trade, GDP, gross domestic product, imports, International Monetary Fund, labor productivity, productivity, productivity growth, total factor productivity, Trade, trade openness, World Bank, {What's Left of) Our Economy

The idea that the more international trade a country engages in, the more strongly its productivity will grow, is widely accepted among economists. Indeed, no less than the World Bank, the International Monetary Fund, and the European Central Bank (the eurozone’s version of America’s Federal Reserve) say so.

How then, can these august institutions and other believers explain the following: On the one hand according to the United Kingdom’s Royal Statistical Society, the country’s feeble annual average labor productivity growth of 0.3 percent over the last ten years was its “statistic of the decade”? Worse, it was the poorest decade for British productivity growth since the early 19^th century.

Yet on the other hand, during this period, the United Kingdom’s openness to foreign trade – a data point created by adding a country’s imports and exports and then expressing this sum as a percentage of its entire economy, or gross domestic product (GDP) – has for the most part been hovering near post-1960s highs. In other words, the more foreign trade the UK has been engaging in, the lower its productivity growth seems to have become.

Nor is this phenomenon restricted to the UK. The same pattern can be seen in the United States, although the country’s openness to trade is much lower than the United Kingdom’s in absolute terms (not surprising, since we’re comparing an island with a continental sized economy). RealityChek regulars shouldn’t have to be reminded about America’s discouraging collapse in labor productivity growth.

What about trade? In fairness, America’s openness to trade has been falling recently. But no, that’s not President Trump’s “fault.” The decline began in 2011, when trade’s share of GDP hit a post-1960 high of 30.79 percent. As of 2017 (the latest data year available according to this source), it still stood at 27.09 percent – much higher than the period average of 19.29 percent.   

Also in fairness: Simply because openness to trade for these two big national economies has coincided with lousy productivity growth doesn’t mean that openness to trade causes the problem (or vice versa). It doesn’t even mean that openness to trade is the main productivity culprit, for many different characteristics of an economy influence any single characteristic.

But certainly in light of the American and British experiences, even if the conventional wisdom is right and trade openness does encourage productivity growth, it’s clearly a policy choice that’s often overwhelmed by other features of that same economy. P.S. – it ain’t just the Anglo-Americans. The World Bank’s databases also portray global trade at only slightly off its all-time high as a share of the global economy. And guess what? It turns out that global productivity growth has been crappy lately, too, whether we’re talking labor productivity or total factor productivity (a broader gauge that measures output from the use of many different inputs, not just labor).

As a matter of fact, it’s not difficult to think of ways in which more trade can undermine productivity growth – e.g., if import floods decimate the sectors of the economy that have historically been its manufacturing leaders, or if trade policy fosters their offshoring. (Strong cases can be made for both propositions when it comes to American domestic manufacturing.) 

So the case that trade fosters productivity growth is hardly a slam dunk.  And that’s one more reason to believe that the broader case for free trade isn’t, either.

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(What’s Left of) Our Economy: A Laughable Indictment of Trump’s World Bank Choice

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David Malpass, economic development, Financial Times, globalism, multilateralism, third world, Trump, World Bank, {What's Left of) Our Economy

I was going to post this morning on more implications of yesterday’s new monthly U.S. trade figures, but as so often happens, the Mainstream Media has just come out with an article whose mind-boggling cluelessness reveals such deep-seated biases that I had to switch gears. Special bonus – it didn’t even come from a mainstay of the establishmentarian U.S. foreign policy and globalization Blob. Instead, we have the Financial Times editorial board to thank.

What other conclusion can be reasonably drawn from the FT editorial slamming President Trump’s appointment of David Malpass to head the World Bank?

Not that Malpass has been God’s Gift to Economics or to the cause of third world economic development. But according to the FT, a big problem with Malpass is that he lacks the leadership experience as well as intellectual and often political heft of previous U.S. choices like – wait for it – Robert S. McNamara.

That’s right – the same Robert McNamara who deserves such blame for the American disaster in Vietnam. What’s next for the FT? Criticizing Mr. Trump for appointing a senior military adviser lacking the battlefield genius of George Armstrong Custer?

Almost as bad: What’s given the FT editorialists the idea that McNamara, or any of his pre-Malpass successors, was such a whiz at the Bank? Here’s an appraisal of McNamara’s tenure arguing that he unintentionally created “incentives for Bank staff and management to push money out the door, sometimes with relatively little regard for how it would be used—a practice that still bedevils the Bank’s work today.” And this was from an admirer.

A second major FT argument against Malpass looks more reasonable at first glance:

“His judgment even on economics, his supposed speciality, is wanting. Notoriously, as then chief economist at Bear Stearns, Mr Malpass was blithely confident about the strength of the US economy in 2007 — a year before the global financial crisis hit and his own employer went under.”

What the FT conveniently forgets, though, is that using this standard would rule out virtually every economist in the world as World Bank president.  

Considerably stronger is the FT‘s observation that “As early as 2011 [Malpass] suggested tightening monetary policy and driving up the dollar, a hard-money philosophy entirely at odds with the reality that the Fed had averted economic disaster.”

The problem with this school of thought is that, although the Federal Reserve’s flooding of the American economy with easy money may have been necessary to keep the nation (and world) afloat, it’s also arguably created a global addiction to super-cheap credit that’s kneecapped chances of restoring genuine long-run economic health.

As contended by no less an economic authority than Lawrence Summers (a former World Bank research chief), the result has been “secular stagnation” – the inability of the United States or other major countries to grow acceptably without inflating lending and spending bubbles that are doomed to burst disastrously.

As the editorial makes clear, the FT mainly objects to Malpass because he’s “deeply sceptical of multilateral institutions.” Which would be funny even if the FT itself didn’t describe the Bank as already “dysfunctional” – despite being led by McNamara and all his supposedly genius successors.

More fundamentally, all else equal, why should anyone lack skepticism about any means to an end? Worshiping multilateralism is like worshiping a hammer. Sometimes is the best tool to use; sometimes it’s not.

The FT reasonably argues that “With an increasing number of rival sources of development finance — not to mention private capital — the bank needs to think hard about where it can best add value.” The paper just as reasonably concludes that effecting change requires its president “to be a critical friend of multilateralism who recognises that its institutions need to be adapted to a changing world, not an instinctive ideological enemy.”

But given that these – and other – problems with the Bank have persisted for so long, it’s hard to imagine that a leader accepted by multilateral fetishists like the FT would generate the necessary push.

As a result, the Malpass nomination can just as reasonably be viewed as a Trump administration attempt to change the kind of losing game coddled for so long by diehard multilateralists like the FT editorial board. Such critics should exhibit a little more humility before writing him off as a sure failure. Not to mention minimal historical memory. 

(What’s Left of) Our Economy: Some Surprising New Data on Manufacturing and Trade

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China, IMF, International Monetary Fund, manufacturing, manufacturing jobs, Nicholas Lardy, Peterson Institute for International Economics, Trade, Trade Deficits, trade surpluses, World Bank, World Economic Outlook, {What's Left of) Our Economy

That was some chart in this week’s newest International Monetary Fund (IMF) update on the world economy on how different countries (including the United States) have fared when it comes to increasing or maintaining their manufacturing employment and their manufacturing output. (The detail in the below reproduction is tough to see, but for the original, see p. 5 in the third chapter of the Fund’s April World Economic Outlook.) 

 

Looking at performance for 20 high-income countries and 20 low-income countries, it makes clear that, contrary to the conventional wisdom, there’s nothing unusual about national economies boosting manufacturing jobs as a share of total jobs, and manufacturing output as a share of total output, at the same time. So it’s a powerful retort to claims from American globalization cheerleaders that all over the world, in rich and poor countries alike, both manufacturing indicators are bound to fall in relative terms as economies inevitably evolve in more services-oriented directions.

And at the very least, it calls into question the notion that trade balances in manufacturing have little or nothing to do job loss in the sector in particular. For example, according to the chart, 22 of the 40 countries examined have boosted manufacturing as a share of their employment and their real value-added (a measure of output) from 1960 through 2015. And 11 of these were high-income countries, where the conventional wisdom says manufacturing’s economic importance is likeliest to shrink over any significant time frame.

Of these 22 countries, 17 ran surpluses in their combined goods and services trade in 2015. And nine were high-income countries.

Not that trade surpluses are automatic indicators of economic success: This group does include economically stagnant Italy as well as economically collapsing Venezuela. Spain, which experienced a terrible stretch during the last recession, is on this list, too – although it’s been a strong grower more recently. And there’s one country whose failure to qualify sure surprised me: Germany. Nonetheless, the countries that have excelled at manufacturing during this period also include major success stories like Chile, the Netherlands, Sweden, Ireland, Singapore, South Korea, Malaysia, and of course China (along with Japan, which is currently in the midst of its best growth stretch in nearly three decades).

Of course, the 1960-2015 time frame is still problematic at best, especially for China – since in 1960 it was still being run by leaders enamored with ideas like making steel in peasants’ backyard furnaces. But more recent comparisons between China and the United States look much more instructive – and supportive of the idea that a strong manufacturing trade performance is a great way to maintain robust manufacturing employment and production – and of its converse.

Let’s examine the post-2002 period – with the baseline chosen because that’s the year China actually joined the World Trade Organization, and began receiving WTO-style protection for its predatory, surplus-building trade practices. And for manufacturing output, let’s use pre-inflation value-added, since I wasn’t able to find inflation-adjusted data for China.

According to World Bank figures, manufacturing by this measure dipped from 31.06 percent of China’s economy in 2002 to 29.38 percent – a 5.72 percent decline. For the United States, between 2002 and 2015 manufacturing value-added as a share of gross domestic product (GDP) fell from 13.74 percent to 12.27 percent. That 10.70 drop-off was nearly twice that of China.

As for employment, Sinologist Nicholas Lardy of the Peterson Institute for International Economics (and no hardliner on China) has compiled Chinese statistics dating from 2003, and covering employment in the country’s cities. They show that manufacturing jobs as a share of this China total rose from 15 percent that year to 20 percent in 2014. In the United States during those years, manufacturing employment as a share of total non-farm jobs (the U.S. Bureau of Labor Statistics’ American jobs universe), dropped from 11.91 percent to 8.76 percent.

And nowhere have the manufacturing differences between the two economies been greater than in trade flows. For the first year of its WTO membership, China’s goods and services trade surplus (which was mainly in manufacturing) was $30.35 billion. By 2014, it was ballooned to $382 billion. During this period, the American manufacturing trade deficit shot up by just under 74 percent – from $362.64 billion to $629.53 billion.

So the new IMF chart (and related data) by no means ends the debate over whether trade balances impact national manufacturing employment and output. But if I was a globalization cheerleader, I’d sure hope they didn’t attract too much attention.

Our So-Called Foreign Policy: More Childish Attacks on Trump

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alliances, allies, Council on Foreign Relations, foreign policy establishment, George H.W. Bush, Greece, IMF, International Monetary Fund, international organizations, internationalism, Iran deal, JCPOA, Joint Comprehensive Plan of Action, journalists, Mainstream Media, media, military bases, NAFTA, New Zealand, North American Free Trade Agreement, Our So-Called Foreign Policy, Paris climate accord, Philippines, Richard N. Haass, Ronald Reagan, TPP, Trans-Pacific Partnership, Trump, UN, UNESCO, United Nations, Withdrawal Doctrine, World Bank, World Trade Organization, WTO

I’m getting to think that in an important way it’s good that establishment journalists and foreign policy think tank hacks still dominate America’s debate on world affairs. It means that for the foreseeable future, we’ll never run out of evidence of how hidebound, juvenile, and astonishingly ignorant these worshipers of the status quo tend to be. Just consider the latest fad in their ranks: the narrative that the only theme conferring any coherence on President Trump’s foreign policy is his impulse to pull the United States out of alliances and international organizations, or at least rewrite them substantially.

This meme was apparently brewed up at the heart of the country’s foreign policy establishment – the Council on Foreign Relations. Its president, former aide to Republican presidents Richard N. Haass, tweeted on October 12, “Trump foreign policy has found its theme: The Withdrawal Doctrine. US has left/threatening to leave TPP, Paris accord, Unesco, NAFTA, JCPOA.” [He’s referring here to the Trans-Pacific Partnership trade deal that aimed to link the U.S. economy more tightly to East Asian and Western Hemisphere countries bordering the world’s largest ocean; the global deal to slow down climate change; the United Nations Educational, Scientific and Cultural Organization; the North American Free Trade Agreement, and the Joint Comprehensive Plan of Action – the official name of the agreement seeking to deny Iran nuclear weapons.]

In a classic instance of group-think, this one little 140-character sentence was all it took to spur the claim’s propagation by The Washington Post, The Atlantic, Marketwatch.com, Vice.com, The Los Angeles Times, and Britain’s Financial Times (which publishes a widely read U.S. edition).  For good measure, the idea showed up in The New Republic, too – albeit without mentioning Haass.

You’d have to read far into (only some of) these reports to see any mention that American presidents taking similar decisions is anything but unprecedented. Indeed, none of them reminded readers of one of the most striking examples of alliance disruption from the White House: former President Ronald Reagan’s decision to withdraw American defense guarantees to New Zealand because of a nuclear weapons policy dispute. Moreover, the administrations of Reagan and George H.W. Bush engaged in long, testy negotiations with long-time allies the Philippines and Greece on renewing basing agreements that involved major U.S. cash payments.

Just as important, you could spend hours on Google without finding any sense in these reports that President Trump has decided to remain in America’s major security alliances in Europe and Asia, as well as in the United Nations, the International Monetary Fund, the World Bank, and the World Trade Organization (along with a series of multilateral regional development banks).

More important, you’d also fail to find on Google to find any indication that any of the arrangements opposed by Mr. Trump might have less than a roaring success. The apparent feeling in establishment ranks is that it’s not legitimate for American leaders to decide that some international arrangements serve U.S. interests well, some need to be recast, and some are such failures or are so unpromising that they need to be ditched or avoided in the first place.

And the reason that such discrimination is so doggedly opposed is that, the internationalist world affairs strategy pursued for decades by Presidents and Congresses across the political spectrum (until, possibly, now) is far from a pragmatic formula for dealing with a highly variegated, dynamic world. Instead, it’s the kind of rigid dogma that’s most often (and correctly) associated with know-it-all adolescents and equally callow academics. What else but an utterly utopian ideology could move a writer from a venerable pillar of opinion journalism (the aforementioned Atlantic) to traffick in such otherworldly drivel as

“A foreign-policy doctrine of withdrawal also casts profound doubt on America’s commitment to the intricate international system that the United States helped create and nurture after World War II so that countries could collaborate on issues that transcend any one nation.”

Without putting too fine a point on it, does that sound like the planet you live on?

I have no idea whether whatever changes President Trump is mulling in foreign policy will prove effective or disastrous, or turn out to be much ado about very little. I do feel confident in believing that the mere fact of rethinking some foreign policy fundamentals makes his approach infinitely more promising than one that views international alliances and other arrangements in all-or-nothing terms; that evidently can’t distinguish the means chosen to advance U.S. objectives from the objectives themselves; and that seems oblivious to the reality that the international sphere lacks the characteristic that makes prioritizing institution’s creation and maintenance not only possible in the domestic sphere, but indispensable – a strong consensus on defining acceptable and unacceptable behavior.

One of the most widely (and deservedly) quoted adages about international relations is the observation, attributed to a 19^th century British foreign minister, that his nation had “no eternal allies, and we have no perpetual enemies. Our interests are eternal and perpetual, and those interests it is our duty to follow.” Until America’s foreign policy establishment and its media mouthpieces recognize that this advice applies to international institutions, too, and start understanding the implications, they’ll keep losing influence among their compatriots. And rightly so.

(What’s Left of) Our Economy: Obama’s TPP Case is Staler than Ever

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ADB, AIIB, APEC, Asia Pacific Economic Cooperation, Asian Development Bank, Asian Infrastructure Investment Bank, China, environmental standards, export-led growth, exports, Free Trade Area of the Asia Pacific, FTAAP, Japan, labor standards, NAFTA, North American Free Trade Agreement, Obama, RCEP, Regional Comprehensive Economic Partnership, SOEs, state-owned enterprises, TPP, Trade, Trans-Pacific Parternship, World Bank, {What's Left of) Our Economy

Maybe President Obama believes that repeating even the most laughably off-base contentions endlessly will make them true? Or convincing? It’s hard to look at his new Washington Post op-ed urging passage of his Pacific Rim trade deal and conclude anything else. The article makes clearer than ever that the Trans-Pacific Partnership (TPP) makes sense for the United States only if Americans ignore everything known about the agreement itself, about U.S. trade with the eleven other signatories, and about the region’s economics and commerce.

The President’s fraudulent case for TPP starts with his first claim – that “some of our greatest economic opportunities abroad are in the Asia-Pacific region.” Trouble is, as I’ve noted, the only truly fast growers on the list of TPP countries are economies like Vietnam and Malaysia, whose growth depends on not only exporting, but on amassing large trade surpluses. They lack both the capabilities and the intention of becoming significant net buyers of U.S.-origin goods and services. Compared with the United States, most of the other TPP countries are growth laggards.

Similarly, Mr. Obama’s description of the proposed TPP zone as representing a whopping 40 percent of the global economy ignores how the American economy represents more than 60 percent of total TPP area output. Moreover, the United States already has negotiated trade deals with many of the largest signatories, notably Australia, Canada, and Mexico. So Americans have long reaped nearly all of whatever benefits the President argues will result from this exercise in trade expansion.

No more credible is Mr. Obama’s insistence that the TPP will benefit America by enabling the United States to influence writing the rules that govern regional commerce rather than permitting Chinese-led arrangements shape this environment.

After all, as critics like Republican presidential front-runner Donald Trump has pointed out, China already stands to gain from the TPP, thanks to loose origin requirements that permit free or freer trade of goods with high levels of content from non-TPP countries. And since China for decades has been a key node in the multinational production chains that bind together so many Asian economies, much of this non-TPP content will obviously be Chinese.

Further, nothing could be clearer than the determination of the TPP countries to avoid making either-or choices when it comes to rule-writing exercises for East Asian commerce. No less than six TPP signatories – including Australia and New Zealand – have signed up to participate in the Asian Infrastructure Investment Bank (AIIB) that China set up recently in part as a TPP counterweight. And although the largest by far non-U.S. TPP signatory, Japan, has so far declined to bandwagon, the Asian Development Bank (ADB) that it has traditionally co-dominated has started working actively with the AIIB. So has the World Bank.

These last two developments, by the way, mean that the United States has also decided to work with the Chinese initiative rather than continuing to oppose it, since Washington plays a major role in both institutions.

And what about the Chinese-initiated regional trade agreements about which Mr. Obama expressed so much alarm? The Regional Comprehensive Economic Partnership singled out by the president has already attracted seven TPP signatories – including Japan, along with Australia and New Zealand.

Interestingly, Mr. Obama didn’t mention a second Chinese regional trade scheme – a Free Trade Area of the Asia Pacific (FTAAP). Maybe that’s because he’s decided to cooperate with Beijing on this front, too, at least to the extent that he approved a study of the proposal under the auspices of the Asia Pacific Economic Cooperation (APEC) process in which Washington participates.

Finally, the president’s belief that the TPP will greatly boost U.S. exports through enforceable new rules remains a monument to delusion. As I’ve explained, enforcing labor and environmental standards would require an army of American officials to inspect hundreds of thousands of facilities in low-income countries like Vietnam and Malaysia. Who’s going to pay for these personnel? And that’s not even including the vast manufacturing complex that’s been created in Mexico since it joined a North American Free Trade Agreement (NAFTA) more than twenty years ago, and in which evidence abounds such provisions remain overwhelmingly ineffective.  (Hence, largely, the president’s insistence that “this time, it will be different” in TPP.)  

As for the state-owned enterprises (SOEs) whose trade-distorting activities TPP will supposedly curb, how will U.S. officials gain access to these notoriously secretive constructs and their financial records? Moreover, since low (at best) labor and environmental standards along with opaque SOEs are keys to competitiveness throughout Asia, why would the region’s TPP signatories give Washington the power to weaken these arrangements through dispute-resolution hearings?

President Obama writes that the alternative to Congress passing the TPP is “building walls to isolate ourselves from the global economy.” That’s the most pernicious trade policy and TPP myth of all. The real alternative is developing trade policies based on global economic realities, not his own fantasies about the power of mere pen strokes.

(What’s Left of) Our Economy: The IMF (Unwittingly) Trashes the Case for Obama’s Pacific Trade Deal

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Christine LaGarde, developed countries, developing countries, emerging markets, free trade agreements, IMF, International Labor Organization, International Monetary Fund, Obama, Stolper-Samuelson theory, third world, TPP, Trade, Trans-Pacific Partnership, World Bank, {What's Left of) Our Economy

Whatever reputation the French have had for being master logicians has just been shredded by International Monetary Fund (IMF) chief Christine LaGarde.  Her take on emerging markets’ emerging role in the world economy is completely incoherent, and its fatal flaws have big implications for President Obama’s Trans-Pacific Partnership (TPP) and U.S. trade policy as a whole.

For decades, Washington has told Americans that the U.S. economy urgently needs new trade deals mainly because without them, the nation and its workers would be shut out of all the huge, rapidly expanding third world economies that would surely be the globe’s most powerful growth engine for the indefinite future. Moreover, both Democratic and Republican presidents and Congresses have followed through, as new U.S. trade deals since Mexico’s addition to the North American Free Trade Agreement (NAFTA) have focused tightly on developing countries.

Mr. Obama and other TPP supporters have used the same justification for the Pacific Rim trade agreement, repeating over and over again the mantra that “more than 95 percent of our potential customers live outside our borders….” Obviously, they haven’t been thinking mainly of developed markets like Europe and Japan.

On the level of both individuals and national economies, these claims have always been bogus. As I’ve shown, according to major international organizations like the World Bank and the International Labor Organization, the vast majority of third world populations still earn far too little to buy goods made in wealthier countries like the United States on anything close to a regular basis. Moreover, as my book The Race to the Bottom documented exhaustively, most major developing countries – ranging from Mexico to China and its low-income Asian neighbors – have achieved most of their growth by selling to America and the high-income world. Even the commodity producers that have profited by supplying China have remained dependent on U.S. and other developed markets indirectly, since they have been such important final customers for China’s output.

In a Tuesday speech in Paris, LaGarde echoed recent observations that developing countries are in the process of turning into global growth laggards from global growth leaders. As made clear above, their claim to that former status was dubious at best, but LaGarde’s outlook was also noteworthy for its profound pessimism. She not only warned that emerging economies that borrowed heavily in dollars were vulnerable to monetary tightening moves from the Federal Reserve. She also declared that “emerging and developing countries are now confronted with a new reality. Growth rates are down, and cyclical and structural forces have undermined the traditional growth paradigm.”

Indeed, LaGarde pointed to IMF research projecting that “the emerging world will converge to advanced economy income levels at less than two-thirds the pace we had predicted just a decade ago. This is cause for concern.” (What she failed to mention is that this convergence could also result in part from incomes in the developed world sinking closer to third world standards, as the Stolper-Samuelson theory of international trade’s impact first stipulated.) For good measure, LaGarde reminded her audience that “Clearly, emerging markets are benefiting from the fact that many central banks in many advanced economies still have a very easy policy stance.” In other words, historically easy credit in the wealthier countries had kept third world exports and growth much greater than they would have been otherwise.

Yet even though she made the case that emerging market economies’ prospects were deteriorating and had relied critically on the developed countries even after the financial crisis, LaGarde also mysteriously contended that the emerging world “contributed more than 80 percent of global growth since” the global economy seemed on the verge of collapse and that, consequently, “The economic health of the emerging world is of first-order importance for the advanced economies.”

And in the strangest statement of all, she proceeded to insist that the wealthy countries now need to deal with this situation by propping up emerging market performance with “a stronger global financial safety net” for these economies that expands their access to the swap lines of the richer countries’ central banks.

A respectable case can be made that emerging markets have always been the keys to future global growth. Equally respectable cases can be made for the propositions that they have been the main global growth drivers since the financial crisis; that they have never been the keys to global growth; that they will remain central to the wealthier countries’ well-being; that they are headed to a much gloomier “new normal;” and that they need new aid from the developed countries to avoid major future woes. But no case can be made for all these contentions at the same time – unless reason and logic are abandoned entirely.

Moreover, since the claim behind which LaGarde is putting her money is the one that’s downgrading the third world’s economic importance substantially, and the one conforming with past and future realities, it should be clear that the term “emerging markets” is likeliest to be an oxymoron going forward. As a result, although the United States and other wealthier countries could legitimately decide to lend them a hand for moral and humanitarian reasons, the argument from self-interest is looking ever more far-fetched. And tying America’s fortunes even more tightly to global economic losers via new trade deals like the TPP? That looks downright masochistic.

Our So-Called Foreign Policy: A Big Overlooked Lesson of the Iran Deal

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AIIB, allies, Asian Infrastructure Investment Bank, burden sharing, China, Cold War, IMF, Iran, Iran deal, John Kerry, multilateralism, Obama, Our So-Called Foreign Policy, sanctions, Security Council, United Nations, World Bank

Whatever you think of President Obama’s deal aimed at preventing Iran’s acquisition of a nuclear weapon, it’s vital to recognize that it greatly compounds the evidence that a key pillar of recent U.S. foreign policy is crumbling – the belief that many crucial American international objectives can successfully be pursued multilaterally. The terms of the deal powerfully indict extensive reliance on formal U.S. alliances and less formal groupings of allegedly like-minded countries. They also indict extensive reliance on international institutions like the United Nations. And they make more urgent than ever the development of alternatives.

Even President Obama has described the terms of the Iran deal as sub-optimal. But he and his aides have insisted that it is better than any feasible alternative non-military approaches to Iran’s nuclear program. The president appears to be correct on this score, and consequently, a compelling case can be made for the deal’s approval by Congress. Nonetheless, it’s imperative to understand why an agreement with genuinely disturbing weaknesses has in fact been the best peaceful option available.

The principal reason, as made clear by Mr. Obama and Secretary of State John Kerry, is that even the western powers involved in the Iran negotiations have decided that the economic sanctions to which they have agreed have exacted a high enough price, and that the further costs they might have to pay due to efforts to strengthen the deal are unacceptable. In other words, for Britain, France, and Germany, the desire to resume potentially lucrative commercial ties with Iran outweighs the benefits of increasing pressure on Iran’s economy in order to, say achieve the right of no-notice, “anytime, anywhere” inspections of suspect Iranian sites. Similarly, the allies judge new business opportunities to be more important than requiring Iranian compliance with the agreement’s terms for longer time spans before restoring its ability to buy arms – including ballistic missiles – on the international market.

Kerry has noted that the United Nations has been even less interested in keeping The Bomb out of Iran’s hands. He has pointed out that the Security Council had not decided to condition early ends to the weapons- and missile-buying embargoes on signing a nuclear deal with Iran. The Council conditioned these actions on nothing more than Iran’s agreement to participate in nuclear negotiations. That’s why, Kerry argues, he needed to agree to these relatively early sunsets to begin with, and why he insists that the United States will be isolated in the world community if Congress does not agree.

In other words, a goal described by the president as vital – keeping Iran nuclear weapons free – has been significantly compromised because the allies do not fully share U.S. concerns. Nor does most of the rest of the world. As a result of this fundamental disagreement, it’s difficult to understand, as I’ve written, why anyone supposes the allies or the UN membership would agree to reimposing (“snapping back”) sanctions while the agreement is in place, much less holding Iran’s feet to the fire once the deal’s various provisions lapse.

Economics just delivered a similar message to Washington. The United States had initially decided to oppose China’s decision to set up an international development bank to serve as an alternative to the existing World Bank. Chinese leaders argued that the Western-dominated Bank was too slow to finance the massive infrastructure needs of developing countries in Asia and elsewhere, but U.S. leaders suspected that China was really seeking to gain international influence at America’s expense. Washington also worried that a Chinese dominated aid bank would be managed irresponsibly from a financial and governance standpoint, and that its projects would run roughshod over the environment. Anyone who knows anything about Chinese financial, governance, and environmental practices would need to regard these fears as legitimate.

As I’ve written, however, despite this U.S. opposition, even most of its closest allies decided to join the Chinese-led Asian Infrastructure Investment Bank (AIIB) anyway. They have cited two main reasons that even many prominent Americans agree with, but that turn out to be bogus on closer inspection – and that underscore the weaknesses of multilateralism. First, many of the allies themselves maintained that their participation would promote best business and environmental practices at the new institution. Second, they – and many influential Americans – describe the aid bank as an understandable Chinese reaction to the U.S. Congress’ refusal to approve increasing China’s voting power in the International Monetary Fund (IMF).

Yet the U.S. allies that have jumped on the AIIB bandwagon are acting so eager to win new infrastructure contracts that it’s hard to believe they’ll pressure Beijing to adopt high standards. Moreover, increasing China’s IMF vote amounts to increasing the global clout of a government and economic system that’s by far the worst kleptocracy of all major countries. That’s a terrible idea, which in particular overlooks the multi-decade failure of western policies to moderate China’s behavior by integrating it into the world economy. The results to date have been a country that’s immensely stronger militarily, far more aggressive towards its neighbors, increasingly protectionist on the trade and investment fronts, and increasingly repressive towards domestic dissent.

The United States has never been especially successful at alliance management. In particular, it was never able to convince either its European or Asian allies to contribute proportionately to the common defense and security burden. And the Europeans frequently broke with Washington even on the military conflicts of the day – to the point of continuing to trade with North Vietnam during the Indochina conflict. But failures during the Cold War took place in a period when America possessed much greater relative military and economic power than today. So it needed allied cooperation much less to achieve goals it considered important. The Iran deal and AIIB failures show that a lack of allied cooperation is now enough to prevent America from achieving such goals.

Which means that, as during the Cold War, the main point is not the United States has been necessarily right and other countries necessarily wrong in these disputes. The main point is that America today finds itself in a position in which the rest of the world (including its closest allies) can – and have – fatally undermined measures needed to achieve objectives that Washington regards as deserving the utmost importance. As a result, whether its leaders know it or not, the nation faces a basic choice. It can either accept the global consensus, and decide to live in a world that its own leaders have stated will pose unacceptable risks. Or it can start figuring out ways to attain an acceptable level of security through its own devices.

The possibilities are wide-ranging, depending on how the American political system defines the nation’s overseas priorities, how much it decides to spend on achieving them, and how much wealth the economy can generate – thereby determining how intense the inevitable resource competition between “guns and butter” will be. My own hope is that U.S. leaders recognize two truths that seem to be recognized by the public already. First, foreign policy is about achieving important goals that cannot be attained through domestic policy. Second, although the United States lacks the power to become acceptably safe and secure by stabilizing, pacifying, enriching, or democratizing the rest of the world, it has ample power to survive and prosper even in the deeply flawed and indeed dangerous world it faces today.  

Worrisomely, though, President Obama doesn’t even yet seem to recognize the problem. Speaking at the West Point commencement last year, he made a point that’s become presidential boilerplate by now: “America should never ask permission to protect our people, our homeland, or our way of life.” Yet as demonstrated by his Iran diplomacy and, secondarily, by the AIIB fiasco, that’s exactly what the nation is doing.  And the rest of the world is anything but reluctant to say “No.”

 

Our So-Called Foreign Policy: How a Superpower Would React to China’s Infrastructure Bank Challenge

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AIIB, allies, Asian Infrastructure Investment Bank, China, escalation dominance, Financial Crisis, Global Imbalances, Ingternational Monetary Fund, Japan, Korea, NATO, North Korea, Our So-Called Foreign Policy, Russia, TPP, Trade, Trans-Pacific Partnership, World Bank

So now what? That’s the question a Twitter follower asked me after reading my posts and tweets criticizing China’s establishment of a new Asian infrastructure financing bank, and the ineffective U.S. response to its’ allies rush to join an institution that challenges an international economic order that they themselves built. I’ve now started to think this through, and here are my preliminary thoughts – which focus on the golden opportunity these events create to rethink an American alliance policy that was obsolete even before the Cold War ended.

China’s move spells trouble for the United States on any number of levels, but especially for its efforts to preserve the approach to foreign policy and the global economy it’s clung to under Democratic and Republican presidents alike since the end of World War II. This strategy has ultimately aimed at eliminating the conditions responsible for great power war in the first place by binding like-minded countries (generally, but not always, democracies) into cooperative economic networks that could promote global stability and prosperity, and by expanding this system whenever practicable. Challengers from outside this free world camp would be dealt with through various global alliances.

Also crucial: In all of these endeavors, the United States provided the lion’s share of the so-called public goods – the resources for defense and liquidity for promoting growth (which included wide open trade markets for countries that kept theirs substantially closed). In turn, the United States was generally recognized as first among equals for the systemic, existential decisions.

These arrangements, which extended to the free world camp’s consequential institutions (NATO and the other security relationships, the World Bank and the International Monetary Fund) were far from America’s only viable strategy during the early post-World War II decades, as I’ve explained here. But they were a sensible choice and deserve credit for fostering successful postwar reconstruction, as well as peace and record prosperity throughout the developed world.

Yet it made much less strategic sense for the United States once the Soviet Union caught up in nuclear armaments, and thereby gained the power to turn America’s defense of its allies into an exercise in suicide. And it made much less economic sense for the United States once its allies began catching up economically, and its role as liquidity provider became less affordable.

It’s no surprise, then, that the early postwar monetary system – the heart of that period’s international economic system – fell apart in 1971, and has never been adequately replaced, even though its institutions survived in shriveled forms. The alliance system outlived its Soviet adversary, and China’s weakness following the Cultural Revolution and growing tensions with Moscow pushed it to the military and ideological competition’s sidelines for many years. But by the same token, the remaining American costs and risks required to maintain Cold War security structures lost much of their rationale.

Now new versions of these problems and dilemmas are now being forced into the open – including those involving nuclear threats – by China’s Asian Infrastructure Investment Bank (AIIB) gambit as well as by the return of Russian revanchism. In fact, because so many of America’s NATO allies have applied to join the bank, these two developments intersect. These allies are facing Russian challenges throughout Europe that for the first time in decades raise the possibility of spheres of influence being redrawn by force – primarily in the Baltics. As I’ve written, I believe that America’s ill-considered decision to expand NATO’s frontiers right up to Russia’s borders is largely responsible. But the allies clearly went along, and the shrunken states of their conventional military forces mean that they have no prospect of responding effectively – but not catastrophically (i.e., without nuclear weapons) – without American help.

At the same time, these allies have ignored American objections and joined a Chinese creation that can only be legitimately viewed as a rival of a U.S. and Western-fostered blueprint to ensure that growth and development worldwide proceed according to market-based principles and associated political values. Anyone familiar with Asia in particular knows that this goal often has been honored in the breach – one main reason for the global economic imbalances that nearly blew up the world economy just over six short years ago. It’s entirely understandable that low-income countries complain that even the rapid growth they’ve achieved under the Western-dominated global economy hasn’t been fast enough. But imagine how excessive and unbalanced their growth would be, and how dangerously distorted the world economy would become once again, if the current restraints were removed – if China was allowed to write the rules of doing business in Asia, as President Obama says he fears. Moreover, the entirety of East Asia itself could look as bloated and filthy and corrupt as China itself.

That America’s allies (Japan is still sitting on the fence) should ignore these considerations in a clear rush to win whatever contracts the AIIB winds up handing out raises the most profound questions about their commitment to longstanding free world foreign policy goals. Their actions are particularly stunning in light of renewed security threats that, due to enduring facts of geography, endanger them much more than they endanger America. The idea that the United States should continue assuming any risks of nuclear confrontation on behalf of such countries looks particularly dubious.

Nor should it be forgotten that China itself has been a major beneficiary of the current American-inspired order. Peace and stability in Asia has been by far the most important contributor to its breakneck growth and dramatically improved living standards. So it’s at least jaw-droppingly ironic to read reports of Chinese warnings that North Korea’s nuclear arsenal could be much larger than so far estimated, and could grow much faster. After all, Beijing not only still serves as the North’s economic lifeline, and has been more aggressively pressing its claims to seas and islands in East and Southeast Asia, on top of its campaign of undermining America’s regional influence.

Even worse, Korea looks like an ever more dangerous tar baby for the United States. Yes, the ongoing large U.S. troop deployment in South Korea no doubt helps to deter destabilizing provocations and even aggression by the North. At the same time, it threatens to draw the United States into any conflict on the peninsula – which could well go nuclear. Further, as I’ve written, the North’s nuclear forces could soon become strong enough to deter deeper U.S. involvement in a new Korean War – and doom the troops already in harm’s way. Most important, America is exposed to these possible disasters even though it’s located thousands of miles away from Korea, and Northeast Asia looks endowed with more than enough big powers (not only China, but Russia and Japan as well as South Korea) to deal with the North itself. Oh – and did I mention? South Korea is all in with the AIIB, too.

To me, therefore, one obvious U.S. response to China’s creation of the AIIB should be to deliver an ultimatum to those new members that are also negotiating to conclude the Trans-Pacific Partnership (TPP) trade deal with America: If you’re that keen on the AIIB, you can kiss good-bye the TPP and the greater access to America’s market you’re seeking. In fact, Washington should feel free to increase and erect new trade barriers to their products. Nor should the main culprit escape unscathed; China’s access to American customers should be restricted, too. And South Korea should be told that it’s new free trade agreement will be torn up if Seoul doesn’t leave the Chinese-led institution.

The new European members of the AIIB present a more complicated problem. One possible solution would be for Washington to make clear that any Asian products created with the help of new AIIB-financed infrastructure projects (ranging from ports, roads, and bridges to power and water systems) will face new U.S. trade barriers – and Washington would be judge, jury, and court of appeals for identifying these goods. Without the ability to sell to America, those infrastructure contracts sought by the Europeans (and others) become a lot less valuable.

And although the AIIB doesn’t pose any security threats to America per se, its creation carries major security implications because a main rationale for the risks Washington has assumed via its East Asian military presence is economic. In other words, if remaining aloof from the AIIB winds up discriminating against American domestic businesses (as opposed to the foreign factories of U.S. multinational companies), the American military is out of South Korea, its bases in Japan will be cut way back, and the Asians will be more than welcome to deal with North Korea’s nukes on their own. Ditto for those Asian countries worried about the expansionism of China itself. If they want U.S. military help, they’d better not be playing footsie with the threat. I’d also support American leaders reminding the Europeans that it remains an ocean away from Vladimir Putin’s designs, and that the allies would be well advised to take seriously their talk of working inside the AIIB to make sure it acts quasi-responsibly.

U.S. leaders trapped in 20^th century ways of thought will (nervously) laugh off these proposals because they’re still convinced that America needs its allies more than vice versa. Leaders who understand geopolitics and the full range of thoroughly viable strategic options it creates – not to mention America’s unmatched market power and potential for much greater economic self-sufficiency – will start to act like a superpower rather than settling for (increasingly) hollow rhetoric. I just hope Washington doesn’t need a completely unnecessary war to come to its sense.

(What’s Left of) Our Economy: China Aid Bank Success Reveals Obama’s TPP Naivete

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AIIB, allies, Asian Infrastructure Investment Bank, Australia, China, IMF, Korea, TPP, Trade, Trans-Pacific Partnership, transparency, United Kingdom, World Bank, {What's Left of) Our Economy

The readiness of American allies worldwide and numerous major Asia-Pacific countries to ignore Washington’s objections and sign on to the Chinese-led Asian Infrastructure Investment Bank (AIIB) isn’t just a major diplomatic embarrassment for the Obama administration. It also exposes the dangerous naivete of U.S. expectations of how the Pacific rim trade agreement being sought by the president will function.

According to President Obama, the American-spearheaded Trans-Pacific Partnership (TPP) trade deal is needed largely to prevent China and its often free market-unfriendly objectives from dominating the process of writing the rules that govern commerce in one of the world’s most economically vibrant regions. But the folly of faith in international rules should be more painfully obvious than ever from the rush of so many countries to join a regional economic development bank created precisely to marginalize the transparency, environmental and other standards imposed on aid spending by existing, Western-dominated institutions.

It’s true that Asian and other developing countries have long objected to their limited role in the World Bank, International Monetary Fund, and similar institutions. But their main objections are that being outvoted has meant a curbing of their access to resources by requirements of financial and policy controls aimed at ensuring adequate efficiency and sustainability. In other words, results have mattered far more to them than rules.

As for the wealthier countries that have signed on to this Chinese initiative, they’ve clearly been motivated by the lure of contracts that could juice their stagnant economies. Britain’s government and many analysts believe that the presence of European countries and Australia can maximize the odds that the AIIB will operate responsibly. But these countries could already look to existing institutions for lending based on good governance and balanced priorities (not that these institutions have been perfect by these measures). With so much opportunity at stake, will the growth- and jobs-starved Europeans and Australians really challenge – and therefore complicate – Chinese-style procedures?

Australia and several new AIIB participants would also be among the first round of TPP signatories. Moreover, other new AIIB members, like Korea and China itself, are knocking on the door. Mr. Obama’s comments on the Pacific trade deal’s rule-making benefits for America appear to be based on one of two equally illogical propositions.

The first is that once in TPP, these other members will suddenly drop their “anything for a buck” mentality and rediscover their devotion to strong procedures. (In the case of TPP’s Asian members, the belief seems to be that they will convert to rules-based priorities despite rejecting this approach to governing for their entire histories.) The second is that whatever priorities the majority of TPP members bring to its bargaining tables and dispute-resolution systems, the United States will be able to sell them on the superiority of stringent rules and all of the openness and market orientation they foster.

The good news for Americans is that their country retains ample capacity to shape commerce around the Pacific rim to its liking – and in a way that can prevent the reemergence of the historic global trade imbalances that helped trigger the financial crisis and its painful aftermath. As the most important final market for much of what’s produced by export-dependent Asia-Pacific countries, the United States can use its economic power to ensure mutually beneficial, sustainable trade and investment. The bad news is that the president seems ignorant of America’s advantages, and clueless that the TPP can only weaken, not strengthen them.

Our So-Called Foreign Policy: Obama Ignores the Diplomacy Lesson Taught by China’s Aid Bank Gambit

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allies, Asian Development Bank, Asian Infrastructure Investment Bank, China, diplomacy, international organizations, international relations, Obama, Our So-Called Foreign Policy, power, TPP, Trade, trade agreements, Trans-Pacific Partnership, World Bank

You have to be a regular visitor to the furthest reaches of business news websites to be up to speed on the controversy over dealing with the new Asian Infrastructure Investment Bank (AIIB) China has organized. Which is a shame, because the issues involved bring up our most fundamental ideas about how international relations are actually carried out and how they should be carried out.  They show how violently many of them clash.  And they point to the dangers of learning the wrong lessons.

The bank is an institution that Beijing says will serve two main purposes. First, it will speed up lending to Asian countries for urgently needed infrastructure projects that has been slowed by concerns about adequate spending controls, environmental standards, merit-based contracting practices, and similar conditions typically attached by existing development organizations like the World Bank and the Asian Development Bank. Second, it will give Asians more control over their own destinies, because those existing aid organizations are still dominated by Western countries – and by extension the supposedly Western values epitomized by their aforementioned policies.

The United States initially opposed the AIIB’s creation. But when China pushed ahead anyway, Washington began focusing on urging its regional allies and other Asian countries, as well as prospective non-Asian donor governments, to give it the cold shoulder. Unfortunately, many of these countries have ignored U.S. wishes, too – including Britain, Germany, France, Italy, and probably Australia.

The results add up to a major setback for American diplomacy – but also a self-inflicted one. U.S. leaders have viewed the Bank’s creation as part of a Chinese master plan to ensure that the rules of commerce in the economically dynamic Asia-Pacific region are written by free market countries and therefore reflect free market norms, rather than by Beijing and other champions of more secretive, more discriminatory, and more nationalistic practices. In addition to opposing the Bank’s creation, the Obama administration also has sought to respond by concluding the Trans-Pacific Partnership (TPP) trade deal, whose provisions it believes will lock the region into a free market future, and create incentives for countries seeking to join (like China) to change their ways.

But China’s successes are just the latest reminder that Washington completely misunderstands the forces that separate the winners from the losers not only in Asian politics, but around the world. For as widely reported, even America’s closest partners are cooperating with China because the lure of Chinese economic power, and the promise of increasing access to China’s enormous actual and potential market, have proven irresistible. All maintain generally free market, and thus rule-based, economic systems at home.  But none of these governments seems concerned about entering arrangements with countries like China, which actively reject the primacy of rules and all of their corollaries, like openness, and accountability to consumers, voters, and the like.

In other words, President Obama’s focus on rule-writing is completely misplaced. Fortunately, the United States has ample power of its own. In fact, as the most important final market by far for all countries currently involved in the TPP negotiations, and for all countries hoping to join, as well as the military protector of many of these nations (and of the Europeans flocking to the AIIB), the United States should have no trouble keeping the lid on China’s influence. A simple declaration that “If you want the benefits of trade with and protection by the United States, you need to act like it,” should suffice – along of course with the determination to walk this walk.

But the most important ingredient for this strategy is a U.S. chief executive who recognizes that world affairs is still mostly jungle, not civics class. Troublingly, the record indicates that Americans won’t get one until January, 2017 at the earliest.