(What’s Left of) Our Economy: The World Trade Organization Unmasked

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Chad Bown, China, Foreign Affairs, Keith Bradsher, multinational companies, Peterson Institute for International Economics, Ronald Reagan, Section 301, The New York Times, Trade, trade law, Trump, World Trade Organization, WTO, {What's Left of) Our Economy

It isn’t every day that Washington’s offshoring-happy economic policy establishment reveals one of its dirtiest secrets in public (unwittingly, of course!). So anyone – and especially U.S. political leaders – with any interest at all in trade, globalization, manufacturing, employment, and related issues (e.g., the economy, getting re-elected) urgently needs to read the final paragraphs of Tuesday’s New York Times article reporting that President Trump will soon greatly ramp up trade pressure on China.

But it’s vital to read the passage intelligently, because the point is made in in the kind of Washington-speak intended to conceal its real meaning.

As Times reporter Keith Bradsher wrote, a key feature of Mr. Trump’s alleged new China strategy will be the use of a provision of America’s national trade law system called “Section 301.” It’s a provision that grants a president broad authority to respond with punitive tariffs to foreign trade practices considered to be damaging the U.S. economy in “unfair” ways, and to respond pretty quickly. (It’s still not nearly quick enough for me, but that’s a separate issue.) And as he made clear, it’s a trade law provision with a noteworthy history. In Bradsher’s words:

“The United States used Section 301 energetically against other countries during the Reagan administration and the administration of President George Bush. Mr. Lighthizer [the current chief U.S. Trade negotiator] was a deputy United States trade representative in the Reagan administration and has been an advocate of shielding the American industrial base from government-assisted foreign competitors.

“But the cases then thoroughly antagonized America’s trading partners.

“‘It was really the aggressive uses of this in the late 1980s and early 1990s that prompted the rest of the world to set up the dispute resolution system’ of the World Trade Organization [WTO], said Chad P. Bown, a senior fellow at the Peterson Institute for International Economics here.”

Bown – whose Peterson Institute home is heavily funded by the offshoring lobby – no doubt meant his statement to reinforce the standard establishment description of and rationale for the WTO-centered world trade system that’s been in existence for the last quarter century. That is, the international economy had too long operated on a law of the jungle basis that bred continual and dangerous conflict, and that in an act of enlightened self-interest, the world’s economies recognized these perils and created a global trade court that would mete out justice according to objective legal standards and thereby serve every countries’ long-term interests.

In fact, Bown wound up confirming a very different description of the WTO and the motives behind its creation that I have advanced since it was first proposed: It’s an arrangement supported by America’s trade partners in order to prevent the United States from using its matchless market power to promote and defend its legitimate international economic interests. P.S. – because U.S.-based multinational companies supply the American market from so many overseas factories, undercutting Washington’s unilateral power to restrict imports mattered crucially to them, too.

For the Reagan-era uses of Section 301 cases that Bown (and Bradsher) mention were noteworthy not mainly because they were “energetic” or “aggressive”. (Unless you view most of America’s trade partners as snowflakes or strong champions of the rule of law.) These 301 uses were noteworthy because they worked. All the evidence is contained in this article I published in Foreign Affairs in 1994. And as Bown made clear, this success was completely unacceptable to “the rest of the world” – most of which, like China, relies heavily on selling to America in order to grow and develop satisfactorily. As a result, these economies, along with the multinationals, became convinced that handcuffing the United States was essential. And official Washington dutifully went along.

Although Section 301 is still on the books, it’s been U.S. policy under Democratic and Republican presidents alike to avoid it in favor of WTO procedures (just as most foreign governments, including allies, and the multinational companies want). And legally speaking (a term I use advisedly when it comes to the WTO and international law generally), that approach seems to dovetail with WTO rules.

But the Trump administration appears to be considering the contention that the United States retains the unfettered authority to use 301 at least in certain instances. The administration further seems confident that, whether it’s right or wrong on the law, the WTO membership collectively will shrink from a frontal challenge for fear of completely destroying a dispute-resolution system that still might serve its interests well going forward – at least much of the time. 

Nevertheless, the reports of a Trump course change on China trade – which could eventually be broadened – are still just reports. All that’s certain now is that, if they’re accurate, the president will wind up showing the his own compatriots and the rest of the world what a real America-First trade policy would look like.

 

(What’s Left of) Our Economy: Trump’s NAFTA Rewrite Blueprint is an Encouraging Start

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bubbles, Buy American, Canada, dispute resolution, environmental standards, GATT, General Agreement on Tariffs and Trade, government procurement, labor standards, manufacturing, Mexico, NAFTA, national treatment, non-discrimination, North American Free Trade Agreement, reciprocity, rules of origin, tariffs, TPP, Trade, trade deficit, trade enforcement, trade laws, Trans-Pacific Partnership, Trump, value-added taxes, VATs, World Trade Organization, WTO, {What's Left of) Our Economy

The Trump administration is out with its detailed statement of renegotiation objectives for the North American Free Trade Agreement (NAFTA), and if you’ve favored turning U.S. trade policy from an engine of debt-creation and offshoring into one of production-fueled growth and domestic job creation, you should be pretty pleased.

As critics have noted, yesterday’s statement does lack numerous important details about how the administration intends to achieve its goals, and some of these omissions (as will be explained) raise legitimate questions about the depth of the president’s commitment to these changes. But the statute requiring the release of such statements doesn’t mandate disclosure of every – or any – specific strategy for reaching these goals. Moreover, the talks haven’t even started, and these tactics naturally tend to change with circumstances. So those accusing the administration of excessive vagueness should start holding their fire.

As indicated in yesterday’s post, the most important change needed in NAFTA is the addition of teeth to the agreement’s existing rules of origin – the requirements that goods sold within the NAFTA free trade zone comprised of the United States, Mexico, and Canada be made overwhelmingly of parts, components, and materials made inside the zone.

After all, manufacturing dominates trade not only inside NAFTA, but between the NAFTA countries and the rest of the world. Without imposing teeth, non-NAFTA countries will have no meaningful incentive to invest in new NAFTA-area facilities to produce the intermediate goods that comprise the content of final products, like automobiles. And the economies, businesses, and workers in the three countries will be denied immense opportunities to boost production and employment. Indeed, this is precisely this opportunity that’s been missed under the current NAFTA.

It’s difficult to imagine these teeth taking a form other than steep tariffs on goods imports from outside NAFTA, and the Trump blueprint never mentions that “t” word. But it does contain a call to “Update and strengthen the rules of origin, as necessary, to ensure that the benefits of NAFTA go to products genuinely made in the United States and North America.” And it specifies that these improved origin rules must “incentivize the sourcing of goods and materials from the United States and North America.” How could anyone supporting more U.S. manufacturing production and employment not be heartened?

Also impressive – as widely reported, the administration has prioritized preserving America’s ability to “enforce rigorously its trade laws, including the antidumping, countervailing duty, and safeguard laws” chiefly by eliminating the NAFTA provisions that established international tribunals as the last word in resolving trade complaints among the signatories, rather than the U.S. trade law system. The Trump administration is also seeking to reestablish America’s unfettered authority to impose “safeguard” tariffs on imports from Mexico and Canada when they begin to surge into the United States. So if you’re worried that NAFTA and other recent U.S. trade agreements have needlessly undermined American sovereignty, this blueprint is for you.

Similarly, critics have long complained about NAFTA’s overriding of the Buy America provisions of U.S. public procurement regulations aimed at maximizing the American taxpayer dollars used to purchase goods and services for government agencies. The Trump strategy laid out in the blueprint seeks to preserve these and other key domestic preference programs.

It’s true, as is being contended, that in areas ranging from promoting high labor rights and environmental standards, to dealing more effectively with the trade distortions created by state-owned enterprises (SOEs), the Trump NAFTA blueprint looks a lot like the Trans-Pacific Partnership (TPP) trade deal that the president condemned as a candidate and withdrew from on his first day in office.

It’s just as true, however, that formidable obstacles were bound to prevent effective enforcement of those proposed TPP rules. These loom as large as ever – notably, the huge numbers of U.S. government officials that would be needed to monitor the even huge-er Mexican manufacturing sector on anything close to an ongoing basis. But the final TPP text demonstrated beyond reasonable doubt that the Obama administration failed to address these concerns adequately. Maybe the Trump administration will come up with viable answers.

Finally, the Trump NAFTA blueprint contains two conceptual objectives that have never been prioritized since the current world trading system was created shortly after World War II, and that trade policy critics should be applauding vigorously. The first is the endorsement of reciprocity as a lodestar of American trade strategy. The second is an emphasis on reducing America’s mammoth trade deficits.

Although reciprocity (i.e., America opens its markets to certain trade partners only to the extent that their markets are open to U.S.-origin goods and services) seems like an uncontroversial trade goal for Washington to seek, and is often presumed to be the goal, nothing until now could be further from the truth. In particular, the foundational principles of the world trade system under the General Agreement on Tariffs and Trade (GATT), and the World Trade Organization (WTO) are national treatment and non-discrimination.

National treatment simply insists that countries deal with foreign enterprises the same way they deal with their own domestic enterprises. Non-discrimination simply mandates that countries treat imports from all trade partners’ identically. The big problems? They enable closed economies to maintain way too many trade barriers. For instance, countries that favor certain companies over others for either political reasons (as with China’s state-owned sector) or reasons of national economic strategy (as with Japan’s efforts to limit entrants into certain industries to prevent excessive domestic competition) can continue discriminating in similar ways against foreign competitors. And countries can maintain high trade barriers as long as they apply equally to all imports.

As for trade deficit reduction, it’s a great way to promote healthy, production-led American growth, rather than the kind of debt-led, bubble-ized growth that’s been engineered arguably going back to the 1990s. But here’s where the Trump blueprint can be faulted. Especially if the new NAFTA contains better rules of origin, it’s likeliest to reduce the U.S. trade deficit with non-NAFTA countries, not with the treaty signatories that the blueprint targets. And nothing would be wrong with that result at all.

Two other aspects of the NAFTA objectives deserve comment – and merit genuine concern. First, although it’s good that the administration has included on the list currency manipulation, critics are right to note that specifics are urgently needed. Their development, moreover, is important not mainly because Canada and Mexico have been important culprits (they haven’t been) but because this is a challenge that President Trump needs to meet in connection with countries that clearly have manipulated in the past and could well do so again.

Second, the Trump blueprint makes no mention of value-added taxes (VATS). Mexico’s is 16 percent, Canada’s is five percent at the federal level and eight percent at the provincial level. As with all other VATs, these levies act as barriers to imports and subsidies for exports. Candidate Trump rightly called for American countermeasures in order to level the trade playing field inside NAFTA. President Trump should take heed.   

(What’s Left of) Our Economy: Trump Steel Trade Critics Offer Recipes for (Continued) Failure

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Barack Obama, China, European Union, globalization, Japan, national security, Russia, steel, tariffs, The Washington Post, Trade, trade law, Trump, World Steel Organization, World Trade Organization, {What's Left of) Our Economy

The case for bold new Trump administration steps to ensure the U.S. steel industry’s continued viability is so clear that even opponents can’t help but (unwittingly) make it.

Thus this morning, The Washington Post editorial board praised – or at least seems to have praised – the Obama administration’s imposition of the tariffs on imports of Chinese steel because the world’s overwhelming source of overcapacity is China. The Post also urged the White House to remember that in order to avoid “international destabilization,” it’s critical to keep relying on “global institutions such as the World Trade Organization.”

Yet as the paper implicitly recognizes, none of these approaches has succeeded. What else can reasonably be concluded from its acknowledgment that the although the world’s “major governments, including President Barack Obama’s administration, have long recognized” the problem of Chinese fueled steel overcapacity,” the glut continues to create “unsustainable downward pressure on producers’ prices….” That’s “unsustainable” as in “can’t be sustained.” As in “if the downward pressure isn’t stopped, steel producers will start going under.”

The Post, however, has left out some crucial information. Specifically, the pressure on global steel producers has been far from uniformly felt. According to the latest (2015) figures from the World Steel Organization, which represents most of the global industry, the United States runs the world’s largest steel trade deficit by far measured in volume (which leaves out the distortions created by falling prices). At 26.5 million tons, it was nearly 80 percent greater than that of the world’s next biggest net steel importer (Vietnam, at 14.9 million tons), and nearly seven times greater than that of the European Union (3.9 million tons).

China, Japan, Russia, South Korea, and others are running surpluses, with China lapping the pack at 98.4 million tons and Japan, universally described as a staunch U.S. ally, coming in second at still-impressive 34.9 million tons.

These skewed trade patterns, moreover, are unmistakably affecting national steel output. For example, according to the World Steel Organization, in 2010, as the world’s recovery from the Great Recession was becoming established, the United States accounted for 7.46 percent of global steel output by volume. In 2016, its share had shrunk to 4.95 percent.

China clearly has been the big winner, with its share of world steel production rising from 42.62 percent to 50.16 percent during this period. Japan has boosted market share as well – albeit only from 6.49 percent to 6.60 percent. The European Union and Russia have lost ground – but the losses have been minimal. The former’s global market share has dipped from 11.54 percent to 10.43 percent. The latter’s is down from 4.48 percent to 4.45 percent.

Even weirder: America’s economic growth during this period has outstripped the recoveries of all these countries except China, and its manufacturing sector has recovered (though not completely) thanks largely to a rebound in the steel-intensive automotive industry.

In other words, according to the Post editorial board, due to global overcapacity, the U.S. steel industry is facing unsustainable (and largely artificial) pricing pressure, the worldwide statistics make clear that this pressure is in a class by itself…and the Trump administration is being advised to stick with responses that have been manifestly incapable of preventing this dangerous situation.

It’s perfectly respectable to oppose as a solution the kind of national security-focused tariffs that the Trump administration is considering – even though the advantages they offer (they need no Congressional approval and they can be implemented relatively quickly as well as flexibly) are substantial. But if critics – domestic and foreign – are genuinely interested in solving the longstanding world steel problem in a timely manner, they’ll start proposing alternatives that haven’t already failed.

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

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

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

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

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

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

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

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

(What’s Left of) Our Economy: U.S. Productivity Remains in the Doldrums

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China, Labor Department, labor productivity, living standards, manufacturing, multi-factor productivity, offshoring, productivity, reshoring, World Trade Organization, WTO, {What's Left of) Our Economy

The Labor Department reported earlier this week that America’s labor productivity flat-lined at an annual rate between the last quarter of last year and the first quarter of this year. And relatively speaking, that was good news. The initial study of this measure of economic efficiency – and key determinant of the nation’s living standards – estimated that business labor productivity in the non-farm business sector (the government’s main proxy for the entire economy) fell at an annualized 0.6 percent.

Labor productivity, you may recall, is the narrowest of two measures of productivity. It gauges how much in the way of stuff or services Americans produce per hour of work from each worker. So the resulting picture isn’t as complete as that provided by multi-factor productivity – which as the name suggests looks at production per man or woman hour generated by many different inputs. But the labor numbers come out on a much timelier basis (each quarter), and for all the unusual amount of uncertainty that economists admit when they analyze productivity, they’re viewed as being reasonably reliable.

One small consolation, especially if you value manufacturing highly (as you should): Industry’s labor productivity not only grew quarter-to-quarter during the first three months of 2017 (by 0.50 percent annualized). It grew faster than the original estimate of 0.40 percent.

Manufacturing’s role as the economy’s productivity leader is also crystal clear upon reviewing the longer-term trends. During the 1990s expansion (as known by RealityChek regulars, comparing similar phases of the business cycle produces the most informative data), non-farm business labor productivity increased by 23.25 percent, while manufacturing labor productivity improved by 46.18 percent.

That recovery was America’s longest on record – just under ten years. The next expansion, during the bubble decade that preceded the financial crisis, lasted only six years. Non-farm business labor productivity rose by about the same annual pace as during the 1990s – 16.03 percent. But manufacturing labor productivity grew even faster year-by-year, advancing by 41.22 percent during the entire period.

The story is as different during this recovery as it is depressing. Although it’s so far been nearly as long as the 1990s recovery (having started nine years ago), the improvement in non-farm business labor productivity has been just 8.05 percent overall. For manufacturing, it’s been much higher – 21.55 percent – but relatively speaking, it’s a big fall-off.

Incidentally, undoubtedly one big reason for manufacturing’s excellent productivity performance during that bubble decade has to do with production offshoring. As I’ve written repeatedly, the way labor productivity is calculated results in productivity gains being recorded when businesses send jobs overseas, as well as when they use other techniques for saving labor or using their employees more effectively. And because the United States helped China enter the World Trade Organization at the start of that decade, and thus assured multinational companies that they’d remain overwhelmingly free to supply the American market from Chinese factories, that bubble decade was a major manufacturing offshoring decade.

The fall in productivity growth could indicate that, as widely claimed, manufacturing offshoring has dropped off significantly. But the evidence is mixed at best. What’s much more apparent is that, if Americans want their country’s productivity performance to rebound, they’ll press their leaders to make robust growth in domestic manufacturing a much higher priority.

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

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

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

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

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

“They did not.”

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(What’s Left of) Our Economy: New Peterson Pro-Globalization Study Only Deserves a “Nice Try”

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China, Financial Crisis, Gary C. Hufbauer, Global Imbalances, globalization, Great Recession, Larry Summers, manufacturing, Peterson Institute for International Economics, productivity, secular stagnation, technology, Trade, trade agreements, trade liberalization, trade policy, World Trade Organization, {What's Left of) Our Economy

The Peterson Institute’s new study of the benefits to Americans of globalization apparently leaves no doubt that the nation should promptly forget about any retreat from conventional trade liberalization policies and resume its aggressive pursuit of new trade agreements like the Trans-Pacific Partnership (TPP). Or does it? A close reading of the report reveals gaping holes in these claims.

According to authors Gary C. Hufbauer and Zhiyao Lu, between 1950 and 2016, “trade expansion” has enriched the overall U.S. economy by $2.1 trillion, and boosted America’s output per head and per household by just over $7,000 and $18,000, respectively. Even better, lower-income households probably gained the most (since the greatest trade liberalization progress has been made in the goods that comprise so much of their consumption).

Yet the phrase quoted in that previous paragraph points to the first big hole in the Peterson findings. “Trade expansion’s” benefits, the authors specify, entails much more than either signing new trade deals or otherwise reducing trade barriers. It also includes “technological advances in transportation and communications [that] have drastically slashed the economic distance between countries.”

Of course, there’s been a lot of the latter over the last 66 years. What share of expanded trade’s benefits has come from trade liberalization policy decisions and what share from that technological progress? Darned if the authors know.

The long time frame, in turn, reveals a second major problem with the central argument. Obviously over that last two-thirds of a century, the world economy, and America’s position in it, have changed in numerous and fundamental ways. One prominent example: For the first roughly three post-World War II decades, the United States was the only fully intact developed country. How could trade liberalization not have been a major net benefit? America produced countless products that the rest of the world desperately needed. And none of its important industries faced significant import competition until the 1970s. That doesn’t sound much like current circumstances.

And in fact, Hufbauer and Lu acknowledge this problem, noting, for example, that “compared to previous decades, increased trade since 2003 has not delivered substantial gains.” At this point, however, their analysis gets dicey. For example, they speculate that that low recent payoff resulted partly from “the lack of fresh policy liberalization on a large scale (the failure of the Doha Round)….” But that period actually saw a hugely important liberalization initiative completed – China’s accession to the World Trade Organization. And don’t forget the numerous free trade deals signed by the George W. Bush and Obama administrations, including with South Korea’s very large economy.

Moreover, although Hufbauer and Lu rightly note that the financial crisis and Great Recession also have marked the post-2003 period, they claim that “The decade that experienced the greatest gains from increased trade was 1970 to 1980.” That decade witnessed no less than two recessions (three if you count the 1980 downturn).

Undaunted, the authors contend that returning to the trade liberalization policy course will result in even more American wealth creation. But here’s where their discussion of the post-2003 period fails badly – and unmistakably. They never mention that, thanks largely to that aforementioned boost to incredibly lopsided U.S.-China the first decade of this century produced the greatest U.S. trade deficits and associated global economic imbalances in world history. They ended in the financial crisis and the nation’s worst economic downturn since the Great Recession.

Since America’s main trade partners – including China – seem either just as export-dependent, and/or just as import-and consumption-phobic as ever, it’s difficult to understand why a return to conventional trade diplomacy, combined with the cumulative and often lagged impact of past deals (as noted by Hufbauer and Zu) wouldn’t end in near-catastrophe again.

Another big problem: Former Treasury Secretary and chief Obama economic adviser Larry Summers, along with many others, worry that the United States has fallen into an economic trap they call “secular stagnation.” They speculate that the nation has become so incapable of generating healthy growth that it’s grown dependent on blowing up credit and consumption bubbles to at least produce (misleading) signs of economic life – and that these bubble’s inevitable bursting keeps creating financial crises and serious slumps. Do Hufbauer and Zu believe that the sandbagging of domestic manufacturing (which hasn’t grown in real terms since 2006) due to import competition and offshoring isn’t partly to blame? 

Finally, and similarly, American leaders have finally recognized that the economy is experiencing a major productivity growth slowdown. Can trade liberalization’s real economic impact be measured without considering the effect on productivity of allowing all that trade damage to manufacturing, which historically has led the nation in productivity growth?  

It’s definitely encouraging that a major think tank like the Peterson Institute is looking in detail at globalization’s impact on America’s economy.  Let’s hope that its next effort reflects some actual thinking.  

Following Up: Why Buy American Reform is More Urgent – & Feasible – Than Ever

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Buy American, Following Up, free trade agreements, GAO, Government Accountability Office, Government Procurement Agreement, GPA, NAFTA, North American Free Trade Agreement, Obama, The Wall Street Journal, Trade, World Trade Organization, WTO

Although it doubtless wasn’t an intention of Wall Street Journal reporters Coulter Jones and Shane Shifflett, their article this morning on President Trump’s recent efforts to strengthen the U.S. government’s Buy America regulations considerably bolstered the case that overhaul is indeed vital – and within reach politically.

As I reported last month, a February Government Accountability Office (GAO) study showed that the United States is getting completely fleeced by its adherence to provisions in various bilateral or regional trade deals (like the North American Free Trade Agreement), along with a worldwide plurilateral agreement, that aim at eliminating domestic preference programs like Buy American regs.

The two main problems, according to the GAO? First, the best available data reveals that the United States has opened up its government purchases to foreign competition much wider than the nearly 50 other signatories of the Government Procurement Agreement (GPA) sponsored by the World Trade Organization (WTO). Second, Washington’s implementation of this arrangement and of similar provisions in other trade deals has been so negligent that the U.S. government never bothered even to find out how well the GPA, or any of the similar agreements, was working until two Democratic Senators commissioned the GAO study – more than twenty years after the global agreement was signed.

Journal correspondents Jones and Shifflett spent most of their article purporting to explain that any administration efforts to boost Washington’s purchases of U.S.-origin goods and services would amount to “swimming against the tide.” After all, as they documented, “For the current fiscal year beginning in October, foreign businesses have received a bigger share of federal contract dollars than in any other year since at least 2009.” In fact, “foreign-owned companies already hauled in more money from federal contracts in the past three months [i.e, during the Trump presidency] than in any corresponding period in a decade.”

Moreover, any changes to procurement policy made by President Trump “would likely face legal challenges….Additionally, any executive order Mr. Trump may issue requiring the government to buy exclusively American-made products has the potential to be challenged in court, or overturned by Congress or a future administration” – because of trade treaties that aimed “to make it easier for U.S. companies to compete overseas by mutually easing trade restrictions with other countries.”

But the recent rise in federal contracts for foreign-made goods, according to the article, has nothing to do with either Trump administration negligence or uncontrollable forces. As the authors point out, “Much of the payout to foreign-owned firms in the first quarter of this calendar year was set in motion by the Obama administration.” Of course, that was the same Obama administration that came into office in 2009 and oversaw that previously noted longer-term surge in contracts awarded to foreign goods and services providers.

Further, those trade treaties described by the Journal piece as such towering obstacles to a Buy American overhaul are the same trade treaties that the GAO has strongly indicated are utter failures.

The administration knows about the unacceptable record of these arrangements, as do the Democratic Senators who requested the GAO study. How difficult, then, would it really be for the president to muster bipartisan Congressional support for declaring these deals null and void – at least pending convincing evidence that they’re working after all? And given the pervasive discrimination U.S.-based goods and service providers clearly face in most foreign government markets, how difficult would it be for Mr. Trump to win similar legislative backing for narrowing the loopholes and waivers contained in the current Buy American regulations – and monitoring and enforcing tighter rules much more effectively?

In other words, how many American lawmakers would insist on continuing to obey broken treaties and on refusing to re-level the procurement playing field unilaterally for domestic businesses and their employers? The answers may not be obvious to Mainstream Media journalists. They’re surely more obvious to politicians accountable to American voters.

(What’s Left of) Our Economy: All the Trade Fakeonomics That’s Fit to Print

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China, globalization, John Maynard Keynes, Mainstream Media, Paul Krugman, Peter S. Goodman, The New York Times, Trade, Trade Deficits, Trump, US-China summit, World Trade Organization, WTO, {What's Left of) Our Economy

Last week’s U.S.-China summit turned out to be as close to a nothing-burger as any meeting between the leaders of the world’s two most important countries could possibly be. But at least one useful purpose was served by the understandably suspenseful run-up to this eagerly anticipated first direct encounter between President Trump and the human face of the economic rival he blasted during his White House campaign: It reminded once again how relentlessly terrible Mainstream Media coverage of trade and globalization issues tends to be.

Any number of reports and columns dealing with the summit and the surrounding economic issues deserves targeting by buckets of rotten tomatoes. Worthy of special attention, however, was a “news analysis” on the economics of trade and U.S.-China trade by New York Times correspondent Peter S. Goodman. Indeed, his April 5 article, “Behind Trump’s Trade Deficit Obsession: Deficient Analysis” was so permeated with fakeonomics and outright howlers that even zeroing in on the following three will produce a pretty lengthy post. 

First, Goodman portrays as detached from “economic reality,” President Trump’s belief that “international trade is a zero-sum affair, as if every country were jockeying for a share of forever limited amounts of business.” Instead, according to Goodman, “Trade is not zero-sum. Expanded trade has historically tended to support economic growth, which generates more spoils to be divvied up for all.”

That may indeed be what the economics textbooks say. It may even be what many economists have told Goodman. But this claim misses a far more important reality. Whatever the import of trade balances in a strongly or even normally growing world, the world of recent years hasn’t fit that description. Why didn’t Goodman note that – or an equally important point that economists such as John Maynard Keynes and his own newspaper’s Paul Krugman have observed: In today’s slow growth world (to quote the latter) “mercantilism makes a fair bit of sense”? And of course the corollary is equally true: Countering that mercantilism is sensible, too.

Second, Goodman correctly reports that “Economists generally dismiss bilateral trade deficits as essentially meaningless, for reasons easily recognizable in the rest of everyday life. Most people surely run lopsided trade deficits with their dentists, handing these professionals their dollars without expecting them to purchase anything in return. One may assume that successful dentists will distribute their profits throughout the economy — on marketing, accounting, laundry and streaming music services. One way or another, these dollars generate jobs and income for other people. So it is with countries.”

But apparently, Goodman doesn’t believe that his “news analysis” mandate permits him to analyze this particular statement. If it did, he’d surely recognize that this analogy has nothing do with America’s current circumstances.

For starters, this comparison with everyday life is generally used by economists to illustrate the virtues of specialization – which unfettered trade enhances in theory and often in fact. That is, no one need worry about running a trade deficit with his or her dentist because attempting to take care of their own dental needs would be a foolish waste of their talents, resources, and time. Far better to leave that responsibility to someone with expertise and experience. And this strategy is viable because patients presumably can offer the dentist equally valuable services, or (in a more complex model), because the total amount of goods and or services that patients can offer to all of the merchants that they patronize roughly balance the amount of goods and services that the patients consume.

In other words, patients can run trade deficits with their dentists and remain financially solvent because they are earning the income to pay for these services by successfully “exporting” their own output.

Of course, this is far from the position in which the United States finds itself, since its global trade is in deep deficit, and has been so for many decades. Its economy has remained viable because it’s been able to finance those deficits by a combination of selling off assets and ever more borrowing. Its ability to borrow at affordable rates, in turn, largely reflects the reserve currency role of the dollar – which itself stems from the nation’s past record as a matchless creator of real wealth, its still world-class financial markets, and the lack of any suitable alternative. If Goodman thinks this situation is fine and dandy, he should at least say so. Then he should try remembering how similar circumstances led to the entire world economy’s near-meltdown less than ten years ago.

The financial crisis also should have taught Goodman how unrealistic it has become to expect that “one way or another,” America’s creditors will recycle their trade surplus earnings back into the U.S. economy that generate “jobs and income.” For as I’ve explained frequently, the very offshoring-happy trade policies of so little concern to Goodman (and the rest of the American establishment) greatly reduced the odds that capital inflows would be used productively (e.g., on new factories and labs) and greatly increased the odds that they would be used instead to finance consumption and crackpot finance. Responsible and productive use of recycled trade surpluses is also unlikely when they reach the mammoth scale seen during the bubble decade. For the very abundance of cheap credit greatly erodes the incentive to use it prudently. 

As for the bilateral deficits, it is indeed reasonable to downplay them – when the global deficit is fairly evenly distributed across a nation’s foreign trade partners. When nearly half of the total merchandise deficit is concentrated in U.S.-China trade, as is the case now, bilateral deficits clearly count for a great deal – unless the importance of trade deficits is discounted completely.

In fact, like Goodman, we can analogize to daily life: If an individual or family’s over-consumption is highly concentrated in a single product or service area, that’s a conspicuous target for belt-tightening.

Third, it was nothing less than jaw-dropping to see Goodman emphasize that “even if China were a paragon of fair trading practices, it would almost certainly run a surplus with the United States. Despite tremendous economic advances, China remains a relatively low-income country, home to hundreds of millions of people who cannot afford the more sophisticated fruits of the American economy.”

Just recall: This statement is being made a quarter century after the United States decided to prioritize the expansion of trade with China, and a decade-and-a-half after the landmark decision to admit China into the World Trade Organization – which was based on predictions that China would soon become a market whose growth would contribute to America’s prosperity.

If after all this time, China is still too poor to be able to support a reasonably balanced trade relationship with the United States, then its at least arguable to conclude that liberalizing trade with China so rapidly was a major mistake and was sold to the American public with completely erroneous arguments. It’s also crucial to remember that during the vigorous China trade debates that surrounded those decisions, numerous critics predicted that such imbalances would result – and in part precisely because China’s very low income levels made export bonanza forecasts so ludicrous.

But strangely, none of their views was included in Goodman’s article. Apparently being right isn’t news that’s fit to print.