Im-Politic: The China/Biden Opportunity Sanders Needs to Seize

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Bernie Sanders, China, China virus, coronavirus, Democrats, drugs, election 2020, health security, Im-Politic, Jobs, Joe Biden, manufacturing, Michigan primary, pharmaceuticals, technology, Trade, World Trade Organization, WTO

Since he emerged as a major rival to Hillary Clinton for the 2016 Democratic presidential nomination, Vermont Senator Bernie Sanders has been criticized for lacking a killer instinct. Specifically, he’s generally declined to attack his competitors as harshly as many supporters and supposed political pros would like. (The articles here and here nicely frame the history.)  

I don’t feel qualified to weigh in on this debate, but with a crucial primary coming up in Michigan tomorrow, it’s clear to me that the progressive standard-bearer could use more of a killer instinct on a big policy issue: former Vice President Joe Biden’s record on China issues.

Sanders has decided to assail Biden on his overall trade record, which makes sense considering the latter’s support for the kind of trade deals and policy decisions (like NAFTA, the North American Free Trade Agreement, and the rush to expand commerce of all kinds with China) that have hammered workers in manufacturing-heavy states like Michigan. 

But his focus is far too narrow, especially considering developments over the last few years and particularly the last few months. For the Democratic Socialist is solely emphasizing the job and wages loss resulting from agreements like the Biden-endorsed deal that supported China’s entry into the World Trade Organization (WTO) in 2001 – which granted Beijing vital legal protection against unilateral American efforts to fight its protectionism and other forms of economic predation. That mattered greatly because many of these Chinese transgressions persisted post-WTO and by all accounts have worsened under the regime of Xi Jinping.

It’s now clear, however, that the China threat is even worse because it’s far broader; that Biden as long-time Senator from Delaware in particular flunked those non-economic policy tests, too; and that the biggest arguably was the WTO vote. So despite signs from polls that Americans generally (though not necessarily in manufacturing centers) aren’t as opposed to pre-Trump trade policies as in the past, the same surveys make clear that all manner of China-related concerns are mounting, and that therefore hitting Biden for supporting measures that have clearly increased Beijing’s wealth, power, and consequent capacities to threaten key U.S. interests in many fields would succeed roaringly.

Indeed, Biden’s stated justification in 2000 for favoring the crucial WTO decision looks especially and dangerously loopy nearly two decades later, when a Chinese cover-up helped the coronavirus become a serious threat to the United States and the rest of the world at large, when American leaders have finally become aware of how the industrial offshoring accelerated by the WTO move has made the nation shockingly dependent on healthcare products from China, and when the PRC’s official press has just published an article all but threatening to plunge the United States into coronavirus hell by blocking the export of the drugs and their chemical ingredients needed to fight the pandemic.

For in 2000, Biden made clear that he mainly supported China’s entry into the trade body – and ending the policy of granting Beijing tariff breaks only on an annual basis and only if its repressive human rights practices improved – in the belief that this new approach would both promote political and economic freedom in China and help “encourage” its “development as a productive, responsible member of the world community.”

Moreover, Biden not only guzzled the kool-aid of claims that WTO entry would foster greater political as well as economic freedoms in China. He argued that such change was exactly what most of China’s leaders intended. These dictators, he argued,

“have consciously undertaken–for their own reasons, not ours–a fundamental transformation of the communist system that so long condemned their great people to isolation, poverty, and misery. They have been forced to acknowledge the failure of communism, and have conceded the irrefutable superiority of an open market economy.”

Biden was right in noting that economic reforms already by then undertaken had greatly improved living standards for enormous numbers of Chinese. But he was completely wrong in believing that “this growing prosperity” would start bringing more democratic reform and a move toward genuinely open markets. Nor did he foresee that because China’s economic progress depended on amassing ever greater trade surpluses in ever more sophisticated products – and especially with the United States, the world’s biggest, most lucrative market – much of the rise in Chinese living standards would come at the expense of American domestic manufacturing and its workforce.

In fact, Biden explicitly scoffed at fears that WTO entry would bring about “the collapse of the American manufacturing economy, as China, a nation with the impact on the world economy about the size of the Netherlands, suddenly becomes our major economic competitor.”

But in light of China’s growing international belligerence particularly under Xi Jinping, it’s disturbing that the then-Senator – supposedly a foreign policy expert – was equally blind to the likelihood that a WTO-fostered “emergence of a prosperous, independent, China on the world stage” would enable China to flout “international norms in the areas of trade, security, and human rights” whenever it chose, rather than strengthen China’s loyalty to that “liberal global order.” 

Sanders and other critics of the WTO decision rightly derided all of these declared convictions. But I’ve yet to hear him spotlight the dangers to America’s global technology leadership and therefore national security (including health security) generated and continually worsened by the richer, stronger China made possible by the policies supported by Biden and the rest of the bipartisan globalist establishment that ran Washington, D.C. – and U.S. China policy – before Donald Trump’s election as President. P.S. A China that achieved its strategic goals could decimate American living standards still further.

This presidential campaign has already featured so many ups and downs, and so many front-runners who have risen and fallen, that Michigan probably won’t be  Sanders’ last chance to mount a broad-brush attack on Biden’s atrocious China record. (Just FYI, as of this afternoon, the polls show Sanders getting thumped.) The continuing coronavirus fallout could create further opportunities for him as well.

What is clear, however, and to large, growing numbers of Americans, is that enabling the rise of China ranks as one of the most potentially calamitous mistakes in American history.  And the sooner Sanders starts exploiting Biden’s role in enabling it (which continued during the do-nothing Obama administration), the better.     

(What’s Left of) Our Economy: New Productivity Data Further Debunk “Tariffs Hurt” Claims

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aluminum, aluminum tariffs, China, durable goods, fabricated metals products, inputs, Labor Department, labor productivity, manufacturing, metals, metals tariffs, multi-factor productivity, productivity, steel, steel tariffs, tariffs, Trade, trade law, World Trade Organization, WTO, {What's Left of) Our Economy

The Trump administration’s announcement last Friday of new tariffs on some metals-using manufactures imports was greeted with the predictable combination of chuckles and gloating from the economists, think tank hacks, and Mainstream Media journalists who keep insisting that all such trade curbs are self-destructive whenever they’re imposed.

If the critics bothered to look at the new official data on multi-factor productivity, however, they’d stop their victory laps in their tracks. For the Labor Department’s latest report on this broadest productivity measure utterly trashes their claims that the tariffs slapped on metals in early 2018 – which unofficially launched the so-called Trump trade wars – have backfired by undercutting most domestic American manufacturing.

In fairness, the Trump administration itself gave the trade and globalization cheerleaders lots of evidence for their triumphalism. Specifically, the levies were justified with statistics showing that various categories of goods made primarily of tariff-ed steel and aluminum had seen major surges of imports since the duties began. The obvious conclusion? Foreign-based producers of these products were capitalizing on their cheaper metals available to their factories to undersell their U.S.-based competition.

As a result, Mr. Trump decided to tariff some of these final products, too – to erase the advantage created for imports from less expensive steel and aluminum.

So in one sense, it’s tough to blame tariff critics for feeling vindicated about predictions that the metals levies might boost the metals-producing sectors themselves, but injure the far larger metals-using sectors. Ditto for their warnings that in an economy with so many connected industries, protection for one or a few would inevitably spur calls for such alleged favoritism by others, threatening a consequent loss of efficiency for all of manufacturing and even the entire economy.

Examine the issue in more detail, though, and you see that it’s entirely possible to arrive at radically different conclusions. For example, the new tariffs appear to be imposed on a limited set of products, and none of them (e.g., nails, tacks, wires, cables, even aluminum auto stampings) qualifies as a major industry. In other words, the chief metals-using industries, like motor vehicles and parts overall, aerospace, industrial machinery (many of which have been complaining loudly about the metals tariffs, even though their overall operational costs have been barely affected) were left out.

Finally in this vein, and as the critics imply, the new Trump tariffs also make the case for trade curbs on any final products whose significant inputs receive duties. Why indeed strap otherwise competitive domestic producers with higher prices for materials, parts, and components? This practice has been a major flaw in the U.S. trade law system, which has prioritized legal over economic and industrial considerations, since its founding. And in fact, my old organization, the U.S. Business and Industry Council, has been urging this reform since at least 2008.

Even better – to prevent cronyism from influencing such trade policy decisions, impose a uniform global tariff on all manufactures, or all non-energy goods.

But it’s just as important to point out a gaping hole in the longstanding argument that cheap imported inputs (including subsidized, and therefore artificially cheap imported inputs) are essential for the overall global competitiveness of U.S. domestic manufacturing. And the hole has been opened (or perhaps it’s more accurate to say, reopened, given this previous RealityChek analysis of earlier data) by those new multi-factor productivity statistics.

They only go through 2018 (such time lags explain why multi-factor productivity trends aren’t followed as closely as labor productivity trends). But they’re the broader of the two productivity measures, as they gauge the effect of many inputs other than hours worked. And via the table below, they make clear that even the wide open access domestic manufacturers enjoyed to artificially cheap metals and other imported inputs have played absolutely no evident role in improving industry’s health. In fact, there’s reason to conclude that the more access domestic industry had to such materials, parts, and components, the less productive it became.

                                                               Total mfg   Durable goods   fabr metals

1990s expansion (91-2000):                   +23.40%       +38.76%         +4.79%

bubble decade expansion (02-07):          +11.74%      +16.61%          +7.62%

current expansion (10-present):                -4.84%         -0.84%           -4.51%

pre-China WTO (87-2001):                   +22.18%      +37.72%           -3.32%

post-China WTO (02-present):               +6.72%      +17.17%           -2.05%

As usual, the time periods chosen to illustrate these trends consist (with one exception) of recent economic expansions (because they enable the best apples-to-apples comparisons to be made). And the 1990s expansion is the first one examined because the relevant Labor Department data only go back to 1987. The products chosen consist of all manufactured goods, durable goods industries (the super-category containing most of the big metals users), and fabricated metals products (the most metals-intensive sectors of all).

The table demonstrates that multi-factor productivity growth across-the-board has weakened dramatically from the 1990s expansion through the current – ongoing – expansion. The slowdown between the 1990s expansion and the previous decade’s expansion was moderate (and multi-factor productivity actually grew faster during the second in fabricated metals, though in absolute terms its improvement lagged badly). But during the current recovery, multi-factor productivity growth has been replaced in all three instances by multi-factor productivity decline. And crucially, during none of this time did any of these manufacturing categories face any shortage of imported inputs of any kind – subsidized or not.

Indeed, one event in 2001 greatly increased the supply of subsidized inputs – China’s admission into the World Trade Organization (WTO). For once China joined, the difficulty of using U.S. trade law to keep these Chinese products out of the U.S. economy became much greater.

Yet at the same time, as shown below, productivity growth was considerably weaker after China’s WTO entry than before in manufacturing overall, and in durable goods. And although its performance actually improved in fabricated metals, that industry’s performance was much worse in absolute terms.

Nor does the inclusion of the 2007-2009 Great Recession in the post-2002 China-related data (which violates the “apples-to-apples rule”) seem to have been a game changer – because the worst performances of all in each case, and by a mile, have been registered during the current expansion. Moreover, since the data stop in 2018, those current expansion results are dominated by the period preceding both the Trump metals tariffs and the Trump China tariffs (most of which target industrial inputs, as opposed to final products).

It’s entirely possible that, for various reasons, the multi-factor productivity statistics would have been even worse if not for the widespread availability of cheap imports. Or maybe multi-factor productivity isn’t much of a measure of manufacturing’s health? Both alternative explanations, however, seem pretty far-fetched (especially given the pre- and post-China WTO results).

Much likelier – as I argued in that post linked above – the availability of cheap inputs has helped retard productivity growth by enabling businesses to achieve cost-savings without investing in research and development into new products and especially processes, and without buying more efficient equipment (including software).

Those Stubborn Facts: How Protectionism Pays at the WTO

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China, Those Stubborn Facts, Trade Deficits, trade surpluses, World Trade Organization, WTO

Disputes brought against the United States since China joined the World Trade Organization*: 99

Share of total disputes brought to the World Trade Organization since China joined: 28.37%

Disputes brought against China since China joined the World Trade Organization: 44

Share of total disputes brought to the World Trade Organization since China joined: 12.61 percent

U.S. cumulative merchandise trade balance since China joined the World Trade Organization:** -$9.509 trillion

China cumulative merchandise trade balance since China joined the World Trade Organization: +$3.028 trillion

*December, 2001

**2002 through 2018

(Sources: “How to Revive the WTO,” by Shang-Jin Wei and Xinding Yu,” Project Syndicate, December 11, 2019, https://www.project-syndicate.org/commentary/world-trade-organization-revive-appellate-body-by-shang-jin-wei-and-xinding-yu-2019-12; and calculated from “Net trade in goods and services (BoP, current US$) – China, United States,” DataBank, World Bank, https://data.worldbank.org/indicator/BN.GSR.GNFS.CD?locations=CN-US)

(What’s Left of) Our Economy: The Latest Details Still Don’t Justify Trump’s China Trade Deal

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agriculture, China, Clyde V. Prestowitz, dispute resolution, enforcement, managed trade, manufacturing, Phase One, trade deal, trade war, Trump, U.S. Trade Representative, USTR Rpbert :Lighthizer, World Trade Organization, WTO, {What's Left of) Our Economy

Because the Trump administration has for some reason been putting out the specifics on its new “Phase One” trade deal with China in dribs and drabs, information has come out since Friday’s post panning the agreement suggesting that it might be better than first impressions indicated. At the same time, the case for continued skepticism still looks considerably stronger.

Grounds for optimism can be seen in the Fact Sheet on the deal put out late Friday afternoon by the office of the U.S. Trade Representative (USTR). Most promising: This administration indicates that the President has finally adopted a strategy urged by me last month, originally articulated by former U.S. trade negotiator Clyde V. Prestowitz, Jr. back in the 1980s, and oddly endorsed by a former senior Chinese official recently – in an interview he would never have given had he not been certain that Beijing would at least receptive.

The strategy has been denigrated by critics as “managed trade” – a supposedly foolhardy departure from the standard free trade approach followed by pre-Trump Presidents. Rather than trying to persuade foreign governments to open their markets to American exports and put in effect other free market practices, managed trade seeks to persuade foreign governments to reduce their surpluses with the United States by boosting their purchases by designated amounts. The big advantage: Managed trade efforts permit negotiators to avoid getting bogged down in philosophical debates about the virtues of economic liberalism, or in mudslinging matches over which economies are “fair” and “unfair.” Instead, they focus on unemotional bargaining over numbers. In addition, as Prestowitz has noted (and the senior Chinese official recently confirmed), Asian governments in particular are much more comfortable haggling over “how much” than preaching ethics and other intangibles.

The President’s interest in managed trade has been evident since he began pushing the Chinese to resume by certain amounts blocked purchases of soybeans and other agricultural commodities. But according to the Fact Sheet, China has not only consented to hit specific targets in its imports of farm products and energy goods like natural gas. (USTR Robert Lighthizer on Friday told reporters that Chinese farm products imports would rise over the next two years by a total of some $16 billion a year over the 2017 figure of $24 billion.) Beijing has also committed to “import various U.S. goods and services [including the agricultural buys] over the next two years in a total amount that exceeds China’s annual level of imports for those goods and services in 2017 by no less than $200 billion.” Even better, these purchases will include manufactures.

If these promises are kept, the massive U.S. merchandise trade deficit with China will shrink considerably, and American output and employment will grow. And the greater the share of manufactured products in this total, the higher quality the growth and the better the jobs.

But what will the manufacturing numbers be? Lighthizer has said that broad target figures will be released. But if it can already quantify China’s pledges to boost agriculture imports, why not for industry? Is it because Chinese promises in these areas haven’t been nailed down? And what’s the deal with the reference to targets? Does it mean that China is free to fall short for certain reasons? For any reasons?

Lighthizer explained the failure to divulge more detailed, product-by-product numbers even for agriculture by pointing to the need to “avoid distorting markets.” On the one hand, this worry isn’t unreasonable. On the other, the secrecy won’t make it any easier for any Americans without a vested political stake in claiming victory or success to assess progress with any precision.

More ominously, Lighthizer said that China would be free to buy things when “it’s the perfect time in the market to buy things.” That sounds suspiciously like the objection China originally raised when pressed to buy more farm products as part of the Phase One deal – i.e., purchases that ignored levels of Chinese domestic demand would make no economic sense, “might be hard for the domestic market to digest,” and would sharply depress local prices.

Of course, the response to these points needs to be that China has never let free market forces interfere with its mercantile trade policy goals before. Therefore, this is no time to start swallowing this kind of excuse. Indeed, if Beijing is so worried about supporting the prices received by local producers for any good, it can keep them off the market by stuffing the excess imports into warehouses. That’s not America’s problem.

Unfortunately, the Lighthizer statement indicates that the Trump administration has decided to accept this bogus Chinese rationale – which threatens to permit China to insist indefinitely that the time just isn’t ripe to buy all those extra American products called for in the deal. And with China’s growth likely to slow further for the foreseeable future, expect this claim to be trotted out frequently.

Also suspicious: If the United States has secured Chinese agreement to ramp up agriculture imports greatly, why did the agreement need to address “a multitude of [Chinese] non-tariff barriers to U.S. agriculture and seafood products…including for meat, poultry, seafood, rice, dairy, infant formula, horticultural products, animal feed and feed additives, pet food, and products of agriculture biotechnology.”

After all, as long as the promised results keep coming in for American agricultural producers, who cares what Chinese trade barriers remain officially in place? And if the U.S. team did bother to negotiate these provisions to ensure adequate market access for U.S.-based producers once the two years apparently covered by the agreement run out, then this is more a temporary fix than a big win for the American sectors affected.

What about the other structural issues – the intellectual property theft, the technology extortion, and other predatory Chinese practices that threaten both American national security as well as prosperity? The Fact Sheet remains distressingly vague.

For the former, we’re told only that the agreement “addresses numerous longstanding concerns.”

For the latter, the administration claims the establishment of “binding and enforceable obligations to address several of the unfair technology transfer practices of China that were identified” by its prior investigation of Chinese economic predation.” These entail Chinese agreement to end demanding cutting edge knowhow in return for access to the Chinese market and other benefits, and a Chinese commitment “to provide transparency, fairness, and due process in administrative proceedings and to have technology transfer and licensing take place on market terms.”

But how will these Chinese promises be monitored and enforced? How will “transparency, fairness, and due process” be defined?

And speaking of enforcement, it’s encouraging that the agreement “establishes strong procedures for addressing disputes related to the agreement” and in particular “allows each party to take proportionate responsive actions that it deems appropriate.”

Yet how long will it take for the procedures to reach the point at which Washington gains the right to punish Chinese violations with tariffs? One major criticism of the World Trade Organization (WTO) has been that many years often have passed between the initial filing of complaints till judgments were handed down determining that transgressions had indeed taken place, and authorizing tariffs unless the offending actions were halted. Although the Face Sheet promises resolving disputes “expeditiously,” it’s far from clear yet that the Phase One arrangements will be able to achieve this goal.

In addition, will Beijing enjoy similar authority to determine American violations of Phase One, and to levy punitive tariffs if it’s “deemed appropriate” by China? Moreover, whenever either side concludes that a violation has taken place, what in the agreement, if anything, will prevent the other side from retaliating.

And if the answer is “nothing,” then how would post-Phase One U.S.-China economic relations differ from those relations today – since each country would appear to be as free legally speaking as it is now practically speaking to deal with problems it blames on the other however it wishes, and to respond to any resulting tariffs with whatever countermeasures it chooses? 

The Phase One deal is no cave-in to China, as many have claimed. The high tariffs remaining on most products imported from China belie that description. Nor does it matter whether China’s dictators believe they’ve outwitted or intimidated Mr. Trump, and therefore that they can keep resisting his demands for improved behavior – since the towering obstacles will prevent adequately verifying even the most forthcoming Chinese promises of reform. 

Instead, the deal is mainly a lost opportunity; indeed a big one. Moreover, it raises the crucial question of when the President will finally start downplaying – at least – the consequently futile efforts to negotiate a better trade and broader economic relationship between the United States and China, and start emphasizing the need to keep moving down the road toward what should be the overriding goal of decoupling.      

(What’s Left of) Our Economy: Boeing’s Safety Woes are Hammering U.S. Manufacturing & Overall Trade Flows Under Trump

Tags

Airbus, Boeing, civilian aircraft, exports, imports, manufacturing, non-oil goods trade deficit, safety, services trade, tariffs, Trade, trade deficit, Trump, World Trade Organization, {What's Left of) Our Economy

When last month’s U.S. trade figures (for August) came out, I wrote about how the economic narratives about the woes of domestic manufacturing and America’s trade accounts during the Trump Tariffs Era have been turning into a story about the safety related troubles of Boeing. This morning, the September data were issued, and the Boeing drag on the trade performances of industry and the entire economy look bigger than ever. Especially interesting, the Boeing effect worsened during a data month when total U.S. trade, manufacturing trade, and civilian aircraft trade all took modest turns for the better.

Specifically, the overall U.S. trade deficit in September dropped by 4.70 percent, from an upwardly revised $55.04 billion to $52.45 billion. The total was the lowest since April’s $51.98 billion, and the sequential decrease the biggest since January’s 12.61 percent nosedive.

Partly as a result, the year-to-date trade deficit is up by 5.47 percent – a rate of increase less than half that of the previous year’s 12.68 percent.

Combined goods and services exports rose by 0.88 percent from $207.83 billion to $205.99 billion – their worst monthly performance since April’s $205.76 billion. Total imports, however, sank by nearly twice as much proportionately – 1.68 percent. And September’s $258.44 billion figure was also the lowest since April ($257.74 billion).

Services trade, however, provided an oddly glum counterpoint. It’s long been a trade surplus generator, and remained so in September. But the new monthly surplus of $19.27 billion was the lowest since December, 2012’s $18.55 billion. The main culprit? The fourth straight high for monthly services imports ($49.89 billion).

At the same time, the huge and chronic manufacturing trade deficit fell sequentially in September for the second straight month, from $92.08 billion by 4.53 percent, to $87.91 billion. That total was the best since June’s $83.63 billion. And this progress was mirrored in civilian aircraft. Their exports jumped month-to-month in September by 25 percent. Imports rose even faster – by 41.58 percent. But their amount is much smaller ($1.35 billion vs $3.29 billion). Therefore, the civilian aircraft trade surplus improved from $1.69 billion to $1.95 billion.

What, then, is the problem? It becomes glaringly visible upon examining trade in civilian aircraft during the entire stretch of Boeing’s current woes (which essentially began this past March with many national aviation authorities grounding the plane in their own countries’ airlines, and/or barring it from their national air spaces), and comparing it with the aircraft trade figures for the same periods of previous years, and with the performance of overall manufacturing exports and imports.

Last month, I described how civilian aircraft’s trade performance between this past April (the first full month in which the Boeing effect could be expected to begin showing up) and August had deteriorated markedly from the same period last year. Today’s trade data show that the deterioration has grown far worse.

As made clear in last month’s post, despite its reputation as a major American trade winner, the civilian aircraft sector has experienced ever poorer results since 2017, and the new trade figures confirm this trend.

Between April and September of 2017 and April and September of 2018, civilian aircraft exports fell by 10.32 percent, even though overall U.S. manufacturing exports increased by 6.84 percent. The industry’s record on the import side was better – they dropped during this time by 13.98 percent, while manufacturing imports in total climbed by 11.64 percent.

But the comparison between the following April-to-September periods looks considerably drearier for aircraft. Between April and September of last year and the same period this year, although manufacturing exports were down by 3.82 percent, civilian aircraft foreign sales sank by 26.80 percent. And although manufacturing imports edged up only 0.27 percent between these periods, American purchases of civilian aircraft surged by just over 26 percent.

Further, the impact of aircraft’s slump on manufacturing and overall U.S. trade has been substantial and growing. As of last month’s trade report, the fall in these products’ exports between the April-August 2018 and April-August 2019 periods accounted for 30.72 percent of the decrease in total manufacturing exports during that time, and 16.81 percent of the increase in total manufacturing imports.

As of today’s figures, the civilian aircraft share of manufacturing’s total export decline is up to 31.35 percent of the total, while their share of industry’s total import increase has shot up to more than half manufacturing’s total.

Expanding the focus to all U.S. goods trade except for energy products (which to date haven’t received significant attention in free trade negotiations or any other aspects of American trade diplomacy) also reveals a sizable Boeing effect. Between the April-September 2018 and 2019 periods, civilian aircraft’s export decline accounted for fully 42.39 percent of the total U.S. non-oil goods export decrease recorded then, and 20.61 percent of the non-oil goods import increase.

In addition, to repeat a crucial point, this major Boeing effect on manufacturing and overall trade has absolutely nothing to do with the Trump trade wars, since civilian aircraft so far have not been subjected to foreign tariffs on American exports imposed in retaliation for Mr. Trump’s levies. This situation will change due to recent and upcoming rulings in the long-running World Trade Organization case between Boeing and the European Union’s Airbus. But as of now, any evaluation of the Trump effect on U.S. trade flows ignoring the powerful drag created by Boeing’s troubles deserves a grade of “incomplete” – at best.

(What’s Left of) Our Economy: (Inadequate) Establishment Progress on China Trade

Tags

China, decoupling, dual-use technologies, national security, reciprocity, Trade, Trade Deficits, trade war, Trump, World Trade Organization, WTO, {What's Left of) Our Economy

Normally, it’s bad news for anyone seeking a realistic, sustainable U.S.-China trade policy when a group like private “The U.S.-China Trade Policy Working Group” issues a statement outlining “a new framework for trade negotiations” out of concern that bilateral economic relations “have taken a very concerning turn.”

Such phrases usually signal that the group of supposed experts in question is going to “Blame America First” for the current trade war (albeit with token acknowledgments of problematic Chinese policies) and urge a return to a cosmetically altered pre-Trump status quo. A quintessential example is this July letter to the President and Members of Congress from “members of the scholarly, foreign policy, military and business communities, overwhelmingly from the United States, including many who have focused on Asia throughout our professional careers.” Pessimism seemed especially appropriate given that this latest Working Group is comprised of “economists and legal scholars from China and the United States,” since members from the PRC can be accurately seen only as mouthpieces for the dictators in Beijing.

So I’m as pleased as I am surprised to report that the Group’s October 18 statement reinforces the case for a Trump-ian turn in China policies in two important ways. First, it made clear that, contrary to the economic conventional wisdom, lopsided U.S.-China trade flows (i.e., U.S. trade deficits) are an important, legitimate concern for Americans and their leaders. Second, it echoed increasingly common criticisms that the World Trade Organization (WTO) is a sorely inadequate forum for dealing adequately with these as well as the grave threats to U.S. security created by China’s rapid progress toward superpower status.

Not that the Working Group’s endorsement of a concentration on economic imbalances was emphatic, or even explicit. In fact, it was disappointingly implicit, and justified partly for political, not economic reasons. But nonetheless, endorsement it was, and it came twice, in the following passages:

>”In today’s interdependent global economy, a broad assortment of divergent domestic policies (including policies that have not historically been regulated through WTO rules) can trigger calls to ‘rebalance’ the structure of cross-border market access and trade barriers between countries.”

>”One advantage of [the Group’s proposed new framework for world trade] is that it offers a structure whereby the US and China can, together, make choices about how to rebalance their trading relationship in the future.”

At the same time, some individual Group members have accorded considerably more importance to the bilateral imbalances, both in economic and political terms. For example, University of Cambridge (United Kingdom) economist Meredith A. Crowley wrote in a concurring statement:

“Economic research has documented that the US’s trade policy commitments at the WTO have resulted in a higher level of penetration of the US market by producers based in China than China’s trade policy commitments have generated for producers based in the US. This asymmetry in border policy commitments, in conjunction with changes in technology, domestic and regulatory policies, and the wider economy have resulted in an asymmetry in the real and perceived benefits of the US-China economic relationship between these countries and across groups within the United States.”

And according to Dartmouth College economist Robert W. Staiger:

“US expectations of reciprocal market access expansion into the Chinese market arising from China’s 2001 entry into the WTO have not been met. This requires a rebalancing of the existing WTO market access commitments between the US and China to achieve the degree of reciprocity in these commitments that was intended to arise from their 2001 negotiations.”

Indeed, Staiger both went on to note that the same criticism could be made of the 1994 Uruguay Round global trade agreement that produced some trade barrier cuts along with creating the WTO:

“US expectations of the balance between the internal benefits and costs of its own tariff commitments agreed to at the…Uruguay Round have not materialized. This may require a rethinking and possible renegotiation of some of the Uruguay Round tariff commitments made by the US, subject to the preservation of reciprocity (once achieved) with China and with other US trading partners who would be impacted by this renegotiation.”

His mention of reciprocity as a trade diplomacy goal is noteworthy as well, for although this objective has been sought by the Trump administration and long supported by trade policy critics, it was never a goal enshrined by the WTO (or its predecessor, the General Agreement on Tariffs and Trade) and is roundly rejected by most economists.  (See, e.g., here.)

As for the WTO itself, the Group as a whole made two key observations:

“It has been almost 18 years since China joined the WTO, the system of trade rules and dispute resolution mechanisms that, at that time, defined the state of the art. During the intervening years, the global economy and the technologies that sustain it have changed dramatically, in ways that very few people anticipated at the time”; and

“[T]hese changes have had significant impacts on the international trade ecosystem, and the political leaders of many WTO members have voiced concerns that globalization pursuant to the WTO system is no longer attuned to their countries’ needs.”

As a result, the Group declared its intent to offer an “intellectual framework” that would represent an “alternative” to that which “undergirded the global economy at the time of China’s 2001 Protocol of Accession to the WTO.” (In fairness, the Group has also described its recommendations as an alternative to more recent ideas, emphasizing geopolitical competition, that underlie more recent calls for U.S.-China economic decoupling.)

Most strikingly of all, although Group members clearly would like to preserve as much of the WTO’s multilateral dispute-resolution system as possible (in order to preserve to the great possible extent what they remain confident are the mutual gains resulting from maximum free trade), all are now on record as backing both the United States and China dealing with certain high priority issues “bilaterally outside the WTO framework initially, with subsequent WTO-compliance then achieved through the application of various WTO ‘flexibilities,’ or, in the case of new areas such as digital trade, through the development of new WTO norms.”

And despite the above qualifications to outside-the-WTO bilateralism, the references to “WTO ‘flexibilities’” and to “developing new WTO norms,” can only shrink the trade body’s role and legally accepted authority over the trade policies of both countries.

Unfortunately, the new Working Group report isn’t entirely a good news story for critics of pre-Trump China trade policies – mainly because it says so little about operational details, and what little is said is so unconvincing. For example, it uses a “buckets of policies” methodology to identify practices that the two countries (and the world trade system as a whole) should agree to prohibit or forswear, and practices that all parties concerned should be permitted in the name of sovereignty in general and economic development objectives more specifically.

But even keeping in mind the Group’s recognition that it work is only a start down this road, the suggested standards they propose for classifying practices as permissable and not seem hopelessly subjective. Even regarding rules they consider relatively uncontroversial, what will be the real world difference between “policies [that] cause harm to [another] country…without necessarily taking on a beggar-thy-neighbor character or entailing global economic losses” on the one hand, and on the other, policies that cause harm to another country that do take on a beggar-thy-neighbor character?

Similarly, in terms of the more controversial situations they explore, what’s the real world difference between “cases where Country A’s policies have adverse implications for Country B, but the harm is the incidental consequence of, and not the primary motivation for, those policies” and cases where the harm isn’t incidental and/or the primary motive?

And within these areas, huge definitional questions loom just as large. Like what kinds of compensation for various trade-related offenses will be deemed “adequate” and what kinds of responses considered “well-calibrated”?

The calibration point also brings up another problem never squarely faced by the Group to begin with: What’s the verification mechanism? That’s an especially important omission given China’s long record of violating official commitments. To date, if anyone’s thought of an answer that can adequately safeguard legitimate American interests other than reserving that authority unilaterally to Washington, they’ve very effectively kept it secret.

Moreover, the Group’s approach can be faulted for failing to recognize the systemic nature of China’s assault both on even minimally free market-oriented norms. “Well-calibrated domestic policy adjustments” and “proportionate and well-targeted” remedies sound great until the ease with which China’s vast and secretive bureaucracy can reorganize and rename offending entities is considered.

In fact, the Group seems to try to define the systemic nature of the China threat out of existence, touting the “advantage” created by its framework of “encouraging each country to refrain from aggregating the other’s extraterritorially injurious policies into a single grievance and to refrain from amalgamating extraterritorially injurious policies with other, non-economic concerns.”

Such aggregation is precisely what’s needed to deal with the China challenge satisfactorily from a U.S. standpoint, and avoid being drawn into the mug’s game of responding to offending Chinese behavior episodically.

Moreover, for all the potential benefits of delinking lower from higher hanging fruit, delinking economic concerns and strategic concerns created by Chinese transgressions clashes with the Group’s own recognition of the emergence and multiplication of “dual use” technologies with civilian and crucial military applications.

This U.S.-China Trade Policy Working Group deserves credit for breaking out of some dangerously outdated academic and policy molds. But compared with the growth of the Chinese threat, and the extent to which the economic decoupling it seeks in part to avoid is already proceeding, its work is way behind the times.

(What’s Left of) Our Economy: How Many Strikes Does Paul Krugman Get on Trade?

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automation, China, China shock, globalization, hyperglobalization, Jobs, manufacturing, manufacturing employment, offshoring, Paul M. Krugman, protectionism, tariffs, The New York Times, Trade, Trade Deficits, World Trade Organization, WTO, {What's Left of) Our Economy

Contrary to what many trade mavens must think, Paul Krugman’s recent confession that he (and nearly all of his economics colleagues) have seriously misjudged the impact of international trade on America’s manufacturing workers isn’t his first. At least twice before (see here and here), this Nobel Prize-winning economist and New York Times columnist has admitted in print that the economics profession’s consensus was wrong to brush off (and often scorn) claims that post-Cold War trade agreements and similar trade policy decisions would foster a combination of wholly new and unbeatable (but economically unsustainable) forms of import competition for domestic industry, and related job and production offshoring. (I’m among those he’s mauled in print.) And he’s granted that trade policy critics who predicted these consequences and kept pointing to evidence of their emergence were right. (See here and here.)

Still, Krugman’s latest mea culpa is noteworthy for two reasons. First, it undercuts another tenet of trade economics dogma held almost as strongly believed as the belief that trade expansion in all circumstances is a net contributor to human welfare – the related conviction that imbalances like trade deficits don’t matter (at worst).

In particular, the author acknowledges that the rapid and massive increase in America’s manufacturing-dominated goods trade deficit – especially from super-low cost economies (and offshoring destinations) like Mexico and especially China – occurred at exactly the same time that U.S. industrial employment cratered. And not coincidentally, the destruction began right about when China was admitted into the World Trade Organization (WTO). That mattered greatly because the Beijing subsidies and other predatory trade practices that benefited both foreign- and Chinese-owned producers in the PRC gained invaluable protection from unilateral U.S. responses.

How greatly? According to Krugman, the worsening of the trade deficit “reduced the share of manufacturing in GDP by around 1.5 percentage points, or more than 10%, which means that it explains more than half the roughly 20% decline in manufacturing employment between 1997 and 2005.” In other words, most of the manufacturing job loss during this crucial period – which is a particularly important one because that’s when critical masses of recently offshored factories got up and running and began exporting to the American market – should be blamed not on supposedly impersonal and clearly positive forces of progress like containerization in global shipping, and automation generally, but on actions by American leaders.

Not that Krugman abandons conventional trade economics completely. Specifically, he contends that trade deficits generally speaking are still ultimately unimportant, partly because countries can’t grow indefinitely indebted to the rest of the world and “must pay their way eventually.” The post mid-nineties surge in the manufacturing trade shortfall hammered domestic American manufacturing, he explains, only because it skyrocketed so suddenly.

Readers, however, will ask themselves how the United States can pay its way in the foreseeable future when manufacturing still dominates its lopsided goods trade flows. And they should note that although the damage to manufacturing could still prove temporary, it’s already lasted nearly twenty years, with no imminent end in sight until the past year. (See this post for one of my recent claims that President Trump’s trade policies are starting to bend the curve.)

Second, and following logically from the first point, Krugman continues to insist that protective tariffs should be avoided. Now his opposition focuses on his contention that the trade-related danger to U.S. manufacturing is coming to an end. The China shock in particular, which spearheaded the recent period of “hyperglobalization,” was “a one-time event” that’s already showing signs of ebbing.

But if Krugman was so offbase in evaluating trade’s economic effects, why should such predictions deserve any credibility? Off the top of my head, I can think of several reasons for ongoing concern. For example, China still has massive reserves of super cheap, U.S. wage-depressing labor in its interior and, counter-intuitively, in its national student body. In addition, the progress Beijing has fostered in capital- and technology-intensive industries means that these sectors of American manufacturing will keep facing the same kinds of low-wage (but high productivity) challenges that decimated less advanced, more labor-intensive U.S.-based sectors in previous decades. Moreover, if China does lose competitiveness even in these portions of manufacturing, there’s no shortage of bargain basement third world population giants – like India, Indonesia, and Brazil – that would be more than happy to receive more manufacturing investment from the United States and other high-income countries.

Everyone’s entitled to make mistakes – even know-it-alls like Krugman, who’s known for torching those disagreeing with him as know-nothings and liars. And Krugman deserves praise for owning up to his own mistakes. But it’s also appropriate to ask this question: Since Krugman first established his economic chops as a trade expert, and since he’s clearly been proven wrong about the leading trade-related controversy of our time, how many more strikes does he get?

(What’s Left of) Our Economy: The Atlantic’s Hatchet Job on Trump’s Trade Policy and Trade Negotiator

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Chad Bown, China, globalization, James Bacchus, Matt Peterson, Merit Janow, multinational companies, Peterson Institute for International Economics, Robert Lighthizer, The Atlantic, Trade, trade war, Trump, U.S. Trade Representative, World Trade Organization, WTO, {What's Left of) Our Economy

I wish I could say that, in the process of ringing out the old year, America is ringing out incompetent or willfully ignorant journalism about U.S. trade policy. But a looooong article just published by The Atlantic on U.S. Trade Representative Robert Lighthizer makes painfully clear that that point remains as far away as ever.

The article, by Atlantic Senior Editor Matt Peterson, would deserve quick dismissal simply due to one of its major themes: that Lighthizer, President Trump’s chief trade negotiator, takes a hard line on the issue in general, and on China in particular, because he’s long been in the pocket of the domestic steel industry as one of its principal trade lawyers.

This smear is especially rich because a trade policymaker lionized by Peterson as a strong opponent of such conflicts of interest and consequent paragon of policy virtue – another American trade lawyer named Merit Janow – followed her stint as a senior magistrate at the World Trade Organization (WTO) – by accepting a position as “a charter member of the International Advisory Council of China’s sovereign wealth fund, China Investment Corporation or CIC.” That is, she jumped onto the payroll of the Chinese government.

But more fundamentally troubling about Peterson’s piece is its – sadly, standard – description of the WTO as an institution that defends and promotes the interests of the entire American economy. How so? By creating a U.S.-style court of law that would impartially mete out commercial justice but that could be used especially effectively by American diplomats highly skilled in working with such systems. One genuine contribution made by Peterson is reporting evidence that Lighthizer himself once apparently bought into this argument.

These views, however, completely ignore two related, alternative interpretations of the WTO’s creation that at deserve consideration at least because one of them is so regularly repeated by journalists and WTO supporters. That interpretation portrays the WTO as an arrangement that aimed primarily at restraining America’s ability to combat predatory foreign trade practices by enmeshing the United States in a simple majoritarian legal system in which all countries – including the vast majority of members who relied heavily on such mercantilism for their growth.

Chad Bown of the (pro-WTO) Peterson Institute for International Economics, one of the American media’s “go to” trade policy commentators made this point abundantly clear when he told The New York Times that the main foreign impetus for establishing the WTO was a determination to find ways of resisting America’s (successful) 1980s unilateral efforts to frustrate their trade predation and pry open their markets to U.S.-made goods.

Former WTO official (and U.S. Member of Congress) James Bacchus made a similar point earlier this year when he criticized Lighthizer (and other American economic nationalists) for their belief that the United States was better off under the pre-WTO world trade system.  Why?  Because it left the (democratically elected) U.S. government “free to go on the offence aggressively in trade by taking unilateral trade actions without any international legal constraint.”

The second, related alternative interpretation of the WTO’s creation focuses on the U.S. multinational corporations that dominated U.S. trade policymaking under Mr. Trump’s immediate predecessors: They strongly favored subjecting unilateral American power in trade diplomacy because their overseas operations – especially those geared toward supplying the American market – benefited immensely, often at the expense of domestic competitors, from many of the predatory foreign practices targeted by many American leaders who don’t shill for these offshoring interests. China’s longstanding beggar-its-neighbors currency policies have been only one example.

The Atlantic is rightly proud of its long history of publishing “iconic thinkers” and “covering ideas that matter.” Many more articles like Peterson’s, and it will also be known for hatchet jobs.

Im-Politic: Elizabeth Warren, Nationalist?

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Elizabeth Warren, Emmanuel Macron, global poverty, globalization, Im-Politic, nationalism, progressives, Seattle WTO protests, third world, Trade, World Trade Organization, WTO

Whatever its historical roots, “nationalism” has recently become a dirty word. Among the dangers embodied by this concept, as determined by political correctness authorities such as France’s (politically besieged) President Emmanuel Macron, it’s “a betrayal of patriotism. By saying ‘Our interests first, who cares about the others,’ we erase what a nation holds dearest, what gives it life, what gives it grace, and what is essential: its moral values.”

How stunning, therefore, to read Elizabeth Warren’s recent speech on U.S. foreign policy. According to this definition, the Massachusetts Democratic Senator, progressive heroine, and likely 2020 presidential hopeful, is a card-carrying, selfish, immoral (amoral?) America First-style nationalist – at least when it comes to international trade and related globalization issues.

Skeptical? Just read the Warren transcript. On the one hand, she admitted that “The globalization of trade has opened up opportunity and lifted billions out of poverty around the world” – which by any standard is a pretty remarkable achievement. Yet on the other hand, Warren condemned the “trade and economic policies” behind this epic success for failing to deliver “the same kind of benefits for America’s middle class.”

In fact, she emphasized, “U.S. trade policy has delivered one punch in the gut after another to [U.S.] workers and to the unions that fight for them.”

It’s true that, elsewhere in her speech, Warren briefly referred to revamping American trade policy to ensure “that workers are meaningfully represented at the negotiating table and build trade agreements that strengthen labor standards worldwide.” But much more often, she lambasted agreements like the North American Free Trade Agreement (NAFTA) and its successor, the U.S.-Mexico-Canada Agreement (USMCA) for encouraging “outsourcing jobs to Mexico.”

In other words, either such outsourcing somehow failed to ameliorate poverty in Mexico (even though Warren credits it with uplifting the poor elsewhere), or she assigns little importance to achieving that goal. In either case, Warren has some major explaining to do.

Also fascinating about Warren’s speech: If it’s to be taken seriously (never a sure thing when it comes to politicians’ rhetoric), it would represent a significant, and in my view, welcome change in progressives’ take on trade, globalization, and what’s fundamentally wrong with them.

For since these issues became front-page news during the debate over NAFTA, at the start of the 1990s, critics to the left-of-center have proclaimed that U.S. trade and related policies would remain unacceptable unless they boosted living standards everywhere, not just in America – and that they had betrayed workers in developing countries as completely as their counterparts in the United States.

American progressives’ emphasis on the devastation created in the third world by U.S.-spearheaded trade arrangements came to a head during the Seattle World Trade Organization (WTO) protests in 1999 – as did the companion belief that win-win solutions for workers and consumers everywhere should be and could be the very raison d’etre of the global economy. And as indicated by this 2015 statement from the Congressional Progressive Caucus, it remains their party line today.

The point here is not that no conceivable form of globalization can ever produce globe-wide benefits. Instead, it’s that the road to mutual gain is unlikely to proceed in a straight, smooth, uninterrupted line, and that without recognizing that hard choices are likely for the foreseeable future, and that those global benefits may not be distributed evenly, the worst of all worlds is all too likely.

So here’s hoping that her speech is evidence that Warren is becoming aware of these at-least-likely complications, that she’ll start prompting such globalization realism on the American Left – and that she won’t be deterred by apologists for a failed status quo who, along with most of her fellow progressives, have been reduced to portraying nationalism as part of the problem, rather than potentially part of the solution.

(What’s Left of) Our Economy: U.S. Trade Policy Deserves Blame for the Caravans

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apparel, asylum seekers, Bangladesh, CAFTA, caravan, Caribbean Basin Initiative, Central America, Central America Free Trade Agreement, China, economic development, El Salvador, globalization, Guatemala, Honduras, immigrants, Immigration, manufacturing, migrants, Multi-Fibre Arrangement, NAFTA, North American Free Trade Agreement, Northern Triangle, Trade, Uruguay Round, Vietnam, World Trade Organization, WTO, {What's Left of) Our Economy

Hot on the heels of the current caravan of Central Americans heading through Mexico to the U.S. border, another such procession is gathering in Guatemala. And these two have followed the flood of unaccompanied migrant children from the area that reached the United States in 2014.

I wish I could tell you that there’s a silver bullet for solving the problem – though nothing could be clearer than that these human tides will keep organizing in even greater numbers if Washington follows the general advice of the Open Borders lobby to view all of the caravan-ers as legitimate asylum-seekers entitled to full due process once they reach the border and request this status. Upon which time current procedures call for recording their claims and then releasing them based on the ludicrous assumption that they’ll report back to immigration court on the appointed date and risk being rejected and thus deported.

What I can tell you is that this crisis has been greatly aggravated by an unforgivably short-sighted U.S. trade policy strategy that emerged in the 1990s. It consisted of indiscriminately liberalizing trade with developing countries, and thereby ignoring the case for targeting trade diplomacy to ensure that countries and regions of greatest importance to the United States receive the lion’s share of the benefits. And the prime victims of this strategic failure – which mainly reflected the determination of offshoring multinational manufacturers and Big Box retailers to gain maximum flexibility to source imported inputs and final products – were the poorer countries of the Western Hemisphere. That group of course includes Mexico and the Central American countries that have sent so many migrants northward.

Interestingly, Central America and the Caribbean countries were placed prominently in line to receive significant shares of the vast U.S. market by a Reagan-era initiative aimed mainly at stemming the spread of left-wing revolutionary forces in the region. But scant years later, any hopes generated by this strategy for fostering more prosperity in these impoverished regions and strengthening the appeal of pro-Western leaders were kneecapped by two big decisions.

The first was the negotiation of the North American Free Trade Agreement (NAFTA) in 1993. The second was the phase out of U.S. and other developed countries’ quotas on apparel imports that was approved the following year as part of the Uruguay Round global agreement that reduced various trade barriers worldwide and created the World Trade Organization (WTO). And the third was the Clinton administration’s subsequent rush to liberalize trade with a host of low-income countries outside the Western Hemisphere.

In principle NAFTA’s tight focus on Mexico was justifiable given Mexico’s size, position as a U.S. neighbor, and history of political, economic, and social policy failure that seemed to be reaching a crisis point. But economic growth and employment could still have been greatly lifted in Mexico and Central American (along with the Caribbean countries) had American trade liberalization stopped or at least paused there.

Yet the quota phaseout forbade Washington from incorporating any strategic or non-economic considerations into apparel trade policy, whether conditions urgently required them or not.  As a result, it ensured that the benefits of freer trade would be greatly watered down (and many garnered by China and the rest of developing Asia in particular), and insult was added to injury by new liberalization deals reached or renewed, or decisions made, regarding Vietnam, sub-Saharan Africa, Jordan, most of developing Asia (in the form of a deal on information technology products, including labor-intensive consumer electronics), and China. Largely as a result, the poorer countries of the Western Hemisphere were left in the dust in the business models of the multinationals and the big retailers.

Nowhere does the opportunity lost by Mexico and Central America come through more clearly than in the apparel trade figures. This sector is almost always the first utilized by developing countries to begin their industrialization and modernization drives mainly because its own labor intensivity means that capital and technology requirements are pretty modest, the relevant skills can be taught fairly easily, and its job-creation promise is substantial.

Here are the figures for apparel imports from Mexico, the three “Northern Triangle” Central American countries, China, and two other current Asian textile giants (Bangladesh and Vietnam) for four key years. Next to them will be the figure for the share of American apparel consumption (market share) won at that point by each. We start with 1997 because that’s the year when the U.S. government began adopting its current dominant system for slicing and dicing trade and manufacturing data – which enables us to see statistics that are apples-to-apples. The second year is 2001 – the year China’s was admitted into the WTO – and thus gained substantial immunity from American laws aimed at curbing predatory trade practices. The third year is 2006 – when Congress approved a Central America Free Trade Agreement (CAFTA) negotiate by George W. Bush’s administration. And the fourth year is last year – the latest for which we have full-year numbers.

1997

Mexico:                       $5.317b                    11.29 percent 

El Salvador:                 $1.052b                     2.18 percent

Guatemala:                  $0.973b                     2.07 percent

Honduras:                    $1.689b                     3.59 percent

China:                          $7.279b                   15.46 percent

Bangladesh:                 $1.442b                      3.06 percent

Vietnam:                      $0.026b                      0.06 percent

2001:

Mexico:                       $8.112b                     12.99 percent 

El Salvador:                 $1.634b                      2.62 percent

Guatemala:                  $1.630b                       2.61 percent

Honduras:                    $2.438b                       3.91 percent

China:                          $8.597b                     13.47 percent

Bangladesh:                 $2.101b                      3.37 percent

Vietnam:                      $0.048b                       0.08 percent

2006:

Mexico:                       $5.514b                       7.16 percent 

El Salvador:                 $1.408b                      1.83 percent

Guatemala:                  $1.685b                      2.19 percent

Honduras:                    $2.519b                      3.27 percent

China:                        $22.405b                    22.09 percent

Bangladesh:                 $2.915b                       3.79 percent

Vietnam:                      $3.226b                       4.19 percent

2017:

Mexico:                       $3.806b                       4.52 percent 

El Salvador:                 $1.920b                       2.28 percent

Guatemala:                  $1.371b                       1.63 percent

Honduras:                    $2.522b                       3.00 percent

China:                        $29.322b                     34.85 percent

Bangladesh:                $5.046b                       6.00 percent

Vietnam:                    $11.613b                     13.80 percent

The big takeaway? Even during the decade after the Central America free trade deal was signed, the three Northern Triangle countries actually saw their share of the U.S. apparel market stagnate or actually shrink. Mexico’s share has been cut by about almost 60 percent. And the business won by China, Bangladesh, and Vietnam has exploded – since 2001 for China, and since 2006 for the two other Asians. Again, the year that the free trade deal that was supposed to benefit El Salvador, Guatemala, and Honduras was inked.

With Mexico, there are of course mitigating factors. Chiefly, although its apparel competitiveness in the U.S. market is way down, its competitiveness in higher value automotive manufacturing in particular is way up. But millions of poor Mexicans still could have benefited from apparel employment, and no such progress has been made in Central America – which is partly understandable since incomes are even lower, and governments and other institutions needed for economic development are so much weaker.

Apparel should have been the great hope for these populations, but that sector’s potential for expanding production (which of course needs to be export-oriented since these countries’ domestic markets are tiny) and employment has been virtually choked off. Just as important, the prospect that apparel wages in the Northern Triangle might rise adequately has been limited, too – since pay throughout developing East and South Asia (even in China, according to the chart below) remains so much lower.

American trade policy could have lent a big helping hand to Central America had it adopted a strategically sensible set of priorities. But it failed to learn a fundamental lesson of strategy: When everything is a priority, then nothing is a priority. You can see the victims of this failure in the flow of human misery heading up from the Northern Triangle.