(What’s Left of) Our Economy: The Rules-Based Global Order – & Other Fairy Tales

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alliances, America First, burden sharing, China, currency, Federal Reserve, Financial Crisis, globalists, Great Recession, hegemony, NAFTA, North American Free Trade Agreement, offshoring, public goods, recovery, Robert Triffin, tariffs, Trade, Trade Deficits, Triffin dilemma, Trump, World Trade Organization, WTO, {What's Left of) Our Economy

Can the foreign and domestic critics of President Trump’s latest trade policy moves finally get real – and start talking and acting like adults? I’m not referring to politicians and analysts who have pointed out problems with individual aspects of the President’s recent announcements of tariffs on various trade competitors. I’ve been one of these myself.

Instead, I’m talking about those who keep whining that Mr. Trump’s tariffs and his overall – inconsistently to be sure – emerging “transactional” approach to alliances and other international arrangements are endangering a rules- and institutions-based global order that has served both America and the rest of the world unmistakably well. No description of the post-World War II world could be less accurate and indeed more childish – not to mention more self-serving for the supposed U.S. allies and multinational business interests (and their Washington, D.C. hired guns) that have pushed this canards so insistently.

For the institutions and rules so touted by President Trump’s globalist critics were simply window-dressing created to obscure a much less aesthetically pleasing reality: The postwar (non-communist) world’s success has been based fundamentally on America’s power and wealth, and the  consequent U.S. ability to provide what political scientists call “public goods” for those aligned with it. Specifically, it almost single-handedly created the conditions on which success decisively depended: the military protection that countries recovering from war-time devastation could not provide for themselves, and the credit and export markets that were similarly beyond the capacities of their crippled economies. Just as important, during the early post-war decades, the United States could play this role for the most part without excessive security risks and economic costs.

Unfortunately, even the biggest, best-run public goods-providing country will find these arrangements unsustainable, especially on the economic front, and especially if its government is substantially accountable to its people. The essential dilemma was first identified by the Yale University economist Robert Triffin back in 1960, when American power was at or near its zenith.

Triffin’s warning was narrowly economic. He argued that the very free lending and especially spending by which such a country (which political scientists call a “hegemon”) fueled growth around the world would eventually massive international deficits and a global glut of its currency – which was serving as the world’s money – and erode global confidence that currency’s value. Either the hegemon could tighten up – and likely throw the entire world economy into a major downturn. Or it could keep over-lending and especially spending. In this case, its currency would lose enough of its perceived value to end its world-money role, and the world economy would degenerate into chaos. Or the rest of the world could keep stockpiling these excess dollars – which as the French in particular noted would result in the inflation caused by the greenback’s declining value being exported around the world.

Yet in America’s case, the ultimate engines of the paradox – at least in post-World War II America’s case – were foreign policy and domestic politics-related. The over-spending, and consequent deficits stemmed from the United States’ determination simultaneously to incur the expenses of maintaining huge military forces at home and abroad (along with dispensing considerable foreign aid), and of satisfying the American public’s growing demand for social services, without increasing taxes enough to finance these programs responsibly. At the same time, the dilemma was greatly intensified by the refusal of the foreign beneficiaries of these U.S.-provided public goods to pay many more of the costs of their own defense, or to open their markets wider to American exports.

The breakdown of these arrangements in 1971 bore out Triffin’s warnings, but although major adjustments were made globally, the rest of the world continued relying heavily on American security guarantees and markets. And in fairness, a bipartisan American foreign policy establishment addicted to intangibles like “global leadership” and genuinely worried that its European and East Asian allies could not manage their own security affairs in particular responsibly, staunchly resisted any fundamental changes to the status quo.

Fast forward to the mid-2000s, and the exact same fundamental problem reemerged. Further, a Triffin-like situation was greatly worsened by two new developments. First, the Federal Reserve decided to enable reckless over-spending by American consumers by keeping interest rates at peacetime lows not seen for many decades.

Second, American trade policy swelled the international deficits by taking a new, offshoring-focused turn starting with the North American Free Trade Agreement (NAFTA) in the early 1990s, and culminating with multinational companies’ decisions to focus tightly on supplying more and more American business and consumer demand from China, not from the United States.

Not so coincidentally, this trade policy shift was accompanied by the creation of an international organization – the World Trade Organization (WTO) – that was the first such body ever authorized to create both binding rules for any international policy sphere, and to utilize enforcement mechanisms in which the United States enjoys no special standing (as opposed, for example, to the United Nations Security Council, where the United States and other permanent members possess an individual veto over decisions).

A better recipe could not be created for empowering China (and the rest of the world’s major export-dependent economies) to view the United States as an even more attractive dumping ground for surplus production; for undermining America’s internationally recognized right to respond unilaterally; and for consequently enabling footloose multinational companies to supercharge the trade deficits by sending an astonishing amount of the nation’s production capacity to China and other super-low cost countries that could not or would not import remotely as much as they could or would export.

The end result: Rather than the United States winding up exporting inflation and (along with free-riding allies and trade competitors) bringing down a global monetary order, America exported financial instability, triggering the worst worldwide financial crisis, the deepest international economic downturn since the Great Recession, and the weakest U.S. economic recovery on record. And revealingly, to the cheers of the bipartisan American foreign policy and economic policy establishments, the first post-financial crisis president, Barack Obama, kept America’s grand strategy firmly on course.

Although it’s still unclear whether Mr. Trump is choosing an effective combination of trade and alliance policy tactics, his initiatives so far raise even more important questions. Chiefly, is he simply trying to achieve greater security and economic burden-sharing? And even if his aims at present are restricted to securing better deals, is he prepared to scrap American participation in current alliances and other international institutions altogether if U.S. tariffs and other America First-type threats don’t seem to be working?

Nonetheless, the President has opened the door to elevating America’s thinking about its global environment toward the adult levels that ultimately will be needed to prevent today’s lopsided unsustainable international arrangements from disastrous crackups. If his critics want to increase the odds that the best choices will be made, they’ll need to grow up, too.

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(What’s Left of) Our Economy: What are Trump’s “Trade War” Priorities?

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border adjustment tax, China, Gordon G. Chang, intellectual property, manufacturing, natural gas, tariffs, Trade, trade deficit, Trump, value-added tax, VAT, World Trade Organization, WTO, {What's Left of) Our Economy

Last week on CNBC, I surprised one of the anchors by expressing frustration at how President Trump’s China trade policies have been unfolding.

As I tried to explain, I’ve been pleased with the President’s recognition that past efforts to discipline China’s wide-ranging trade predation have failed miserably, and that the alternatives currently being touted by his critics (launching a suit at the World Trade Organization, further bilateral talks, mobilizing a global coalition to confront China) are simply old, spoiled vintages being poured into new bottles.

But I also faulted the administration for not comprehensively describing its end game, and for not employing the considerable power of the presidential bully pulpit to make its case to the public. So I feel obligated at least to lay out the main challenges Mr. Trump needs to meet in order to succeed. The biggest by far? Prioritizing a series of China trade objectives that the President and his aides keep mentioning, but that are far from being satisfactory or even entirely consistent with each other. Here are some examples.

The Trump administration is rightly concerned about China’s many and varied efforts to steal American intellectual property. The technological progress that this theft has enabled the PRC to make has displaced U.S. production and employment in advanced American manufacturing, and has helped China catch up with the United States militarily. And as analysts like Gordon G. Chang have warned, if dictatorial China gains supremacy in key cutting-edge technologies like telecommunications and artificial intelligence, privacy and individual liberty around the world could be profoundly threatened as well.

It should be obvious by now that China’s technology predation won’t stop unless Beijing is made to suffer major consequences – or believes they’re on the way. But American success would breed problems whose solutions aren’t easy to see. Principally, how would Chinese promises to stop either the outright stealing of intellectual property or its extortion (in exchange for access to the Chinese market) be verified?

As I’ve asked previously, as with other proposals for improving Chinese behavior, like improving its labor or environmental standards, how many American officials would need to be running around how many Chinese corporate suites ensuring compliance? And would the U.S. tech and other companies victimized by Chinese rip-offs and blackmail suddenly start complaining loudly, and en masse, about practices they’ve meekly tolerated for decades in exchange for short-term China profits? At least, the burden of proof should be on the optimists.

The administration has also spoken about securing a Chinese promise to reduce its trade surplus with the United States by $100 billion. That’s a worthy goal in principle, and Asian comfort with trade management could easily result in Beijing making major purchases of American services and especially goods simply to reach a compromise solution even if there’s no demand for these imports in the Chinese market. The latter, for example, could simply be stuffed into warehouses.

But not all traded goods create equal economic value. For instance, would Washington really want most of the reduction in the Chinese surplus to come on the agricultural front? Pro-Trump farm states might rejoice, but what’s the justification for favoring commodities as opposed to manufacturing industries – which have long punched way above their weight in terms of productivity increases, knowledge intensiveness, and growth and employment multipliers?

Another idea that’s been floated has been to close some of the trade gap with U.S. natural gas exports. But much cheaper energy prices resulting from such fossil fuel extraction and reduction revolution has turned into a big advantage for domestic U.S. manufacturers. Do Americans really want to share this advantage with their Chinese competitors?

The crucial question of imposing pain apparently needs to be examined more thoroughly as well. Assuming that the main U.S. objective is changing Chinese behavior by creating fearsome consequences for continuing with the status quo, is the best way to hurt Beijing (at least in the short run) tariff-ing its advanced, technology-intensive goods sectors – which employ relatively few Chinese? Such levies could well undermine China’s long-range plans for supremacy in these fields. But isn’t it likelier that in the short run, China would be much more worried about the job destruction that could result from curbing Chinese exports in labor-intensive consumer goods sectors, which are still mass employers?

Yes, the U.S. retailers that import and sell most of these products could obtain them from other super low-cost, barely or unregulated foreign economies – meaning that this step wouldn’t add much, if anything, to American output and job creation. But China at least would be punished.

At the same time, success here, too, raises the aforementioned monitoring and enforcement questions: How can Washington be certain that the Chinese will behave even after they cry “Uncle!”

Finally, however, the President does believes that his China tariffs – including the possible expansion of the round that’s already been announced – will return production and jobs to the United States. Interestingly, previous tariffs have achieved some notable successes along these lines. And America buys lots of Chinese manufactures that can’t be procured from many other developing countries because they can’t match China’s industrial infrastructure, or from many high income countries because they can’t match Chinese prices. So it’s reasonable to expect that the China tariffs will generate some further manufacturing reshoring.

But many of the more sophisticated products imported by the United States can be supplied by other countries, so China-specific tariffs are unlikely to affect those shipments. This problem could be solved – and much reshoring spurred – by more sweeping tariffs. Which is why it’s such a shame that the President was so dismissive of the border adjustment tax contained in the House Republicans’ original version of the tax reform bill.

This levy would have worked like a value-added tax (VAT). U.S. exports would have been effectively subsidized, and U.S. imports penalized. The tax would have likely been legal according to the World Trade Organization (because it would be considered a domestic tax and therefore outside the organization’s purview – which is why most other WTO members use VATs). Both because of its all-embracing nature and the subsidies it would afford, it would have spared the administration and the country most of the task of fine-tuning tariffs on China, or on steel and aluminum imports, in order to minimize domestic economic or political costs. The measure enjoyed strong support from many powerful Congressional Republicans (especially House Speaker Paul Ryan and House Ways and Means Chair Kevin Brady), along with many influential big American manufacturers. And don’t forget all the revenue it would have raised.

Mr. Trump has just expressed buyers’ remorse about the budget deal he just signed. Inserting the border adjustment tax into an alternative proposal just might enable him to accomplish key fiscal and trade policy goals – and avoid many of the headaches in these fields his administration is currently experiencing.

(What’s Left of) Our Economy: Martin Wolf Whiffs on the Trump Tariffs

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allies, aluminum, EU, European Union, Financial Times, General Motors, Martin Wolf, Mary Barra, national security, steel, tariffs, Trade, Trump, World Trade Organization, WTO, {What's Left of) Our Economy

I hate to go after the Financial Times‘ Martin Wolf, because he’s definitely one of the world’s smartest and most responsible economics commentators. Unfortunately, his March 6 column on the Trump tariffs fell so far short of his standards – and in fact simply parrots so much wrongheaded and/or simplistic trade-related conventional wisdom – that a response is essential. Let’s take his main arguments seriatim.

Wolf is apparently upset that the tariffs are “explicitly intended to last a long time.” But what could make more sense? If the aim is to spur more American steel and aluminum output, which requires major capital investments that need time to pay off, short-term tariffs, or tariffs with a publicized termination date, are bound to fall way short of their mark. The former will naturally scare off investors that simply have the requisite time horizon; the latter will additionally tell potential capital sources and foreign steel and aluminum exporters exactly when they can resume dumping subsidized product.

Wolf believes that the tariffs will so raise the costs of steel- and aluminum-using U.S.-made products that these industries and their workforces, which vastly outnumber those of the metals-makers, will suffer major losses of global competitiveness. In making this claim, he both overlooks the relatively small steel and aluminum content of many of these products, and oddly dismisses any possibility that these businesses will find ways to offset any notable input price increases with greater efficiencies elsewhere in their operations.

I say “odd” because that’s exactly what conventional economics tells us will happen – at least with companies determined to stay in their respective businesses. It’s one main reason why productivity growth exists at all. It’s also at the least significant that no less than General Motors Chair and CEO Mary Barra has stated that that’s exactly what her company will do: “We would look to find offsets and efficiencies to offset that [higher steel prices] and not have to pass it on to the customer.”

Wolf worries about the spread of what he admits are trade actions confined to steel and aluminum because so many American trade partners will retaliate. I was waiting for him – as a major supporter of free trade – preemptively to scold these countries for not realizing that theory holds that the best way to respond to tariffs is by compensating losers, not by retaliating. But it doesn’t appear to think that this venerable maxim applies outside the United States.

Wolf predicts that this retaliation will take the form of World Trade Organization  (WTO) challenges and safeguards “to forestall diversion of imports on to their markets.” But because the global steel market is a single integrated market (like so many other markets in this era of extensive globalization), such country-specific measures will fail to prevent diversion as completely as have similar past U.S. Measures. That’s probably why the European Union, for example, has hinted that it won’t wait for the WTO Good Housekeeping Seal for any retaliation. Which of course would be illegal according to WTO rules.

Wolf regurgitates the argument that the sweep of the Trump tariffs will hit “friends and allies” – belying the claim that they’re based on national security considerations. As I’ve noted, though, many of these supposed friends and allies have long been directly or indirectly helping make sure that an outsized share of Chinese-spurred global overcapacity in steel and aluminum winds up being sent to the United States. With allies like these….

Wolf expresses bewilderment that the United States would seek protection for its steel and aluminum industries because output in both has been “stable” since roughly 1990. But in the business world, that’s a euphemism for “no growth since roughly 1990.” Does that scream “competitiveness” to you? Moreover, Wolf overlooks the loss of global and U.S. market share for both sectors – not normally a sign of companies or industries with bright or even viable futures. (See here for the steel data and here for the aluminum figures.)

Wolf uses tariffs as his main measure of whether, as many trade policy critics argue, the United States really is the world’s least protectionist major economy. But nowhere in his article does the term “non-tariff barriers” appear – a shocking omission given their prevalence and strong growth as global negotiations have reduced tariff rates worldwide.

Finally, Wolf alludes to the canard that America’s national savings rate is overwhelmingly responsible for its bloated trade deficits. In fact, the relationship between the trade and broader current account balances on the one hand, and the savings rate on the other is a mathematical identity. As such, it says nothing whatever about causation – which could easily flow the other way.

It’s understandable that Wolf doesn’t like the Trump tariffs per se – I’ve been critical of them in some respects myself. But the scornful tone of his article, and its utter failure even to consider obvious rejoinders (much less address them) indicates that something deeper is at work here: One of our most thoughtful and knowledgeable economics analyst has come down with a bad case of Trump Derangement Syndrome.

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

Tags

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

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

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

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

         2010                                                   January, 2018

US:    7.46                                                           4.89

China:   42.62                                                    48.05

EU 27: 12.18                                                    10.32*

Japan:   7.73                                                        6.48

South Korea:   4.12                                             4.39

India:   4.82                                                         6.47

Vietnam:   0.30                                                    0.76

Taiwan:   1.39                                                      1.41

Turkey:   2.06                                                      2.28

Brazil:   2.32                                                        2.06

Russia:   4.48                                                       4.09

Thailand:   0.29                                                    0.30

Canada:   0.92                                                      0.82

Mexico:   1.18                                                      1.16

Argentina:   0.36                                                  0.25

South Africa:   0.54                                             0.41

Egypt:   0.47                                                        0.47

Australia:   0.51                                                   0.35

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

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

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

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

global total: +19.56

China: -5.0

India: +209.0

Russia: +64

Taiwan: +36

Thailand: +274

South Africa +68

United Arab Emirates +98

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

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

World: 35.6

China: 15.2

EU 28: 19.4

Japan: 1.6

South Korea: 21.2

India: 88.8

Taiwan: 33.1

Brazil: 51.8

Russia: 98.1

Australia: 65.4

Thailand: 213.7

Canada: 26.6

Mexico: 27.4

Argentina: 198.6

Albania: 583.5

Bahrain: 26,148.1

Belarus: 116.9

Colombia: 96.6

Georgia: 57.0

Guatemala: 430.1

New Caledonia: 70.7

New Zealand: 64.8

Oman: 81.1

Pakistan: 41.1

Peru: 127.4

Philippines: 147.1

Saudi Arabia: 794.5

Ukraine :111.1

United Arab Emirates: 123.7

Zimbabwe: 376.1

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

(What’s Left of) Our Economy: The Case for Trump’s New Metals Tariffs

Tags

alliances, allies, aluminum, China, inflation, manufacturing, overcapacity, steel, subsidies, tariffs, Trade, trade law, Trump, World Steel Association, World Trade Organization, WTO, {What's Left of) Our Economy

President Trump has announced his decision to impose tariffs on U.S. imports of steel and aluminum – cue the trade war hysteria. And the national security hysteria. And the inflation hysteria. Here are some talking points I hope the administration will feel free to steal as it defends the decision in the days leading up to the release of the final tariff plan:

>Many countries have declared their intention to retaliate against the American tariffs with higher barriers to U.S. exports. Curiously, they are overlooking the Chinese government-subsidized overcapacity at the root of the long-time distortions in world steel and aluminum markets.

>Many of these countries want the problem tackled multilaterally. But the World Trade Organization (WTO) has failed to stem this overcapacity (or deal effectively with many other forms of Chinese trade and broader economic predation), and a G20 forum specifically addressing the steel issue has produced nothing since its founding in December, 2016.

>Although major steel-producing powers like the European Union have imposed their own steep tariffs on shipments from China, the global glut has continued. One reason may be that, since the global economic recovery took hold in 2010, according to World Steel Association data. the United States has been the major steel producer that has suffered by far the greatest loss of global production share by volume. (See this post of mine for the 2010 figures and the Steel Association’s latest report for the most recent – January, 2018 – figures.) And as of the most current World Steel Association data (2016), the United States is also the steel producer with the highest steel trade deficit by volume (21.7 million tons). 

>As a result, charges that American steel tariffs in particular will jeopardize the rules-based global trade system seem to be arguing that this system requires the United States to remain as the world’s dumping ground for government-subsidized steel.

>A much more constructive response from America’s trade partners would be finally getting serious about shutting down China’s overcapacity and placing market forces back in the saddle for global steel pricing. The Trump tariffs should be seen as a signal that the United States will no longer accept world steel trade patterns that treat the United States as the fall guy, and should therefore act as a spur to achieve genuinely meaningful multilateral results.

>The above gaming of global steel trade by so many American trade partners also explains the need for the kinds of sweeping measures made possible by the national security-oriented Section 232 of U.S. trade law, rather than the narrower curbs required by, say, the countervailing duty statutes.

>Fears have been expressed in the U.S. foreign policy community, and by the Trump administration’s Defense Department, that certain tariff schemes may needlessly harm America’s relationships with key security allies. Those voicing such concerns should also explain why countries that would permit these U.S. measures to undermine alliance relationships should be seen as reliable partners when overseas crises erupt.

>Tariff opponents contend that America’s use of an allegedly bogus national security rationale for the curbs will open the doors for other members of the WTO to use equally specious justifications for their own tariffs on numerous products. These opponents seem to forget that most of the world’s major economies, which rely heavily on export-led growth resulting from large trade surpluses, so far have encountered little difficulty in protecting their own domestic markets via a wide range of both tariff and non-tariff trade barriers.

>New national security rationales for new tariffs will be especially suspicious if used by the numerous American security allies that have been free-riding on U.S. defense guarantees for decades – and skimping on their own defense spending. These allies include Germany, Japan, South Korea, and Canada.

>Tariff critics also insist that the American economy will suffer major harm from foreign retaliation. They seem – oddly – convinced that U.S. trade partners that rely heavily on net exporting to the United States for their growth have nothing to fear from further the American trade restrictions that may result. Will these countries really launch trade attacks on one of their best customers?

>Tariff opponents focusing on economic impacts argue that the measures will increase the cost of a key American manufacturing input, and reduce the competitiveness of domestic steel-and aluminum-using industries. They seem to fear that these industries cannot become or remain globally competitive if such inputs are priced via free market mechanisms, rather than kept artificially cheap due to foreign government decisions.

>These economically focused tariff opponents also seem to believe that the current U.S. economy is one characterized by companies that enjoy considerable pricing power. Given inflation that has long undershot the Federal Reserve’s target, that’s a difficult argument to understand.

>In addition, those with an economic focus appear unconcerned about the prevalence and spread of government interventions in trade flows not only in steel, but in a wide variety of traded goods. If foreign governments conclude that they can subsidize and dump two key American industries out of existence, why would they stop with steel and aluminum? How can a growing presence of foreign government-subsidized goods (and services) help strengthen free markets in the United States and enable Americans to reap their maximum gains? And how can such growing foreign intervention help the global economy as a whole progress toward reaping the maximum gains of unfettered trade?

Over to you, Mr. President!

(What’s Left of) Our Economy: With Friends Like This, Today’s World Trade System Doesn’t Need Enemies

Tags

Bill Emmott, Chad Bown, dispute resolution, free trade agreements, Peterson Institute for International Economics, Project-Syndicate.org, The Economist, Trade, Trump, unilateralism, World Trade Organization, WTO, {What's Left of) Our Economy

One of the best pieces of advice I’ve ever received about analytical and opinion writing is “Let your adversaries hang themselves with their own words.” So on the eve of Thanksgiving, 2017, I’m especially grateful to Bill Emmott, the former editor-in-chief of The Economist magazine, for making clear why President Trump and other nationalist critics of U.S. trade policy have been exactly right in slamming as a huge mistake America’s decision to join the World Trade Organization (WTO) – the linchpin of the global trade order for the past two-plus decades.

Writing on the Project-Syndicate.org website, Emmott reports that the Trump administration has embarked on a campaign to cripple the operations of the WTO, which went into business at the beginning of 1995 and which possesses unprecedented internationally recognized authority not only to develop rules for governing many kinds of global commerce, but for enforcing them.

As with other efforts to subject countries to some legal-type checks, the ostensible purpose of the WTO was to remove power from the picture when countries negotiated trade arrangements, and especially when they dealt with the disputes over such arrangements that inevitably arise.

Many powerful critiques of the WTO have been advanced by trade policy critics across the spectrum, but I’ve always viewed two interlocking objections as supremely convincing. First, despite its lofty stated legalistic objectives, the WTO has always been as quintessentially a political organization as other international organizations, like the United Nations. Second, the politics of the WTO has always been decidedly anti-American – for the overwhelming majority of its members depended heavily on amassing big trade surpluses with the United States in order to generate adequate growth for themselves.

So Washington’s decision (backed by Democratic and Republican leaders alike of course) to spearhead the WTO’s creation and become a founding member achieved none of its promised major advantages for the U.S. economy (an impartial forum for handling trade disputes), and saddled the country with all of the major drawbacks of such a system (nullifying most of its ability to use its immense market power to resolve most of these disagreements favorably).

And wouldn’t you know it? Emmott, whose former publication was created in the mid-19^th century precisely to advocate for so-called free trade principles, strongly agrees! As he wrote in an essay yesterday:

“With the WTO essentially out of the picture, the US will launch a new initiative to strike bilateral deals on trade rules – an approach that Trump advocated in his APEC [Asia Pacific Economic Cooperation forum] speech. Given that the US remains a vital market for most exporters, such an initiative will have clout.”

Even Emmott’s suggestion that these U.S. moves will fail unwittingly confirms the case that American leverage will secure the best possible outcomes for Americans. “Asian and European countries,” he writes, “should be preparing for the worst by negotiating their own trade agreements with one another to preempt American mercantilism. After all, taking the initiative to boost trade and other commercial contacts is the best way to resist a trade war.”

What the author apparently misses is that the United States is such “a vital market for most exporters” precisely because the latter countries simply don’t believe in opening their economies to others’ goods and services any more than is absolutely necessary. It’s entirely possible that the dramatically altered circumstances created by new unilateralist U.S. policies could imbue these mercantile economies with some free trade religion. But decades- – and in some cases, centuries- – old approaches generally don’t die so easily. Moreover, if such market-opening did indeed take place, and it could be adequately monitored and enforced, why wouldn’t the United States want to take part?

Until then, however, it would make the most possible sense for Washington to proceed along the unilateralist lines Emmott dreads. For thanks in large measure to its transparent political system and strong rule-of-law tradition, the reciprocal market-opening promises offered by America in bilateral trade diplomacy will be much more credible than those made by Japan, or China, or Germany, or other major protectionist economies. The days of selling the United States much more than they buy from it would come to an end. But genuinely intelligent foreign leaders will recognize that receiving a half a loaf from dealing with Washington on this new basis is the best trade bet they can realistically hope for.

As for countries that stubbornly refuse (possibly egged on by free trade zealots like Emmott) the United States – with its considerable present degree of self-sufficiency and matchless potential for much more – will be more than capable of shrugging its shoulders and moving on.

Incidentally, as RealityChek regulars may recall, Emmott isn’t the first globalization cheerleader unintentionally to reveal that the WTO was a pig in a poke for U.S. economic interests, and indeed was created expressly to neuter American power. Chad Bown, a former World Bank economist now with the Offshoring Lobby-funded Peterson Institute for International Economics, handed trade policy critics, and the American people, a similar gift just last August.

(What’s Left of) Our Economy: Trump’s Muddled Asia Trade Speech

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Asia, globalization, Obama, rule of law, sovereignty, Trade, Trump, Vietnam, World Trade Organization, WTO, {What's Left of) Our Economy

There were so many important points in President Trump’s speech today in Vietnam on trade and globalization that urgently needed to be made. What a shame, then, that they could well be undercut by massive contradictions in the president’s message. Two in particular stand out. The first concerns Mr. Trump’s critique of the current rules-based global trade system. The second concerns a key aspect of that critique and its relationship to his views on national sovereignty.

Mr. Trump was absolutely accurate in his description of the problems that have plagued the world trade system as it’s evolved to date, and especially its ostensible focus on organizing global economic activity according to universally accepted and followed rules and norms. Who, after all, can reasonably argue with his proposition that “Organizations like the WTO [the World Trade Organization] can only function properly when all members follow the rules and respect the sovereign rights of every member. We cannot achieve open markets if we do not ensure fair market access. In the end, unfair trade undermines us all.” In fact, it’s so uncontroversial that every one of Mr. Trump’s recent White House predecessors has made the same seminal point (including President Obama’s administration).

The Trump trade approach toward the WTO so far has differed from those of Presidents Clinton, George W. Bush, and Obama mainly in that it’s criticized the organization’s workings much more intently, and actually taken some actions to gum up its works.

But the President will be repeating their fundamental mistakes if he believes that the solution to today’s flawed rules-based system is constructing a better rules-based system. That goal faces so many insuperable obstacles. For example, few of the countries involved in the system accept Anglo-American rule of law principles in their own political and legal systems, or the economic practices that flow inexorably from them.

Mr. Trump praised governments represented in his audience in Vietnam today for pursuing “visions of justice and accountability, [promoting] private property and the rule of law, and [embracing] systems that value hard work and individual enterprise,” along with seeking partnerships “directed toward mutual gain.”

Yet anyone who knows anything about most East Asian economies know that this description is at best seriously misleading. Instead, the region’s recipe for impressive economic success was based largely on practices that the president highlighted just a few paragraphs later in his address. Not that they’ve been alone, but it’s been the Asian economies that have masterminded “product dumping, subsidized goods, currency manipulation, and predatory industrial policies.” It’s they who have so systematically “ignored the rules to gain advantage over those who followed the rules, causing enormous distortions in commerce and threatening the foundations of international trade itself.”

And just legally speaking, why would these same countries do an about-face and start treating foreign businesses more equitably than they treat their own people?

Even more bizarre, the President specified (correctly) that “Such practices, along with our collective failure to respond to them, hurt many people in our country and also in other countries. Jobs, factories, and industries were stripped out of the United States and out of many countries in addition. And many opportunities for mutually beneficial investments were lost because people could not trust the system.”

In principle, the United States can use its economic power – stemming from the overwhelming importance of its market to an Asian region and indeed entire world heavily dependent on growing by amassing trade surpluses – to convert other economies to its values and policies. But at least for the foreseeable future, this strategy would require the United States – not an international organization created to reflect a global consensus on appropriate economic behavior that clearly is nowhere to be seen – to enforce these rules energetically and continuously until genuine conversion takes place.

Further, that conversion seems a remote prospect. For as the President himself has repeatedly stated, just as he feels obliged “to put America First,” he expects other national leaders “to put your countries first” – a remark evidently applauded by his audience.

Moreover, leaving aside the enormous administrative challenge of this enforcement mission, the process would clash violently with the President’s promise to Asian countries to “respect your independence and your sovereignty. We want you to be strong, prosperous, and self-reliant, rooted in your history….”

Far more promising for President Trump to dispense entirely with the idea of rules-based trade systems, whether regional or global, and use the nation’s (still) unmatched economic leverage to lay down the rules of access to its market, enforce them unilaterally, and leave other economies free to accept them or seek prosperity without the privilege of doing business with the United States.

This approach would generate a major strategic benefit as well – the conceptual freedom to use trade and broader economic diplomacy to offer better deals (which would still benefit the domestic economy) with countries or regions of special importance, whether economic or geopolitical or both. One possible example – creating a genuine North American trade bloc capable of strengthening Mexico’s economy, society, and political system, and/or broader arrangements to enrich other close hemispheric neighbors whose problems often become America’s.

In fact, Mr. Trump’s trade speech sounds like it’s two dramatically different speeches stapled together – something like a famous address on U.S.-Soviet detente delivered by former President Jimmy Carter decades ago. Carter’s apparent refusal to make up his mind reinforced his image as a worrisomely confused leader. Unless President Trump understands that “to govern is to choose,” he could well suffer Carter’s one-term fate.

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

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

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

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

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

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

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

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

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

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

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

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

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

(What’s Left of) Our Economy: 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.