Our So-Called Foreign Policy: Evidence that the Multinationals Really Did Sell the U.S. Out to China

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capital spending, chemicals, China, computers, electronics, health security, healthcare goods, information technology, investment, Lenin, manufacturing, multinational companies, national security, offshoring, offshoring lobby, Our So-Called Foreign Policy, pharmaceuticals, research and development, supply chains, tech, tech transfer, U.S-China Economic and Security Review Commission, USCC, World Trade Organization, WTO

RealityChek readers and anyone who’s familiar with my work over many years know that I’ve often lambasted U.S. multinational companies for powerfully aiding and abetting China’s rise to the status of economic great power status – and of surging threat to U.S. national security and prosperity. In fact, the dangers posed by China’s activities and goals have become so obvious that even the American political and policy establishments that on the whole actively supported the policies – and that permitted money from this corporate Offshoring Lobby to drive their decisions – are paying attention.

If you still doubt how these big U.S. corporations have sold China much of the rope with which it’s determined to hang their own companies and all of America (paraphrasing Lenin’s vivid supposed description of and prediction about the perilously shortsighted greed of capitalists), you should check out the latest report of the U.S-China Economic and Security Review Commission (USCC). As made clear by this study from an organization set up by Congress to monitor the China threat, not only have the multinationals’ investments in China figured “prominently in China’s national development ambitions.” They also “may indirectly erode the United States’ domestic industrial competitiveness and technological leadership relative to China.”

Worst of all, “as U.S. MNE (“multinational enterprise) activity in China increasingly focuses on the production of high-end technologies, the risk that U.S. firms are unwittingly enabling China to achieve its industrial policy and military development objectives rises.”

And a special bonus – these companies’ offshoring has greatly increased America’s dependence on China for supplies of crucial healthcare goods.

Here’s just a sampling of the evidence presented (and taken directly by the Commission from U.S. government reports):

> U.S. multinationals “employ more people in China than in any other country outside of the United States, primarily in the assembly of computers and electronic products.” Moreover, this employment skyrocketed by 574.6 percent from 2000 to 2017.

> “China is the fourth-largest destination for U.S. MNE research and development (R&D) expenditure and increasingly competes with advanced economies in serving as a key research hub for U.S. MNEs. The growth of U.S. MNE R&D expenditure in China is also comparatively accelerated, averaging 13.6 percent yearon-year since 2003 compared with 7.1 percent for all U.S. MNE foreign affiliates in the same period. This expenditure is highest in manufacturing, particularly in the production of computers and electronic products.”

> “U.S. MNE capital expenditure in China has focused on the creation of production sites for technology products. This development is aided by the Chinese government’s extensive policy support to develop China.”

> The multinationals’ capital spending on semiconductor manufacturing assets “has jumped 166.7 percent from $1.2 billion in 2010 (the earliest year for which complete [U.S government] data is available) to $3.2 billion in 2017, accounting for 90 percent of all U.S. MNE expenditure on computers and electronic products manufacturing assets in China.”

> “China has grown from the 20th-highest source of U.S. MNE affiliate value added in 2000 ($5.5 billion) to the fifth highest in 2017 ($71.5 billion), driven primarily by the manufacture of computers and electronic products as well as chemicals. The surge is especially notable in semiconductors and other electronic components.”

> “[P]harmaceutical manufacturing serves as the largest chemical sector in terms of value-added [a measure of manufacturing output that seeks to eliminate double-counting of output by stripping out the contribution of intermediate goods used in final products]…” And chemicals – the manufacturing category that include pharmaceuticals – has become the second largest U.S-owned industry in China measured by the value of its assets (after computers and electronic products).

Incidentally, the report’s tendency to use 2000 as a baseline year for examining trends is no accident. That’s the year before China was admitted into the World Trade Organization (WTO) – and the numbers strongly reenforce the argument that the multinationals so avidly sought this objective in order to make sure that the value of their huge planned investments in China wouldn’t be kneecapped by any unilateral U.S. tariffs on imports from China (including those from their factories). For the WTO’s combination of consensus decision-making plus the protectionist natures of most of its members’ economies created a towering obstacle to Washington acting on its own to safeguard legitimate American domestic economic interests from Chinese and other foreign predatory trade and broader economic activity.

At the same time, despite the WTO’s key role in preserving the value of the multinationals’ export-focused China investments, the USCC study underestimates how notably such investment remains geared toward exporting, including to the United States. This issue matters greatly because chances are high that this kind of investment (in China or anywhere else abroad) has replaced the multinationals’ factories and workers in the United States. By contrast, multinational investment in China (or anywhere else abroad) that’s supplying the China market almost never harms the U.S. domestic economy and in fact can help it, certainly in early stages, by providing foreign customers that add to the domestic customers of U.S.-based manufacturers.

There’s no doubt that the phenomenal growth of China’s own consumer class in recent decades has, as the China Commission report observes, generated more and more American business decisions to supply those customers from China. In other words, the days when critical masses of Chinese couldn’t possibly afford to buy the goods they made in U.S.- and other foreign-owned factories are long gone.

But the data presented by the USCC does nothing to support this claim, and the key to understanding why is the central role played by computer, electronics, and other information technology-related manufacturing in the U.S. corporate presence in China. For when the Commission (and others) report that large shares of the output of these factories are now sold to Chinese customers, they overlook the fact that many of these other customers are their fellow entities comprising links of China-centric corporate supply chains. These sales, however, don’t mean that the final customers for these products are located in China.

In other words, when a facility in China that, for example, performs final assembly activities on semiconductors sells those chips to another factory in China that sticks them into computers or cell phones or HDTV sets, the sale is regarded as one made to a Chinese customer. But that customer in turn surely sells much of its own production overseas. As the USCC documents, China’s consumer market for these goods has grown tremendously, too. But China’s continually surging share of total global production of these electronics products (also documented in the Commission report) indicates that lots of this output continues to be sold overseas.

Also overlooked by the USCC – two other disturbing apects of the multinationals’ activities in China.

First, it fails to mention that all the computer and electronics-related investment in China – which presumably includes a great deal of software-related investment – has contributed to China’s economic and military ambitions not only by transferring knowhow to Chinese partners, but by teaching huge numbers of Chinese science and technology workers how to generate their technology advances. The companies’ own (often glowing) descriptions of these training activities – which have often taken the form of dedicated training programs and academies – were revealed in this 2013 article of mine.

Second, the Commission’s report doesn’t seem to include U.S. multinationals’ growing investments not simply in high tech facilities in China that they partly or wholly own, but in Chinese-owned entities. As I’ve reported here on RealityChek, these capital flows are helping China develop and produce high tech goods with numerous critical defense-related applications, and the scale has grown so large that some elements of the U.S. national security community had been taking notice as early as 2015. And President Trump seems to be just as oblivious to these investments as globalist former President Barack Obama was.

These criticisms aside, though, the USCC has performed a major public service with this survey of the multinationals’ China activities. It should be must reading in particular for anyone who still believes that these companies – whose China operations have so greatly enriched and therefore strengthened the People’s Republic at America’s expense – deserve much influence over the U.S. China policy debate going forward.

Im-Politic: A World Trade Organization Pull-Out Proposal that Falls Sadly Short

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America First, CCP Virus, China, conservartives, coronavirus, COVID 19, export bans, GATT, General Agreement on Tariffs and Trade, health security, Im-Politic, Josh Hawley, Marco Rubio, national treatment, nationalism, non-discrimination, Populism, protectionism, reciprocity, Republicans, rules-based trade, sovereignty, Trade, unilateralism, World Trade Organization, WTO, Wuhan virus

I can barely describe how much I wanted to like Missouri Republican Senator Josh Hawley’s May 6 op-ed piece in The New York Times calling for a U.S. withdrawal from the World Trade Organization (WTO). That’s why I can also barely describe the growing disappointment I felt as I read through it.  At best, it deserves only an “A for effort” grade.

First, let’s give Hawley (considerable) credit where it’s due. As I’ve been arguing since it went into business at the start of 1995, and in fact was predicting during the national debate preceding Congress’ approval of the idea the fall before, the WTO has gravely harmed crucial American economic interests. (This recent post briefy summarizes my views.)

Let’s also give The Times op-ed page credit for running an article that’s even more strongly opposed to the pre-Trump U.S. trade policy status quo than President Trump has been – because although he’s approved policies that have thrown the WTO’s future into doubt, he’s never explicitly called for a pull-out, and in fact his administration has portrayed these measures as vital steps toward WTO reform.

Hawley, moreover, articulates many powerful indictments of the WTO’s failure to defend or advance U.S. interests satisfactorily – notably, the cover it’s given to China and other protectionist economies. 

Unfortunately, Hawley’s anti-WTO case and recommendations for going forward are fundamentally basedsed on two big misunderstandings. The first is that the pre-WTO global trading order set up by the United States was based on reciprocity, and therefore adequately safeguarded the interests of American workers. Absolutely not. In fact, the concept of reciprocity – holding that a country has no obligation to reduce its trade barriers any more than those of its partners – was explicitly rejected by the pre-WTO rules, which were known collectively as the General Agreement on Tariffs and Trade (GATT).

Instead, this global trade regime was based on two principles that actually entitled protectionist countries to maintain higher trade and related economic barriers than those of freer trading countries. The first was called non-discrimination. It simply urged all member countries to treat all other countries the same trade-wise. So if, say, Japan largely closed its markets to one country, all it needed to do to satisfy GATT rules was to treat other countries just as badly.

The second core GATT principle was called national treatment. Under its terms, member countries agreed to treat foreign-owned companies the same as their own companies. So if, say, a country like (again) Japan, which was is still known for fostering cartel-like arrangements that favored some of its own companies over others wanted to discriminate against whatever foreign companies it wished, that was OK according to the WTO.

Some limited exceptions were permitted to both principles. But they explain in a nutshell why Japan’s trade predation (among others’) inflicted so much damage on U.S.-based manufacturing during the WTO period, and why its own economy (among others’) remained so hermetically sealed throughout.

The GATT’s only saving grace – as I just tried to hint by using terms like “urged” and “agreed”  – was that its rules were essentially unenforceable. All told, though, it’s a lousy model for post-WTO U.S. trade policy.

The WTO has featured a strong enforcement mechanism, which is why Hawley (and other critics, like me) have rightly argued that the organization has eroded U.S. national sovereignty. But at the same time, Hawley wants to replace it with “new arrangements and new rules, in concert with other free nations, to restore America’s economic sovereignty and allow this country to practice again the capitalism that made it strong.”

If the rules are for all intents and purposes voluntary, as with the GATT, then fine – although the question then arises of why the rules are needed in the first place. And the question becomes particularly pointed when it comes to the United States, whose longstanding role as the world’s importer of last resort has long given it more than enough unilateral leverage to create all by itself whatever terms of trade it wishes with any trade partner.

At the same time, this business about creating new arrangements with “other free nations” reveals a second major flaw in Hawley’s argument: a belief that there are lots of other countries out there that agree with the United States on defining what is and isn’t acceptable in international trade and commerce. That kind of consensus is a sine qua non of any rules-based system. In fact, it needs to predate the formal creation of that system. The existence of the system itself can’t summon it into existence – unless one or a group of members can force holdouts to accept the consensus, which brings us back to the question of why countries with those capabilities need a system in the first place.

But if anyone really believed in the required preexisting consensus before the CCP Virus struck, their conviction should lay in smoking ruins now. Because as of March 21, no fewer than 54 countries worldwide had been imposing export curbs of some kind on medical supplies, and the same think tank that compiled this data reported that, as of early April, that number had risen to 70. And their ranks included many U.S. allies. So it should be obvious that, when major chips are down, global trade becomes more of a free-for-all than ever.

Hawley has been among those leading U.S. conservatives and Republicans who are trying to develop a nationalist and populist approach to both domestic and international U.S. policy-making that can survive President Trump’s departure from the White House. (Another has been Florida Republican Senator Marco Rubio.) And I’ve been very impressed by much of their work so far.

But if they’re genuinely concerned about transforming U.S. trade policy, they’ll recognize the need not only to pull the United States out of the WTO, but to replace that organization with a unilateral strategy incorporating the street smarts and the flexibility to free up America to handle its trade policy needs on its own. If others want to sign on and accept U.S. rules and unilateral enforcement, so much the better. But that kind of “America First” arrangement is the only kind of international regime that can adequately serve the national interest.

Im-Politic: Biden’s Massive China Fakery

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2020 election, Biden, CCP Virus, CDC, Centers for Disease Control and Prevention, China, China trade deal, coronavirus, COVID 19, currency, currency manipulation, Hunter Biden, Im-Politic, Joe Biden, Obama, Trade, travel ban, WHO, World Health Organization, World Trade Organization, WTO, Wuhan virus, xenophobia

Imagine the gall that would’ve been required had Republican nominee Mitt Romney campaigned for President in 2012 by blaming incumbent Barack Obama for the financial crisis and Great Recession of 2007-09. Not only did these economic disasters erupt well before Obama took office, but the White House at that time had been held for eight years by the GOP. (The Democrats did win control of the House and Senate in the 2006 midterm elections, but still….) 

Multiply that gall many times over and you get this year’s presumptive Democratic candidate for President, Joe Biden, charging that Donald Trump is largely responsible for the devastating hit the nation is taking from the CCP Virus because Mr. Trump has been too soft on China. The Biden claims are much more contemptible because whereas Romney played no role in bringing on the Wall Street meltdown and subsequent near-depression, Biden has long supported many of the China policies that have both greatly enriched and militarily strengthened the People’s Republic, and sent key links in America’s supply chains for producing vital healthcare-related goods offshore – including to a China that has threatened the United States with healthcare supplies blackmail.

The Biden campaign’s most comprehensive indictment of President Trump’s China and CCP Virus policies was made in this release, titled “Trump Rolled Over for China.” Its core claim:

“We’d say Trump is weak on China, but that’s an understatement. Trump rolled over in a way that has been catastrophic for our country. He did nothing for months because he put himself and his political fortunes first. He refused to push China on its coronavirus response and delayed taking action to mitigate the crisis in an effort not to upset Beijing and secure a limited trade deal that has largely gone unfulfilled.”

More specifically, the Biden organization claims that even long before the pandemic broke out, Mr. Trump has “never followed through” on his 2016 campaign’s “big promises about being tough on China” and simply conducted “reckless trade policies that pushed farmers and manufacturers to the brink” before he was “forced to make concessions to China without making any progress toward a level playing field for American industry.”

I’d say “the mind reels” but that phrase doesn’t begin to capture the mendacity at work here. Not to mention the sheer incompetence. After all, the trade deal was signed on January 15. It was only two weeks before that China told the World Health Organization (WHO) that an unknown illness had appeared in Wuhan. On January 3, China officially notified the U.S. government. It was only the day before the trade deal signing that WHO broadcast to the world China’s claim (later exposed as disastrously erroneous – at best) that no evidence of person-to-person transmission had been found. It wasn’t until the very day of the deal signing that the individual who became the first known American virus case left Wuhan and arrived in the United States. It wasn’t until January 21 that the U.S. Centers for Disease Control and Prevention (CDC) confirmed him as the first American victim.  (See this timeline for specifics.)

So evidently the Biden folks don’t know how to read a calendar.

Meanwhile, in early January, The New York Times has reported, CDC offered to send a team of its specialists to China to observe conditions and offer assistance. China never replied. On January 7, four days after Washington received its first CCP Virus notification, but two weeks before it identified the first U.S. virus case, the CDC began planning for tests. We now know that it bungled this challenge badly.

But did Trump coddle China in order to keep Beijing from terminating the agreement? Surely Biden’s team isn’t calling that failure an effort to appease China. It’s also true that on February 7, the Trump administration announced its readiness to provide Beijing with $100 million worth of anti-virus aid to China (and other countries), and had just sent nearly 18 tons of medical supplies (including protective gear) to help the People’s Republic combat the pandemic. But is the Biden campaign condemning these actions? From its indictment, it’s clear that its focus instead is on the numerous Trump statements praising China’s anti-virus performance and transparency, and reassuring the American public that the situation was under control.

Where, however, is the evidence that these remarks amounted to the President treating China with kid gloves, and stemmed from desperation to save the trade deal? Just as important, here we come to a fundamental incoherence in Biden’s treatment of the agreement – descriptions that are so flatly contradictory that they reek of flailing. After all, on the one hand, the Phase One agreement is dismissed as a fake that fails to safeguard American trade and broader economic interests adequately. On the other, it assumes that China has been eager from the start to call the whole thing off. Yet if Phase One had accomplished so little from the U.S. standpoint, wouldn’t Beijing actually have been focused on sustaining this charade?

But even if the Biden read on trade deal politics is correct, how to explain the January 31 Trump announcement of major restrictions on inbound travel from China that went into effect February 2? Clearly China didn’t like it. Or were these reactions part of a secret plot between the American and Chinese Presidents to snow their respective publics and indeed the entire world?

How, moreover, to explain such Trump administration policies as the continuing crackdown on Chinese telecommunications giant Huawei, and its effort to kick out of the U.S. market  Chinese services provider China Telecom? Or the ongoing intensification of the Justice Department’s campaign against Chinese espionage efforts centered on U.S. college and university campuses? Or yesterday’s administration announcement that although some payments of U.S. tariffs on imports would be deferred in order to help hard-pressed American retailers survive the CCP Virus-induced national economic shutdown, the steep tariffs on literally hundreds of billions of dollars’ worth of prospective imports from China would remain firmly in place?

In addition, all these measures of course put the lie to another central Biden claim – that Mr. Trump is not only soft on China today, but has been soft since his inauguration. A bigger goof – or whopper – can scarcely be imagined.

Unless it’s the companion Biden insistence that the Trump trade wars have devastated American agriculture and manufacturing? When, as documented painstakingly here, U.S. farm prices began diving into the dumps well before the Trump 2016 victory (when Biden himself was second-in-command in America)? When manufacturing, as documented equally painstakingly, went through the mildest recession conceivable, when its output was clearly hobbled by Boeing’s completely un-tradewar-related safety woes), and when every indication during the pre-virus weeks pointed to rebound? When the raging inflation widely predicted to stem from the tariffs has been absolutely nowhere in sight?

Which leaves the biggest lies of all: The claim that Biden is being tough on China now – the promise that he’ll “hold China accountable,” and the implication that he’s always been far-sighted and hard-headed in dealing with Beijing

According to the campaign’s Trump indictment, the former Vice President “publicly warned Trump in February not to take China’s word” on its anti-virus efforts. But this Biden warning didn’t come until February 26. As to making China pay, the campaign offers zero specifics – and given Biden’s staunch opposition to Mr. Trump’s tariffs (and silence on the other, major elements of the Trump approach to China) it’s legitimate to ask what on earth he’s talking about. In addition, Biden insinuated that the Trump curbs on travel from China were “xenophobia” the very day they were announced – before pushback prompted him to endorse them.

Finally, the Biden China record has been dreadful by any real-world standards. In the words of this analysis from the Cato Institute, “he voted consistently to maintain normal trade relations with China, including permanent NTR in 2000” – meaning that he favored the disastrous decision to admit China into the World Trade Organization (WTO), which gave Beijing invaluable protection against unilateral U.S. efforts to combat its pervasive trade predation. He did apparently vote once for sanctions to punish China for its currency manipulation (which has artificially under-priced goods made in China and thereby given them government-created advantages against any competition), but many such Senate trade votes were purely for show. (I apologize for not being able to find the specific reference, and will nail down the matter in an addendum and post as soon as possible.)  

Revealingly, once he was in the Obama administration, he failed to lift a finger to continue the battle against this Chinese exchange-rate protectionism, and served as the President’s “leading pitchman” for the Trans-Pacific Partnership, whose provisions would have handed China many of the benefits of membership without imposing any of the obligations. More generally, there’s no evidence of any Biden words or actions opposing an Obama strategy that greatly enriched the People’s Republic, and therefore supercharged its military potential and actual power. 

For good measure, despite constant bragging that his personal contact with numerous foreign leaders during his Senate and Vice Presidential years, he completely misjudged Xi Jinping, writing in a 2011 article that the Chinese dictator (then heir apparent to the top job in Beijing) “agrees” that “we have a stake in each other’s success” and that “On issues from global security to global economic growth, we share common challenges and responsibilities — and we have incentives to work together.”

There clearly are many valid reasons to support Biden’s Presidential bid.  But if China’s rise and its implications worry you (as they should), then the former Vice President’s record of dealing with Beijing just as clearly shouldn’t be one of them. 

(What’s Left of) Our Economy: How Pre-Trump Trade Policies Devastated U.S. Protective Gear Capacity

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apparel, CCP Virus, China, coronavirus, COVID 19, Fed, Federal Reserve, free trade, garments, health security, manufacturing, manufacturing capacity, NAFTA, non-durable goods, North American Free Trade Agreement, offshoring, textiles, Trade, Trump, World Trade Organization, WTO, Wuhan virus, {What's Left of) Our Economy

Recently I put up a post expressing gratitude that, despite their best efforts, pre-Trump U.S. trade policies didn’t manage to send the entire U.S. textile and apparel industries offshore. After all, companies in these sectors are the companies with the greatest expertise and capabilities in making all the personal protective equipment (PPE) crucial in the anti-CCP Virus fight.

Of course, the nation is therefore reliant for these and other medical products on countries, like China, which have responded to the emergency at various times with export bans. And in the case of pandemic-prone China, much production of all kinds was shut down temporarily because of the original virus outbreak.

Thanks to the release of the latest Federal Reserve industrial production data, it’s possible to quantify the damage done to these vital industries in ways other than the output figures I presented in that previous offering. That’s because the Fed’s monthly releases report in detail not only on increases or decreases in after-inflation output for manufacturing (and related) sectors. They also report the monthly changes in industrial capacity – the resources and facilities available to turn out various goods.

The results through last month are below. They use as baselines the month the North American Free Trade Agreement (NAFTA – which has now been turned into the U.S.-Mexico-Canada Agreement) went into effect, and the month that China entered the World Trade Organization (WTO). NAFTA’s January, 1994 onset signaled to many the transformation of U.S. trade policy into U.S. offshoring policy (see my book, The Race to the Bottom, for this argument). The January, 2002 beginning of China’s WTO membership gave the People’s Republic  overall, and its even-then-immense textile and especially apparel sectors, invaluable protection against American responses to its various forms of trade predation. (Limited safeguards versus “market-disrupting” surges in imports from China were written into the WTO agreement.)

For comparison’s sake, the industrial capacity changes for non-durable goods manufacturing (the super-sector into which textiles and apparel are grouped), and total manufacturing are provided as well:

                                                       Since NAFTA onset    Since China WTO entry

Textiles:                                              -37.05 percent              -44.05 percent

Apparel & leather goods:                   -81.97 percent              -77.18 percent

Non-durables manufacturing:           +17.06 percent                -2.23 percent

Total manufacturing:                         +75.54 percent             +10.78 percent

Clearly, the decimation of apparel capacity sticks out prominently. But although the more capital-intensive textiles industry didn’t suffer nearly as much, it fared much worse than either manufacturing in toto or the non-durables sectors overall. That’s largely because as the apparel industry disappeared, so did a prime domestic customer for textiles producers.

It’s also obvious for all these categories that although NAFTA was, to say the least, hardly a bonanza, the big trade-related damage was done by China’s WTO entry. Afterward that event has been when the shrinkage of textiles capacity accelerated, when the vast majority of the post-NAFTA apparel damage was done, when non-durables capacity gains shifted into reverse, and when total manufacturing capacity growth slowed to a crawl.

Calls are now abounding for remedies to the resulting shortages – like greater stockpiling and various tax and subsidy incentives for reshoring at least some of this production. But material in stockpiles can decay if unused too long, and companies would be foolish to spend heavily on new U.S. factories if they still face the likelihood of being subsidized and dumped out of existence by predatory foreign trade policies. As a result, there’s no substitute for stiff tariffs, and a credible national resolve to keep them in place, for ensuring that America’s health security never becomes so degraded again.

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

Tags

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tags

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

Tags

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

Tags

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

Tags

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.