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

Tags

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

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

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

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

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

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

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

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

Tags

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

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

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

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

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

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

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

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

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

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

Tags

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

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

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

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

“They did not.”

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

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

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

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

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

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

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

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

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

Tags

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

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

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

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

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

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

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

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

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

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

Tags

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Tags

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

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

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

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

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

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

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

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

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

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

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

Tags

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(What’s Left of) Our Economy: Where America Has Literally Been Asleep at the Switch on Trade

Tags

Buy American, Canada, Commerce Department, European Union, free trade agreements, FTAs, government procurement, Government Procurement Agreement, GPA, Japan, Jeff Merkley, NAFTA, North American Free Trade Agreement, Norway, Politico, South Korea, Tammy Baldwin, Trade, Trump, Wilbur Ross, World Trade Organization, WTO, {What's Left of) Our Economy

Here’s a big, sincere shout-out to U.S. Senators Jeff Merkley (Oregon) and Tammy Baldwin (Illinois). Thanks to their insightful curiosity, Americans have just gotten evidence that their country’s trade policy is indeed as much of a disaster area as claimed by President Trump and other critics.

Their accomplishment? The two Democrats asked the Government Accountability Office (GAO) to look into how well Washington has been implementing a more than two-decade-old global trade agreement aimed at opening government procurement markets around the world. Also examined: the trade liberalization record of government procurement provisions of bilateral and regional trade agreements signed by the United States (like the North American Free Trade Agreement, or NAFTA).

The findings were released last month (and alertly reported by Politico‘s trade correspondents), and make clear that the United States has been getting royally shafted. Moreover, these results have been inevitable both because the global deal was so poorly conceived from an American standpoint, and because literally no one in the U.S. trade policy-making apparatus has been tracking the results of either the global agreement or the relevant sections of the narrower trade deals agreement affecting literally trillions of dollars worth of actual and potential sales.

Even worse, the blithe assumption that other signatory countries has been scrupulously abiding by all of these procurement agreements has sharply limited America’s willingness to expand and tighten the Buy American rules that cover its own official purchases – in the process, passing up major opportunities for growth and job creation at a time of economic weakness. And P.S. This includes President Trump.

The GPA is a “plurilateral” agreement negotiated under the auspices of the World Trade Organization. In other words, accession by WTO members is voluntary. Still, the deal, which went into effect in 1996, currently encompasses 47 countries that are now committed to placing foreign enterprises and their own domestic entities on an equal footing when they compete for government contracts. Nine other WTO members are in the process of signing on. Most of America’s bilateral and regional trade agreements also prohibit discrimination in awarding these opportunities for supplying governments with goods and services. Consequently, 19 other countries have promised the United States to open their official procurement markets to the United States in return for America opening its own to them. (All of these governments have carved out various agreed on exemptions. And sub-national governments are covered by these deals as well.)

With stakes this high, you’d think that at some point the U.S. government would display reasonably consistent interest during the multi-decade lives of these trade agreements in whether they’ve been paying off. But according to the GAO researchers, you’d be wrong.

Even though the GPA requires detailed, annual reporting of procurement statistics by signatory governments, the GAO’s

“review of data that the United States and next five largest GPA parties [the European Union, Japan, Canada, South Korea, and Norway] submitted to the WTO for 2008 through 2013 found that a number of parties did not submit the reports annually, the submitted reports did not include all required data, and each party’s reports included inconsistencies that limit the data’s comparability. Further, a lack of common understanding on definitions of key terms has led to inconsistent reporting practices among the GPA parties, and a GPA statistical working group has made little progress in addressing such challenges.”

Some specific failings:

>”although Canada submitted annual notifications with central government procurement data for 2008 through 2013, the notifications did not include data on procurement by subcentral governments or by other government entities”;

>”Japan’s annual notifications have not included procurement by entities such as utilities and state-owned enterprises that are covered by the GPA”:

>”South Korea has not submitted notifications for any year except 2010, and Japan has not submitted a notification for 2012 although it did so for other years through 2013.”

>”Of the U.S. FTAs [free trade agreements] we reviewed, only NAFTA requires its parties to report annual statistics on government procurement; however, the last data exchange between the three NAFTA parties took place in 2005. As a result, information about the extent to which U.S. FTA partner governments open procurement to U.S. suppliers is not available.” [Emphasis added.]

The United States has been far from a whiz in reporting, either. But its failings have been much less excusable given all the evidence provided by the GAO showing that it’s opened its procurement markets much wider than any other GPA or FTA signatory. Despite the above data limitations, the GAO nonetheless felt confident in concluding that for 2010, “[T]he United States reported more than twice as much GPA-covered government procurement as the next five largest GPA parties combined, although total U.S. government procurement is less than the combined total for the other five parties.”

In money terms, the value of contracts opened to non-discriminatory bidding by the United States at all levels of government was $837 billion. The value of contracts opened by those five non-U.S. GPA parties that promised to liberalize the most in absolute terms was some $381 billion. Yet total government procurement in the United States that year was some $1.7 trillion, the GAO estimates. For the other five GPA signatories, it was much larger – $4.4 trillion.

Moreover, because of the aforementioned reporting failures, it’s not possible at all for the U.S. government, or the American people, to gauge procurement liberalization under free trade agreements – with the exception of Canada. But when their procurement budgets are added in, and duplication eliminated (e.g., for Canada), the total market that should be available to American business and workers at least in principle is $4.4 trillion. 

The GAO doesn’t conclude that U.S. trade partners are simply capitalizing on Washington’s indifference to flout their treat obligations. In fact, in one instance, it even tries to get them partly off the hook: “Many EU member states, as well as Japan and South Korea, have actual government expenditures smaller than the United States’ and are therefore likely to have more smaller-value individual procurement contracts that fall below the GPA threshold levels.” (Decisions on the smallest government contracts typically are one of the main GPA and FTA procurement carve-outs.)

But if so many foreign government contracts are too small to be opened for non-discriminatory bidding, then obviously these trade deals are too poorly structured to give American producers anything remotely like reciprocity. And more important, Washington so far has had no way of knowing judging by any measures whether non-discrimination in principle is being translated into non-discrimination in fact .

As Mr. Trump’s Commerce Secretary, Wilbur Ross, recently noted, “There’s not a lot of point making trade deals if you don’t enforce them.” He could have added that such enforcement is impossible without seeking and obtaining reliable data on results. Donald Trump’s predecessors have flunked these two crucial tests of American trade policy-making. Until he gets strong evidence to the contrary, it’s time for the president to take the logical next step, assume that the GPA and the FTA government procurement measures have been serious mistakes, and ignore them as thoroughly as America’s competitors evidently have.

(What’s Left of) Our Economy: Why Trade’s Best Champions Really Need to Raise Their Game

Tags

Brad Setser, China, Council on Foreign Relations, Financial Times, George W. Bush, Global Imbalances, manufacturing, Martin Wolf, non-tariff barriers, offshoring, offshoring lobby, tariffs, Trade, Trump, World Trade Organization, WTO, {What's Left of) Our Economy

When you’ve been in the trade policy trenches as long as I have, it’s important these days to look up from time to time and pinch or otherwise remind yourself how dramatically Donald Trump’s election a president has changed the policy landscape. And I’m of course someone who broadly supports his stated objectives in this field.

Weirdly, however, folks who oppose Mr. Trump’s views keep showing that their need to wake up is even greater, and this goes double for backers of the general trade status quo intellectually honest enough to acknowledge many of its serious problems. The biggest adjustment they need to make? Demonstrating that they can develop approaches to solving these problems that are realistic alternatives to the tariff-centered measures that the president is apparently contemplating. Recent offerings from the Financial Times‘ Martin Wolf and the Council on Foreign Relations’ Brad Setser reveal how much more progress is needed.

In Wolf’s latest column, he heaps scorn on the Trump-ian claim that expanding trade with China (or with any country) has played a “significant” role in causing any of U.S. manufacturing’s problems. And he declares that “Nothing [President Trump] does will reinstate manufacturing to its lost role as the dominant provider of “good jobs”.

But Wolf continues to see a different – and arguably more important – danger stemming from preserving the global trade status quo:

“[H]uge current account surpluses in some countries forced deficit countries into financial excesses as an (ultimately unsustainable) way to maintain demand in line with potential output. The [2007-08 financial] crisis vindicated the concern of John Maynard Keynes about the potentially malign role of surplus countries in the global economy.”

So logically, Wolf is telling readers that if better balance doesn’t come to global trade, Financial Crisis 2.0 could easily result – echoing a warning made both by me and by many eminent economists.

What does he recommend to stave off such a catastrophe? A “proactive, not defensive” approach that includes a drive to “open global markets” (as if this hasn’t been tried before?) and – most interesting in light of his opposition to U.S. trade barriers – “forcing” chronic trade surplus countries like China “to rely more on domestic and less on external demand.” It’s somewhat encouraging that Wolf recognizes that the surplus countries (read “protectionists”) won’t take these steps voluntarily. But what could he possibly mean by “forcing” if no “defensive,” or even punitive, measures like tariffs are permissable? Maybe he’ll tell us in his next column?

The gap between diagnosis and prognosis is at least as wide in Setser’s January 18 post on “China’s WTO Entry, 15 Years On.” The essay is worth reading in its entirety, for it decimates the arguments made by the entire bipartisan U.S. globalization cheerleading policy establishment (not to mention the corporate Offshoring Lobby) about the unprecedented benefits that would flow from admitting China into the global trade rule-making and enforcement body – and thereby shielding it legally from most American unilateral economic power and leverage. Here, though, are a few key examples:

>”It now seems clear that the magnitude of the post-WTO China shock to manufacturing was significantly larger than was expected at the time of China’s entry into the WTO. China already had ‘most-favored-nation” (MFN)/“normal trade’ access to the U.S. Market….But China’s pre-WTO access to the U.S. came with an annual Congressional review, and the resulting uncertainty seems to have deterred some firms from moving production to China.”

>”Moving final assembly of electronic goods to Asia created pressures for the full supply chain [i.e., the much more valuable and innovative production of parts and components, as well as the research and development and engineering work] to move to Asia….Even if the currency issue is taken off the table, I suspect that the trade gains—or really the export gains— from integrating China into the WTO’s “rules” were overestimated.”

>“It is now clear that WTO accession was not enough to make China into an easy market for foreign firms to supply from outside China.

“Here is a point that I think should get a bit more emphasis. China’s imports of manufactures, net of its imports of imported components, peaked as a share of Chinese GDP in 2003—and have fallen steadily since then. There is no ‘WTO’ effect on China’s imports of manufactures, properly measured (i.e. leaving out imports for re-export).”

>”Some firms have succeeded in China, but generally by producing in China for the Chinese market, not by selling to China. Successful challenges to some specific Chinese practices in the WTO have yet to alter this pattern….The WTO rules aren’t all that constraining in a country like China—thanks to state control of commanding heights enterprises and banks, and institutions, such as the National Development and Reform Commission (NRDC), that assure party control of major state firms and large investment projects.”

>Many WTO-legal remedies that might have worked were not used “because U.S. and European firms benefited from making use of Chinese production to meet global demand” – and because George W. Bush’s administration danced to their tune.

But Setser’s policy recommendations seem no more realistic than Wolf’s, especially if significant, unilateral tariffs are ruled out:

“The correct fight right now is against the domestic policies that keep China’s savings so high, against a surge in capital outflows that leads to a yuan depreciation that then becomes entrenched (if China’s currency goes down, I worry it won’t go back up), and against Chinese import-substituting industrial policies that aim to displace major exports to China.”

In the pre-Trump period, the diagnosis-prognosis gap unaddressed by intellectually honest supporters of the trade status quo didn’t matter much, since American presidents were so determined to preserve that status quo. But this time, it seems to be different.  And if these trade advocates hope to prevent what they tend to describe as a counterproductive – and maybe worse – shift in American policy, they’ll need to do a much better job of showing that no major course change is needed at all.

(What’s Left of) Our Economy: White House Fakeonomics on Tariffs and the Poorest Americans

Tags

China, consumer spending, Council of Economic Advisers, incomes, Jobs, Labor Department, NAFTA, North American Free Trade Agreement, Obama, offshoring, poverty, tariffs, Trade, White House, World Trade Organization, WTO, {What's Left of) Our Economy

We’ve heard a lot lately about fake news. But President Obama’s outgoing Council of Economic Advisers (CEA) has just reminded us that at least as great a problem is fake policy analysis. For its new report emphasizing that tariffs are “an arbitrary and regressive tax” that hits low-income Americans especially hard glosses over and ignores completely the biggest trade-related income questions that any intellectually honest researcher would ask.

CEA argues that “tariffs – taxes on imported goods – likely impose a heavier burden on lower-income households, as these households generally spend more on traded goods as a share of expenditure/income and because of the higher level of tariffs placed on some key consumer goods.”

But here’s the main point it glosses over: The vast majority of spending by poorer Americans goes to goods and service that are lightly traded, at best. Indeed, the White House economists provide the first clues themselves. As they show (in the figure below), even though the tariff burden on after-tax income does rise as such income falls, the absolute levels are very low – a little over 1.50 percent of such income for the poorest 10 percent of households.

Figure 2 Tariff burden relative to after-tax income

And as the next figure reveals, when totally untraded mortgage, rent, and utilities are removed, both the tariff burden gap between the richest and poorest Americans, and the absolute tariff burden, shrink dramatically. The latter falls all the way down to less than 0.60 percent of the total income of the lowest 10 percent.

Figure 3 Tariff burden relative to expenditures excluding mortgage, rent, and utilities

Looking at what lower-income households actually spend explains these rock-bottom numbers. According to the same Labor Department consumption data set used by the CEA economists, households in the lowest decile on the American income scale are spending fully 42 percent of their income on housing (which is not at all traded internationally) and another 17 percent on food (which is mainly produced domestically). Another six-plus percent of these households’ economic intake goes to health care, five percent to education, and a bit over four percent to entertainment (also all wholly or largely un-traded).

Interestingly, another 14 percent of the lowest-income group’s expenditures goes to transportation. U.S. oil imports are (lightly) tariffed. But assuming most of the poorest Americans don’t own, lease, or rent their own vehicles, the impact on their finances is surely minimal.

Add these numbers up, and clearly America’s lowest-income consumers spend hardly anything on imported goods that are subject to tariffs.

Moreover, here’s what the CEA economists completely ignore: The last few decades’ worth of trade policies they implicitly endorse here have wreaked havoc on the employment – and therefore incomes – of many of these same lower-income households.

Just look at what’s happened to domestic payrolls in two industries that used to provide jobs for many Americans who have no doubt fallen way down the income ladder: furniture and apparel. According to Labor Department data, since the North American Free Trade Agreement (NAFTA) went into effect in 1994 and ushered in the current era of U.S. trade policy, employment is down by more than a third in the former and by nearly 85 percent in the latter. Moreover, import- and offshoring-related job losses have been especially steep since China entered the World Trade Organization at the end of 2001 – as widely cited scholarship has emphasized.

As NAFTA also triggered a heated debate on trade policy in the United States, critics started printing up and handing out garments reading “My job went overseas and all I got was this lousy T-shirt.” Obviously, these are gifts that someone should have mailed the White House economists who suggest that tariffs have delivered the main trade-related hit to America’s poorest.