Category Archives: international trade

Deal-maker Trump Can’t Deal

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(August 27, 2017) — Donald Trump has threatened new trade barriers against China while simultaneously depending on Beijing’s help to rein in North Korea’s alarming nuclear weapons program.   These two aspects of US policy toward China are at odds.

It feels inappropriate to write a column that treats the two issues on a par.  To state the obvious, the stakes are vastly higher in a potential US-North Korean military conflict, especially when it comes to the real danger that nuclear weapons will be used, but even if they are not.  But we need to consider the Chinese trade issues together with the Korean nuclear issues because the Trump White House does.  (Chief strategist Steve Bannon, for example, had the priorities reversed.  Just before he was fired he said that the Korea issue was a “side show” compared with the all-important “economic war with China.”)

It is hard to know if Trump sees the two issues as related.   Quite likely he imagines that he can use trade threats against China as “bargaining chips” to secure its help in dealing with its troublesome ally.  Regardless, he is on the wrong track.  The consequences of this mistake could be disastrous.

The usual defense of Trump’s unprecedented approach to governing is that he is “transactional,” a deal-maker who presumably has bargaining skills because he was a businessman.  Many speak of this transactional approach as if it is a relevant alternative to the traditional assumption that a president should have some regard for rules and principles, and some respect for international alliances and institutions that are favorable to the long-run interest of the US.   They speak of it as a matter of short-term tactics versus long-term strategy.   But there is a serious question whether Trump can pull off even short-term tactical successes.

Despite his career in the private sector, the President acts as if he were unfamiliar with some of the most elementary requirements for successful negotiation.  One principle of bargaining is to consider the game also from the other player’s viewpoint and to think of outcomes that both sides will have reason to view as favorable compared to the relevant alternatives.  Another principle is to build credibility with respect to threats and rewards, so that the other player will perceive a genuine choice of outcomes.

It is probably true that heightened Chinese pressure on Pyongyang up to and including a cut-off of oil supplies, would be the best hope of getting Kim Jung-un to agree to suspend his nuclear program in return for certain security assurances from the US.  But how can the US persuade China to take stronger steps?

Despite Trump’s hope that he can use trade with China as a “bargaining chip” to secure its help, erratic threats from the White House are not the way.  Chinese leaders in China have already learned that they need not take Trump threats seriously. In December, before taking office, Trump challenged the One China policy.  He evidently did not think ahead or take into account that China is more willing to go to war over Taiwan than is the US.  On February 9 he had to reverse himself.  He got nothing for his “bargaining chip” other than loss of face and a bad precedent for future threats.

Another example of a threat that Trump backed down on was his oft-repeated campaign promise that he would name China a currency-manipulator as soon as he took office.  This policy was foolish all along.  If Chinese authorities had agreed to US politicians’ demands that they stop intervening in the foreign exchange market during the period 2015-16, the result would have been a more competitive yuan, not a stronger one.   But regardless of whether there was any merit to the original charge, which Trump repeated as recently as April 2, 2017, he again lost face with the Chinese by suddenly reversing himself a week later.  By now Chinese President Xi Jinping, like most observers, has learned to discount warnings from Trump because they bear such a very low correlation with reality.

The White House is still pursuing aggressive trade policy actions against China.  The measures cover a range with respect to their merits.  An attempt to block steel imports by means of a national security exemption is farcical — flimsy on legal grounds and bad policy on economic grounds: excluding steel imports, if successful, would raise costs for the rest of US manufacturing.  Some other measures have more merit, such as attempts to enforce intellectual property rights.  (On August 18, the White House launched a formal inquiry into whether China is stealing intellectual property.)

But none of these trade initiatives would have much of a positive effect, if any, on the US trade balance, on US real income or employment. And, regardless of the merits, the penny-ante games they are playing on trade policy will not work in favor of enlisting Chinese help in dealing with their neighbor, but more likely will work against it.

In a follow-up column I will address the right way to deal with the North Korea problem.

[An earlier version of this column appeared at Project Syndicate: “Can Trump Deal with North Korea and China?” Comments can be posted there or at Econbrowser.]

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Year-End Perspectives on the US & Global Economies

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A year-end summing up of where we stand is harder than usual this time!

I have recently spoken:

  • on “Global Economic Challenges for Donald Trump,” (outline; slides: Ppt, pdf) on a panel at the American Enterprise Institute, Washington, DC, Dec. 5, 2016. Summary & video.
  • And on “An Economy That Works for All Americans” (slides: pptpdf)  to the Bipartisan Program for Newly Elected Members of Congress, Institute of Politics, December 7, 2016.
  • And  on “Trade and Inequality,” (slides: Ppt, pdf) at the  Providence Committee on Foreign Relations, Dec. 14, 2016.
  • The Chosun Daily now asks for five key factors for 2017.  Here is my response.
  1. Continued uncertainty over what US policies will come out of the new Trump Administration.
    Reason: we don’t know what he will propose, because he has said so many contradictory things, and we don’t know how much resistance he will face in the Congress.
  2. Strong dollar and widening US trade deficits
    Reason: Rising US interest rates will continue to make dollar assets more attractive to global investors than other countries’ assets. A new monetary-fiscal policy mix, reminiscent of the early 1980s, underlies these trends.
  3. Difficulties in some Emerging Market countries, especially those dependent on commodity exports and/or with debts denominated in dollars.
    Reason: their debt service ratios will worsen, because their debt service obligations arl going up while their dollar export receipts are going down.
  4. China forced to choose between halting the depreciation of the RMB, on the one hand, versus further internationalization of the currency on the other hand.
    Reason:  Controls on capital outflows could be used to slow down the fundamentals-driven depreciation, but imply suspending the RMB internationalization project for the time being.
  5. The possible end of a 70-year period of US-led global progress toward a liberal international order. 
    Reasons:  Global trade has stopped rising as a share of global GDP since 2008.  One factor is that we have had no important successful new trade deals.  Now the incoming US President appears explicitly to reject the very ideas of globalization, liberal values, and US leadership.  Analogous nationalistic political forces have risen in other countries too, as shown by Brexit.
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Brexit, Trump, and Workers Left Behind

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Observers have pointed out many parallels between the June referendum on Brexit in the United Kingdom and Donald Trump’s presidential campaign in the US.  One parallel is that both the British movement to leave the EU and the Trump campaign for the American Republican nomination achieved success that few had expected, particularly not the various elites.  In both cases, the general interpretation is that the elites underestimated the anger of working class voters who feel they have been left behind by economic forces in a fast-changing world, and in particular by globalization.

Another parallel is the centrality to both campaigns of promises that are close to logically impossible, and the consequent inevitability with which supporters will feel betrayed when the promises do not come true.  In the United Kingdom, one of the promises that cannot be kept is that if Britain left the EU it could somehow still keep the same trade access to its members, while yet reducing immigration by curtailing free mobility of persons.  Another promise that cannot be kept is that the £350 million ($465 million) supposedly sent to the EU each week would be reallocated to the cash-strapped National Health Service.  On my side of the Atlantic, Trump says that he will bring back the manufacturing jobs that have disappeared. Secondly, as most Republican candidates do, he promises to enact big tax cuts while simultaneously reducing the budget deficit or even the national debt.

It is true that, for some years, most national income gains have been going to those at the very top, with many workers having fallen behind.  Apparently this inequality and globalization, and the perceived connection between the two, play a large role in the anger among many workers that we see in the Brexit and Trump campaigns.  It is far from clear that either trade or migration is in fact among the top reasons for widening inequality. But that is the way many see it.

It is certainly true that globalization produces both winners and losers.  How can the concerns of angry workers be addressed?

A fundamental proposition in economics holds that when individuals are free to engage in trade, the size of the economic pie increases enough that the winners could in theory compensate the losers, in which case everyone would be better off. Formally it is a case of what economists call the Second Fundamental Welfare Theorem.   (The proposition requires that there be no market failures like monopolies or pollution externalities.)

Skeptics of globalization may understand this theorem and yet, quite reasonably, point out that the compensation in practice tends to remain hypothetical.   Some of the skeptics suggest that we should recognize political reality, take the failure to compensate losers as given, and so work on trying to slow down or roll back globalization.   But an alternative would be the reverse strategy: to take globalization as given and instead work on trying to help those who are in danger of being left behind.

The second strategy is the sensible one, not the first.  For one thing, it would be difficult to roll back globalization even if we wanted to.  Presumably the policies would include attempting to renegotiate NAFTA or TPP (or, for Britain, the EU), or dropping out of the World Trade Organization, or else unilaterally imposing tariffs and quotas even though they violate existing international agreements.  Even leaving aside the negative effects of trade wars on economic growth, anything that a president does would be very unlikely to bring trade back down to the levels of 50 years ago, and still less likely to bring the number of steel jobs back up to the levels of 50 years ago.   Globalization is a reality.

That we can’t turn back the clock on globalization is understood fairly widely.  But a second point is less often made.  In the context of US presidential elections, the choice between the two parties is less a referendum on globalization than it is a choice whether to adopt the specific policies that would help those who are in danger of being left behind.   Much is new and different in the 2016 election, but not that.

Policies to help those who are left behind [or, in clinical theoretical terms, to compensate the losers] are precisely where the two parties disagree.  They most effective measures, as I see it, are ones that Hillary Clinton and Barack Obama, like his predecessors, try to push and that the Republicans try to block.

The main program to help specifically those who have lost their jobs due to trade is Trade Adjustment Assistance.  But why help only the small number of workers who have identifiably lost their jobs due to trade agreements?  Wouldn’t it be better to help those who have been left behind regardless if the cause is trade, technology, or something else?  Sensible policies to do that include wage insurance, an expanded Earned Income Tax Credit and universal health insurance, among others.  Also: a more progressive payroll tax structure, universal quality pre-school, and infrastructure investment spending.  These are all policies favored by Democrats.  Most have been opposed by Republicans. [Still, one hopes that even if a second President Clinton once again had to deal with a Republican Congress, the two might be able to find common ground in the EITC and infrastructure investment.]

Not long ago, it was possible to admire the sort of political equilibrium achieved by the British electoral system.  The two largest parties tended to be led by relatively competent and consistent leaders who represented relatively well-demarcated stances on the issues: right-of-center in the case of the Conservatives and left-of-center on the part of Labor.  Voters could make their choices based on the policy issues.  Under a parliamentary system, the victorious prime minister could work to carry out the policies that he or she had campaigned on.  It compared favorably to the ever-worsening gridlock of the American system, where presidential initiatives could and would be blocked by congressmen from the opposite party, even when the initiatives were consistent with philosophies that they themselves had espoused in the past.

To state the obvious, the British system has broken down.   Some of those competent leaders eventually made fatefully ill-advised decisions: Margaret Thatcher’s poll tax, Tony Blair’s support for the US invasion of Iraq, and David Cameron’s decision to hold the Brexit referendum. What is now left is a mess.  It is hard to discern much clarity or consistency in the new crop of English politicians.  When the next election is eventually held, the voters could well be asked to choose between parties that do not correspond in any clear way to the relevant policy decisions that Britain must make, mainly whether to seek to negotiate a relatively close association with the EU or to cut off completely.

In some familiar ways the American political system has also deteriorated in this election cycle, bringing past trends to a reductio ad absurdum.  But the American political situation at the moment has an advantage that the Brits lack: ability for voters to choose what is to be the national policy orientation. The Democrats still favor policies like wage insurance and universal health insurance and the Republicans still oppose them. So American voters in 2016 are still able to make the relevant choice, either for or against policies that deal with the reality of globalization by helping those who are left behind.

[This is an extended version of a column that appeared at Project Syndicate, July 14, 2016. Comments can be posted there or at Econbrowser.]

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