A note from the East Asia Forum in Australia caught my attention over the weekend. It urged the importance of confronting the Asian Century. The notion of Asian dominance of the twenty first century and of concurrent and consequent American decline has recently become a favorite theme of the global commentariat.
In this telling, the combined GDP of all the Asian countries which already totals about 40 percent of the global total will quickly grow to more than 50 percent while the U.S. GDP will decline relatively from about 20 percent of global GDP today to maybe 15 percent in five to ten years. From these statistics it is inferred that a great power shift will occur to which the United States must adjust and to which it will in all likelihood have great difficulty adjusting.
At first glance, the argument appears plausible and even convincing. But when one asks exactly what is meant by Asian GDP or Asian Century, the flaws quickly appear. It is, in fact, nothing more than an agglomeration of numbers. To speak of the Asian Century or the Asian economy is to suggest some degree of unity and commonality among the Asian countries and economies. But this is simply not the case. With China and Japan at close to the point of war over the Senkaku Islands and Japan and South Korea unable to share intelligence information because of disputes over which holds sovereignty over the Takashima Islands and India and China still trying to make peace over disputed territory in the Himalayas, does anyone believe there is unity or commonality among the Asians? This is not to mention the conflicting claims of the Chinese, Taiwanese, Philippines, Vietnam, Malaysia, and Indonesia over the South China Sea.
Combining the economies of India, China, and Japan automatically yields a total GDP that is a large percentage of the global economy -- not least because it also equals nearly half of the global population. But it's a meaningless combination. India, China, and Japan are not now and will not in the future be governed by any overarching authority and are very unlikely even to be allies in a loose sense. Moreover, Japan's is not a burgeoning economy that suggests the power and glory of an Asian century. Rather, It is in what may very well turn out to be a disastrous decline. Yet to reach a big combined Asian GDP number to justify talk of an Asian Century, Japan must be included despite the fact that it is by no means a rising power.
Or consider the other side of the equation. The United States alone accounts for only about 20 percent of today's Global GDP calculated at purchasing power parity (PPP). But the combined economies of the United States and the EU now equal about 42-23 percent of global GDP. Add to that the GDPs of Canada, Mexico, and the countries of South America and you get over 50 percent. This is not to speak of Russia or Africa or the Middle East. So just on the numbers, even if the fast growth Asian economies continue their rapid growth (and all of them are now slowing down), if we subtract Japan from the total Asian number, it doesn't reach 50 percent. Thus, the notion of a dramatic shift from the west to Asia appears a bit exaggerated.
Most of what is going on is journalistic hype. There will be no need to come to terms with an Asian Century. There may well be a need to come to terms with China. It is unlikely that there will be any need to come to terms with India or Japan or Korea or Singapore. This is because the issue is not really a pan- Asian Century or entity or movement of some kind. The issue is much more the nature of the systems behind the economy. The democratic systems of India, Japan, and most of the rest of Asia are not a challenge to any except by example to competing authoritarian systems.
Some argue that there is, in fact, great interdependence among the Asian economies that does, indeed, combine them into a significant united entity. But here too there is less than meets the eye. The great global supply chains of which many of the Asian countries are a part mostly do not end in Asia. Rather they supply primarily the U.S. and EU markets. So any Asian unity that exists depends heavily on the primacy of western consumption.
Does that sound like an Asian Century that must urgently be confronted?
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Two important articles over the weekend and a recent speech raise serious concern by commentators with impeccable establishment credentials about the fundamental assumptions of American policy on China.
The announcement that China's Shanghui International is acquiring America's venerable ham and pork producer Smithfield Foods in a $4.7 billion deal sparked a very thoughtful and insightful response in Saturday's Washington Post by long time free trade champion and Carter administration undersecretary of commerce for international trade, Bob Herzstein. Then Sunday's New York Times featured an article on China's Economic Empire by Heriberto Araujo and Juan Pablo Cardenal, authors of China's Silent Army: The Pioneers, Traders, Fixers, and Workers Who Are Remaking The World in Beijing's Image. These followed a speech two weeks ago by founder and retired Director of the Peterson Institute for International Fred Bergsten who said that currency manipulation by China and others is seriously damaging the U.S. and global economies.
Let's start with Herzstein who inadvertently provided the answer to the first question my wife popped when she read of the Chinese acquisition of Smithfield.
"Why," she asked, "can't Smithfield just sell the pork and ham to China without being taken over by a Chinese company?" She also wondered why there would be any concern in the United States about the deal since pork doesn't immediately strike one as a national security issue. Of course she operates under the impression that free trade prevails between the United States and China because, after all, both countries are members of the World Trade Organization (WTO).
But Herzstein points out the unseen problems and risks. One is that Shuanghui is known to have fed chemicals to its pigs in China that made them lean but that made humans sick. Rampant food adulteration in China indicates a lack of concern for safety and health standards. Of course, U.S. standards would apply in the U.S. market, but enforcement is spotty and heavily reliant on voluntary compliance. Then there is the probability that Shuanghui will use Smithfield's animal gene technology in its production in China which could, in a few years, lead to enhanced Chinese production and a reduction in imports from Smithfield. Indeed, it could even lead to a reverse in the flow of trade with the United States becoming an importer rather than an exporter of pork. Why is this? Herzstein points out that U.S. companies seeking to invest and sell in China's state dominated economy have been forced to share their intellectual property and manufacturing know how with Chinese competitors. In other words, the WTO to the contrary notwithstanding, U.S. trade with China is not free trade, says Herzstein.
He goes on to emphasize this point by noting that Chinese investors in U.S. companies such as AMC movie theaters and IBM's personal computer business (now called Lenovo) operate freely in the U.S. market without being subject to special conditions. Not so in China however. There U.S. firms often are forced to share ownership with state owned companies, to make special deals on supply or sales with local companies, and to clear many investment decisions with bureaucratic authorities. Herzstein concludes that China's economy is state dominated economy, that its business culture is vastly different from the free market systems of the United States and most of its trading partners, and that it is directed for purposes of potentially adverse strategic interests. He emphasizes that the United States and other countries that rely on open trade and investment badly need leverage to counter what he calls "China's protectionist practices." His key recommendation is broader authority for U.S. government review of the likely impact of foreign investment on U.S. and global economic interests.
Araujo and Cardenal explain that as a result of subsidization of key industries and maintaining an undervalued currency, China has established a chronic trade surplus and accumulated over $3 trillion of dollar reserves which are completely at the disposal of the state. It is now using this and its control of state owned enterprises that comprise about half of China's economy to conduct a far reaching program of foreign investment aimed at gaining as much control of key foreign sources of supply and of key foreign markets as possible.
They emphasize that: "it is important to remember what is really behind China's global economic expansion: the state. China may be moving in the right direction on a number of issues, but when Chinese state owned companies go abroad and seek to play by rules that emanate from an authoritarian regime, there is grave danger that Western countries will, out of economic need, end up playing by Beijing's rules. As China becomes a global player and a fierce competitor in American and European (one might add Japanese) markets, its political system and state capitalist ideology pose a threat."
Fred Bergsten has been a leading champion in Washington for free trade and globalization for more than forty years. Some consider him the father of APEC (Asia Pacific Economic Cooperation) and he has been an enthusiastic supporter of NAFTA (North American Free Trade Agreement), CAFTA (Central American Free Trade Agreement), and of all the WTO rounds of free trade negotiation. No one would call Fred Bergsten a protectionist. Yet in his paper on currencies he makes the point that the global financial system is broken, that the role of the dollar as the main global reserve currency makes America vulnerable to the off-shoring of its tradable industries as a result of currency manipulation, and that such manipulation by China and others is causing the loss of 2-3 percent of U.S. GDP growth annually. To stop this he calls for drastic measures such as countervailing currency manipulation and taxation of certain foreign investment in the United States.
As President Obama prepares to meet this week with Chinese President Xi Jinping, it is essential that the fundamental contradiction of U.S. China policy highlighted by the above articles be resolved. On the one hand, the United States is dealing with China economically on the basis of the syllogism adopted by President Clinton and popularized by the New York Times columnist Tom Friedman - globalization will make all countries rich, being rich they will become democratic, and being democratic they will become peace loving because we know that democracies don't go to war with each other." Thus the primary assumption of U.S. China policy has been that as a member of the WTO and an integral part of the global economy, China will become what former U.S. Trade Representative and World Bank President Bob Zoelleck has called a "responsible stake holder" in the largely U.S.-Europe designed and constructed global economic system.
On the other hand, the Obama administration's "Pivot to Asia" which emphasizes an upgraded and increased military presence along with promotion of the Trans Pacific Partnership (TPP) free trade agreement and along with the obvious intent to maintain military superiority in the western Pacific suggests the perception by the White House and the U.S. security community of a threat from China.
All of the commentary above suggests that there may be more than a mere military threat, that, indeed, there may be a system threat. Moreover, the prevailing economic policies of America, Europe, Japan, and others may actually be feeding both the military and the system threat.
At the very least, President Obama should use his upcoming discussions with President Xi to determine the true nature of China's system, of the guiding assumptions and principles or its leaders, and of its likely direction and impact on America and the global system supported by America.
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Sheryl Sandberg has become the toast of the publishing world and the envy of all authors everywhere with her runaway bestseller Lean In that tells women they can, indeed, have it all if they will just, well, lean in by being more aggressive and putting in more effort.
However, here in Singapore where I've been visiting for the past few days, the government of this uber competitive city state is telling its top executives to let up a bit and lean out.
A recent survey here has shown that one in three people are getting so little sleep that it is affecting their health. Worse, a Straits Times poll of 140 people shows that most of them didn't know that lack of sleep can cause obesity, diabetes, and heart disease not to mention that it can also result in loss of memory and cognitive functions. Further, a study by the Singapore Academy of Medicine has shown that lack of sleep causes lack of concentration that in turn nearly doubles the risk of transport and industrial accidents.
Indeed, the lead story in the Straits Times this past weekend warned that road rage is becoming an epidemic with one rage attack about every four days.
To solve this problem, a Straits Times editorial says, corporate managers should set an example by not staying late in the office when there is no pressing need to do so. The commentary goes on to say that executives should impress on their staff that working long hours in the office does not make them better workers. Rather, it indicates that they may not be as organized in their work as they should be.
So take that Sheryl Sandberg. Maybe women who want to leave the office early and spend more time at home are on the right track and should be hailed as the real pace setters instead of being urged to spend more time with the boys in the office.
By way of setting an example, the Singapore Ministry of Education has given schools the authority to start morning classes at 8 a.m. instead of 7:30 a.m. I really wish I could do my schooling all over again in Singapore. I always felt that the ministry's present conclusion is correct. Getting kids up at or before dawn in order to start school as early as possible in the day is not only unpleasant, it's downright unhealthy.
It also helps establish at an early age bad sleeping habits that will lead to the loss of a country's competitiveness in the long run.
Of course, Singapore's trade surplus is always around 20 percent of GDP. Imagine what it will be when Singaporeans start actually getting enough sleep.
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Last week, I explained how Japanese Prime Minister Shinzo Abe's strategy for revitalizing the Japanese economy looks from Hawaii. Having in the meantime arrived in Japan, let me show you how it appears on Tokyo.
Not surprisingly, the picture from here is quite different. For starters, it is much more positive. The just released numbers for the last reporting period show GDP growth on an annual basis of about 3 percent. Mind you, this is only for one period and could easily change in the next month or two. But for people starved for good news like the Japanese, this is extremely gratifying. To add to the encouragement, the Nikkei stock market average is up, expectations of inflation (devoutly to be hoped for in deflationary Japan) are up, and exports are up while the currency, after months of rising, is up. So at a quick glance it appears as if Abenomics is working and the real question is "what's not to like?"
Let me say up front that I've never been a big fan of Abe's. Yet, I have to admit that he seems to be sincerely trying to turn Japan around and that much of what he has done represents at least some good first steps. The media, of course, has picked up on his administration's efforts to reduce interest rates and provide more stimulus and higher inflationary expectations through quantitative easing by the Bank of Japan. They have also noted and encouraged the rise in inflationary expectations, and, of course, the growth of both GDP and exports. But what has not been so reported upon that is unusually encouraging are some of Abe's efforts to deal with politically difficult structural problems. In joining the negotiations for a Trans Pacific Partnership free trade agreement, he is going directly against Japan's farmers and agricultural interests who have always been a main stay of his political party. He also recently announced a program for doubling the number of Japanese students studying abroad and for improving the teaching of English in Japanese schools, going against the entrenched interests of the Teachers' Union in this case.
Nevertheless, although Abe and his Liberal Democratic Party (LDP -- which according to some expert observers is neither liberal nor democratic nor a party) are likely to win the upcoming July election in the upper house of the Diet on the basis of their performance so far, the fact is that there is still quite a lot to be desired in the Abe program.
The most important omission is of anything dealing with Japan's disastrous demographic trends. On its present track, Japan's population in the year 2050 will have fallen from today's 127 million people to somewhere between 88-105 million of which about 40 percent will be more than 65 years of age. Less than two young workers will be available to pay the cost of one retiree.
This is an impossible situation. It could easily result in financial collapse and/or political revolution. Fortunately, it is not impossible to reverse. France, for example, has shown that policy measures can be successful in raising the number of children born per woman and the United States, Canada, and the UK have shown the positive potential of immigration. But in order for Japan to have any chance even of just halting these trends, it must do something now. It does not have the luxury of time. Because these trends work themselves out over relatively long periods, dramatic action is required now in order to have even a partially acceptable outcome in 2050.
But Abe has not taken any serious step in this direction so far. Take something as seemingly innocuous as live-in house maids from the Philippines. Asian and Middle East countries are full of live in Filipina housemaids. Yet they are virtually absent in Japan despite the strong demand of the hospitals and healthcare facilities and wealthy Japanese housholds . Why is this the case? Well, I as a non-Japanese can pretty easily obtain a Japanese visa for my ownFilipina maid. But a Japanese citizen cannot get the same visa for his maid.
I could go on, but the bottom line is that if Abe does not bite the bullet on population aging and shrinkage, quantitative easing, inflationary expectations, exports, and all the rest won't mean a hill of beans. None of it will matter at all if the only Japanese left are in wheel chairs in nursing homes.
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Over the past five years, the issue of global currencies and unfair currency manipulation has received much attention as countries like China, Brazil, Switzerland, and the United States have been accused of distorting trade by the application of their currency policies. But a new book suggests that more attention should be focused on subsidies.
In Subsidies to Chinese Industry, Usha and George Haley of West Virginia University and the University of New Haven respectively argue that in addition to cheap labor and an undervalued currency China's economic miracle and industrial competitiveness owes a very large debt to good old fashioned subsidies. After exhaustive research into hard to find and even harder to understand numbers, they have calculated that between 1985 and 2005, China's biggest State Owned Enterprises (SOEs) were the recipients of more than $300 in gifts from the state. This included preferential access to cheap capital and underpriced inputs not available to other global competitors. In several cases, the significance of the subsidies is astounding. Take Geely Automotive which recently bought Sweden's Volvo as an example. In 2011, more than half its profits came from subsidies. (I had wondered at the time how Geely could afford to take over Volvo when no other global auto company was willing to step forward. Now I know why).
The consequences of this kind of government funded largess are severe both domestically and internationally. Consulting firm Fathom China notes that small and medium sized Chinese companies are usually starved of capital because their bigger state owned and private sector brothers are being fed capital at little or no cost. At the global level, subsidies have created huge gluts of overcapacity in the steel, solar panel, and other industries. In steel, for example, China's excess capacity of roughly 200 million tons exceeds the entire potential output of the Japanese industry. The solar panel glut has driven virtually the entire global industry into bankruptcy.
Nor is China the only subsidizer. South Korea, Taiwan, Brazil, India, the United States, France, and many others are culpable in various sectors, although China appears to make the most far reaching and aggressive use of subsidies.
As the World Trade Organization (WTO) is about to appoint a new director, this subsidy situation raises some profound questions. The kinds of subsidies noted above are all strictly illegal under WTO rules. This is not like currency issues on which the International Monetary Fund (IMF) plays a companion role to the WTO and which, in any case, are the collateral damage of macroeconomic policies. There is no ambiguity here. The subsidies are illegal and the WTO is supposed to be in charge of stopping them. Yet, they continue, apparently unabated. Why?
The main reason is that the WTO is not really structured to enforce its own rules. It does not monitor the policies, practices, and actions of its members. The U.S. government publishes every year a compendium of the unfair trade practices of other countries, and, as a kind of retaliation, China now does the same, at least with regard to what it sees as the unfair trade practices of America. But the WTO does no monitoring, or data collection, or issuing of warning letters, and does no direct policing. Rather it relies on member countries to file formal complaints in the dispute settlement mechanism. Such filings lead to appointment of a formal dispute settlement panel which then conducts an investigation, listens to the arguments of the contending parties, and finally renders a judgement that may then be appealed. The point is that this can take a very long time during which the subsidy continues so that by the time a conclusion is reached the possibility that the original victims are bankrupt and out of business is quite high. Countries thus hesitate even to enter into the process.
But wait. It gets worse. National governments also don't proactively monitor and take cases on their own initiative to the WTO. Rather, they wait for corporations to file formal complaints with them. But the corporations are often hesitant to do so for fear of offending the subsidizing governments whose markets they wish to enter. Think about it. If you were the head of Ford Motor, for example, and you had plans to make a big push into the Chinese market. Would you be running to Washington to complain to the U.S. government about China's subsidies to Geely? Or, if as is the case with GM, you were getting perhaps as much as half your sales in China, would you run to complain to Washington or to the WTO in Geneva? I thought not.
Now imagine that you are the President in Washington. You want the Chinese to help you with North Korea, Syria, and Iran. You also want the Chinese to stop being beastly to the Japanese in the Senkaku Islands and you want them to get their pollution and greenhouse gases under control before their environmental degradation becomes ours as well. You also want them to stop hacking all your computer systems and you have a lot of other wants as well. Are you going quickly and rashly to file a formal complaint over subsidies at the WTO? Again, I thought not.
And I rest my case. The anti-subsidy codes of the WTO are essentially unenforceable and worthless as presently constituted.
If the WTO is to remain a significant arbiter of global trade, it must find a way effectively to police and enforce its rules without relying on the complaint system. This should be the first task of the new director.
It was a desperate effort by Tokyo to preserve its oil lifeline and imperial ambitions in the face of the American oil embargo that led to the bombing of Pearl Harbor in Honolulu, Hawaii in December 1941.
Now, Hawaii appears about to become again a victim of collateral damage, this time from the fall of the yen in the wake of Tokyo's new desperate effort to jump start the Japanese economy with massive monetary easing, stimulus, and hoped for inflation.
The efforts of the new Tokyo regime of Prime Minister Shinzo Abe to have the Bank of Japan engage in so called quantitative easing by buying assets onto the BOJ balance sheet have already resulted in more than a 20 percent decline of the yen against the dollar. This has resulted in outcries of pain from Seoul, Taipei, and the capitals of other countries that compete with Japan in global export markets. Indeed, the head of General Motors in South Korea publically called on the Korean government to take counter measures to prevent the won from becoming too strong with regard to the yen. If it did not do so, he warned, Korea's export dependent economy could suffer severe damage.
Nevertheless, the Obama administration has blessed this move by announcing its support of Japan's efforts to revitalize its economy and by declaring that the BOJ's quantitative easing does not constitute currency value manipulation which would be contrary to the rules and commitments of the World Trade Organization (WTO) and the International Monetary Fund (IMF). The White House may be judging that a revitalized Japanese economy in the long run is worth some loss of competitiveness on the part of U.S. domestic producers and exporters in the short run. It may also be chary of criticizing another country's quantitative easing in light of the U.S. Federal Reserve Bank's own quantitative easing policies even though the Fed's efforts appear much less aimed at the exchange rate than the BOJ's.
For Obama, however, the impact of all this on his home state of Hawaii may make the real affect of the new Japanese policies more significant.
By far the largest industry in the state and the one that drives virtually all other economic activity in the islands is tourism or what is locally referred to as the Visitor Industry. With a recovering U.S. economy and strong growth in Asia outside of Japan, the number of visitors to the islands in 2013 is showing growth of about 4.3 percent. Having just arrived myself for a brief visit, I can vouch for the fact that the flights all seem to be full. Yet, Hawaii's leading economists are predicting that visitor growth in the later part of this year and in 2014 is likely to fall by nearly fifty percent .
Why? According to Hawaii Department of Business, Economic Development, and Tourism Chief Economist Eugene Tam, the decline in growth will be significantly a result of the depreciation of the Japanese yen . He points out that the falling yen will have a two edged negative affect. First, it will make flights from Japan to the islands more expensive and thereby reduce the number of travelers willing or able to buy a ticket and make the trip. Second, the travelers who do make the trip are likely to spend less because everything will seem more expensive in the light of the devalued yen. This means that the state of Hawaii's expected GDP and job growth will fall about eight percent from previous expectations.
Thus, Japan's gain, if there is any, will be partly at Hawaii's expense. This may be outweighed by longer term gains for the state if Japan actually achieves revitalization of its long dormant economy. But the fear is that because the Abe administration has not suggested the far reaching structural reforms necessary for a genuine Japanese economic renaissance, the exchange rate move will be the major influence. If so, the desired revitalization is likely not to occur with the result of a more or less permanent negative impact on Hawaii and on other economies significantly impacted by Japan.
This makes it imperative for the White House and the international community to make it clear to Tokyo that there must be far reaching structural reform is Japan is to continue to benefit from the forbearance of its global economic partners.
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The post World War II global trading system has always favored the mercantilist nations, but the GATT (General Agreement on Tariffs and Trade) and its World Trade Organization (WTO) successor were always more or less controlled by free trading countries and had as their Director a passionate devotee of free trade.
Now, with the elevation of Brazil's Roberto Azevedo to the Director's position, the mercantilist foxes have taken charge as well as advantage of the WTO chicken house.
Of course, this is not a personal commentary on Azevedo himself. For all I know, he may, in his heart of hearts, be as passionately devoted to free trade as any of his predecessors. Only time will tell. But he got to the top as a leading spokesman, negotiator, and policy maker for Brazil, a country especially noted for its subsidies to and protection of target industries. He also got to the top largely with the support of China and other emerging market countries with the mercantilist inclination that springs naturally in the souls of countries bent on development and the creation of new comparative advantages. The alternative was former Mexican Minister and North American Free Trade Agreement negotiator Herminio Blanco who both personally and as the representative of Mexico is without doubt an apostle of free trade. He had the support of the United States and the EU, the major free trade economies. That he was not chosen suggests that, at least for the moment, it is fair to say the mercantilists are in charge.
This, however, may turn out to be a good thing by bringing to the fore a fundamental cleavage that has long bedeviled the WTO but that heretofore has not been addressed because of the inadequacies of international economic theory and the polite convention that has assumed the cleavage away.
The GATT and the WTO were founded on the notion, first articulated by David Ricardo in 1817, of naturally occurring comparative advantage. Each country has a resource endowment that enables it to produce some things better than it produces others. It should concentrate on producing those things it does best and trade for the rest. For example, Brazil has a tropical climate favorable for raising sugar cane. So it should concentrate on producing sugar and trade that for airplanes made in America or Europe. Under this doctrine, there are no special supports for particular industries and no managed exchange rates. The main barriers to trade are border measures such as tariffs and quotas. Thus the main object of trade negotiations is the reduction and removal of the tariffs and quotas. Once they are gone, it is thought that trade will be free and that it will optimize global welfare.
The idea that comparative advantage can be created or acquired through use of protection, subsidy, management of currency values, and regulatory policy is ignored or rejected and is not part of the comparative advantage doctrine.
Of course, every developing country, beginning with the United States after 1815, has used protection, subsidy, and other mercantilist measures to "catch up " to and surpass the economic leaders on the way to becoming developed countries. This has been particularly true in the post-World War II period after Japan demonstrated its mercantilist economic "miracle" in the early 1960s and the rest of the developing world began to heed Lee Kuan Yew's advice to "look east" for guidance on how to achieve fast economic growth.
Yet the polite convention or fiction has held that all GATT/WTO members are free market free traders who reject mercantilist doctrine and methods. This fiction arises from three sources. One is the U.S. geo-political priority which leads Washington to be patient with mercantilists who are U.S. geo-political allies. Another is the belief that the mercantilists will relatively quickly evolve into free trades. Yet another is the view of most professional economists that the mercantilists are only hurting themselves by providing underpriced goods and services to global consumers.
As a consequence, very few effective steps have been taken in the GATT/WTO system over the years to curtail or stop mercantilism. Of course, there have been many negotiations on subsidies, intellectual property, etc., but they have resulted only in half measures and the major issues of strategic currency management, investment incentives aimed at luring the off-shoring of production and R&D facilities, and cartels have remained largely off the agenda. A consequence has been the evolution of chronic, destabilizing imbalances in flows of trade and finance that have led to or exacerbated continuing crises. Now that the mercantilists are in charge perhaps we can dispense with the polite fiction and start confronting the hard, cold reality of the global economic system.
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At the height of the U.S.-Japan trade frictions of the 1980s, the Treasury Department proposed a set of negotiations under the rubric, Market Oriented Sector Specific . The acronym MOSS led to these being called the MOSS (think moss on a tree) Talks.
Some experienced negotiators at the time suggested that it was really just More Of the Same Old Stuff (also, of course, MOSS). In fact this was only a bit unfair because despite some eventual opening in some of the selected sectors most of the Japanese market long remained virtually impervious to penetration by non-Japanese companies.
President Obama's introduction last week of Mike Froman as his new U.S. Trade Representative and of Penny Pritzker as his new Secretary of Commerce brought this old play on words back to my mind. In his press conference, the president said: "Mike believes -- just as I believe and just as Penny believes -- that our workers are the most competitive in the world, so they deserve a level playing field."
For more than thirty years, I have been listening to presidents of both parties make almost that exact statement. They typically make it when they want Congress to give them trade negotiating authority for to ratify some so called free-trade deal they have just negotiated. Implicit in the statement is the notion that American workers and the companies by which they are employed are highly competitive and prevented from conquering the world of business and commerce only by unfair trade that the president is going to make fair demanding in free trade negotiations that our trading partners play fair and square.
If this is not the most misleading statement presidents make, I don't know what could be. For starters, it's simply not true that American workers and companies are always the most competitive. The playing field is pretty much as tilted for German workers and companies as for the Americans, yet Germany has the world's biggest trade surplus while the United States has its biggest deficit. Yes, Germany is a bigger exporter than China and has a bigger trade surplus. Yet, German wages are higher than U.S. wages, the German regulatory environment is stricter than that in America, and Germany is a welfare state that most Americans think is socialist. How is this possible you ask? The answer is that German workers and companies make things no one else makes and make them of a quality unrivaled by anyone else. That's what being competitive really means -- you win even though the field is tilted.
Nor do presidents intend to level the field, and, in any case, they wouldn't know how even if they actually intended to. Take the case of China joining the World Trade Organization (WTO) in 2001. The U.S. trade deficit with China had risen from $10 billion in 1990 to around $84 billion in 2000. The White House told the Congress that putting China in the WTO would open its markets and result in a flood of U.S. exports that would reduce this deficit and create millions of U.S. jobs. Congress duly signed off, and ten years later the U.S. trade deficit with China was $315 billion as millions of jobs were off-shored.
During this time, the Chinese yuan was managed by Beijing to be undervalued versus the dollar as a way of indirectly subsidizing Chinese exports while also indirectly protecting Chinese markets. In addition, the April 27 edition of The Economist details the wide range of large subsidies that helped make Chinese exports so competitive over the past decade. These measures were certainly tilting the playing field. Yet the Obama White House , like the Bush and Clinton White Houses before it, took no steps to offset this. Indeed, it did not even publicly acknowledge that the Chinese currency was being managed.
Nor is the purpose of the trade negotiations really that of leveling the playing field. Take the proposed Trans Pacific Partnership (TPP) free trade agreement that is currently the centerpiece of the Obama White House's trade policy. Of course, it calls for improvement around the edges such as better protection of intellectual property, further reduction of (already low) tariffs, and measures to ensure that state owned companies play like private, commercial firms. But when I asked about the purpose of the TPP at a White House meeting two years ago, the I answer given was that it is mainly to show America's commitment to Asia and to demonstrate that America is "back" in Asia. This means it is really all about geo-politics and little about level playing fields.
That is why the negotiators are not even talking about the two things that are the most powerful determinants of current trade flows -- strategic currency value management and financial investment incentives like tax holidays, free land, and capital grants that are used as bribes to induce off-shoring of production.
So next time you hear a president or other top official talk about how competitive American workers are and how they will always win if they can just get a level playing field, be sure you understand that they are unlikely actually to have the opportunity to play on such a field.
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Clyde Prestowitz is the president of the Economic Strategy Institute and writes on the global economy for FP.