A while back, I chastised U.S. Trade Representative Michael Froman for not meaning a word he said about trade policy. Now, in the wake of the latest WikiLeaks release of a chapter of the proposed Trans-Pacific Partnership free trade agreement, I realize why he also doesn't want the American public to know a word about that or any trade deal.
In recent testimony before Congress, Froman emphasized that he would use "every available tool" to level the global trade playing field and reduce the U.S. trade deficit. That was laughable because Froman had already demonstrated that he was not going to touch issues like currency manipulation, indirect export subsidies, or mandatory investment and transfer of technology as a condition of market entry. This did not make him unusual. All of his predecessors had also promised to use every possible tool and none had.
All of them had also called on Congress to grant so called "Fast Track" authority to the President to negotiate free trade agreements that would then be submitted to the Congress for an up or down vote without possibility of amendment. The argument for this had always been that other countries' negotiators would never make their best, bottom line offers as long as they thought any deal might be subject to further amendment after it was submitted to the U.S. Congress. While it had a certain logic, this argument always suffered from the weakness of not being true. Because Fast Track ( now euphemistically called Trade Promotion Authority- TPA) attempted to handcuff Congress, it responded in kind by putting so many conditions on the granting of Frast Track authority that foreign negotiators were reluctant even to enter into negotiations and often found themselves negotiating with leading members of Congress more than with the official U.S. negotiators. In fact, Fast Track (TPA) did not grease the wheels of trade talks. If anything, judging by the recent history of World Trade Organization and U.S.-Korea Free Trade Area negotiations, it threw sand in the gears.
What the WikiLeaks leak revealed was that Fast Track combined with the TPP was not so much a mechanism for getting things through the Congress quickly and efficiently as it was a mechanism for getting around the Congress. The leaked TPP chapter was the one on Intellectual Property. Although it is actually about setting rules to restrain certain kinds of trade, intellectual property protection has in recent years become a mainstay of global free trade negotiations. That this is so is a manifestation of the fact that the negotiations have largely been captured by large, multi-national corporations whose patent and copyright portfolios convey a degree of monopoly rights that they would like to extend and strengthen.
After all, something can only be leaked if it is supposed to be unknown to all but a few authorized insiders. That is certainly the situation with the TPP. The global public, including the U.S. Congress and the legislatures of the other countries involved in the negotiations, has been kept in the dark about what is actually being discussed and what trade-offs are being made. But this is not the case for more than 700 "cleared" advisers to the U.S. negotiators. Mostly from major corporations, these advisers are privy to the negotiating texts and, at least in the case of the United States, provide the bulk of the information and proposals on which the negotiations are based. Having little analytical capability in the area of international trade and investment, the U.S. government must rely heavily on the affected traders and producers to develop and negotiate its agenda. While there is nothing wrong in principle with industry-government cooperation and collaboration, the present structure creates an imbalance of information and influence that favors a few industries while disadvantaging the general public.
The extent of this unbalanced influence and how it works can be seen in the contents of the leaks. The deal being proposed apparently includes measures like those contained in the Stop OnLine Piracy Act (SOPA) and the Protect Intellectual Property Act that have already failed once to achieve passage in Congress. It also includes demands by the United States for separate patents for different forms of the same drug. Thus, for example, a patent would be issued for drug Z in pill form. Then when the drug is produced in liquid form, a new patent would be issued, and when it was produced in gel form, yet another patent would be issued. This is something very unlikely to survive open debate in the U.S. Congress. Clearly what is afoot is that the non-transparent TPP talks are being used to make an end run around the Congress and the parliaments and publics of many countries to achieve far reaching special rights in the guise of free trade.
This should not be fast tracked in the guise of a request for TPA. It ought to be subject to normal debate and amendment so that the public can actually achieve the benefits of free trade.
Update: I need to correct some misunderstandings in this post. While I did not say that SOPA or PIPI or ACTA are in the TPP agreement, I did mention that similar things are in the draft deal. Strictly speaking, this is not the case. To be very clear, I should also say that nothing so far made public about the deal indicates that it might contain elements contrary to U.S. law regarding intellectual property. Having said all that, I believe my larger point that the intellectual property provisions of the TPP as well as the TPP itself would not survive open debate in the U.S. Congress or public remains correct.
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Just as events in Syria are demonstrating a huge shift in American foreign-policy doctrine in the Middle East, so are recent developments in the Asia-Pacific region signaling the same kind of shift there.
In Syria, it has become clear that the United States will no longer intervene just for the sake of enforcing its will wherever turmoil arises. Of course, this move is also a sign of the end of American hegemony. In the case of East Asia, the Obama administration's major policy initiative has been the so-called "pivot to Asia," and the centerpiece of that has been negotiation of the Trans-Pacific Partnership (TPP) free trade agreement. Although the free trade label sounds boring, the deal is not really about trade. Rather, it is about assuring Asian friends that America is still committed to them.
That's what U.S. Trade Representative Michael Froman and the State Department have been saying for the past couple of years. It sounds good. Who can object to assuring our friends of our commitment to them? But that bland, motherhood-and-apple-pie reassuring veils something of deeper significance. As a high-ranking Singaporean official once explained to me, China "is like a new sun in the solar system, and all the planets [countries] are readjusting their orbits." His concern and that of most other countries in East Asia and the Pacific is that his country will become fixed in the Chinese orbit with no counterweight to allow some freedom of action. What he wanted was for America to be the counterweight against China. What Froman is really saying is that America will indeed act as the counterweight. This is an expression of American hegemony in East Asia and the Pacific.
That the TPP is not just about trade is signaled by the fact that the negotiations over it have been held in strict secrecy. Few, including members of U.S. Congress who eventually must sign off on the deal, have any idea of what is actually in the draft agreement. But what definitely is not there is any provision to deal with the problem of currency manipulation.
Let me briefly explain that. A number of countries, through a combination of jawboning and using government funds to buy dollars in the international currency markets, act to keep their own currencies artificially undervalued. This is a way to make their exports less expensive and their imports more expensive. It is totally at odds with any concept of free trade, but there are no provisions to deal with it in any of the free trade agreements Washington has negotiated. The World Trade Organization has some vague provisions that have never been enforced, and the same is true of the International Monetary Fund. Thus, a country can negotiate to reduce its tariffs from, say, 10 percent to 5 percent or even to 0. These are 50 percent or 100 percent reductions of the tariffs and would be hailed as a major move to free trade. But at the same time, the country could intervene in the currency markets to drive its currency down by 10 to 20 percent and thereby totally offset the effect of the free trade deal. Indeed, this is pretty much what Japan is doing now. While negotiating the TPP, Tokyo has managed to reduce the value of the yen by about 30 percent. Moreover, it has managed to do this without hearing any voice of complaint from its TPP negotiating partners. The other partners don't complain because they mostly act in the same way. The United States doesn't complain because, as I said, the deal is not about trade so much as about showing commitment to its Asian friends.
But this past week saw what could be a very important development. Sixty senators wrote a letter to the U.S. president demanding that the problem of currency manipulation be addressed in the TPP negotiations before any deal is submitted to Congress for approval. This followed a similar action by members of the House of Representatives. The meaning of both actions is twofold. First, it signifies that as it now stands, the TPP deal may really not be able to gain passage through Congress. That is to say that the chances of its not being ratified are quite good. The second point of significance is that, as in the case of Syria, the U.S. Congress is telling the administration and the world that geopolitics no longer trump economic and domestic welfare considerations. Congress is saying that free trade deals now truly have to be about trade and not about reassuring allies of U.S. commitment to them. No longer will Congress agree to buy allies with distorted and lopsided trade deals.
The end of American hegemony will be mourned by many around the world and in America, but it is likely to be a very good thing for U.S. workers and the American middle class.
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Yesterday afternoon, I attended one of those Washington meetings at which the Chatham House rules were in effect. Doubtless all of my readers know that Chatham House is a London foreign affairs think tank whose rules mandate that no participant in a meeting be quoted by name outside the meeting. This is supposed to encourage free and open discussion, but in my experience it can also lead to great works of fiction. Thus, you will have to take it on faith that I am not making this up and that the discussion I am about to report actually took place.
Several senators and members of the House of Representatives, Fortune 100 CEOs, eminent writers, and high Obama administration officials were present when the discussion turned to the question of negotiating international free trade agreements. Or, to be more precise, the focus was on the absence of conclusion of such agreements. One very well known senator led the discussion by saying it was well nigh unforgiveable that the United States had negotiated no new free trade agreements in the past five years. He said this was evidence of a woeful lack of leadership in the White House and in the Congress. In particular, he excoriated the Obama administration for having not yet concluded the proposed Trans-Pacific Partnership (TPP) free trade agreement now under negotiation.
A high-ranking member of the administration replied that the trade representative is working as hard as he can on bringing the deal to fruition. A former high-ranking member of the administration seconded that and added that it is absolutely essential to get this deal done. He went on to say, however, that opposition and lack of interest in Congress could doom it. That unleashed a round of comments about how the people in this country and even in Congress don't understand that these trade deals are good for them. There was much lamentation about the ignorance of Congress and the need to better educate it.
Why? I wondered. The most optimistic projections of the impact of the TPP on the U.S. economy shows a gain of only one half of one percent of GDP by the year 2025. That is a rounding error. Given the assumptions that go into these kinds of projections, the potential for a big negative impact is quite high. Indeed, if precedent is any guide, the TPP will likely increase the U.S. trade deficit, reduce U.S. economic growth, and cause further unemployment. Trade deals in the past have always been presented as things that "level the global playing field", reduce the U.S. trade deficit, increase U.S. exports, create jobs, and raise incomes. Yet, with a few exceptions the opposite has been the case in the recent past. For example, the Korea-U.S. free trade agreement that went into effect a year or so ago has been followed by a sharp increase in the U.S. trade deficit with Korea. The reports yesterday of median U.S. household income remaining about where it was in the 1970s, suggests that trade deals have not had a major positive impact on the U.S. economy, or, at least not enough of one to offset other negative trends.
So why had this group become so animated about the need to do a deal that at best will have only a tiny positive impact and that at worst could have a significant negative impact on the U.S. economy?
Religion. That's the only answer. This elite group has a god called trade or perhaps globalization. The details of these trade agreements don't really matter because regardless of what they are the results of the deal will be presented as a big success and as having greatly increased the welfare of the public.
That's what used to be called That Old Time Religion.
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A vastly under-reported drama in Australia this past week both sounded a new departure in the old U.S.-Australian alliance and highlighted the central contradiction of the U.S. policy of "pivoting to Asia."
At the annual Australia-U.S. Ministerial meeting in Perth, Secretary of State Hillary Clinton, Defense Secretary Leon Panetta, and their Australian counterparts launched discussions on granting the United States further access to air bases in Northern Australia and to several naval ports, including one on the Indian Ocean just south of Perth. They also announced that the Pentagon would establish a powerful radar and space telescope in Australia to monitor Asian airspace.
In a speech in Adelaide following the meeting, Hillary called Australia an "indispensable ally" and said: "these past three days have reinforced for me the indispensability of the U.S.-Australian partnership. We are cooperating everywhere together -- in business, in shipbuilding, from the mountains of Afghanistan, to the atolls of the Pacific, to the thriving cities of Asia." This, of course, follows the agreement last year to deploy U.S. troops to Australia for the first time since the end of the Second World War. The plan is eventually to have 2500 marines at bases in Darwin. However, so far, only 250 have arrived there.
The announcements and the secretary's speech coincided with two major statements by Australians on the future of Australia. A white paper by a government appointed commission emphasized the centrality of China and Southeast Asia to Australia's future and called for a dramatic shift of Australian economic, educational, commercial, diplomatic, and strategic policies away from their traditional U.S. orientation and toward Asia. In particular, it called for a closer relationship with Indonesia and for Australian membership in the Association of Southeast Asian Nations (ASEAN). A speech by former Prime Minister Paul Keating not only called for closer alignment with Indonesia and ASEAN, but also called for a degree of separation from the United States, saying that Asia sees Australia as a toady of America and too ready to do its bidding. Other commentators raised the issue of whether Australia is unnecessarily and unwisely (in view of Australia's growing economic dependence on China) abetting the United States in a policy of containment of and opposition to the rise of China.
Indeed, in his own press statements, Australian Foreign Minister Bob Carr was at pains to explain that there was nothing about containment of China in any of the Australian-U.S. communiqués and insisted that Australia has not surrendered its foreign policy to the United States.
In her own response in Adelaide, Secretary Clinton said "the Pacific is big enough for all of us" and claimed that those who argue that Australia needs to choose between America and China are presenting a false choice. "That kind of zero sum thinking only leads to negative results," she explained.
On Saturday, however, The Weekend Australian foreign editor Greg Sheridan pointed to important hidden realities. The agreement from last year was supposed to bring 2500 U.S. marines for an annual rotation through Australia and was also to provide for expanded use of military air bases in northern Australia and of naval bases in Western Australia. Yet, so far the only thing that has happened is the rotation not of 2,500, but of only 250, U.S. marines. Sheridan says this is because the Australian government has gotten cold feet in the wake of Chinese warnings that Australia should not partner with America in suppressing China's rise.
What's going on here? Well for starters, it clearly is all about containing China. The United States has been the major power in the Asia-Pacific region for the 67 years since World War II. The Seventh Fleet has been there and U.S. troops have been stationed in Korea and Japan for all that time. Contrary to the popular meme that America was somehow neglecting Asia, it never left. But it also never felt the need to do a "pivot" and to establish further bases and troop rotations in Australia, or to station 60 percent of its naval ships in the western Pacific, or to become involved with the claims of various Asian nations over uninhabited rocks in the sea until China began to emerge as the second major power in the world.
Australia, like all of America's other allies, quasi-allies, and friends in the Asia-Pacific region is benefiting enormously from doing business with China and understandably wants to continue doing that business and even expand it. At the same time, however, it doesn't want to be pulled into too close an orbit by the Chinese tractor beam, nor does it want to have to defend itself against terrorist threats and those lusting for its vast mineral resources all by itself. So it turns to the United States to be the balancer and co-defender.
This, of course, is a way for Australia to have its cake and eat it as well. It is a brilliant strategy if it can be made to work. But there is a vulnerability highlighted by Bob Carr's urgent interjection that there is nothing about containing China in any of the U.S.-Australia agreements and by Hillary Clinton's comment that "the Pacific is big enough for all of us."
The vulnerability is that neither Australia nor any of the other Asia-Pacific nations want to risk offending China. Indeed, the Carr/Clinton comments as well as the slow implementation of the U.S.-Aussie agreements concluded last year are in consequence of complaints China has already made about these deals constituting nothing more than a policy to contain China.
Australia and the rest are increasingly ambivalent. They want Uncle Sam to be readily available in times of danger. At the same time, they don't want to admit too close an association. In short, they don't want to be asked to choose between China and America. One may wonder why the Americans would want friends who are afraid to acknowledge them, but so far, at least, Washington has taken the position that there is no need to choose. That, however, is not the position that China has taken. It interprets the ties of Asia-Pacific nations with America as aimed at containment of itself. It complains and threatens and in response everyone starts talking double talk.
Ultimately the question must boil down to what are the Americans getting out of this. The business the United States does with China makes it large and a chronic international debtor, and maintaining fleets, troops, and bases in the Asia-Pacific region only adds to its federal budget woes. Will it eventually conclude that the double talk is not worth the candle?
"When the center of the global economy shifts, logically, the world intellectual center must shift as well. This institute will be a new think tank for the new Asian Century."
Thus spoke HSBC CEO Stuart Gulliver last night at Hong Kong's Conrad Hotel, where the inauguration of the new Fung Global Institute was celebrated by 200 global movers and shakers, including former Federal Reserve Chairman Paul Volcker, former Hong Kong Chief Executive Tung Chee Hwa, and Institute founders and Li and Fung Corporation Chairman and CEO respectively Victor and William Fung.
As the dinner speaker, Volcker backed Gulliver's sentiment and called on Hong Kong and China to lead the way in overcoming U.S. resistance to adoption of the Volcker Rule (banks with implicit or explicit government guarantees because they hold insured accounts or are too big to fail would be prohibited from doing proprietary trading) by setting the example with immediate adoption in their own markets. He emphasized that the global financial system is sitting on a knife edge without a coherent and consistent set of international or intersecting national regulations on dealing with what is now a $700 trillion global market in derivative instruments that no one understands. In the face of dithering and caviling in the West, maybe, suggested Volcker, the East could start talking sense.
Of course, as Chairman Victor Fung emphasized in his own opening remarks, Asia is a vast, diverse space and no single institute can be its sole voice. But he voiced the intent for the institute to provide Asian perspectives on the key issues facing not only Asian but all global leaders. For that purpose, he presented an all star cast of fellows, advisers, and staffers. These include Nobel prize winning economist Michael Spence, institute President and Peoples' Bank of China adviser Andrew Sheng, former Chairman of the China Bank Regulatory Commission Liu Mingkang, and former World Bank chief economist for China Louis Kuijs.
In that spirit of presenting Asian perspectives to the world, the current crisis in Europe was the focus of much of the inaugural discussion. Commenting on the major challenges facing Asia, Gulliver placed the euro/EU problem first on his list saying that "the key now is the eurozone and calling on the Europeans to establish a Europe wide bank deposit insurance guarantee in euros along with a euro-bond and a fiscal concordance. However, as evidence of the differences in Asian perspectives, former Singapore Foreign Minister George Yeo took a much more relaxed position, arguing that more integration cannot be the answer for Europe and that it should perhaps not strive too hard to sustain what may well be unsustainable. Attractively out of the box in concept, this idea was quickly countered by Spence and others who emphasized that a collapse of the EU would have dire consequences for Asia and America because it is the biggest export market for both regions.
There was, however, unanimity of perspectives in one very important and perhaps defining respect. At a moment when the former head of a private equity firm (Mitt Romney) -- a firm dedicated to maximizing relatively short term profits for shareholders as its sole business objective -- is running to become president of the United States, Victor Fung emphasized that "any individual business has no right to exist if its objectives do not coincide with those of the society it serves." He further called for business to promote full global employment, social justice, and the interests of stakeholders.
That is certainly a different perspective -- a strongly Asian perspective -- from the dominant shareholder value/fiduciary obligation philosophy of U.S. business leaders and thinkers. The importance of that difference was suggested by Fung at the end of his remarks when he warned of a clash of civilizations if dialogue and debate cannot reconcile strongly differing perspectives.
Avoiding such a clash and promoting a truly equitable, sustainable, and prosperous global economy is the gargantuan task the Fung Global Institute has set itself. I sincerely wish it luck.
In response to my recent call for American ASEAN experts to be less focused on promoting a U.S.-ASEAN free trade agreement and more focused on having the ASEAN countries actually buy more from the United States, I received several queries about what exactly the United States has to sell aside from military hardware and systems.
This is an old question in the long running debate over the U.S. trade deficit and unfair trade in the Asia-Pacific region. Typically the discussion goes as follows. American commentators, business executives, and government officials claim the some market is unfairly closed or that exchange rates are being unfairly manipulated to the disadvantage of U.S. exports. This, they say, is exacerbating the already unsustainable U.S. trade deficit and will result in some dire consequence unless the offending countries stop cheating and start playing by the rules. The response from Asia is denial of any foul play and an assertion that American business doesn't try hard enough capped by the question, "aside from weapons and airplanes, what does American make that anyone in Asia could possibly buy?"
This has been an excellent debating technique for Asian officials and commentators because it has diverted attention from Asian policies to well known and glaring American weaknesses. In effect, this question has said: "Look, why don't you just forget about our policies and practices. The truth is that you have nothing to sell that we want to buy, and, therefore, even if we played exactly as you request there would be no change in the trade flows or in your trade deficit."
While it was always an exaggeration of U.S. weaknesses, this argument contained enough truth that it was long hard to counter. Today, however, that is much less the case. Let's start with weapons and aircraft. Even its harshest critics have always acknowledged that the United States is very competitive in the weapons and aircraft markets. Yet, even its closest allies have striven to import only what was absolutely necessary from the United States while having most of the arms and aircraft made in their own factories within their own territories. Take the recent decision by Japan to buy the U.S. F-35 as its next generation fighter plane. Japan is not going to import that plane off the shelf from an American factory. Rather it is negotiating to have as much of the plane as possible made in Japan despite the fact that making it in Japan will dramatically increase the cost.
As for commercial aircraft, press reports this week noted that Airbus will take a larger share of global aircraft sales this year than Boeing. This strong Airbus showing reflects the success of a long running European industrial policy that has been aimed not only at avoiding as much as possible the procurement of U.S. made aircraft but also at displacing them in the world markets. Virtually every Asian economy including those of Japan, Korea, and China has some effort underway to promote the production of commercial jet aircraft or of aircraft parts, and procurement both of U.S. brand military and commercial aircraft is often made conditional on at least partial production of the plane within the home territory of the procuring body.
So a good first reply to the question of what the United States has to sell would be - arms and aircraft, if that would only be fully permitted.
But now the even better reply is that the United States is the most competitive locations for production and provision of a broad range of goods and services. Take autos as an example. Honda has just announced that it may increase its production in the United States by 40 percent and begin to use the United States as an export platform for some models. This is because the strong yen has made U.S. based production more competitive than Japan based production. Similarly, Mercedes Benz, BMW, Hyundai, and other global auto makers are added production capacity in the United States not only to supply the U.S. market but also for export.
This morning's New York Times reports that GE is returning production of some appliances to Louisville, Kentucky and a recent study by Booz & Co. emphasizes that about 90 percent of U.S. manufacturing industries are quite competitive in global markets. One of the most competitive is semiconductors which were the basis of the whole rise of Silicon Valley. Yet, as in the case of aircraft, a number of governments are promoting and subsidizing indigenous semiconductor production as part of efforts to displace the leadership of the U.S. based production.
So the answer today to the question, is that the United States has plenty to sell if the strategic industrial policies aimed at displacing such sales are abandoned or modified. And it is the lack of focus on such policies that constitutes my opposition to proposals for free trade agreements like that suggested between ASEAN and the United States. Free trade agreements that do not result in more trade in items in which it is well know that countries are competitive is not really free trade. Rather it is a charade.
My call is for less charade and more real trade, meaning actual sales and delivery.
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If you want to understand the truly upside-down nature of the thinking of Washington's foreign policy elite on Asia, take a look at the just released report and press commentary by the U.S.-ASEAN Strategy Commission of the Center for Strategic and International Studies (CSIS).
Like all of these think tank commissions, this one is studded with former high ranking officials now consulting for a variety of global corporations both American and foreign. Particularly prominent in their remarks were former U.S. Trade Representative Carla Hills and former Defense Secretary William Cohen. Hills urged negotiation of that philosopher's stone of modern international relations, a free trade agreement, in this case between the United States and ASEAN. Breaking down barriers to trade and capital flows would encourage further investment in the region by U.S. corporations, she said.
In light of the fact that the ASEAN region is drowning in investment while the United States is starving for it, it's not clear why Washington should want to encourage further investment in ASEAN, but maybe Hills thinks the deal would encourage a two way flow of investment that would also be beneficial to the United States.
If that is the case, however, the commission's proposals do not include any recommendations on exchange rate manipulation, reciprocity on investment incentives, or other tax and regulatory tools often employed by the ASEAN countries in ways that tend to promote their trade surpluses and the U.S. trade deficit with its consequent impact on U.S. unemployment.
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The plot of the story of the new made-in-China Oakland Bay Bridge has begun to thicken. Further digging has uncovered additional flaws in the rationale for having a major part of one of the United States' biggest infrastructure projects outsourced to China.
In the June 26 New York Times article that first broke the story, the claim was made that a major reason for having the fabrication of the bridge's major sections done in China was that American fabricators didn't have the capacity or capability to perform the work on such giant structures. Because of their supposed superior capabilities and lower labor costs, the Chinese were said to be providing the $7.2 billion bridge for $400 million less than U.S. fabricators who probably couldn't have done the work in any case.
But it turns out that the issue wasn't one of capability but of scheduling. U.S. fabricators had the capacity and the capability to do the work but argued that the project would take more time than the Chinese were proposing in their bid. Well, in the event, the Chinese have not been able to meet their own timetable, and the bridge is actually being built on the schedule originally proposed by the American fabricators. The first delivery of Chinese steel was more than a year late and the whole project is three years behind schedule and $5.2 billion over budget according to information provided by the National Steel Bridge Alliance.
So it looks like the Chinese low-balled their proposal in order to get the bid and then more than ate up the presumed savings by failing to meet their own timetable.
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An old mentor of mine once remarked that "the only sure thing in life is the unexpected." How true I thought after arriving in Tokyo last night.
One minute, Japan and the world were happily anticipating a quiet weekend amid continued recovery from the world economic crisis. The next, Japan was plunged into what Prime Minister Naoto Kan has called its worst crisis since the end of World War II. The global economy, already roiled by the Arab revolution, is now again in uncharted waters.
It is a measure of the damage done here in Japan that even now, four days after the quake, only about half the trains and metros in Tokyo are operating and some areas remain without service. In fact, the outlook dimmed further today as a third nuclear reactor at the Fukushima power site lost cooling. The Tokyo Electric Power Company has announced that power outages are likely and that this situation will continue until at least the end of April. Given the accuracy of the company's forecasts so far, this could well mean until the end of the year.
With Tokyo and much of the rest of the country operating at half speed, the hit on the Japanese economy is going to be enormous and the knock-on effect on the rest of the world economy will be large and very significant in some critical areas. For example, about 40 percent of the world supply of the Nand semiconductors -- critical to devices like cell phones and the iPad -- are made precisely in the part of Japan most affected by the quake and tsunami. Those plants are down now, and it is not clear when they will be coming back on line. Nor are they something that can quickly be ordered up from another source. A large part of the world supply of silicon and specialty chemicals for the semiconductor industry -- the building blocks for all semiconductor chips -- is also made in Japan. So even companies like Intel, Samsung, and Taiwan Semiconductor Manufacturing Company could be significantly impacted.
The overall impact is expected to be at least several months of slower GDP growth. But those estimates could change substantially. For instance, most comparisons are being made to the Kobe earthquake of 1995, which caused only a relatively short term downturn in the Japanese economy. But that disaster had no impact on the energy situation. This quake will result in large increases in Japan's oil imports which, combined with events in the Middle East, will undoubtedly lead to higher oil prices that will add to the economic drag both on Japan and on the rest of the world.
Also extremely important will be the effect on Japan's public debt, already double its $5 trillion GDP. Mitsubishi UFJ Securities is estimating that the debt costs of recovery will add anywhere from 2 to 10 percent of GDP to the already massive public debt.
Now, here's where the unexpected impact of the unexpected gets really interesting. There is speculation in Japan, that if the public debt should grow by 5 percent of GDP or more, the Japanese government would be reluctant to cover it simply through more borrowing. Rather, an attractive option might be for Japan to sell off a portion of its huge holdings of U.S. Treasuries to cover the cost instead.
That, of course, could result in a dramatically weaker dollar that would that would stimulate inflation and force the Fed to raise interest rates just at the moment when the U.S. economy appears to be gaining a little momentum.
It was Pericles who said that: "The important thing is not to predict the future but to be prepared for it." Globalization has made the economy more fragile. It's time that the world's major economies and global institutions prepare for that reality.
Speaking in Winston-Salem, North Carolina on Monday, President Barack Obama lamented America's stubbornly high unemployment and promised to outline for the gathered students a "vision that will keep our economy strong and growing and competitive in the 21st century."
There was applause as the students sat on the edges of their chairs in anticipation. Unfortunately, what followed only proved that the president should have gone to his eye doctor instead of the Winston-Salem. It was at best, a case of partial vision.
It began with a "recognition" that in the past few decades revolutions in technology and communications and the integration into the global economy of two billion new people in India and China had touched off fierce competition among nations for the industries and jobs of the future to replace the auto mechanics and machinists that Forsyth Technical Community College, where he was speaking, had been founded many years ago to produce. It continued with the argument that the winners of the competition would be the countries with the most educated workers, the most serious commitments to research, the best roads, bridges, high speed trains and airports, the fastest Internet connections, and the most innovation.
The president emphasized that the most important competition the United States faces is not the competition between Republicans and Democrats, but the competition between America and its economic competitors around the world. "That's the competition we've got to spend time thinking about," he stressed.
He went on to reassure the audience that America will win this competition because it has the world's best universities, smartest scientists, best research facilities, and most entrepreneurial people. Indeed, entrepreneurialism is "in our DNA" he said.
But then the vision became a bit cloudy. Despite the reassurances of American superiority, the president said the country is in danger of, indeed is, falling behind -- in high school graduation rates, the quality of math and science education, in the proportion of science and engineering degrees we hand out, in attracting research and development facilities compared to India and China, in R&D spending, and in Internet speed and connections.
Are you a little confused by how we could be falling so badly behind if we have the best universities, best research facilities, smartest scientists, and most entrepreneurial people? All I can tell you is that the president says we are facing in "Sputnik Moment", calling to mind the shock America felt in 1957 when the Russians launched the first earth satellite. To respond to this challenge, he emphasized that we must set the goal of "Made in America."
Hey, nothing wrong with that. At this point, I was cheering. He's the first president in my memory who has dared to say that we need to compete by actually making things. So I give the first half of the vision an A.
But then Obama turned to how we're going to come back and regain leadership by increasing education and R&D spending, improving our infrastructure, and doubling our exports by negotiating more free trade agreements like the one just concluded with Korea.
Aside from the Korea deal (which I'll address in a moment),these are all good things to do and we should do them. But doing them will not by itself reverse the decline in our competitiveness. Actually, the Korea deal illustrates both why this is true and why the president's vision is still impaired. South Korea's workforce is not better educated than America's. Nor does it spend more on R&D, nor is its labor inexpensive like that of China, and nor is it nearly as entrepreneurial. Yet the United States a growing trade deficit with South Korea and is far behind it in areas like liquid crystal displays, various kinds of semiconductors, cell phones, and much more.
What the Koreans do is target development of key industries with special financing and regulations and manage their currency to be undervalued versus the dollar as a kind of protection of the domestic market cum subsidy of exports, impede foreign penetration of domestic markets through a wide variety of formal and informal non-tariff barriers, fail to enforce intellectual property rights of foreign enterprises operating in South Korea, and make foreign investment in Korea extremely difficult as a practical matter.
I am not saying these things to attack South Korea. If these policies work, and they obviously do, South Korea has every right to keep them in place. But obviously Korea is engaging in a different kind of globalization than we are. And equally obviously, the president doesn't recognize that. Thus the president expects that this new free trade deal is going to increase U.S. exports to Korea and create 70,000 jobs in the U.S. But any deal that allows currencies to be managed in such a way as to stimulate exports and inhibit imports - to mention just one factor -- is not going to result in surging U.S. exports or in surging U.S. job creation.
The White House eye doctor needs to prescribe glasses that will allow the president to see the other half of the playing field and to recognize that he must play with a full deck of cards. More education and R&D? By all means, bring them on. But he also needs to respond to the industrial targeting, exchange rate, investment, and getting realistic about the globalization policies and practices of our economic competitors.
Clyde Prestowitz is president of the Economic Strategy Institute and author of The Betrayal of American Prosperity.
yesterday's (Nov. 25) Financial Times,
my friend Claremont College professor Minxin Pei commented
that "China may choose to do nothing (with regard to trying to rein in North
Korea) just to prove that the west cannot bash it and beg at the same time."
the question of China possibly cutting off its nose to spite its face that
caught my attention. After all, China may really not consider North Korea to be
or any danger to it at all. Rather it was the use of the term "bash" and its
ascription of bashing to the "West." Let me hasten to say that my comments here
are not at all meant as a criticism of Minxin who I am sure used the term
simply as a repetition of current usage and without giving it much thought. But
that in itself is significant as a manifestation of how extant this powerfully
loaded term has become.
what bash means or what people would be trying to say if they called you a
basher. The word suggests a vicious, even irrational and probably gratuitous or
perhaps racist, attack on someone or some group or some country. And let me say
up front that I know this and am sensitive to it, because in the 1980s and 1990s
when I was first a U.S. trade negotiator with Japan and then an analyst of
globalization at the Economic Strategy Institute, I was routinely referred to
in the press as a "Japan basher."
In the case
of yesterday's article, the comment was in relation to the fact that China has
been criticized over the past few years on a wide range of issues including its
claims of sovereignty over disputed isles in the South China Sea, the ramming
of a Japanese ship by a Chinese fishing vessel, refusal to relax its
intervention in global currency markets and to allow its currency to revalue
significantly, reluctance to accept some degree of responsibility for
rebalancing the current, massive global trade imbalances, as well as its
refusal or inability to do anything about its North Korean allies' nuclear
doubt, there are two sides to all these stories and China has a right to voice
its claims and to act or not to act as it sees fit. But surely other countries
may have grounds for their criticisms. China no more than any other country
should be immune from legitimate criticism. But this is, in effect, what
happens when we use start using the terms bash, bashing, and basher. Because
they suggest irrationality, hatred, and racism, they inhibit and obviate
serious and necessary discussion of important differences and issues. Are there
no legitimate grounds for concern about China's territorial claims in the
Pacific or about its currency and trade policies? Certainly the Federal
Reserve's monetary policies and U.S. currency policies were subjected to
withering criticism at the last G-20 meeting.
only underlines another interesting element of phenomenon. "Bashing" is
something that apparently can only be done by the West, and really only by the
United States. No one calls China a U.S. basher when it criticizes Ben Bernanke
or the U.S. banking system. No one calls Germany a U.S. basher when it levels
criticism at U.S. economic policies.
basher was first popularized by Washington
Post columnist Hobart Rowen in the 1980s when, in his passionate advocacy
of free trade, he used it to undermine the legitimacy of any U.S. response to
or even criticism of Japan's mercantilist, export led growth strategy of the
time. His tactic proved so effective that it was quickly adopted by the
officialdom and media of Japan and other countries wishing to deflect and halt
U.S. pressure on them for change.
time to stop using this term in reference to debate with or about our
international partners. We should be speaking of "criticizing" rather than of
Clyde Prestowitz is president of the Economic Strategy Institute and author of The Betrayal of American Prosperity.
OLIVIER LABAN-MATTEI/AFP/Getty Images
Napoleon always said he liked lucky generals. He would have loved Barack Obama. The president is so lucky that he now has the South Koreans doing the dirty work of saving him from committing political suicide by signing a Free Trade Agreement (FTA) that would likely further increase both the U.S. trade deficit and the U.S. unemployment rate.
Reports from Seoul yesterday said the deal was essentially done and that Obama and South Korean President Lee Myung-bak would meet their self-imposed deadline by inking the deal today (Thursday). But no, the Koreans, who have been relentlessly promoting this deal as essential to both Korea's future economic well-being and its national security, suddenly said they couldn't agree to a small increase in imports of U.S. beef or a slight relaxation of emissions rules for imports of small numbers of foreign auto imports.
Since, like China, South Korea already manipulates its currency and imposes a myriad of subtle bureaucratic regulations and informal agreements that make the Korean market one of the most closed in the world, one might wonder why Seoul couldn't agree to these two U.S. requests which would in no way result in any significant increase in Korean imports from the United States. But Obama should really thank his lucky stars for South Korea's economic paranoia because it may save him from his administration's own worst instincts.
I know we're all supposed to be free traders and that opposition to anything labeled free trade is strictly taboo. But really, does anyone truly believe that we have anything like free trade with South Korea? This is a country that, as a matter of policy encourages the infringement of foreign intellectual property, and whose courts routinely annul the Korean patents of foreign based companies.
Yes, the proposed deal would significantly reduce Korean tariffs and facilitate foreign investment in Korea and contains strong language on the protection of intellectual property. But if the courts won't enforce the language what is the point? And tariffs are not the real barriers to foreign penetration of the Korean market, especially since the Korean government can and does manipulate its currency to offset the effect of any tariff reductions. As for facilitating foreign investment in Korea, why do we especially want to do that when we need investment in the United States? Moreover, the proposed deal on investment as presently constituted actually allows the U.S. branches of Korean companies to take disputes over U.S. regulatory rulings and impacts out of the American legal system by appealing to the World Bank and the International Court.
Isn't that something? The United States has consistently refused to join the International Criminal Court on grounds of protecting national sovereignty, but was just on the verge of signing a trade deal that would enable foreign companies to evade the sovereignty of the U.S. legal system in certain disputes. I wonder if the Republicans who have been promoting the deal understand that.
But sovereignty is not really the main point; that would be jobs. Here, the deal fails utterly. Of course, there are lots of studies by the various think tanks around Washington. Not surprisingly they only prove that while figures don't lie, liars figure.
If you are for the deal, you can easily find a computer model that will confirm your view and vice versa. So let me put it in the words of one of the Korean negotiators whom I know and to whom I posed the question of whether, honestly between friends, he thought the deal would significantly increase U.S. exports to Korea or U.S. employment. His answer was an immediate "no." And no one who knows anything about doing business in Korea believes otherwise.
So let's hope Obama's lucky streak keeps holding, at least until he gets out of South Korea.
Clyde Prestowitz is president of the Economic Strategy Institute and author of The Betrayal of American Prosperity.
TIM SLOAN/AFP/Getty Image
Clyde Prestowitz is the president of the Economic Strategy Institute and writes on the global economy for FP.