There was a lot of good stuff in the President's State of the Union address last night, but a lot of it is not going to happen unless the Obama administration stops contradicting itself.
Repairing and upgrading infrastructure and education, facilitating and investing in production of more and cheaper energy, fostering domestic manufacturing and the re-shoring of production and jobs, reforming how we do healthcare to cut costs by paying for results rather than procedures, stoking R&D and innovation, and fixing our broken immigration system are all important and largely (or should be) bipartisan undertakings.
But does the White House understand that it is operating in a global economy, have any idea of what that is, or of how other countries conduct themselves in that environment?
The President announced that he is launching talks to conclude a Trans Atlantic Free Trade Agreement (TAFTA) between the United States and the European Union. This is a worthy initiative that I, along with a few others, have been promoting for nearly twenty years. It's worthy because the EU is by far the world's largest economy and the economic relationship between the U.S. and the EU dwarfs any other. The United States sells three times as much to the EU as it does to China, for example. Furthermore, the EU's attitudes and policies on international trade and investment are very similar to our own and its markets most nearly match ours in terms of openness to outsiders. EU wages are, if anything, higher than ours, as are its environmental, health, and safety regulations. So there will be no race to the bottom in a TAFTA. Nor are the euro and the pound sterling manipulated currencies, and the EU anti-trust regime is fully as tough as that of the United States. I believe a TAFTA could add 2 to 4 percentage points to U.S. GDP. So far so good.
But then the President reiterated a line from his inauguration address which said that the Trans Pacific Partnership Free Trade Agreement that he is hoping to complete with Canada, Mexico, Peru, Chile, New Zealand, Australia, Brunei, Singapore, Malaysia, and Vietnam (and possibly Japan) by October will level the playing field and promote American exports and jobs. He essentially equated the two proposed deals.
But they are in no way comparable. For starters, the TPP is likely to undermine the North American Free Trade Agreement (NAFTA) and the Caribbean Area Free Trade Agreement (CAFTA) and result in the loss of more than a million jobs in Mexico and the Caribbean, along with nearly 200,000 jobs lost in the United States. This is because under NAFTA and CAFTA textile producers in the Caribbean and Mexico who use U.S.-made fiber and yarn receive duty free access to the American market. The only manufacturing industries in the Caribbean are based on this deal, as is much of Mexico's manufacturing industry. These deals were done in the 1990s in part to mitigate illegal immigration and illegal production and shipment of drugs to the United States. A TPP will remove the tariffs on textile imports from much of Asia and take large chunks of the U.S. market away from Caribbean and Mexican producers and give it to Vietnamese producers that are heavily controlled and backed by their government, according to studies by the Mary O'Rourke Partners Group of economic analysts.
But that's just a small part of the problem. The main part is that the TPP does not at all address the issue of trade-related currency manipulation in which governments actively adopt policies aimed at promoting their exports and reducing their imports by lowering the value of their currencies. A good recent example is that of Japan. Before being elected, the new Prime Minister Shinzo Abe called for devaluation of the yen. Upon election he immediately began introduction of policies and rhetoric aimed at reducing the value of the yen. Not surprisingly, the yen has devalued by nearly 30 percent over the past few weeks. That would far outweigh any removal of a 5 percent tariff that might be achieved in a TPP deal. Yet the TPP has nothing with which to combat this kind of currency policy.
And it gets a lot worse. On Monday, I received an urgent email from an old friend in Tokyo who is a former top economist for Goldman Sachs. He had just seen on Bloomberg a comment by Treasury Undersecretary Lael Brainard saying in answer to a question about Tokyo's recent actions that the administration supports Abe's policies to stimulate the Japanese economy. In other words, the Obama administration apparently approves of Abe's efforts to weaken the yen as a way of subsidizing Japanese exports, many of which come to America, a country that needs to reduce its trade deficit in order to keep economic growth and job creation going.
Asked my Tokyo friend: "Do these people have any brains? Who do they work for? Who?"
Well, they all work for the president, and he hasn't figured out yet that the TPP and fiddling with currency values to promote trade surpluses and promoting manufacturing in America don't go together. So it was a good speech, but a very mixed message.
Mario Tama/Getty Images
"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.
Clyde Prestowitz is the president of the Economic Strategy Institute and writes on the global economy for FP.