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.
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I just watched an online interview by the New York Times' Tom Friedman with Bill Gates. Friedman notes that as recently as six years ago there was no Facebook, no cloud, barely a Twitter, no iPad, and 4G was a parking place. Gates nods emphatically and says this shows that America is still number one in innovation. Indeed, he emphasizes that more innovation occurs in America than in the rest of the world combined. Then he gives a puzzled face and says that in view of all this innovation, he can't understand why poll after poll now shows Americans to be worried about their future and that of the United States. He adds that he guesses it must be because of uncertainty created by the political gridlock in Washington.
Well, it's always safe to blame Washington, but what I wonder is what Gates knows about innovation or worry. Don't get me wrong, I admire Gates as one of the great business minds of our time. But he's no Steve Jobs. Jobs knew about innovation. Gates knows about negotiation and standard setting and business strategy, but he's never been an innovator. The original MS DOS personal computer operating system on which the Microsoft empire is based was bought by Gates from a friend and then licensed by Microsoft to IBM. Gates bamboozled IBM by persuading it to take only non-exclusive rights to the system, but he didn't invent the system.
Or take the Microsoft Explorer browser. Mosaic and Netscape were the first browsers. Microsoft had no clue and was scared to death when Netscape debuted. Gates bundled Explorer to his Windows monopoly operating systems and, with the help of sleepy U.S. government anti-trust oversight and friendly courts, killed off Netscape. Brilliant, perhaps, but not innovative. More a copy of the Rockefeller Standard Oil model than of Apple.
Gates also doesn't know much about worry because he's a rich kid who always had a job and then bargained his way into one of the history's greatest monopolies. Again, let's give him credit for single-minded drive and focus, clever bargaining, and great business strategy. But he never had to worry. He never had to look at life through the eyes of an everyday American.
He does, however, present a perfect view of the world as seen through the eyes of the American elite. It worships at the alter of innovation and sees the future as an endless series of Facebooks, Twitters, and Groupons. If America is suffering from declining competitiveness and rising trade deficits, innovation, according to the elite, is the philosopher's stone that will turn everything around.
Well, as Santayana said, "Those who cannot remember the past are condemned to repeat it." The British have a long tradition of innovation. Indeed, Japan's Ministry of International Trade and Industry (MITI) once found that 54 percent of the world's most important inventions were British while only 25 percent were American and 5 percent Japanese. The first commercial jet liner was the British Comet. The first digital audio system was British, as was the first operating television system. I could go on and on, but the point is that British industry wound up far behind U.S. industry in all of these sectors, and in many more as well. The British economy reaped very little benefit from these innovations because it did not fully commercialize or mass produce them. They created nice jobs for a relatively few brilliant scientists and engineers in Britain, but none for the average bloke. It was the American companies who came along behind and copied the Brits that garnered most of the sales and profits, American workers who got most of the jobs, and the American economy that gained most of the GDP growth from the innovations.
This history is now being repeated between the United States and Asia with the United States in the role of Great Britain. Average Americans are worried because they can see that, even as the elite is blinded by its own brilliance.
Another great American business leader has been making this point recently from his base in Silicon Valley. Former Intel CEO and Chairman Andy Grove, whose company accounts for half of the WinTel standard that has dominated the PC industry for the past thirty years, wrote in Bloomberg BusinessWeek a bit over a year ago that innovation without follow-up on scale and production is not a great wealth producer. In short, it is a necessary but not sufficient generator of jobs, wealth, and economic growth.
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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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"It's on me. It's on me," GE CEO Jeff Immelt recently told the Wall Street Journal's John Bussey in response to a question about the wisdom of transferring technology and production to his new avionics joint venture with China's state-owned Aviation Industry Corp. (AVIC), a company that supplies both China's commercial and military aircraft industries.
Presumably, this was Immelt's way of saying that he would man up and take responsibility if anything went wrong as a result of the deal. That is, of course, an admirable sentiment, but the problem is that it's not a responsibility Immelt can take because he will never be in a position to actually have to pay for any damage resulting from the deal.
Three points have gotten mixed up in the ongoing discussion of this deal, and it is important to unscramble them. First is the issue of access to the Chinese avionics market being conditioned by Beijing on the transfer of technology and production to China. GE spokespeople keep saying that it was never told it had to make such transfers in order to get the business. This is disingenuous, and Immelt ought to tell his people shut up in order to save his own credibility. Sure, no Chinese official ever made such a direct statement to GE. But it is insulting to trade and industry experts for GE to keep denying what everyone knows to be true. Beijing's five-year plans and its Buy China policies along with its Buy Indigenous Technology policies have made it abundantly clear to all observers of the scene that China intends to develop its own cutting-edge aviation and avionics industries and that it intends to do so by insisting that production and technology development for the Chinese market be done to the maximum possible extent in China. GE is doing this joint venture because it knows it has no chance of getting the business without technology and production transfer, and every China and trade expert in the world knows this to be the case.
The second issue is whether the technology GE is planning to transfer could leak into China's military aircraft programs and thereby endanger U.S. national security at some future date. Related to this question is also that of whether the technology could leak out and be used by other Chinese companies to take business away from other U.S. aerospace companies like Boeing. GE says it has devised strict procedures that have been approved by the U.S. Departments of Defense and Commerce to prevent such leakage. Further, GE insists that technology is the heart of the company and asks rhetorically, "Why would we give away our future?"
When Immelt insists that "it's on me," this is what he means. In other words, he'll take responsibility if somehow the technology gets away from GE into places where it could come back to hurt GE or the United States.
Historical experience strongly suggests that leakage of technology in these kinds of circumstances is virtually impossible to prevent. Look, we couldn't prevent the North Koreans from getting nuclear weapons technology even though we made every effort to stop them and certainly were not doing joint ventures with North Korean state-owned companies. And while it's admirable for Immelt to be willing to take responsibility if something bad happens, as a practical matter, what price exactly is Immelt likely to have to pay? By the time it happens he and his top managers are likely to be long gone from the scene with bonuses and retirement packages in hand. And even if something bad happens sooner, what will "it's on me" really mean to the companies or the U.S. forces that have to face the consequences?
But let's assume for sake of the argument that nothing leaks out of the joint venture. So GE is cool. It continues to control the technology, and its joint venture gets the business. Earnings soar. The stock price skyrockets, and Immelt and his team and the shareholders all collect big bonuses and dividends. The deal will thus prove to have been good for GE. But what about the United States? This avionics technology is something in which U.S.-based production and workers are the world leaders. The United States has a competitive advantage in this stuff. These are jobs that Americans can claim a better right to than anyone else. Under normal market conditions, without the necessity of technology transfer in return for market access, there would be no need of a joint venture. All the technology development and production would be done in America and would be exported in exchange for something that is better done in China or elsewhere. So under circumstances of no leakage, GE may come out looking golden, but the United States would still take a hit.
Oh sure, you can argue, as GE does, that by getting the China business and doing part of the work in the United States, GE is creating new U.S. jobs as well as jobs in China. And there is some truth to this argument. But it ignores the fact that the United States is getting less than the full value of its competitive advantage while at the same time that national advantage is being whittled away with the full support of multinational GE. In other words, GE can and would benefit at America's expense. So nothing would be "on" Immelt. The cost would be on the American worker, researcher, and U.S.-based producer.
That leads to the final point. The real problem here is not GE or Immelt. They are doing what is logical and best for them in the prevailing circumstances. As former Commerce Department official James Lewis told Bussey, "U.S. companies are making the right decision from a business point of view, but it might not be the right decision for the country. We've been passive (as a country) in deciding how to deal with China's aggressive industrial policies."
The real problem is the U.S. government or, rather, its absence from the discussion. China is conditioning access to its markets on technology and production transfer. There is no back pressure from the U.S. government. The CEOs are in a situation in which if they don't accede to China's pressures, they'll lose the business and they get no help from Washington in dealing with the pressures. So the rational thing to do under the circumstances is to play China's game. What is desperately needed is an American game in response. Washington needs to change the circumstances, level the playing field, give GE and Immelt a new set of incentives. The White House has to articulate an American economic interest, and that is not the same thing as the interest of GE or of any other particular company or set of companies.
So why focus so much on Immelt, you may ask. Well, it's true that in most respects he is acting no differently from any other global CEO and, let me make clear, no differently from how he should as the head of a global enterprise like GE. But there is one respect in which he is quite different. He is the chairman of the President's Commission on Jobs and Competitiveness and as such is the chief outside economic advisor to the president. He should be thinking of the American interest as well as the GE interest. He should recognize that the costs to the American economy and the American worker can't be "on" him, and he should be telling the president to change the game.
In the 1960s, mutual fund magnate Bernie Cornfeld used a key question to winnow prospective new employees. It was: "Do you sincerely want to be rich?" Cornfled's view was that anybody could get rich if they really wanted to. The reason there weren't more rich people, in his view, was that most people weren't willing to do what it takes to become rich and thus didn't really want to be.
If we alter the question just a little for today's situation and ask if Washington, by which I mean the president and Congress, really want more jobs for Americans, the answer must be no.
Let me give you just two quick examples of why I say that. A few days ago I was in Singapore meeting with, among others, some old friends from Singapore's Economic Development Board. This is the government body in charge of promoting exports, attracting foreign investment and technology to Singapore, and of generally planning and executing the city-state's economic strategy. As always, I was impressed with the comprehensive strategic thinking of these people and of their single-minded pursuit of investment, technology, and jobs that could be brought to or developed in Singapore.
I went from these meetings to have a drink with a senior U.S. Commerce Department official who happened to be in the neighborhood. Now remember that one of the much-publicized Obama administration initiatives of the past couple of years has been the export doubling program of the Commerce Department's Foreign Commercial Service. The idea was that every $1 billion of exports generates about 15,000 jobs and that doubling exports would therefore generate lots of jobs and drive unemployment down. It was and is a good idea. So you can imagine my surprise when the official explained that, although not yet announced, the Commerce Department is planning to reduce the staff of the Foreign Commercial Service. I guess Obama and his new, inexperienced commerce secretary think the service will do more with less, but the reality is that it will do less with less. And this was the plan before the recent debt ceiling deal. In the wake of that, the likelihood is that the service will get even less and perhaps do nothing.
From Singapore, I proceeded to Tel Aviv, where I have involved in an evaluation of the work of several U.S.-Israel bi-national foundations for promoting science, agricultural research, and industrial research and development. Created in the 1970s with a total endowment paid equally by both governments of about $300 million, these foundations have been making grants to Israeli and U.S. scientists, researchers, and corporations for the past thirty five years. In that time, they have been associated with several Nobel Prizes, the development and commercialization of an astonishingly wide variety of new technologies, products, and processes, and the creation of tens of thousands, if not hundreds of thousands, of U.S. (as well as Israeli) jobs.
The problem for the foundations at the moment is that they have not had their endowments topped up since the early 1980s. They have therefore been requesting that both governments renew and increase their contribution commitments. Now we're not talking real money here. No trillions or billions. Not even hundreds of millions. Just a few millions or even thousands. Crumbs off the table, really.
Well, fractious and combative as it is, the Israeli government sincerely wants to be a technology leader and to create jobs and has therefore put its money where its mouth is. It has committed not only to maintaining the old funding but to increasing it, contingent on the U.S. government doing the same.
Yes, you guessed it. There's the rub. No one in Washington is even considering a replenishment of or increase in the endowment, because, truth be told, Washington does not sincerely want to create new jobs.
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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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In the wake of my recent blog post on the new Oakland Bay Bridge being made in China, a lively debate has erupted. I found the best comments to be those of Vikram Dalal of Iowa State University. I am passing them along here.
By Vikram Dalal
Professor of electrical and computer engineering, Iowa State University
The real problems are:
1. The destruction of American industrial infrastructure. As former Intel chief Andy Grove says, it is absolutely critical that we continue to manufacture "commodity" industrial items, like bridges and rivets and bearings and computer chips and tires and steel and aluminum and commodity chemicals. Once we lose that, we lose the workforce. It takes many, many years to build up an industrial workforce, but only 10 years to destroy it. When younger people see jobs being lost in manufacturing, they turn away from it, with the result that the workforce dies off. That is exactly what is happening today -- industries cannot find enough well-trained young people.
2. The second problem is that as the industrial workforce (the people who make things that we can export) is reduced and laid off, they (and their children) go into "service" businesses, particularly health care. But health care is a giant monopoly -- the doctors have an iron grip on it. There is no competition there. What it means is that the only way more jobs are created in "meaningful" health care -- jobs like technologist or lab tech (as opposed to those in bedpan health care) -- is by doctors prescribing more MRIs, CAT scans, PET scans, and so on. That increases medical costs, especially because Medicare requires no second opinion. You walk in and before you know it, the doctor has prescribed 10 tests, because no one is checking; and he, and the hospital, make more money from more tests. So increasing health-care employment is not a winning strategy from a national economic viewpoint.
President Obama and his administration no doubt richly deserved the victory laps they took this week in the wake of their high stakes success in tracking down and doing away with Osama bin Laden. Now, however, they must quickly confront the fact that in a fundamental way he is still winning.
I don't mean that the terrorism and medieval brand of Islam he fomented are gaining support. Indeed, if anything, we have been over-estimating the terrorist threat posed by al Qaeda for some time. I even allowed myself briefly to wonder this morning if we might again be allowed to keep our shoes on in airport security lines. But terror was only a tactic for bin Laden. His larger strategy, as he wrote to Taliban leader Mullah Omar shortly after 9/11, was to force the United States to over-reach in its reaction to the terror attacks and thereby to incur "great long-term economic burdens" that would "lead to further economic collapse." In that, the late al Qaeda leader continues to be only too successful.
The news of his demise is providing only a brief respite from a looming political clash over the United States' rising debt and how to cap and reduce it. Moreover, this debate is taking place in the context of an international flight from the dollar, slowing recovery from the recent Great Recession, stubbornly high unemployment, rapidly rising trade and current account deficits, and a Standard and Poor's warning of a possible downgrade of the AAA rating on U.S. sovereign debt. Over all this, bin Laden is smiling from his watery grave.
Thus, to really defeat him, President Obama must change his emphasis from geo-politics to geo-economics and revitalize the United States' flagging economic competitiveness. Here's how:
Cut total U.S. national security spending (military and intelligence) in half over the next six years. Even at this reduced amount the United States would still have by far the largest, most powerful military forces in the world. Part of this could be achieved by rapidly drawing down U.S. force levels in Afghanistan and Iraq and by withdrawing U.S. ground forces that have now been stationed in Europe, Japan, and South Korea for well over half a century even as these countries have prospered and become powerful in their own right.
Spending and taxes
Get federal budget deficits under control by closing tax loopholes and adopting a combination of tax increases and spending cuts similar to those recommended by the Bowles/Simpson Commission. Marginal tax rates might actually be reduced if the tax base is broadened. In particular, the mortgage interest deduction should be substantially limited.
Adopt a Value Added Tax (VAT) similar to those of virtually all other advanced industrialized countries which rebate these taxes on their exports.
Reduce the corporate tax rate to the 25 percent levels prevailing in most of the world.
Gradually increase the age of eligibility for early Social Security to 65 and for full Social Security to 70.
Shift the medical payments system from pay for procedures to pay for care and adopt a national system of digitized, on-line medical records.
Set a target not just to double exports but to halve the trade deficit in the next three years. Because there can be no more stimulus spending and no further cuts in interest rates, this will be the only way to cut unemployment.
Adopt the Colombian and Panamanian Free Trade Agreements, but reject the Korea-U.S. Free Trade Agreement. The Korean deal will increase the U.S. trade deficit and impose a net loss of jobs as it is presently structured. It should be renegotiated to cover the items like currency policy that are the main drivers of our bi-lateral trade.
Establish a new template for free trade agreements with the Trans-Pacific Partnership by including coverage of currency manipulation, competition policy, investment incentives, and third party adjudication of intellectual property disputes.
Emphasize INVEST IN THE UNITED STATES. Establish a fund to match the investment incentives being used by many other countries to induce both foreign and domestic direct investment. Ensure that no business person leaves the presence of the President or any other top U.S. official without being asked about plans to invest in the U.S. Make it the top priority of the Commerce Department to maintain awareness of the investment thinking of the United States' and the world's leading corporations.
Embrace and lead global efforts to reduce the role of the dollar as the world's major currency. A system of several competing reserve currencies or of a global basket of currencies or of a global currency backed by commodities would place discipline on all global market participants to avoid chronic trade surpluses and deficits.
Self-initiate enforcement of U.S. and global trade rules to offset the impact of mercantilist policies on the U.S. productive base. Aggressively use the facilities of the World Trade Organization to challenge practices that tend to negate the intent of the global free trade rules.
American economic strategy
Recognize that the sum of regulatory, anti-trust, tax, government procurement, and a host of other policies greatly influences the structure and productivity of the economy. It is a de facto national economic strategy. Because it is never recognized as such, it is never analyzed in a coherent, comprehensive fashion. It should be the job of the National Economic Council to do this. At the same time, a Congressional Economic Strategy Office a la the Congressional Budget Office or inclusion of a strategy analysis as part of the budget office's remit would be advisable
I could go on, but have probably gone too far already. The main point is very simple. The top priority of Obama in the wake of the demise of bin Laden must be to reconstitute America's economic vitality.
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I can't seem to get away from good news about exports. On Monday, the Wall Street Journal worried about foreign shocks retarding America's "export-led rebound." Then a message from the U.S.-China Business Council emphasized that U.S. exports to China are skyrocketing on their way to early fulfillment of President Obama's export doubling objective. Having just digested that, I received an email from Globalworks explaining how last year's 17 percent increase of $265 billion in U.S. exports had accounted for half of 2010 GDP growth.
Because the words "export-led growth" vanished from the American vocabulary over half a century ago, and because I am one who has long called for a U.S. export led growth strategy, I should have been delighted. So why wasn't I? Why did I have the feeling that this news was so, well, too good to be entirely true?
One thing was the fact that there was not much mention in any of these messages of U.S. imports. Yet I knew that after dipping during the Great Recession the chronic U.S. trade deficit has been rising steadily for the past twelve months and that the current account deficit is now well above the 3 percent of GDP level considered sustainable by most economists. So it sounded like we might be in the position of exporting our way to another crisis as our global deficits become increasingly unsustainable.
This paradox is the big problem with what I call the export dodge. Promoters of our present system of international trade and globalization do not want to discuss trade deficits and imports because such topics raise difficult questions about the validity of the theories and assumptions on which the present system is based and about the possibility that the present system is actually disadvantageous to the U.S. economy. Thus the emphasis is placed on exports. The president doesn't want to talk about cutting the trade deficit because that might be perceived by some as smacking of protectionism. So he calls for doubling exports. Other defenders of the status quo want to divert attention from the mercantilist practices of some of our trading partners and from any "protectionist" consideration of measures to counter those practices. So they emphasize how well our exports are doing and how much they are contributing to growth.
Of course, it would be wonderful to double exports. But if attention to that diverts the President and others from noticing that imports continue to rise more than imports, we are very likely to fall into a new crisis.
Let's take a look at the numbers behind the headlines to see how this works.
In 2010, U.S. exports increased by $265 billion or 17 percent over the level of 2009. Exports of goods rose by about $211 billion and exports of services by roughly $43 billion. The total equaled about 1.34 percent of U.S. GDP and was thus credited for raising GDP by that amount. This is well and good and makes it sound as if international trade is doing wonders for the U.S. economy.
But now we must take a look at the other side of the equation. Over the same period, U.S. imports rose by $385 billion or nearly 20 percent with goods imports rising by $360 billion and services imports by $25 billion. Thus imports outstripped exports by $120 billion and adding that amount to America's enormous international debt and to the great pile of dollars and U.S. treasury bonds held by its major trading partners.
The fact that net exports were negative might suggest that trade was actually a drag on U.S. GDP growth and that all the emphasis on exports is entirely misplaced. In fact, it's a little more complicated than that. To know the exact answer one would have to look at what was being imported and exported and to what extent imports displaced potential domestic production.
What is clear, however, is that talking about exports without addressing imports and the balance of trade is misleading and potentially dangerous. In particular, the only way to cut U.S. unemployment without increasing U.S. debt is to reduce the trade deficit. That means increasing exports more than imports. There are several ways to do that. We could cut imports while raising exports or cut imports while holding exports steady or raise exports by a lot more than imports. But what cannot be done is to simply focus on export gains while ignoring imports.
In short, it's time to stop dodging the tough questions on trade.
Joe Raedle/Getty Images
Okay, so yesterday I explained not only that John McCain was wrong to say the iPhone is made in America (as you already knew), but also that most of you were wrong to think it is made in China. I went on to show that the phone is only assembled in China from high-tech parts that are mostly made in Japan, South Korea, and Taiwan. I further explained that production of these parts is not labor intensive, but capital and technology intensive.
In other words, these parts are just the kinds of products American economists, Silicon Valley venture capitalists and entrepreneurs, and Washington political leaders always say America is the best in the world at making. (That's probably why McCain just automatically said without thinking that the iPhone is made in America -- he couldn't imagine it being made anywhere else). Then I left you with the question of why, if America is so good at making this stuff, it doesn't.
All right, I know you've had a sleepless night over this, so I'll relieve the suspense.
Here's the answer -- or perhaps I should say, answers:
The first is economies of scale. Take two economies, say the United States and the E.U. Take a product, say airplanes and especially commercial airliners. During World War II, the Germans, Japanese, British, and Americans all made very good airplanes. Europe was competitive with the United States in its ability to make airplanes. After the war, both the Europeans and the Americans had all the technology, resources, and skills requisite for aircraft production. And, indeed, it was Britain that actually produced the first commercial jetliner. Yet, it was the American companies -- Boeing, Lockheed, and Douglas -- that emerged in the post war period as the globally dominant aircraft makers, especially of commercial jetliners. This was because, as part of the post-war occupation policies, Germany and Japan were forbidden to produce aircraft. While the French and British faced no such prohibition, their national markets for jetliners were relatively small compared to the U.S. market. Aircraft production is an industry with enormous economies of scale.
If you build only one plane, the cost for that one plane is prohibitive. But if you build a thousand of the same model, the cost per plane falls dramatically because high fixed costs can be amortized over a large number of planes produced. With a big home-market advantage, U.S. producers were able quickly to reduce their costs far below the level of the British and French. Once that happened, the British and French producers could not sell at a profit to anyone and could not survive without major subsidies from their governments.
Of course, the E.U. governments decided to engage in what economists call "picking winners and losers" by heavily subsidizing Airbus to make it a viable competitor with the U.S. producers. Their policy eventually paid off and today, Airbus is the world's leading commercial aircraft maker. But it took great policy determination over a long time and hundreds of billions of dollars of subsidies to achieve.
The second answer is U.S. geopolitical and international economic policy doctrine. Since the end of World War II, America's highest priorities have been to assure access to military bases around the globe, to conclude and maintain alliances, and to engage in military intervention to assure a global balance of power deemed favorable to U.S. interests. To this end, Washington has continually been prepared to make economic concessions in order to obtain geo-political objectives. Thus, for example, Washington effectively responded to the Airbus subsidies for fear that doing so might upset NATO arrangements.
This geopolitical priority has long been rationalized and justified by an international economic policy that held free trade to be always and everywhere a win-win proposition. Indeed, it was believed that unilateral free trade (keeping one's markets open, even in the face of protectionism by one's trading partners) was a winning proposition. Thus, there was no need to be concerned about things like subsidization of key foreign industries or loss of capability in these fields, and hence no need for trade measures that might upset delicate geopolitical relationships.
This economic doctrine has been based upon the assumption of Anglo/American economics that economies of scale either don't exist in most traded products and industries or are relatively unimportant. That this assumption is dramatically and demonstrably wrong and not accepted by most of the non-Anglo world has not deterred its application to the making of much American and global trade policy.
A corollary of the free-trade doctrine was also the doctrine that governments cannot and should not "pick winners and losers" by favoring some industries with protection and subsidization.
The third answer is that the rise to dominance of the theory of Shareholder Value (the sole duty of the CEO is to increase relatively short-term returns to shareholders) in U.S. business schools. Beginning in the 1970s, business leaders promoted the off-shoring of production by American CEOs who aimed to increase returns by arbitraging labor costs between Asia and America.
In the 1960s and early 1970s, the U.S. consumer electronics industry was the world leader in virtually every dimension. But first Japan, and then the Asian Tigers, and then China were determined to catch up. Far from believing that governments should not "pick winners" by subsidizing and protecting them, they saw that most of the major industries like steel, shipbuilding, aircraft, and electronics were characterized by economies of scale and that they had no chance of being in these industries except by dint of subsidies and protection. Governments, they believed, had an absolute duty to achieve rapid economic growth precisely by picking these kinds of industries to be winners.
Thus, Japan kept its yen undervalued (just as China is today keeping its yuan undervalued), provided preferential financing to consumer electronics producers, subsidized their exports, encouraged them to dump (sell abroad at prices below cost and/or below the prices at home) fiercely protected its domestic markets, and forced foreign producers to transfer technology to Japan as a condition of obtaining market access. The objective was to achieve high rates of production in order to obtain the economies of scale necessary to match the costs of American producers.
At the same time, the U.S. government, not wishing to upset the U.S.-Japan alliance with nasty trade issues and seeing no need to do so because it believed that trade is always win-win, took no action to counter the dumping, currency undervaluation, intellectual property theft, and subsidization of "winner" industries by Japan.
Also at the same time, U.S. CEOs at companies like RCA, Motorla, Zenith, and Ampex began to outsource the production of their television, radio, and VCR components to Japan while they kept the design, marketing, and distribution functions at home. By the mid-1980s there were virtually no U.S. consumer electronics producers left. The display technology for televisions, electronic watches, and video tape recorders had been taken over by Japan as had also much of the semiconductor production along with production of timers, lenses, and other key components.
In the past 25 years, the governments of Korea, Taiwan, Singapore, and other Asian countries have sought to wrest dominance in these and other key industries away from Japan by imitating its mercantilist, strategic export led growth strategies and its "picking of winners." Thus Korea heavily subsidized and protected companies like Samsung, Hynix, and LG while Taiwan actually founded Taiwan Semiconductor Manufacturing Company, now the second or third largest semiconductor producer in the world.
All of these players managed to achieve large scale production such that, even if a U.S. company like Apple had the requisite technology and resources, it could not hope to compete economically with the giant industry leaders. To do so would require that the U.S. government heavily subsidize and protect U.S. based production, a step that would require a revolution in American policy thinking and that may well no longer be affordable even if it were feasible.
That's why America doesn't produce iPhones or much of the other stuff it keeps saying it's good at. Maybe it could be good and maybe it should be good. But you know how that "coulda, shoulda, woulda thing goes.
TOSHIFUMI KITAMURA/AFP/Getty Images
John McCain provided some good laughs and made himself look stupid on a recent ABC news interview by telling Diane Sawyer that the iPhone and iPad are great examples of products that are made in America.
They're not. And given the amount of high technology production in his state, McCain should certainly have known better. The fact that he didn't does make you wonder about what, if anything, they know in the U.S. Senate. But quick, let me ask you where these iconic Apple products really are made.
If you said China (and I know most of you did), you were wrong, and thereby hang a number of tales.
Those concerned about the demise of American manufacturing have long pointed to the iPhone as an example of how the practice of off-shoring has moved what used to be U.S.-based production and jobs to China. According to this tale, off-shoring of iPhone production is adding about $2 billion annually to the U.S. trade deficit and costing 20-40,000 American jobs.
Supporters of free trade, on the other hand, have told a very different tale. They have argued that out of the roughly $500 retail price of an iPhone, only about $180 is accounted for by the manufacturing and assembly processes done in China. The other $320 results from the design, software development, marketing, shipping, and selling done in the United States. So, of the total value added, nearly twice as much is done in America as in China. Moreover, the low cost of manufacturing in China provides low prices for U.S. consumers who are thus able to buy more phones and thereby create more U.S. based jobs.
Of course, this tale still leaves the United States with a big trade deficit that does cost jobs but that, according to the free trade tale, should be balanced by doubling American exports in other products like commercial aircraft in which the United States has a comparative advantage.
Recently, a new tale has been told by the Asian Development Bank Institute (ADBI) which dissected the supply chain of the iPhone. The study found that China is actually not doing much of the manufacturing. In fact, it is mainly assembling the various parts of the iPhone into the final product and then shipping that to the United States. Because of the way trade statistics work, U.S. customs attributes the entire manufacturing value of the iPhone to China, the point of shipment of the final product. This results in the $2 billion U.S. iPhone trade deficit with China. In actuality, says the ADBI, China's assembly of the iPhone parts accounts for only about 3 percent, or $6, of the final value and because China actually imports some of the more expensive parts from the United States, it actually has a deficit on iPhone trade with America.
The ADBI study is quite good and true as far as it goes. The bulk of the manufacturing of the iPhone is not done in China (although that is changing rapidly) or in any other low-cost labor country. The battery chargers, camera lenses, and timing crystals all come from Taiwan. The screen is from Japan, the video processing chip from South Korea, and many of the other chips Taiwan's Taiwan Semiconductor Manufacturing Company. In all, over nine countries produce the parts and components that all head to final assembly in China. So, it is indeed, quite possible that the United States has a trade surplus with China qua China on the iPhone.
But that begs the bigger question of the U.S. iPhone trade deficit. With the bulk of the parts in the iPhone being made elsewhere in Asia and being shipped from China to the U.S. market, the United States still has a big trade deficit on iPhones. It just happens to be with all of Asia instead of just with China. (Yes, there are also parts from the U.S. and Europe, but the bulk of them are from Asia.) So, in a way, the U.S. deficit with China is a proxy for what is really a deficit with Asia.
That raises more interesting questions. The other Asian countries -- particularly Japan, but also Korea and Taiwan -- do not have low labor costs. Indeed, Japan and Korea are members of the Organization for Economic Development (OECD), the long time rich nations club. Furthermore, the parts they supply for the iPhone -- semiconductor chips, displays, lenses, etc. are not labor intensive. They are capital and, above all, technology intensive. Exactly the kind of products in which the United States is supposed to be the leader. So if America actually did produce the stuff it says it is good at producing, it wouldn't have a trade deficit with Asia for which China is the proxy at all. It would have a trade surplus and 20-40,000 more jobs than it has.
Why then, doesn't America make the stuff it says it ought to be good at making? For the answer stay tuned.
FREDERIC J. BROWN/AFP/Getty Images
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
The FT's Martin Wolf managed to find some encouragement in the final communiqué from the Seoul G-20 meeting. In a column earlier this week, he said that language describing the use of various measures of global imbalances and suggesting the need for action to rebalance chronic current account surpluses and deficits suggested that, under the radar, the U.S. and China are moving toward consensus on a way out of the apparent impasse reached in Seoul.
I told him that I marvel at his optimism. But let's say, for the sake of argument, that he's right and that the U.S. will move toward trying to produce more of what it consumes and exporting more of what it produces while China does the opposite. I think there remains the major question of whether either side can actually, physically do what is necessary to achieve rebalancing.
This question occurred to me last night after a chat with a friend from FedEx who mentioned that while his planes fly fully loaded from Asia to America, they return to Asia almost empty. Well, of course, that makes a lot of sense because we don't make much here in the United States that FedEx can take back. Of course, we do export to China, but in recent years our biggest or second biggest China bound export items have been waste paper and scrap metal, and those items go by ship. In the high-value, low-volume, high-tech category of goods that fly well, the United States, despite its self-image as the world's high tech leader, has a trade deficit that will likely exceed $150 billion this year.
Let's take a few major products to see how things might work. Steel, for example, is a key product for any industrial economy. The United States imports about 30 percent of the steel it uses while China has more steel making capacity than the rest of the world combined. So, in a rebalancing scenario, Washington would try to find ways to encourage U.S. companies to buy more of their steel from American producers. But the government would run into the problem that there may not be enough actual production capacity left in the United States to allow a substantial reduction in imports.
Of course, more production capacity can be built, but not in any short period of time. Construction of a new steel mill, even if anyone would have the courage to build one in the United States knowing that China's producers could at any moment unleash a flood of cheap exports into the market, would take one to two years.
At the same time, China already produces virtually all of the steel it uses and has enough production capacity to fulfill domestic demand many times over for a long time to come, even without increasing production capacity. So China's steel industry really can't rebalance. It can't sell a lot more than it already does at home, and if for some reason it stopped its overseas shipments it would be left with massive excess production capacity that could easily bankrupt its companies.
As another example, take the Apple iPad. Apple is an American based company to be sure, but virtually nothing in the iPad is made in America. Of course, the product is conceived, designed, marketed, and sold in the United States, but the components are mostly made in Japan, South Korea, Taiwan, and Singapore, and the assembly takes place in China. So rebalancing implies that maybe some iPad production would be switched to America.
In principle, there is no reason why the semiconductor chips, displays, and other key components of the iPad couldn't be made competitively in the United States and inexpensive assembly could, perhaps, be done in Mexico or elsewhere in Latin America. But that would mean that the major factories and investments that have been made in iPad production in Asia would have to be at least partly abandoned. That would result huge financial and job losses to which Asian governments would object.
I sometimes wonder if economists consider these structural, nuts and bolts issues when they talk blithely of rebalancing. These are not things that can be turned on and off like a spigot. It takes a couple of years to build a new semiconductor plant and costs $5-8 billion. Once that investment is made, it is not quickly abandoned unless there is some major change in circumstances.
In his column, Wolf insisted that the U.S. and China must achieve rebalancing fairly quickly in order to avoid protectionism. But is it possible that the action actually runs in the opposite direction -- that some degree of protection might be necessary in order to create the change in circumstances necessary to achieve big shifts in the location of production and thereby also achieve the holy grail of rebalancing?
Clyde Prestowitz is president of the Economic Strategy Institute and author of The Betrayal of American Prosperity.
MIKE CLARKE/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
As the G-20 talks get underway, we're thrilled to have Clyde Prestowitz guest-blogging for us over the next few days. Clyde is the president of the Economic Strategy Institute here in D.C. He served as counselor to the secretary of Commerce during the Reagan administration and as vice chairman of the President's Committee on Trade and Investment in the Pacific.
Be sure to check out his most recent book, The Betrayal of American Prosperity: Free Market Delusions, America’s Decline, and How We Must Compete in the Post-Dollar Era as well as his piece, Lie of the Tiger, from the November print issue of FP. -JK
First, Barack Obama was shellacked in last week's congressional elections. Then, the U.S. president was garlanded in India and Indonesia. Now he's in Korea, where he's about to be waterboarded by the G-20.
Oh sure, the G-20 will come up with some paper-over language that will allow everyone to sign on to some vague agreement that it might be a good idea to achieve global rebalancing at some undetermined time in the next century. But this is just what the Japanese would call tatemae -- the packaging or superficial appearance of things. The honne -- the truth or actuality -- is that whether he knows it or not, the U.S. president has arrived in Seoul to preside over the end of the Flat World.
In fact, the Obama administration is demonstrating a lot of schizophrenia about this. In India, Obama couldn't stop spouting the conventional wisdom about how international trade is always a win-win proposition and how those who express concern about the offshoring of U.S. services jobs to India are just bad old protectionists.
At the same time, however, Treasury Secretary Tim Geithner is calling for some kind of deal for the G-20 governments to take concrete actions to reduce their trade surpluses or deficits. To be sure, Geithner has quickly backpedaled from his original proposal that governments would set hard numerical targets for the allowable limits of surpluses and deficits at 4 percent of GDP. His first fallback position was that the numbers would be only voluntary targets or reference points. When that elicited a new round of incoming fire he retreated further to the current proposal for agreement that each country will take the measures it thinks necessary to reduce excessive surpluses and deficits. Hardly much of a deal at all.
Yet even this is a revolution. No matter how watered down, Geithner's proposal is a call for managed trade. It is an implicit admission that contrary to 50 years of the preaching of economists, trade deficits matter. Even bilateral trade deficits can matter if they are big enough because they distort capital flows and exacerbate unemployment in the deficit countries. Further, it is an admission that unfettered, laissez-faire free trade is not self-adjusting and therefore not really win-win.
This implicit admission by Geithner has been manifested even more strongly (but still implicitly) by some of our leading free-trade economists and pundits. Thus, Paul Krugman, a Nobel Prize winner and long a champion of conventional free trade has called for tariffs on imports from China. So has Washington Post columnist and eternal free trader Robert Samuelson, and even the Financial Times' economics columnist Martin Wolf has suggested that some offsetting response to China's currency manipulation might be necessary.
But Obama isn't going to get agreement to any of that in Seoul. None of the other countries want to face the fact that the United States cannot be Uncle Sugar and the buyer of last resort forever. In fact, Obama has asked both the Germans and the Chinese to help out a bit by consuming more and exporting less. The Germans told him bluntly to get lost and the Chinese told him somewhat more politely to get lost. So the honne is that the Germans, because they're Germans, and the rest of Europe, because it is in terrible financial shape and can't borrow any more, are bent on creating jobs by dint of export-led growth. Essentially, they are saying they are going to create jobs by taking U.S. jobs. The Asians are saying and doing the same thing. Neither Asia nor Europe is likely to take steps that will achieve significant rebalancing in any reasonable period of time. That, of course, means no new jobs for Americans.
The big question is whether or not Obama will respond to that refusal by taxing foreign capital inflows, imposing countervailing duties on subsidized imports, matching the tax holidays and other investment incentives used by China and others to induce off-shoring of U.S. production, and challenging the mercantilist practices of many Asian countries in the World Trade Organization (WTO). These are all measures that he could take himself in an effort unilaterally to reduce the U.S. trade and current account balances and thereby create jobs for Americans.
If he does, he is sure to be harshly criticized by the apostles of the conventional wisdom. But if he doesn't he is sure to be toast in two years.
TIM SLOAN/AFP/Getty Images
Clyde Prestowitz is the president of the Economic Strategy Institute and writes on the global economy for FP.