“Disruption” Imperils the U.S. at Home and Abroad

Many of us have watched in horror during the past week as the current U.S. administration has attempted to bully our allies on trade. The drama culminated in the U.S. executive repudiating the G7 communiqué issued on June 9 with a contrived attack on the Canadian Prime Minister.

The confrontation and bravado is for domestic political show. The approach makes no sense as foreign economic policy, only as domestic political mobilization. For the first time in memory, the United States has a “President of his base” rather than a President of the United States.

The disruption to valued domestic institutions and critical international relationships appears to be considerably effective with “the base.” As numerous media accounts suggest, supporters of the administration approve of disruption because the current occupant of the White House “is not a normal politician” and “says what he believes.” The substance of behavior, no matter how offensive, misguided and destructive, does not matter.

While supporters of the administration in the farming sector express reservations about the aggressive use of tariffs, recent accounts of voters in politically decisive districts reveal that some advocates of disruption believe the tariffs and threats of more to come are “necessary” to protect America.

But protect the United States from what, exactly?

Let’s start with the U.S. trade deficit. It is, in fact, enormous, typically running in the range of $50 billion per month. Ironically, though, trade deficits have fallen in recent months, largely due to an acceleration of U.S. exports in a growing global economy.

Global economic growth –- best nurtured through stability rather than disruption — is one of the surest ways to trim the trade deficit.

Trade deficits with individual countries – bilateral deficits – do not tell us a great deal, and a bilateral deficit with a country is certainly not a “loss.”

The U.S. ran a $318 million trade deficit with Bolivia in 2016. Are we “losing” to Bolivia, a country with a GDP per capita of $3100, about 1/19th that of the U.S.? U.S. producers import from Bolivia precious metals, gems and mineral ores, obviously inputs to higher value added production that enriches U.S. companies that import these goods.

Overall, the U.S. consistently runs a trade deficit precisely because the dollar is the world’s reserve currency. The dollar is the most widely used currency for transactions around the globe, and it is the currency most widely held in reserves of central banks around the world, comprising something like 63% of all global reserves.

This means demand for the dollar remains high, bolstering its “price” – i.e., the value of the dollar. Put differently, the value of the dollar is higher than it would be were the dollar not the global reserve currency. The consequence is that U.S. goods are more costly on global markets than they would otherwise be; the flip side of this is that imported goods are cheaper in the U.S. than they would be were the dollar not the principal global reserve currency.

Americans maintain a higher standard of living because of the global role of the dollar.

Were the dollar to decline as a global reserve currency, its value would fall relative to other major currencies. The U.S. trade deficit would as a consequence diminish.

Would we be better off?

Well, to begin with, with less demand for dollars, the U.S. would have to pay higher rates of interest to induce investors to purchase U.S. government debt. With the rising deficits ahead due to the slashing of corporate taxes in December 2017, a considerably larger share of U.S. spending would have to be directed toward paying interest on our debt.

Additionally, our standard of living would be lower due to the higher cost of imported goods.

Perhaps, then, it does not make much sense to focus so exclusively on the size of the trade deficit?

What about our G-7 allies? Supporters of the current administration point to high EU tariffs on U.S. products; the 10% tariff on U.S. autos gets a lot of attention, since the U.S. imposes a tariff of only 2.5% on auto imports from Europe. There are Canadian tariffs on U.S. milk, without which Canadian dairy farmers would be swept aside by a river of U.S. milk.

Nonetheless, Canada imports a much larger share of its total dairy product consumption than does the U.S. (which restricts imports), and the U.S. runs a large overall surplus in dairy trade with Canada.

Canada is also, by far, the leading market for U.S. exports; last year U.S. businesses sold $341 billion of goods and services to Canada.

Canada is also the second-largest source of foreign direct investment in the U.S.

At least three additional points are worth noting in response to claims that tariffs are necessary to protect the country. First, according to World Bank calculations based on U.N. Conference on Trade and Development data, the average level of tariffs between the U.S. and our European allies on traded goods is less than 2% on each side, among the lowest in the world among major economies (with the exception of Canada, which has an average applied tariff rate of about 0.8%).

Collectively, the G-7 countries purchase approximately 1/3 of all U.S. goods and services.

Second, while there are some goods for which European tariffs on U.S. goods are higher than U.S. tariffs on European goods, there are also many products for which the reverse is true.

Finally, while the U.S. runs a large trade deficit with its European Union partners, those partners in turn send a vast flow of investment into the U.S. EU investments in the U.S. total more than $2.7 trillion; U.S. firms hold about $2.3 trillion in investments in the EU. EU investment in the U.S. is eight times the size of EU investments in China and India combined.

The six countries of the G-7 just shunned by the current occupant of the White House account for a larger share of foreign direct investment in the U.S. than the rest of the world combined. Furthermore, these investments contribute enormously to U.S. exports.

Perhaps a policy of disrupting this relationship is not in the interest of the U.S.?

If the administration were genuinely interested in lowering trade barriers rather than engaging in a brawl over trade, diplomacy and steady negotiation would make sense. This could include resuming talks on a Transatlantic Trade and Investment Partnership, a focus of negotiations from 2013 to 2016.

As conveyed by the U.S. Trade Representative during the negotiations, “The Transatlantic Trade and Investment Partnership (T-TIP) is an ambitious, comprehensive, and high-standard trade and investment agreement being negotiated between the United States and the European Union (EU). T-TIP will help unlock opportunity for American families, workers, businesses, farmers and ranchers through increased access to European markets for Made-in-America goods and services.”

But the current administration abandoned TTIP upon entering office.

Careful diplomacy is inconsistent with a policy of bluster and “disruption” designed to appeal to the 40% or so who think the current administration is doing a superb job of putting “America first.”

Support for disruption is especially frightening because disruption drains policy of content. For supporters, it doesn’t matter what the current administration does, only that it is done loudly, that it trample on existing norms and structures, and that it be done in the name of “America first.”

But make no mistake, there are costs. Last week I wrote about the cost to domestic institutions, rule of law and democracy.

There are also costs of disruption to politically and economically important international relationships that can prove especially valuable for coordinating responses to international turmoil or crises.

Disrupting these relationships may just hasten the decline of American economic dominance and the role of the dollar — reducing the trade deficit, and our standard of living – after all.

 

Why Public Investment in Job Training and Apprenticeships Would be Valuable – And Why This Won’t Happen

The “America first” steamroller moves on, now rolling over the global free trade system.

There are indeed workers in the U.S. that have been left behind by globalization, and who are suffering economically even as aggregate growth continues. Shouldn’t U.S. policy makers act to provide support for these workers?

Indeed, they should. In fact, the weakness of past efforts to do so – such as through the cumbersome and limited Trade Adjustment Assistance Program, help explain the current populism.

What’s wrong, then, with striking back at countries with whom the U.S. runs large trade deficits, to create fairer trade and bring back or at least save jobs?

Several things.

First, a focus on bilateral trade deficits is completely misguided. The U.S. runs bilateral deficits in goods trade with Cambodia, Kenya and Algeria (among many others). Is the U.S. “losing” to these countries? Is the U.S. economy harmed by the footwear imported from Cambodia? By the apparel and coffee entering the U.S. market from Kenya? By crude oil imported from Algeria? Or do consumers benefit from these goods, and are oil refiners able to profit from crude oil imports, just as other manufacturers profit from imports of intermediate goods to which they add value?

The U.S. of course runs much larger trade deficits with China and with Germany. More on this below.

Second, as is widely established, job losses in manufacturing have several sources; most studies attribute the largest share of manufacturing job losses to technological change. Protectionism will therefore do nothing to bring jobs back.

Third, protectionist measures enacted by the current administration have been undertaken unilaterally. This renders the U.S. hostile to the multilateral rules-based international system it was instrumental in setting up, and from which it has benefited disproportionately (if anything, the rules have been tilted heavily in favor of U.S. interests to the detriment of developing economies).

Fourth, there will undoubtedly be retaliation for U.S. protectionism. This brings us to China. Scholars of U.S.-China economic relations point out that the bilateral trade deficit between the U.S. and China is misleading.

As Yukon Huang of the Carnegie Endowment points out, with global supply chains so integrated, Chinese producers import semi-finished products from elsewhere in Asia and add a small of amount of value before exporting the finished product to the U.S. The entire value of the product shows up as an export to the U.S., amplifying the size of the U.S. trade deficit with China.

China’s violation of intellectual property rights and insistence that technology transfer accompany foreign investment is a genuine problem. However, knowledgeable accounts indicate that the matter is best addressed through engaging China, whose record in these areas is improving as its economy develops. Efforts to negotiate a bilateral investment treaty, for example, would be valuable to the U.S. economy. But such an endeavor would require diplomacy – as well as patience and resistance to populist instincts, two qualities absent at present from U.S. foreign economic policy.

Just as the noisy embrace of protectionism is a product of domestic politics in the U.S., pressures already are building for China’s government to enact strong retaliatory measures.

China’s retaliation will be targeted on such products as soybeans and aircraft, U.S. products for which China is the largest market. There will be concentrated economic pain in the U.S. Furthermore, as economists such as Mary Lovely of Syracuse University point out, the exchange of protectionist measures will have little net effect on the U.S. trade deficit with China.

One of many problems with “America first” is that America is not alone in the world.

So, returning to the workers who’ve been displaced by economic change, is there a better way to respond? This brings us to the case of Germany – and back then to the U.S. The U.S. runs a large trade deficit with Germany, too. Yet one overlooked German export to the U.S. is its apprenticeship system.

Apprenticeships are integrated into the German economy across economic sectors, with about one half million young Germans entering the apprenticeship system annually. One reflection of the success of the apprenticeship system is the extent to which quality manufacturing continues to thrive in Germany.

 

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The system is a public-private partnership with small, medium and large enterprises offering apprenticeship slots and publicly-funded vocational schools offering formal training to accompany training in the workplace. Employers create standard training requirements for each sector.

While firms see the value in investing in workers, the German government embraces the collective gains that accrue from having a highly skilled and productive workforce.

Some German firms have set up apprenticeships in their U.S. locations with Siemens, for example, establishing apprenticeships at locations in North Carolina, Alabama, California and Georgia; BMW setting up an apprenticeship program at its plant in Spartanburg, South Carolina in which it provides paid part-time positions with workplace training and fully paid study toward an associate’s degree and the promise of a job at the end of the program; and the Georgia Technical College System entering into an apprenticeship partnership with the Bavarian Ministry of Education, Culture and Science.

The U.S. government could embrace the opportunity to encourage and expand such programs. The Obama Administration modestly expanded funding for apprenticeships in 2015 and 2016.

But do not expect public investment in American workers under the current administration. Such investments are an alternative to protectionism, but also to the angry populism and pursuit of political division that animate the current occupant of the White House.