Trade and Globalization Issues:

[DougMacG]

Who is Mr Smoot?

https://en.wikipedia.org/wiki/Smoot%E2%80%93Hawley_Tariff_Act
Reed Smoot was a Republican from Utah and chairman of the Senate Finance Committee.

Smoot Hawley passed the House on May 28, 1929, was enacted in 1930.  Stock market crash began October 24, 1929.
Protectionism strengthened our manufacturing base and enriched farmers as follows:

Smoot Hawley Tariff Act:  raised tariffs on 20,000 items by 6.3% to 19.8%.
Effective‎: ‎March 13, 1930  
Imports: fell 66%
Exports: fell 61%  
GDP: fell over 25%
http://dogbrothers.com/phpBB2/index.php?topic=2240.msg100985#msg100985

The "trade deficit" "improved", if that is how we want to measure it.  A better measure is total trade, exports PLUS imports, which tanked and destroyed GDP and wealth.

The 20s were a prosperous time.  The 30' were the opposite.  What change did investors see coming at the inflection point? Nothing more clear than trade protectionism.

Automobile executive Henry Ford spent an evening at the White House trying to convince Hoover to veto the bill, calling it "an economic stupidity."J. P. Morgan's chief executive Thomas W. Lamont said he "almost went down on [his] knees to beg Herbert Hoover to veto the asinine Hawley-Smoot tariff.
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Can Trump pull this off differently?  Does he with a power-ending midterm coming up in months have more staying power than leader-for-life Xi?
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"President Donald Trump responded with some bellicose tweets, arguing that the U.S. had already lost a trade war with China and that it didn’t have much to lose by ramping up the retaliation. New chief economic advisor Larry Kudlow urged Wall Street not to overreact to the trade spat."
https://www.barrons.com/articles/intraday-update-whats-behind-the-markets-bounceback-1522858869

His trade war isn't only with China.  Canada, Mexico, Europe and everywhere else (including the US!) are also affected.  The Commander in Chief is playing chicken and his advisers advise us not to overreact.  Let me get this right, I'm supposed to know he's bluffing but China doesn't.

[Crafty_Dog]

The conceptual basis for Reagan Revolution owes much to a circle of intellectuals such as George Gilder, Art Laffer, and Jude Wanniski.

Though Jude's final years went off the rails (working from less-than-certain memory, there was anti-semitism and possibly taking money from Saddam Hussein to flack for him in the run up to our invasion of Iraq) in the late 70s and early 80s he was an important editorial writer for the WSJ-- a time when that page was a genuine intellectual leader.

In a manner similar to Thomas Paine's "Common Sense" built the case in the early 1770s for American independence,  Jude's book "The Way the World Works" built the case for the Reagan tax rate cuts.  Of course  Art Laffer was the intellectual author, but Jude was an apostle of importance in making the case.

"The Way the World Works" (in 2001 rated by the WSJ as "one of the 100 most important books of the 20th century") was, and is, and extraordinary work.  Just as physics seeks to develop a set of principles to explain how the physical world works (a physics prof from UCLA one explained to me that "progress in physics consisted of REDUCING the number of principles needed) Jude sought to state the principles of how political economics worked-- an extraordinarily ambitious mission!

Each chapter of the book begins with the statement of a principle, and then develops the case for it.  Chief among these was the importance in marginal tax rates (i.e. the Laffer Principle).  His discussion included a superb application of the principle to explain the collapse of the Roman Empire.

I'm not remembering the details of the intellectual progression of the principles but eventually the book comes to one of its most extraordinary chapters-- the one that explains the Crash of 1929 and the Great Depression.

For most people the received wisdom is that the Crash and the Depression were the result of the excesses of capitalism and proved the need for government guiding economic activity -- "FDR saved capitalism" blah blah.  In that this lies at the core of the vast expansion of the role of government in America since then, this is a matter of considerable importance.

At the time Wanniski was writing, the only intellectual challenge was Milton Friedman's monetarism, which posited that the Great Depression was a recession pushed over the cliff by the Fed shutting down banks for insolvency, thus contracting money supply when the correct response would have been the opposite (do I summarize this accurately here?)

Wanniski has a third approach-- that the volatility of the market in '29 leading up to the Crash DIRECTLY tracked the movement of Smoot-Hawley bills in Congress.  When the bill moved forward, the market would drop sharply, and when it got bottled up in committee the market would rally, etc and that the big Crash came as it became certain the bill would pass (and other countries were reciprocating in various ways, including "beggar thy neighbor" exchange rate policies)  and marginal tax rates looked to increase due to the governmental deficits that came from the ensuing contraction in economic activity.

The key point Wanniski made was these policies (ours and those of other governments) resulted in the fragmentation of the world's economy.

However, all that said, IMHO it does not suffice here and now to answer the policy questions of the present.  There is the matter of China and its economic fascism-- its various ways of cheating (theft of trade secrets and patents, spectacularly non-reciprocal policies, etc etc etc) in pursuit of geopolitical dominance.

[Crafty_Dog]

second post

Too bland for me, but MF is a serious player and I post his thoughts for consideration.

============================
By Martin Feldstein
April 4, 2018 6:19 p.m. ET
90 COMMENTS

Beijing

I have spent a week talking with officials and old friends here about the increasing trade conflict between the U.S. and China. The Chinese are nervous about a potential trade war and uncertain about what the U.S. wants. They say we need negotiations to reduce the trade tensions.

I explain that the U.S. has several straightforward goals and negotiations are not necessary. What is needed is a change in Chinese behavior to conform to the rules Beijing accepted when it joined the World Trade Organization in 2001.

The most important issue is the demand that U.S. companies transfer their technology to Chinese counterparts as a condition of doing business in China. American businesses that want to produce or sell in China are often required to enter into a joint venture with a Chinese firm that then has access to U.S. technology. Chinese companies then use that technology to expand their own production and sales at home and to displace American firms in the rest of the world. The result is a loss of income to the American businesses.

The Chinese government acknowledges that WTO rules forbid making the transfer of technology a condition for access to a nation’s economy. But it argues that the practice is “voluntary” because American firms aren’t forced to do business in China—their other option is to stay out of the country. American companies and officials say it’s a form of extortion because U.S. firms should have access to the Chinese market, as they do to markets in Europe and elsewhere, without losing their intellectual property.

Although the Chinese practice violates WTO rules, it is difficult to bring a successful technology-transfer case because American companies fear retaliation by Beijing if they complain openly or provide detailed evidence that the U.S. government can use in pursuing such a case. Even so, the U.S. government began an investigation in August 2017, as called for by WTO rules, and concluded last month that China does violate the rule that market access may not be conditioned on technology transfer. The U.S. then imposed tariffs and other penalties.

This is not the first accusation that China has taken intellectual property from American companies. The U.S. previously complained that Beijing was using sophisticated cyber tools to invade the computer systems of U.S. manufacturers, extract valuable technology, and transfer it to Chinese companies. The Chinese government denied it.

President Obama met with President Xi Jinping in 2013 and showed the Chinese leader evidence obtained by U.S. intelligence that the Chinese army was infiltrating the computers of American companies. At the end of that meeting, the U.S. and China issued a statement that neither government would use its cyber skills to acquire foreign commercial technology. There was no admission of wrongdoing. I understand that such cyber exploitations of American commercial technology declined significantly afterward.

That experience may provide a good model for dealing with the current form of technology transfer. Presidents Trump and Xi could meet and agree that both countries would now accept a literal interpretation of the WTO rule barring technology transfer as a condition for market access, meaning any such practice should not be interpreted as voluntary. There is no need to look back at past actions or admit past violations of WTO rules.

Although the U.S. does not require a transfer of technology by companies that want to do business there, Chinese firms like Baidu that are very sophisticated in artificial intelligence or other fields may welcome such a promise by America.

Other trade issues should be easy to resolve. The U.S. would like China to reduce its excess capacity in steel and other industries and to stop selling the resulting products on the global market at below cost, in violation of WTO rules. Mr. Trump’s tariffs on steel are a way of putting extra pressure on China to accelerate its reduction of excess capacity.

The U.S. has an overall trade deficit of 3% of gross domestic product because Americans want to consume more than they produce. Reducing the large U.S. bilateral trade deficit with China would not reduce America’s global trade imbalance, but it still would be a politically significant achievement. This could be achieved if China were to substantially shift its global purchase of natural gas toward American producers.

As the Chinese economy grows and Beijing deploys increased military and diplomatic force around Asia and in the rest of the world, the U.S. faces significant geopolitical challenges. Trade issues and the transfer of intellectual property should not be allowed to exacerbate those tensions.

Mr. Feldstein, chairman of the Council of Economic Advisers under President Reagan, is a professor at Harvard and a member of the Journal’s board of contributors.

[DougMacG]

Great points Crafty, that is definitely a world changing book.  The same issues and concepts apply today.  His later wanderings do not take away from the wisdom of his books and articles.

More on that book here:
https://www.commentarymagazine.com/articles/the-way-the-world-works-by-jude-wanniski/
[The book is a bargain on eBay.]

Yes, most people are told that all the ups and downs of markets and "business cycles" are caused by the excesses and defects of capitalism when in fact they are primarily caused by public policy blunders.  Government blunders before and during the depression made a correction into a human catastrophe.  Amity Schlaes has a more recent book on that:
https://www.amazon.com/Forgotten-Man-History-Great-Depression/dp/0060936428

My view is that Milton Friedman and Jude Wanniski are both right.  There was not just one policy blunder. 

Crafty:  "At the time Wanniski was writing, the only intellectual challenge was Milton Friedman's monetarism, which posited that the Great Depression was a recession pushed over the cliff by the Fed shutting down banks for insolvency, thus contracting money supply when the correct response would have been the opposite (do I summarize this accurately here?)"  [Sounds right to me.]

[Crafty continued] Wanniski has a third approach-- that the volatility of the market in '29 leading up to the Crash DIRECTLY tracked the movement of Smoot-Hawley bills in Congress.  When the bill moved forward, the market would drop sharply, and when it got bottled up in committee the market would rally, etc and that the big Crash came as it became certain the bill would pass (and other countries were reciprocating in various ways, including "beggar thy neighbor" exchange rate policies)  and marginal tax rates looked to increase due to the governmental deficits that came from the ensuing contraction in economic activity."

[Crafty]"The key point Wanniski made was these policies (ours and those of other governments) resulted in the fragmentation of the world's economy."

Doug:  Yes.  As I see it, the threat of tariffs and trade war was the trigger and the actual tariffs and trade crash acted as a giant brake on the economy.  Killing off momentum and supply and demand and jobs and output in an economy can have enormous impact.  Trade's impact is noted in the stats I keep posting, trade shrunk 60+% while GDP shrunk 25%.  The trade collapse had a massive negative impact (and we are FAR more dependent on both imports and exports now).  From there, the Friedman-documented monetary squeeze made a bad economic situation horrible.

[Crafty] However, all that said, IMHO it does not suffice here and now to answer the policy questions of the present.  There is the matter of China and its economic fascism-- its various ways of cheating (theft of trade secrets and patents, spectacularly non-reciprocal policies, etc etc etc) in pursuit of geopolitical dominance.

Doug:  The theft and gift or extortion of American intellectual property is inexcusable, especially since we are also military rivals!  Their lack of reciprocity to our products is unfair.  Why is this possible in a post WTO world?  Another failed international treaty!  If Trump's efforts solve this, it will be quite an accomplishment.  But that is not how he set this out.  He set it out with an allegation made largely for political purposes that unfair steel and aluminum practices constitute a national security emergency.  He applied the new tariff (words only so far) to the whole world instead of singling out China.  Important point here from Crafty and 1929, the words of tariff and retaliation affected the markets and the economy, not just the actual tariffs that followed.

If he succeeds in stopping intellectual property threat, great!  But it is hard to be a disciple of free trade principles and follow and support him down all the ugly twists in his path. 

If tariffs and a trade war bring down the US economy by so much as a tenth of a percent of GDP growth, it could make the difference in the already fragile midterms this year and in the Presidential election in 2 years, and hand power back to the other side for a generation or forever.  Without growth, meaning enough growth to offset the lower tax rates in the collection of revenues, Trump and the Republicans and tax rate cuts are out and Leftist rule is back, lock, stock and barrel.

[ccp]

https://www.newsmax.com/newsfront/larry-kudlow-china-trade-war-donald-trump/2018/04/04/id/852556/?ns_mail_job=DM759_04042018&s=acs&dkt_nbr=0105029yth1s&ns_mail_uid=1d2415ee-e7b3-47a2-873d-168cec485331

[DougMacG]

https://www.newsmax.com/newsfront/larry-kudlow-china-trade-war-donald-trump/2018/04/04/id/852556/?ns_mail_job=DM759_04042018&s=acs&dkt_nbr=0105029yth1s&ns_mail_uid=1d2415ee-e7b3-47a2-873d-168cec485331

Kudlow is a skilled communicator, getting people to take a breath. 
"What you got is the early stages of a process that will include tariffs, comments on the tariffs, then ultimate decisions and negotiations," Kudlow said. "There's already backchannel talks going on."

Talks and negotiations, not really tariffs.

We avoid the trade war if China makes big concessions, otherwise economic collapse.  No pressure.

I think our odds for cooperation with China are better on the N.K. crisis than with trade.  Let's see, they are stealing our technology, taking half the profits on our side and selling into our market with unfettered access and getting away with it.  They can make our S&P crash and make Trump lose power by just saying they will retaliate with tariffs of their own and buy their soybeans from elsewhere.

Still I am hopeful.

Remember when party differences (allegedly) ended at the edge of our shore?  If Trump had patriotic opposition, they would get behind him in these negotiations and tell the Chinese all these steps will continue and get stronger until China opens up and plays fair no matter who is in power.

[Crafty_Dog]

Trolling China With a Trade War. Now is the time to get nervous. U.S. President Donald Trump has proposed a second round of tariffs against China on $100 billion worth of Chinese imports. (The tariffs would be punishment for Beijing targeting U.S. goods following an initial move by the Trump administration to place tariffs on nearly $50 billion worth of Chinese goods over intellectual property violations.) Trump's proposal was not a shoot-from-the-hip quip on Twitter; it was a formal White House proposal that U.S. Trade Representative Robert Lighthizer has endorsed as an "appropriate" response. And the United States is not finished yet. In addition to metals tariffs and a doubling down on tariffs on a broader set of Chinese goods, the Trump administration has also been studying use of an emergency act that would impose the same investment restrictions against Chinese businesses that apply to Americans in China.

To be clear, the tariffs have not yet been imposed. Negotiations are underway, and there is room for both sides to back down and avert a worst-case trade war scenario. Chinese President Xi Jinping's April 10 speech at the Boao Forum for Asia will be key to watch to see how far China is willing to go in liberalizing parts of its economy to appease the United States. But no matter what comes out of the negotiations over these next two months, a fundamental gap will remain between the United States' expectation of China to rapidly comply with free market rules under American duress and China's strategic imperative to rebalance and advance its economy though a state-driven approach. Even as White House trade tacticians are trying to leverage Trump's perceived impetuousness for maximum gain in these negotiations, that gap in imperatives is what raises the real risk of tit-for-tat tariffs escalating into a trade war with global ramifications.
Winning in the Western Hemisphere. Trump will try to sell to a wary audience a message of solidarity against predatory Chinese trade when he travels to Lima, Peru, for the Summit of the Americas on April 13 and 14. Though they had to work to secure exemptions from metals tariffs, Brazil and to a lesser extent Argentina have been big beneficiaries of Trump's trade assaults against Mexico and China. From soybeans to orange juice, American farmers are losing market share to their South American competitors as Mexico and China seek out U.S. agricultural alternatives. And warnings of Chinese debt traps aside, the region has also benefited greatly from billions of dollars of direct investment and expanding trade ties with China.

The main headline out of Lima may end up being NAFTA. Trump's desire to announce a framework deal for the North American Free Trade Agreement at the summit has negotiators working around the clock, with the United States notably showing some signs of moderating its original demands on automotive rules of origin. These are cues China will be paying close attention to as it tries to decipher rhetoric from results in its own trade standoff with the United States. Venezuela, which has been barred from the summit, will be another big point of discussion. We have been watching quiet visits between Venezuelan officials and U.S. Sen. Dick Durbin and U.S. Rep. Pete Sessions over the potential release of Joshua Holt, an American imprisoned in Venezuela. With the threat of crippling U.S. sanctions looming ahead of Venezuela's May 20 presidential election, Venezuela is trying to use Holt as leverage for economic reprieve. We'll be looking for any signs that the White House is actually willing to use a potential compromise on Holt to engage in a more serious negotiation centered on an early exit strategy for Venezuelan President Nicolas Maduro.

[Crafty_Dog]

https://www.nytimes.com/2018/04/05/world/asia/china-trade-war-trump-tariffs.html

[Crafty_Dog]

In Trade Fight, China Today Differs From 1980s Japan
Tokyo never threatened to retaliate; Beijing says it is prepared to strike back
By Bob Davis
Updated April 8, 2018 12:36 p.m. ET
117 COMMENTS

WASHINGTON—The White House is looking at the U.S. trade fight against Japan in the 1980s and 1990s for lessons in its trade battle against China. But the two eras are as striking for their differences as they are for their similarities.

U.S. trade officials admire Ronald Reagan’s use of tariffs to get Japan to open its semiconductor market and limit steel and other exports to the U.S. Current Trade Representative Robert Lighthizer, then a midlevel U.S. official, helped carry out that strategy.

Japan back then, like China today, ran a large trade surplus with the U.S. Japan, like China, used industrial policy to turn favored companies into global powers and like China was looking to get U.S. technology any way it could.

The main tool the U.S. used to get Japan to change course, section 301 of the U.S. Trade Act of 1974, is the one the Trump administration is using to confront China. It gives the president broad powers to retaliate through tariffs and other means in trade disputes. “The last time it was used [with Japan], it worked,” says Clyde Prestowitz, a prominent Republican trade warrior from that era.

But even Mr. Prestowitz doubts such tactics will work again.

“China is a different animal,” he says.
Mirror ImageU.S. trade deficits in goods with Japan and China as a percentage of GDPSource: U.S. Commerce Department
%ChinaJapan1985’90’952000’05’10’15-2.5-2.0-1.5-1.0-0.50.0Japanx2006x-0.6%

Along with targeting Japan, the U.S. used section 301 to pressure India. Washington threatened tariffs unless Delhi liberalized its protected insurance market. India was so incensed, it refused to negotiate. “It is not for [the U.S.] to decide the Indian policy matters,” said India’s finance minister at the time. The U.S. backed off.

China today is more like India of that era than Japan. Like India, China is a huge, nationalist country. Its leaders believe they are destined to reclaim China’s place as a world leader and are building a world-class military in the process. Japan was a relatively small nation, whose global aspirations were snuffed out during World War II. It depended on Washington for its security.

While Tokyo frustrated the U.S. through delay, it ultimately had to accommodate Washington’s demands. Among other things, says Mr. Prestowitz, “Japan needed us to protect them from China.”

In practice, that meant Japan never retaliated against U.S. trade actions by putting tariffs on U.S. goods—indeed, it never even threatened to retaliate.

Contrast that with China today. Less than 24 hours after the Trump administration threatened tariffs on $50 billion of Chinese imports to the U.S., China published its own $50 billion hit list of U.S. goods. When President Trump added another $100 billion of Chinese goods subject to levies, a spokesman for Beijing’s Commerce Ministry pledged, “China is fully prepared to hit back forcefully.”

Japan de-escalated the trade battles by allowing some of its most successful auto and electronics companies to build factories in the U.S. Japanese companies continue to invest in U.S. plants, and today directly employ hundreds of thousands of U.S. workers, and through that investment have cultivated useful political allies, particularly among Republicans.

That avenue isn’t as open to Beijing. Chinese investment in the U.S. was $29 billion in 2017, estimates the Rhodium Group a market-research firm. That was down by about one-third from a year earlier. The U.S. is increasingly blocking Chinese purchases of semiconductor and other technology firms because of concerns about national security.


China is fighting back by targeting politically sensitive goods for sanctions, especially U.S. agriculture and aircraft. The idea is to make a trade war so costly, that the U.S. will back off, even if the fight harms China’s economy.

When it comes to imposing tariffs, there is another lesson from the Japan fights: Domestic opposition blunts White House plans. In 1995, the Clinton administration was set to put 100% tariffs on imported Japanese luxury cars to pressure Japan to buy more U.S. auto parts. Few U.S. consumers would be affected and, some Clintonites assumed, they were mainly Republicans anyway.
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But the uproar from U.S. auto dealers put pressure on the White House to cut a deal that mainly required Japan to expand production in the U.S., which it was planning to do anyway.

In the current fight with China, U.S. lobbyists are focusing on the potential harm to farmers—a politically sympathetic and powerful group that is an important part of Mr. Trump’s political base. The president last week said the administration would come up with a plan “to protect our farmers,” but provided no details.

U.S. presidents have long overestimated their advantages in trade fights. In the early 1800s, President Thomas Jefferson embargoed British exports to get Britain to stop harassing U.S. ships, figuring the move would damage the British economy. The plan backfired. When trade collapsed, the U.S. was the loser. “Jefferson was delusional,” says Dartmouth trade historian Douglas Irwin.

Former U.S. Trade Representative Mickey Kantor, who helped negotiate U.S. deals with Japan in the 1990s for the Clinton administration, says his biggest takeaway from those days is the need to be steadfast in deciding goals and strategy.

President Donald Trump has threatened massive retaliation against China but his aides then tried to calm markets by claiming there is no trade war. “The uncertainty undermines your credibility domestically and with the Chinese,” Mr. Kantor said.

[Crafty_Dog]

Highlights

    The United States cannot achieve its goal of countering China's rising economic influence and strength unilaterally.
    The Trump administration's re-examination of the Trans-Pacific Partnership (TPP) reflects the necessity of a multilateral approach.
    But the likelihood of a U.S. return to the trade pact remains low in the near future, since the White House would demand significant changes to the agreement.

Has the White House shifted its trade policy? U.S. Sen. Ben Sasse, a Republican from Nebraska, announced April 12 that President Donald Trump had directed his two top officials — new National Economic Council Director Larry Kudlow and U.S. Trade Representative Robert Lighthizer — to explore rejoining the Trans-Pacific Partnership (TPP). One of Trump's first moves after taking office in January 2017 was to pull out of the trade deal, which his predecessor, Barack Obama, had agreed to. Trump responded to the reports that he would revisit his TPP decision by emphasizing that he had no timeline for a review and that the United States would re-enter the agreement only if its terms changed.

Trump first floated the possibility of rejoining and renegotiating the pact in January as the TPP's remaining 11 members — Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam — which had continued negotiations without the United States — were putting the finishing touches on a new agreement, now known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). (They signed it in March.) Trump's apparent order to re-examine U.S. participation in the deal raises questions about why the White House may be reconsidering its position and about many of the issues that will emerge as a result. Nevertheless, while longer-term geopolitical forces will nudge the United States to eventually return to this trade grouping, several political obstacles still stand in the way of its doing so immediately. Following is a rundown of the issues driving the re-examination and the complications that could arise from it.

The Big Picture

Domestic politics often meets geopolitics. Just a few days after his inauguration, President Donald Trump withdrew the United States from the Trans-Pacific Partnership, a trade pact with 11 Pacific Basin countries that was designed to be a palisade to China's rise in the region. His rationale was to circumvent the possible damage that the deal could wreak on U.S. manufacturing jobs. But now as Trump ramps up his attempts to counter China politically and economically, the White House appears to be dusting off the old playbook and looking at the TPP as a viable strategy for doing so.


Though Trump has argued that the TPP would have damaged U.S. employment because of the access to U.S. markets it would give other countries, being on the sidelines of a deal between the rest of the TPP members will hurt U.S. exporters. The 11 signatory countries will have tariff-free access to one another's markets when the CPTPP comes into force. U.S. businesses will not. When touting the original TPP deal, the Obama administration trumpeted the reduced tariffs that U.S. exporters would enjoy on 18,000 products, including machinery and automotive and agricultural products.

A key selling point for the TPP was that it would break down trade barriers with Japan. Under the deal, the United States would have gained much cheaper access to the country's heavily protected agricultural markets, such as its lucrative beef market. Now, Australia's beef exporters have gained that advantage instead. Disquiet with the turn of events has spurred backlash from the U.S. agricultural sector and other export-oriented groups that wield considerable influence in the normally pro-free trade Republican Party, perhaps influencing Trump's view of the TPP decision. When he ordered the U.S. withdrawal from the pact, the president vowed to seek bilateral trade deals with signatory countries such as Japan in place of the TPP. But in the intervening months, Tokyo's interest in such a deal has been virtually nonexistent. Japan didn't even bother trying to secure an exemption for its steel when the United States recently slapped tariffs on all such imports.

Countering China

Washington's initial interest in the TPP was its utility as a counterweight to China's rising economic influence in the region. The idea was that by sealing a cross-Pacific trade deal similar to the North American Free Trade Agreement — and one that would have functioned as de facto replacement for much of NAFTA — the United States could further tie the TPP economies to its own, giving its fellow signatory countries options to resist Chinese economic pressure. In addition, the United States hoped that the highly advanced TPP deal would serve as the model for all future global trade pacts. It included elevated labor and environmental standards, intellectual property protections, and coverage for digital and data trade. It also — in a not-so-subtle dig at China — included language stating the need for state-owned companies to compete in a market economy.

As the current White House puts China in the crosshairs of its economic and trade policies, many of the strategic underpinnings of TPP are becoming more attractive to Trump as a means to counter China. Washington now hopes to push Beijing to cut its support to state-owned companies, remove its trade barriers and dial back its intellectual property rules, among other things. The question, however, is whether the Trump administration can find a way to merge its strategic concerns over China with the president's protectionist agenda at large. And will the overlap be acceptable to the rest of the TPP's original members?

What Would the U.S. Want From the TPP?

It's not clear how the United States would approach rejoining the TPP or its successor deal, the CPTPP. It could take any number of paths, including trying to join the CPTPP without any major changes — though that option would present a challenge. Many of the original deal's more stringent demands, which the rest of the TPP's members had begrudgingly accepted at the United States' insistence, didn't make it into the CPTPP. The new CPTPP retained 22 of the TPP's original articles as suspended chapters, and most of them fit within core strategic U.S. interests. Many of these are related to protections for intellectual property, provisions that the United States would want to restore before signing on to the CPTPP. The deal's members would also have to revive the TPP's investor-state dispute settlement for the pact to win approval in the U.S. Congress. Some strategic provisions — such as the treatment of state-owned companies — are still in place, however.

The United States could simply demand the pertinent chapters' reinstatement before rejoining the TPP, but the Trump White House likely instead would push for its own changes, tantamount to renegotiating the deal. If the current NAFTA renegotiations are any indication, the demands could be aggressive. U.S. negotiators in the NAFTA talks have made a push to undermine Mexico's competitive advantage in wages, an advantage many CPTPP members share. The United States also has pursued modifications to set regional content levels in the automotive sector as high as 85 percent (since reduced to 75 percent) to qualify for reduced tariffs under NAFTA. Similar CPTPP requirements for the sector range from 35 to 45 percent — a far cry even from the 62.5 percent regional content requirement in the original NAFTA deal.

And should the United States decide to rejoin TPP (or to join CPTPP), it would raise questions about NAFTA. Mexico and Canada, as CPTPP signatories, might opt to use the newer pact's rules in lieu of NAFTA's provisions, choosing whichever is more desirable.

How Would CPTPP Members React?

CPTPP members' reaction to a re-entry by the United States will be critical. Before the TPP, some participating countries lacked a free trade agreement with the United States. Joining the TPP granted them the prospect of greater access to the world's largest market despite the costs on their political or economic systems. Some participants also shared the U.S. strategic objective of gaining trade options beyond China. These factors could give participants an incentive to accept a U.S. return, even if it means changing the agreement. Even so, negotiators for some current members would be leery about the extent of any protectionist measures the United States may try to introduce. The possibility of the United States' inclusion in the deal, moreover, may compel some potential members — such as Thailand, South Korea or the Philippines — to more carefully consider their plans to join the agreement lest they give the impression of taking Washington's side in its heightened competition with Beijing.

The Midterm Factor

Any substantial move to rejoin the TPP or to enter the CPTPP will be a topic of much debate in the United States. When Obama signed the TPP, it wasn't clear that the deal would muster enough votes for ratification by the U.S. Senate or House. Trump could use the fast-track authority in the Trade Promotion Act to make approving the deal a matter of securing a simple majority in the Senate. The law's timing requirements, however, are strict: Once a deal is agreed to and signed, a six-month review period starts in Congress. Even if the United States decides to rejoin TPP and quickly reaches an agreement on terms with the pact's members, the Trump administration would have to sign and present the new deal to Congress by midsummer for lawmakers to vote on it during the current session. A delay could push the pact's ratification beyond U.S. midterm elections and into the 116th Congress, in which Republicans could potentially lose control of the House. Many Democrats rejected the original draft of the TPP, and they may still harbor the same objections to the pact. As a result, it's unclear whether they would consider, much less approve, the trade plan under Trump.

[DougMacG]

From the article: "The 11 signatory countries will have tariff-free access to one another's markets when the CPTPP comes into force. U.S. businesses will not."


The US can achieve the same with (11) bilateral agreements, but must get going on that!  Same for agreement with post Brexit Britain.  Obama said they can get in the back of the line, while trying to influence their election.  Why is there a line??  Let's offer great trade agreements to all our trading partners.

The original TPP agreement had clauses outside of trade that were offensive to us in terms of loss of sovereignty.  Let's write our agreements without those.

Interesting that Canada and Mexico are part of TPP so NAFTA and TPP are intertwined with or without the US in both.  Exempting Canada and Mexico from our new tariffs gives China and others a loophole to get into the US:
https://theconservativetreehouse.com/2018/04/17/breaking-mexico-agrees-to-pay-for-wall-offering-emergency-deal-to-close-nafta-tariff-loophole/#more-148197

Complicating the tortoise-paced trade negotiations is the prediction Mexico is electing a Marxist government on July 1.
https://www.worldcrunch.com/opinion-analysis/far-left-frontrunner-for-mexican-presidency-may-get-help-from-moscow-1

[Crafty_Dog]

The Real US Trade War With China
Apr 19, 2018
By Phillip Orchard

During a meeting with farm-state lawmakers last week, U.S. President Donald Trump ordered his economic team to look into rejoining the Trans-Pacific Partnership. Trump withdrew the U.S. from the 12-nation trade pact on his first day in office, leaving it for dead as signatories wondered how to offset the loss of the ultimate trade carrot: unfettered access to the world’s largest economy. Improbably, the remaining 11 members found a way, signing a slightly slimmed down pact in March. And now Trump, just as improbably, is rethinking the value of the deal he repeatedly lambasted on the campaign trail.

Let’s be clear: For numerous political and technical reasons, the U.S. won’t rejoin the TPP anytime soon. But even Trump’s notional interest in the pact tells us two things about U.S. trade strategy. First, the political obstacles driving the U.S. away from its historical role as architect of the global trading system are by no means permanent. Second, the real trade war isn’t about the deficit – and this fight can’t be won without friends.

Politics by Other Means

When forecasting a trade war, as with a shooting war, it’s not enough to look merely at who can inflict the most pain, but also differing thresholds of pain. Even though the Chinese economy is far more dependent on the U.S. than vice versa, variables like political will also matter.

Though China is evolving into a dictatorship, it has a searing fear of unemployment sowing mass discontent. However, China has an immensely powerful president who doesn’t have to ask his legislature for permission to pass social measures to ease the pain of a trade war (nor for forgiveness if he deems it necessary to crush any sign of backlash). He also has an immense propaganda arm. It won’t be hard for Beijing to rally the nation around the flag and amplify the narrative that the government is merely doing what it must to stand up to the bullying Americans and take China to the promised land. The U.S., by comparison, has an embattled president grappling with a divided public, powerful lobbies and a slow-moving congress whose attention is fixed firmly on the upcoming midterm elections. Even in the best of circumstances, the fractiousness inherent to most democracies can make the politics of trade exceedingly tricky. This is why trade pacts require years of tortuous negotiations – even when broader strategic concerns compel leaders to commit political capital to seeing them through.

(MARC:  This is a powerful point, one that I had not properly considered)

China is proving adept at the U.S. political game. According to Brookings, 82 percent of the counties expected to see job losses from Chinese retaliatory measures were won by Trump. Farmers, in particular, are squarely in Beijing’s crosshairs, with heavily exported U.S. crops like soybeans, wheat and corn facing 25 percent tariffs. This explains why farm-state leaders have been pushing Trump to reconsider TPP. The benefits of rejoining the pact likely wouldn’t be felt for years, but it would likely pry open tightly protected markets such as Japan’s to U.S. agriculture over time.

The difficulty of finding enough carrots to please an array of cantankerous constituencies in pursuit of the broader national interest is why much-maligned multilateral deals often end up making sense – and why presidents often flip-flop on trade. Barack Obama campaigned on overhauling NAFTA before concluding that TPP – which Canada and Mexico both signed, partly to offset U.S. demands on NAFTA – was the best way to update it. It’s why, at least in part, Trump is evidently warming to the trade pact. And it’s why the remaining 11 TPP members designed the revived pact to make a U.S. return as easy as possible. Whether or not the Trump administration moves in this direction, the world expects the U.S. to eventually re-embrace the notion that others have a role to play in making America great again.

It’s a Tech War, and the U.S. Needs Allies

The trade deficit with China is a sideshow, and so too are measures ostensibly meant to decrease it. The U.S. isn’t a major importer of Chinese steel and aluminum, for example, and the U.S. metals sectors – which already enjoyed strong protections – won’t be restored to their past glory by the U.S. tariffs that kicked in on March 23. Meanwhile, as Chinese consumer power has grown, so too have U.S. exports to the Middle Kingdom – by some 500 percent since 2001, with China accounting for 8 percent of all U.S. exports by 2016. General Motors sold nearly a million more cars in China last year than in the U.S. According to a study by Oxford Economics, the combination of U.S. exports of goods and services to China and bilateral foreign direct investment flows contributed to the creation of some 2.6 million jobs in the U.S. in 2015. The same study said cheap Chinese goods such as washing machines and solar panels (both of which were targeted with tariffs in January) have saved the average American household some $850 annually.

All this speaks to the broader issue at hand. The United States’ comparative advantage over lower-cost manufacturers like China is in high-tech goods and services. And the real Chinese threat to U.S. economic and strategic interests is that China eats into this advantage – and then uses its newfound economic heft to try to unravel the U.S.-led postwar order in the Indo-Pacific.

As part of its attempt to address enormous socio-economic challenges today – ones that may well make all this moot – China is laying the groundwork for its much longer-term goals. Underpinning the country’s economic rise over the past half-century has been low-cost manufacturing. But this has made China intolerably vulnerable to rising competition from its lower-cost neighbors, productivity declines as its workforce ages, and downturns in Western economies. This was exposed in 2008-09, when Chinese exports contracted sharply.

Thus, China needs to make a mad dash up the manufacturing value chain. Its blueprint is its “Made in China 2025” initiative, which outlines steps to leapfrog the U.S. as a technological innovator in the industries that will matter most over the coming century (for both commercial and military applications), such as semiconductors, robotics, aerospace, artificial intelligence, green energy and biotech.

The U.S. isn’t opposing China’s development goals reflexively – after all, there is ample money to be made for Western firms – but rather how Beijing is pursuing them. China’s systematic use of four practices, in particular, were cited by the U.S. as rationale for the punitive tariffs announced on April 4: pressure on foreign firms in China to enter into joint ventures with their Chinese counterparts and, in many cases, hand over invaluable intellectual property; laws that require foreign firms to license technology to Chinese companies on unfavorable terms; state support for Chinese acquisitions of overseas competitors in high-tech sectors; and state-sanctioned commercial hacking.
The U.S. is attempting to address the second issue – unfair licensing practices – through the World Trade Organization, and it’s increasingly using the Committee on Foreign Investment in the United States to block Chinese acquisitions in sensitive sectors. But deterring forced technology transfers is more complicated, since such preconditions are typically made informally (to avoid running afoul of WTO regulations), and private Western firms are free to strike whatever deals they think best suit their bottom lines anyway, with little regard for the national interest. Meanwhile, Beijing will never admit to supporting cyberespionage, and even if it did, such activities are exceedingly difficult to detect. Thus, the U.S. is stuck hoping that indirect measures, punitive tariffs in particular, will cause China to behave – and discourage other states from adopting China’s mercantilist tools.

The problem is that punitive measures are a rather ham-fisted means of recourse. This is, in part, because the U.S. does not have a monopsony on Chinese exports, nor a monopoly on the technology and industrial inputs China craves most. Though a trade war would be disruptive in the short term, over time, market adjustments would offset some of the loss of the U.S. consumer base for some Chinese goods. Commodities are fungible, meaning China won’t end up paying much more for inputs such as soybeans. And what China loses in access to technology from U.S. firms like Boeing, for example, it may still be able to get from Airbus. Finally, given the sprawling nature of supply chains today – with China often contributing to only a small percentage of the value of a finished good made with components manufactured elsewhere – tariffs are likely to end up hurting, perhaps as much as China, U.S. allies and partners that are central to broader U.S. strategic aims. Taiwan’s central bank, for example, estimated that a full-blown trade war between the U.S. and China would cut the self-ruled island’s gross domestic product by 1.8 percent.

To gain overwhelming leverage over China, the U.S. would need to limit Beijing’s ability to find substitute imports and markets, incentivize broader participation in the rules-based trading system, and shield U.S. consumers and allied economies from the fallout. In other words, the U.S. needs a multilateral framework that supports these aims – like TPP. Trump’s new chief economic adviser unwittingly made this case in February, when he called for a “trade coalition of the willing” to counter Chinese flaunting of international trade rules.

Cobbling together another TPP-like coalition wouldn’t solve these challenges overnight, particularly if it didn’t attract more economic heavyweights. But it would deepen adoption of the sorts of intellectual property protections that are key to the “knowledge-based” industries of the future, while making it harder for China to distort markets and tilt the playing field in its favor through alternative, Beijing-led trade pacts. Ultimately, it would pull countries more firmly into the U.S. economic and security orbit and assuage their doubts about long-term U.S. commitments, while weakening their vulnerability to Chinese economic coercion. Hence why South China Sea littoral states like Malaysia, Brunei and Vietnam were so eager to join TPP in the first place.

China is playing a long game here – and one that will demand more than tit-for-tat tariffs in response. Unless tariffs push China to the brink of mass economic and political instability – or unless China’s colossal financial risks do the trick on their own – Beijing won’t sacrifice its core national development goals for short-term relief. More likely, tariffs will merely reinforce Beijing’s view that dependence on foreign technology is a potentially crippling risk to national security. The White House’s nascent turn toward multilateralism, however half-hearted, is in recognition of this long-term strategic reality.

The post The Real US Trade War With China appeared first on Geopolitical Futures.

[DougMacG]

This is very good analysis on the trade war negotiations.

[In war and in trade] "it’s not enough to look merely at who can inflict the most pain, but also differing thresholds of pain."

Both sides fear an uprising of the masses if they screw up their economy but Trump has a mid-term coming up and the Chinese people don't have a revolution ready right now - the government owns all of the tanks.

GPF:  "the real trade war isn’t about the deficit"

It's about having a fair playing field only, not the results on the field.

"this fight can’t be won without friends."
"Commodities are fungible, meaning China won’t end up paying much more for inputs such as soybeans" [from Brazil for example, and aeronautics from Airbus, France]

Right.  A fight against China should not have been framed as USA vs. the world.

[Free trade with the US is] "the ultimate trade carrot: unfettered access to the world’s largest economy"

That is a good position to be in when cutting great trade deals, bilateral or otherwise.  No country can fully compete in a global economy without access to the largest market if their competitors have that access.  Advantage of bilateral agreements is that each country can feel they will be the only one left out if they don't come to an agreement with the US, on reasonable and fair, US dictated terms.  On the multilateral side, WTO failed and led to the current crisis.  You take your dispute to a neutral party; where are they from?  Mars?
-----------
Recall that TPP had sovereignty issues.  5554 pages is not a free trade agreement; a free trade agreement can be written on one side of a cocktail napkin.
https://www.mfat.govt.nz/en/about-us/who-we-are/treaties/trans-pacific-partnership-agreement-tpp/text-of-the-trans-pacific-partnership

Provisions of the TPP, at least as we left it, contain "global-governance components." Required countries to adopt and maintain faulty economics including minimum-wage regulations, and promote corporate social responsibility, whatever that means to an international body.  We already have a failed UN and IPCC.  

"Trade agreements should stick to trade."  - Andrew McCarthy
https://www.nationalreview.com/2017/01/tpp-deal-protectionist-american-sovereignty-undermined/

[Crafty_Dog]

Very good comments Doug.

[DougMacG]

Source: NYT Feb 16, 2018
“a rise of one percentage point in the ratio of trade to G.D.P. increases income per person by at least one-half percent.”

I like the part of Roger Federer probably being great at mowing his own lawn, but economically he has a larger advantage playing tennis and should focus on that.
[A quick skill demo by Roger Federer:  https://www.youtube.com/watch?v=RAGaTNSuSRg   Gillette commercial 'Trick Shot' 2012.]

Trump is trying to get concessions from trading partners and I hope he succeeds.  But at the end of the ordeal, we are either on a path to freer trade or we are on a path to declining incomes.
-----------------------------------------------------------------
Why Economists Are Worried About International Trade

By N. GREGORY MANKIW FEB. 16, 2018

The Trump administration has imposed a tariff on imported solar panels, raising questions about America’s commitment to free trade.

When President Trump imposed tariffs on imported solar panels and washing machines, I was reminded of a line from George Orwell: “We have now sunk to a depth at which the restatement of the obvious is the first duty of intelligent men.”

While Orwell’s comment was focused on military and political issues of the late 1930s, my subject is economics, and to most people in my field, the benefits of an unfettered system of world trade are obvious. Any good student of Econ 101 can explain the logic.

But in light of the growing evidence of the Trump administration’s apparent disdain for free trade, from the recent tariffs, to a report recommending fresh quotas or tariffs on steel and aluminum, to its earlier rejection of the Trans-Pacific Partnership, it may be worth reviewing the theory, as well as the evidence that convinces economists that the theory is right.

The place to start is 18th-century Scotland. Adam Smith’s book “An Inquiry Into the Nature and Causes of the Wealth of Nations” is often credited as the beginning of economics. The case for free trade is one of its major themes.

Smith argued that trade among nations is like trade among people. No one feels compelled to sew his own clothes and grow his own food simply to keep busy. Instead, we find employment doing what we do best and rely on other people for most goods and services. Similarly, nations should specialize in producing what they do best and freely trade with other nations to satisfy their consumption needs.

This argument was expanded by David Ricardo in the 19th century. Ricardo addressed the question: What if one nation does everything better than another? His answer was that trade depends on comparative advantage — how good a nation is at producing one thing relative to how good it is at producing another.

Ricardo used England and Portugal as an example. Even if Portugal was better than England at producing both wine and cloth, if Portugal had a larger advantage in wine production, Portugal should export wine and import cloth. Both nations would end up better off.

The same principle applies to people. Given his athletic prowess, Roger Federer may be able to mow his lawn faster than anyone else. But that does not mean he should mow his own lawn. The advantage he has playing tennis is far greater than he has mowing lawns. So, according to Ricardo (and common sense), Mr. Federer should hire a lawn service and spend more time on the court.

By the way, Ricardo was not merely a theorist. He was also a successful stock trader and a member of Parliament. During his political career, he fought for free trade, notably, by opposing the Corn Laws, which imposed tariffs on grain imports.

More recently, economists have emphasized how trade affects productivity. In a model pioneered by my Harvard colleague Marc Melitz, when a nation opens up to international trade, the most productive firms expand their markets, while the least productive are forced out by increased competition. As resources move from the least to the most productive firms, overall productivity rises.

A skeptic might say that all this is just theory. Where’s the evidence?

One approach to answering this question is to examine whether countries that are open to trade enjoy greater prosperity. In a 1995 paper, the economists Jeffrey D. Sachs and Andrew Warner studied a large sample of nations and found that open economies grew significantly faster than closed ones.

A second approach is to look at what happens when closed economies remove their trade restrictions. Again, free trade fares well. Throughout history, when nations have opened themselves up to the world economy, the typical result has been an increase in their growth rates. This occurred in Japan in the 1850s, South Korea in the 1960s and Vietnam in the 1990s.

These results, while suggestive, come with a caveat. Trade restrictions often accompany other government policies that interfere with markets. Perhaps these other policies, rather than trade restrictions, impede growth.

To address this problem, a third approach to measuring the effects of trade, proposed by the economists Jeffrey A. Frankel of Harvard and David C. Romer of the University of California, Berkeley, focuses on geography. Some countries trade less because of geographic disadvantages.

For example, New Zealand is disadvantaged compared with Belgium because it is farther from other populous countries. Similarly, landlocked nations are disadvantaged compared with nations with their own seaports. Because these geographic characteristics are correlated with trade, but arguably uncorrelated with other determinants of prosperity, they can be used to separate the impact of trade on national income from other confounding factors.

After analyzing the data, Mr. Frankel and Mr. Romer concluded that “a rise of one percentage point in the ratio of trade to G.D.P. increases income per person by at least one-half percent.” In other words, nations should take the theories of Smith, Ricardo and Melitz seriously.

To be sure, expanding trade hurts some people in the short run, especially those in import-competing sectors who have to find new jobs. That fact may call for a robust safety net and effective retraining. But it does not undermine the conclusion that free trade raises average living standards.

That is the theory and evidence regarding international trade. ...
N. Gregory Mankiw is professor of economics at Harvard University.

[DougMacG]

Economists polled from Harvard, Yale, MIT, Berkeley, Princeton, Univ. Chicago, Stanford.  See list at link.
98% say NAFTA had a net positive effect for the US?  Who knew?

These numbers are higher than for dentists who recommend sugarless gum to their patients who chew gum.
----------------------
1) Freer trade improves productive efficiency and offers consumers better choices, and in the long run these gains are much larger than any effects on employment.

96% of economists polled agree, 4% uncertain, 0% disagree. Weighted by expert confidence level.

2) On average, citizens of the U.S. have been better off with the North American Free Trade Agreement than they would have been if the trade rules for the U.S., Canada and Mexico prior to NAFTA had remained in place.

98% of economists polled agree, 2% uncertain, 0% disagree.  Weighted by confidence level.

http://www.igmchicago.org/surveys/free-trade

[DougMacG]

[China stealing our technology is another matter.]

Opinion piece at investors business daily, Adam Brandon is President of Freedomworks.  He makes points I have been trying to make on these pages.

https://www.investors.com/author/adam-brandon/
Trade Deficit Is Most Meaningless Economic Indicator Of All
ADAM BRANDON 5/04/2018
The trade deficit doesn't matter. There shouldn't be anything controversial about this fact. As Adam Smith, the father of modern economics, wrote in "An Inquiry into the Nature and Causes of the Wealth of Nations," "Nothing ... can be more absurd than this whole doctrine of the balance of trade."
...
Trade deficits, however, simply are not a concern. Well, at least not in the way politicians who preach fear would have you believe.

A trade deficit is a sign that Americans have purchasing power and are creating demand for products. When the economy is in a downturn, the trade deficit shrinks. In 2006, for example, the trade deficit was $762 billion and the unemployment rate was 4.9%. By the end of 2009, the trade deficit declined to $384 billion, and the unemployment rate peaked at 10%.

Trade Deficit And Jobs
As the economy slowed during the Great Recession, manufacturing output also declined. But as the economy has improved, real manufacturing output has increased, reaching near pre-recession levels and record highs.

Citing data from the Bureau of Labor Statistics, the Pew Research Center noted, "After adjusting for inflation, manufacturing output in the first quarter of (2017) was more than 80% above its level 30 years ago." It's true that the manufacturing sector has experienced job losses, but increased worker productivity and automation have created the need for fewer workers in this sector, not trade.

Many politicians wrongly view the trade deficit as a sign that Americans are being taken advantage of by other countries. Correcting this notion, Rep. Justin Amash, R-Mich., recently put the trade deficit in the context of something as mundane as basic consumer transactions with a business:

"Trade deficits do not mean that anyone is taking advantage of anyone else. The grocery store will have a trade deficit with a farmer or supplier, just as you have a trade deficit with the grocery store," Amash tweeted. "This basic economic concept applies to international transactions just as it applies to neighborhood transactions."

Whether you purchase groceries from a Kroger in Chattanooga, Tenn., a new television from a Best Buy in Cleveland, Ohio, or an Echo Dot from Amazon.com, you have created a trade deficit with that company. You probably don't view these transactions this way, and you shouldn't. After all, these transactions are mutually beneficial exchanges of goods or services. In a mostly free economy, it isn't a zero-sum game.

What's more, the concept of the United States running a trade deficit with other countries is faulty. As economist Mark J. Perry explains, "It might be a subtle point, but it's important to realize that countries don't trade with each other as countries — rather it's individual consumers and individual companies that are doing the buying and selling."

Certainly, some politicians want to appeal to core constituencies, such as labor unions or companies that rely on antiquated business models, by espousing fear about the trade deficit. Such absurd rhetoric leads to policies that harm American workers and consumers, but it also ignores that we have a capital account surplus and a services surplus.
...
 the trade deficit is a sign of a healthy economy. Americans have more money to spend, which means more jobs created by businesses and more investment in the economy. This is what creates prosperity, which benefits all Americans, and that is not a zero-sum game.

[Crafty_Dog]

I used to think as that piece writes, but now I find myself wondering if things are more complex.

What happens when a mercantilist strategy pairs up with an elite spending the wealth of a country outside the country?

This was (and is?) seen in Latin America; is the same happening with China and America?  What meaning is to be imputed to high tech surrendering American high tech in order to sell in China?

[DougMacG]

I used to think as that piece writes, but now I find myself wondering if things are more complex.

What happens when a mercantilist strategy pairs up with an elite spending the wealth of a country outside the country?

This was (and is?) seen in Latin America; is the same happening with China and America?  What meaning is to be imputed to high tech surrendering American high tech in order to sell in China?

Starting with the last part,
"What meaning is to be imputed to high tech surrendering American high tech in order to sell in China?"

This is a real problem, theft and extortion, and not "mostly free" trade.  Maybe grounds for a trade war, and hopefully this gets fixed in Trump's trade war.

On the first part, let's say China is accumulating monetary reserves and US buying what it needs at good prices, who is better off?

[Crafty_Dog]

A big part of the US becoming the #1 power in the world had to do with it becoming a creditor nation. 

China is now establishing a formidable world-wide resource web in Africa, Latin America, and Central Asia as it captures the South China Sea in slow motion.  Our interest payments to it if not now will soon pay for all of its military spending!!!

[DougMacG]

A big part of the US becoming the #1 power in the world had to do with it becoming a creditor nation. 

China is now establishing a formidable world-wide resource web in Africa, Latin America, and Central Asia as it captures the South China Sea in slow motion.  Our interest payments to it if not now will soon pay for all of its military spending!!!

China owns $1.17 trillion of our 20T debt. 
https://www.investopedia.com/articles/investing/080615/china-owns-us-debt-how-much.asp
With interest rates below 3% that makes $30 billion and rising.
The US military budget is US$600 billion, 20 times greater than their interest return.

Balance our budget, grow our economy, and they will never catch up.

The interest they earn on our federal debt is in lieu of having that money invested elsewhere - like buying up assets in Latin America or investing in their own companies.  How much do they gain having a large sum invested at a low return?  None, really IMHO. Then let's say they fight us over the S. China Sea and payments get curtailed?  It is a risky dependence - for them.

Japan owns a nearly identical amount of our debt and it doesn't seem to help their growth or military.

Deductibility of corporate debt was curbed in the latest tax reform making our country less debt dependent and more equity oriented going forward.  (A Trump accomplishment.)  https://www.reuters.com/article/us-usa-tax-privateequity/u-s-tax-curbs-on-debt-deduction-to-sting-buyout-barons-idUSKBN1EF1G5
We already ended personal debt deductibility except for mortgage interest.

In the last century at least, a shrinking trade deficit for goods and services has been associated with bad economic times.  Trade wars also correlate with bad economic times. 

China blocks its consumers and businesses from the right to buy goods and services from around the world that would benefit them.  Who benefits from that?  No one?

Stealing our technology is another matter, unacceptable, period.

The point of the original article is that each trade is mutually beneficial.  That is to say we benefit from each and every trade whether it is a buy or a sell.  To the previous question, "let's say China is accumulating monetary reserves and US is buying what it needs at good prices, who is better off?", I think the answer is both but most certainly us.

In war we (or they) would shut down trade, hurting both sides.  If Trump did that to China now as a strategy to take down their intellectual property theft ring, and if it succeeded in breaking them, I would be fine with that.  But that is different point entirely than voluntarily curtailing our own economic freedoms including freedom to buy and sell goods and services around the world.   We won't be number one in the world without these freedoms.  I'm not saying you support curtailing that; I'm just not clear what you are proposing or favoring.

[DougMacG]

Followup thoughts to yesterday's post.

Again, I would like to separate out the intellectual property theft issue with China.  If we want to get the free world together, form a coalition and have an embargo and all-out temporary trade war with them for the purpose of breaking down their barriers and ending their theft extortion policies, I am fine with that.

Mercantilism in general, from google:  "Adam Smith coined the term “mercantile system” to describe the system of political economy that sought to enrich the country by restraining imports and encouraging exports. This system dominated Western European economic thought and policies from the sixteenth to the late eighteenth centuries."

Let's take some examples of restricting imports, Reagan protected Harley Davidson temporarily by restricting imports of Japanese motorcycles.  Trump levied (or threatened) 25% and 15% tariffs on steel and aluminum.  China has a 25% tariff on foreign made automobiles and many other imports.  In a different way the US government bailed out Chrysler, Ford, GM. That is also a trade intervention like what we accuse of China and Europe. 

At its very best, government can pick winners and losers and look good doing it when they are right.  There is a lot of nationalist and Wisconsin pride in Harley motorcycles, still alive and profitable.

My view is that is a losing battle.  For the most part, government will: choose the wrong cause, protect the wrong industry, harm the industry with its protection, and make its choices for political instead of economic reasons. It is a classic fight between central planning versus the aggregate of millions of individual economic decisions made in a free market.  The failures of businesses is an ugly part of dynamic capitalism.  But like democracy, it beats all the alternatives.

How do we measure success?  Standard of living, it's not easy or perfect but look at income, per capita, measured in PPP purchasing power parity. 

When you add the 25% import tax to Chinese consumer, what does that do to their standard of living? What does protecting your own industries do for their competitiveness?  China, if it were a state, comes in at about a third of the income of our 50th richest state.  http://www.aei.org/publication/us-gdp-per-capita-by-state-vs-european-countries-and-japan-korea-mexico-and-china-and-some-lessons-for-the-donald/print/

They are growing faster than us because a) they lie about their statistics, b) we restrain our own growth rate, and c) the potential growth rate is higher in a less developed country.  Also they steal technology and get away with it.



Back to the other examples, let's look at the US as it was growing into the world's largest economy.  We were far less dependent on foreign trade.  Yes we had tariffs but that was lieu of all other federal taxes and federal programs that now slow our growth.  I would argue that our success came from our freedoms more so than from our import taxes.

Currency manipulation is another trick to favor exports over imports.  From our point of view, a low dollar makes exports more competitive and imports more expensive.  Canada has a low dollar now and Europe a relatively low euro.  How is that working for them?  Badly I would argue.  When your currency devalues, so does your income and wealth.  Most economists on our side argue instead for a neutral, non-interventionist monetary policy, see George Gilder's 'Scandal of Money', Prof. John Taylor, Wesbury, Grannis, et al.

Mercantilism in Latin America.  I'mnoexperton this but mercantilism necessarily involves government interventionism which I would argue was their downfall. 

Financial times, 2012:
https://www.ft.com/content/878bab8a-729d-11e1-9c23-00144feab49a

Brazil is shielding its car industry from Mexican competition and its vintners want protection from Chilean imports. Argentina, a prodigious inventor of eccentric economic policies, is requiring importing businesses to sell something – anything – to foreigners worth as much as what they buy from them.

Such policies do nothing to fend off currency-driven price competition from China or the rich world. Worse, they undermine the sort of policies that would shore up Latin America’s industrial base.
----------------
Other than (failed) public policies there is no reason I know of that Latin America shouldn't have GDP at least on par with the US.

[Crafty_Dog]

Doug:

You make and support your case very well and I cannot cite where I read to the contrary, but I cannot shake the feeling that something is badly off with the idea that we are paying only $30B in interest to China.

[DougMacG]

Doug:
You make and support your case very well and I cannot cite where I read to the contrary, but I cannot shake the feeling that something is badly off with the idea that we are paying only $30B in interest to China.

I think there is an assumption out there that we borrow all our debt ($20T) from China and pay all our interest (475B in 2017) to them, and that debt could go to 30T in the foreseeable future and interest rates could easily go to 10% and we would soon be talking about multiple trillions.

But we borrow a good part of the debt from within our own government (Intragovernmental holdings $5.4 trillion), a little less than half the debt held by the public, and the rest, 6T 2014, from foreign governments.  Of that,  $1.17 T is from China, 2017, and they haven't been increasing that position much over the last several years.

See this chart of which foreign governments own how much US debt: 
https://upload.wikimedia.org/wikipedia/commons/thumb/9/9d/Composition_of_U.S._Long-Term_Treasury_Debt_2000-2014.svg/1251px-Composition_of_U.S._Long-Term_Treasury_Debt_2000-2014.svg.png

[Crafty_Dog]

https://www.nytimes.com/2018/05/13/business/trump-vows-to-save-jobs-at-chinas-zte-lost-after-us-sanctions.html?emc=edit_na_20180513&nl=breaking-news&nlid=49641193ing-news&ref=cta

[Crafty_Dog]

https://www.themaven.net/theresurgent/erick-erickson/president-trump-and-the-united-states-should-not-help-zte-UG1j6MGpeEaMjjfky_zovA/?full=1

[Crafty_Dog]

By James Freeman
May 14, 2018 3:02 p.m. ET
336 COMMENTS

Is President Donald Trump’s emerging trade deal with China as bad as it looks? It’s hard to see how he will be able to call it a win—unless perhaps the deal’s most important terms have nothing to do with trade.

Late Sunday morning Mr. Trump tweeted,“President Xi of China, and I, are working together to give massive Chinese phone company, ZTE, a way to get back into business, fast. Too many jobs in China lost. Commerce Department has been instructed to get it done!”

Protecting jobs in China was not exactly part of the agenda Mr. Trump campaigned on in 2016 and the announcement seems to have caught some members of his administration by surprise. Amid concerns about the terms of trade he’s negotiating with communist China, President Trump advised his Twitter followers on Sunday to “be cool” and promised “it will all work out!”

If one were to create a list of the companies where Americans should not want jobs created, the telecommunications giant ZTE might be at the top. The history of cyber attacks emanating from China and the security risks of any Chinese company having a major role in the world’s telecom infrastructure are natural reasons for caution. And then there is the particular record of ZTE.

Last month the Journal reported:

    ... the Commerce Department said Monday that ZTE had violated the terms of a previous settlement, alleging it illegally evaded sanctions. The department said ZTE agreed last year to combined civil and criminal penalties and forfeiture amounting to $1.19 billion for allegedly shipping sanctioned telecom gear to Iran and North Korea.

    The agency said Monday it has since determined ZTE made false statements during and after the settlement talks. Moreover, the company didn’t discipline executives involved, as agreed, and paid them full bonuses.

    It said as a result, ZTE would no longer be able to buy components from U.S. manufacturers. The move could impact ZTE supply lines and U.S. firms that have come to rely on ZTE as a customer.

Maybe there’s an argument for letting this bad actor off the hook in return for China ending its theft of U.S. intellectual property and its coercion of U.S. companies to share technology and trade secrets. But that doesn’t appear to be happening. Today the Journal reports:

    The U.S. and China are closing in on a deal that would give China’s ZTE Corp. a reprieve from potentially crippling U.S. sanctions in exchange for Beijing removing tariffs on billions of dollars of U.S. agricultural products, said people in both countries briefed on the deal.

    The negotiations would also ease roadblocks in China faced by a U.S. semiconductor company Qualcomm Inc., whose proposed acquisition of NXP Semiconductors NV of the Netherlands has been held up by Beijing....

    The unfolding deal is already kicking up criticism from trade allies of the administration. “It’s outrageous,” said American Enterprise Institute China scholar Derek Scissors. “We are giving up on punishing ZTE for the Chinese restoring the trade status quo.”

The Chinese agricultural tariffs were mainly a response to Mr. Trump’s threatened tariffs. So the grand bargain is simply to help revive a sanctions-busting Chinese firm that poses a strategic threat?

This column asked a senior administration official if Mr. Trump’s proposed ZTE relief will come in return for China applying extreme pressure to North Korean dictator Kim Jong Un. The reply: “Perhaps.”

[Crafty_Dog]

third post

http://thehill.com/policy/technology/387645-trump-stuns-lawmakers-with-push-to-help-chinese-company?userid=188403

[DougMacG]

"asked a senior administration official if Mr. Trump’s proposed ZTE relief will come in return for China applying extreme pressure to North Korean dictator Kim Jong Un. The reply: “Perhaps.” "

That's about what I was going to guess, there is something else going on with this.  Xi needs ZTE more than he needs N.K. and Trump wants the N.K. deal.

[Crafty_Dog]

https://www.nationalreview.com/2018/05/trump-trade-policy-on-china-not-about-enforcing-rules/?utm_source=Sailthru&utm_medium=email&utm_campaign=NR%20Daily%20Monday%20through%20Friday%202018-05-18&utm_term=NR5PM%20Actives

[Crafty_Dog]

Not liking that Trump backed off on ZTE 

What about tech, trade secret, and patent theft?!?

Maybe he's waiting until after the mid-terms?

========================================


An agreement by China to increase imports of U.S. goods and services appears to have cooled off some of the heated trade rhetoric that had been building between the countries over the past few months. But a statement issued May 19 after two days of talks in Washington between trade delegations that included Chinese Vice Premier Liu He and U.S. President Donald Trump left the details of those purchases vague. Although the immediate danger of a trade war between the United States and China appears to have eased, the longer-term competition between the world's largest economies will continue to put them at loggerheads.

U.S. Secretary of Commerce Wilbur Ross will reportedly travel to China next week to hammer out some of the details of the agreement that, if finalized, would reduce the trade imbalance between the countries. Shortly after the agreement, China announced plans to reduce import tariffs on selected automobiles from an average of 25 percent to 13.8 percent and those on auto parts to 6 percent. In response to China's moves, the United States, despite its internal divisions, has indicated it will ease its death penalty on China's telecom giant ZTE, which was banned from receiving core technology from American suppliers.

In the statement, China also promised to increase its purchases of U.S. agricultural and energy products, and to push forward reforms of its intellectual property laws. But no specifics over volume of trade or the time frame for the reforms were detailed in the agreement. Although U.S. Secretary of the Treasury Steven Mnuchin said that Chinese agricultural purchases could rise by as much as 40 percent this year and that U.S. energy sales to China were expected to double in three to five years, details have yet to be worked out. If the United States does not like what it hears from Chinese negotiators during those talks, it could still slap tariffs on Chinese goods and exercise other aggressive non-tariff options.

Here's what is known about the situation based on the joint U.S.-Chinese statement and what to watch for as more detailed negotiations between the two sides get underway.
What the Joint Statement Detailed

It is unknown at this point what agricultural and energy products are involved. But during the so-called "100-day plan" signed in 2017, China pledged to ramp up its purchases of liquified natural gas (LNG), beef and chicken from the United States. Some progress has been made. For instance, China has signed its first long-term LNG contract with U.S. firms. But the escalatory trade spats also compelled Beijing to hit key U.S. agricultural products such as apple, sorghum and potentially soybeans and pork in a bid to impose political costs on the Trump administration.

Deescalating trade spats could, at a minimum, avoid negatively impacting some of the more sensitive U.S. agricultural exports, such as soybeans and sorghum, for the short term. It also raises the prospect of increased Chinese imports of U.S. natural gas, particularly as the country pushes to upgrade its industrial sector and contain pollution. Demand for U.S. LNG has already been rising in China, which has set a goal of doubling natural gas consumption by 2020 from 2015 levels. It imported six times more LNG from the United States in 2017 than the previous year. And with four more U.S. LNG export terminals coming online over the next two years, increasing Chinese imports are a benefit for both sides. But U.S. LNG exports are also in demand in other countries that have been the subject of trade rancor from the White House, including Japan and South Korea. And even with its annual imports of U.S. agricultural products totaling about $20 billion and its oil and gas purchases coming to around $7 billion, doubling or tripling the purchases wouldn't make up for a substantial reduction in trade surplus, let alone the 200-billion-dollar reduction that the United States has demanded.
What the Joint Statement Omitted

There were no indications of how quickly China would move toward increasing intellectual property protections or how broadly those changes would be instituted. Foreign competitors have long complained that lax intellectual protections and forced technological transfers have given China's industries an unfair competitive advantage, and it has been a core component to U.S. demands that China work to reshape these practices.

Other points of contention left unaddressed include how Beijing would approach reducing restrictions on foreign investment in China and when or whether it would open economic sectors that are now closed to such investment. The U.S. Treasury Department, meanwhile, was expected to propose its own revised rules on Chinese investment into the United States.
The Lasting Competition Between the U.S. and China

Even if the two sides sign off on the details that fill in the broad outlines of their trade agreement, the fundamental differences between China and the United States over trade and economic practices will remain. China's companies and markets are better able to weather foreign competition, and as it cultivates an environment to enhance innovation and develop its tech sectors, it acknowledges the needs for IP protection. Thus, the agreements to shrink China's U.S. trade surplus were relatively easy to reach, along with China's pledge to open its markets and enhance intellectual property protections at its own pace, compared with other issues brewing between the countries.

Some of those stickier issues were not addressed in the joint statement. For instance, China will not give up its state-funded"Made in China 2025" initiative, the strategy to support its maturing domestic technology sector, even if it risks sparking a trade war with the United States. Although Beijing is reportedly considering inviting foreign companies to take part in the program, in part to defuse trade tensions with the United States, the U.S. sanctions targeting Chinese telecommunications equipment maker ZTE only strengthened Beijing's resolve to achieve state-led tech independence.

Another point of contention was the U.S. restrictions on high-tech exports to China. Beijing has long argued that relaxing U.S. export rules on technology would help reduce the trade imbalance between the countries. The New York Times reported that such discussions had been included in the Washington talks, with Mnuchin reportedly pushing to relax the rules, but that idea faced pushback from the U.S. Department of Defense.

However this round of trade competition between the United States and China plays out, the underlying economic and strategic differences between the two global heavyweights are not easily resolved. And even if this pause in the trade skirmishes between the countries holds, and a full-blown trade war can be averted, those fundamental differences will continue to manifest themselves in the economic arena.

Stratfor

[Crafty_Dog]

https://pjmedia.com/news-and-politics/senate-committee-overwhelming-votes-to-block-trump-from-saving-chinese-telecom-giant/

[DougMacG]

https://pjmedia.com/news-and-politics/senate-committee-overwhelming-votes-to-block-trump-from-saving-chinese-telecom-giant/

Two cents of observations.
1.  I don't think Trump's goal is to save Chinese companies.  He is working on a few things larger than the fate a handset manufacturer, denuclearizing North Korea, stopping their threat to bomb Guam, Japan, South Korea, LA, etc, restoring global non-proliferation that could save the planet or prevent the next world war, and opening up the world's largest market outside of the US to US manufacturers.
2.  Foreign policy works better if not conducted by a committee of 535.

[Crafty_Dog]

Fair points, but

a) the details of the ZTE thing are disconcerting, and strike at the core of his reputation;

b) he can use the vote in question as "bad cop" to which he plays "good cop".

[DougMacG]

Fair points, but

a) the details of the ZTE thing are disconcerting, and strike at the core of his reputation;

b) he can use the vote in question as "bad cop" to which he plays "good cop".

A. Yes, what you think of this action by Trump depends on what you thought of him before he took it. On the face of it, it makes no sense. My take, he is the only person getting tough with China (and North Korea) so I am inclined to give him benefit of the doubt on negotiating details.
B. True, good point.

[Crafty_Dog]

http://thehill.com/homenews/administration/389097-trump-on-collision-course-with-congress-on-zte?userid=188403

http://thehill.com/homenews/senate/388913-republicans-think-trump-is-losing-trade-war?userid=188403

[Crafty_Dog]

•   Middling powers in Europe, Asia and the Middle East will face increasing pressure from Washington on their ties with Russia because of the United States' new sanctions legislation.
•   Germany, Vietnam and Turkey are some of the major states most likely to defy U.S. pressure on their Russia relations.
•   In Asia, India may struggle to cope with the U.S. sanctions, while Indonesia could go either way.
•   Saudi Arabia, Qatar and the United Arab Emirates will find it easier to comply thanks to their limited links to Russia and deep defense relationships with Washington.
•   Measures such as the Countering America's Adversaries Through Sanctions Act will encourage U.S. partners to adopt a more multilateral strategy in an emerging world of great power competition.

Yesterday was Tehran and today it's Moscow. As the United States, Russia and China engage in a great power competition, growing tensions between Washington and Moscow could soon have a major effect on U.S. relations with other countries. Upset by the Kremlin's actions around the world, U.S. lawmakers are hoping to hit Russia where it hurts most, its defense and energy business, through the Countering America's Adversaries Through Sanctions Act (CAATSA), which applies secondary sanctions to countries engaging in business with Moscow in these fields. CAATSA has faced some resistance — not least from the commander in chief himself — but its gradual implementation promises to have far-reaching effects on all concerned.

The Big Picture

In its second-quarter forecast for 2018, Stratfor noted that the United States would turn its attention toward its competition with Russia and China. Washington already has targeted Beijing with trade tariffs, and now it is finally starting to implement measures that could change Russia's strategic ties around the world under the Countering America's Adversaries Through Sanctions Act.

See 2018 Second-Quarter Forecast
A Potent New Process

Secondary sanctions are hardly new to U.S. foreign policy. Washington used them extensively against Tehran in an effort to force the Islamic republic to modify its behavior before the Iranian nuclear deal's signing in 2015. But Russia occupies a different position from Iran in the international system as a great power that boasts robust energy relationships with Europe and China, as well as diverse defense ties with many states, particularly in Asia and the Middle East. CAATSA also targets Iran, along with North Korea, yet it is the secondary sanctions against Russia — especially those stipulated in sections 231 and 232 of the act — that could affect the United States' partnerships the most.

Under Section 231 of CAATSA, any third-country firm or individual that engages in a "significant transaction" with Russia's defense or intelligence sectors will face a penalty. Companies and individuals can apply for an exemption from the sanctions. Getting one, however, would require U.S. authorities to certify not only that the exemption would not harm the United States' national security interests but also that Russia had made "significant efforts to reduce the number and intensity of cyber intrusions."

Given that the Kremlin is unlikely to meet the second condition anytime soon, countries wishing to continue trade with Russia's defense or intelligence sectors could opt for a waiver under Section 231. The waiver, which has a maximum length of 180 days, requires U.S. officials to certify that the applicant is "substantially reducing the number of significant transactions" with targeted Russian interests. (The U.S. Congress is also currently considering the 2019 National Defense Authorization Bill, legislation that would replace the waiver process with an upfront certification that determines whether the entity in question is taking "significant and verifiable steps" or "has agreed to reduce reliance" on Russia over a "specified period.") But the waiver could draw unwanted attention to countries engaged in trade with Russia and give Washington leverage to try to exact concessions from them.

Section 232, meanwhile, focuses on energy, targeting investments of $1 million or more in Russian pipelines or support for building or operating pipelines — in goods, services, technology and information — worth an annual total of at least $5 million. Unlike those prescribed under Section 231, Section 232 sanctions are discretionary rather than mandatory.

The waiver could draw unwanted attention to countries engaged in trade with Russia and give Washington leverage to try to exact concessions from them.
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•   
Off to a Slow Start

U.S. President Donald Trump opposed CAATSA (the act largely stems from a unilateral initiative by Congress, which took action out of concern that the U.S. leader could become too conciliatory toward Russia). Nevertheless, it passed by veto-proof majorities in the Senate and House of Representatives alike. The president then delayed its implementation beyond the Jan. 29 congressional deadline, arguing that the date signified the start, rather than the end, of the process.

Facing growing pressure from Congress, Trump has signaled that he will begin applying the law. The State Department has tried to define "significant transaction" and is already engaged in conversations with many countries on their relationships with Russia. At the same time, U.S. diplomats also tried to entice countries to expand their defense ties with Washington to compensate for the loss of Russian supplies. The overtures suggest that CAATSA's aim is not simply to penalize Russia for its perceived bad behavior but also to expand U.S. arms sales wherever possible. Still, some prominent members of the U.S. Congress are dissatisfied with the progress toward implementing the act. Key Democrats, such as Sen. Robert Menendez, and some Republicans, in fact, recently requested a rare multiagency investigation into the delays in the law's application. But regardless of the snags in its implementation, CAATSA demonstrates that the United States is more strident than ever in pushing other countries to reduce their defense and energy ties with Russia.

Addressing Russia's Worldwide Influence

According to the Stockholm International Peace Research Institute, Russia is the world's second-largest arms exporter. From 2013 to 2017, the country accounted for 22 percent of the globe's weapons exports, lagging behind only the United States at 34 percent. (All other exporters' contributions, by contrast, are in the single digits.) Russia also has numerous clients in diverse fields that purchase its air defense systems, aircraft, missiles, ships, armored vehicles and aircraft engines. Nearly two-thirds of Russia's exports go to Asia, though the Middle East and Africa also receive a significant portion of the country's arms.

Regardless of the snags in its implementation, CAATSA demonstrates that the United States is more strident than ever in pushing other countries to reduce their defense and energy ties with Russia.
•   
•   
•   
•   
Russia's deepest defense relationships are with China, India and Vietnam, which together account for 58 percent of Russian exports. China has received top-of-the-line Russian equipment of late, including the S-400 air defense system and Su-35 aircraft, while India and Vietnam have been purchasing and using Russian equipment since Soviet times. Farther afield, Russia has signed major arms deals with Indonesia and Turkey, and it's in talks with Saudi Arabia and Qatar over the sale of the S-400 system. The United Arab Emirates, too, is considering the purchase of Su-35 aircraft. Although these countries are some of Russia's biggest customers — or prospective customers — they aren't the only ones that could run afoul of CAATSA. States such as Algeria, Myanmar, Malaysia, Kazakhstan and Ethiopia also could soon find themselves in hot water with the United States because of their "significant" defense relationships with Russia.

Mulling a Response

China

As one of the biggest purchasers of Russian arms, China will likely have the most difficulty scaling down its ties with Russia — all the more so since Washington has already targeted Beijing in separate trade disputes. Its connections with Russia are so deep and strategic that China will be unlikely to make more than token concessions on its core defense purchases from Moscow. (But even without the threat of U.S. sanctions, China is destined to purchase less Russian military hardware as it develops technology that would allow it to manufacture its own arms.) Similarly, major energy projects such as the Power of Siberia gas pipeline from Russia to the Far East are more or less irreversible.

As one of the biggest purchasers of Russian arms, China will likely have the most difficulty scaling down its ties with Russia — all the more so since Washington has already targeted Beijing in separate trade disputes.
•   
•   
•   
•   
India

Russia also has deep relations with China's rival over the Himalayas, India. Moscow supplies most of the arms for the Indian military, including combat aircraft, naval destroyers, battle tanks and a lone nuclear submarine. The BrahMos missile — the product of Russian-Indian cooperation — is a signature success for New Delhi's defense establishment that also has great export potential. Furthermore, Russian arms deals offer generous terms, such as technology transfers and opportunities for joint production, that are important to India's strategic autonomy doctrine.

If push comes to shove, India will not sacrifice its relationship with Russia. Instead, it will try to compromise with the United States by purchasing more U.S. arms or by signing the two outstanding foundational defense agreements with the country. Despite its historical links with Moscow, New Delhi has expanded its security and economic relationship with the United States over the past two decades to try to increase its clout in the global system. Their ties are now strong, and India increasingly relies on the United States to balance China's rise in Asia. As a result, Washington has greater leverage over New Delhi, which, in turn, is more vulnerable to CAATSA's stipulations than Beijing is. In the longer run, however, the CAATSA process could rekindle anti-American sentiment in the Indian defense bureaucracy and the political class, two decades after a reset in U.S.-Indian relations consigned such nationalism to the margins.

Vietnam

In Southeast Asia, Vietnam — whose military gets nearly all its equipment from Russia — also has been more open to U.S. defense ties since the United States lifted an embargo on lethal arms sales to Hanoi in 2016. The United States has sold patrol boats to Vietnam, and a U.S. aircraft carrier even docked at the country's Cam Ranh naval base. Even so, Vietnam's connections to the United States remain limited at this nascent stage of their rapprochement. That means Vietnam will be in a stronger position than India in negotiations with Washington over CAATSA — even though it has deeper ties with Russia. In fact, the CAATSA process could discourage Vietnam from further building its defense relationship with the United States, if only to avoid future compromises to its strategic autonomy.

Indonesia

Indonesia could go either way in its ties with Russia. Its military has long relied on suppliers from multiple countries, including Russia, with which it is drafting a strategic partnership agreement. Indonesia reportedly defied U.S. pressure in February when it proceeded with a new order for 11 Su-35 jets in a deal with Moscow. At the same time, though, the Southeast Asian country counts the United States as a major export destination and tends to be less assertive than Vietnam.

Turkey

Toward the other end of Eurasia, Turkey would seem to be an unexpected target for CAATSA as a member of NATO, the gold standard for U.S. alliances. But Ankara has been moving to engage in more transactional relationships with all powers, including putative ally the United States. In a symbolic departure from the practices of alliance behavior, Turkey inked an agreement to acquire the S-400 air defense system from Russia, a NATO adversary.

The Trump administration has demanded that Ankara scuttle the deal, only to trigger a hostile response from the Turkish government. Now the U.S. Congress appears to
be upping the ante with a draft defense bill that would include provisions to suspend the sale of 100 F-35s to Turkey until U.S. authorities provide a report assessing the effects of Washington and Ankara's strained relations on U.S. operations in Turkey. And as in military matters, so in energy: Ankara is expected to defy Washington on the Turk Stream natural gas pipeline between Russia and Turkey, which could become a target of sanctions. If the United States becomes insistent in its demands, Ankara could use its cooperation in Syria as further leverage against Washington.

The Gulf States

Saudi Arabia, Qatar and the United Arab Emirates, meanwhile, have far fewer defense ties with Russia than with the United States, meaning they will find it easier to demonstrate a reduction in defense transactions with Moscow.

Germany

In terms of energy, another of the United States' most enduring allies, Germany, will find itself in the CAATSA crosshairs. Large European energy firms such as Royal Dutch/Shell, Uniper, OMV and Engie could all suffer U.S. sanctions because of their financial involvement in Nord Stream 2, a controversial pipeline that will bring natural gas directly to Germany from Russia. Germany, which has publicly condemned CAATSA's provision regarding Nord Stream 2, is well-placed to resist U.S. demands, thanks to its position as a major global player. Yet its strong economic ties with the United States will also make it vulnerable to punitive U.S. action.

Risks and Rewards

Secondary sanctions are part of the United States' broader strategy to achieve a set of objectives with regard to an adversary by imposing its laws on other countries. Washington has applied extraterritoriality in this way several times in the post-Cold War era, to Cuba, Iran and Libya in the 1990s, and once again to Iran in the 2000s.
If CATSAA succeeds, the rewards for Washington will be nothing less than altering Russia's behavior or curtailing its influence in the international system.
•   
•   
•   
•   
Most countries view energy and defense as delicate areas in which market dynamics compete with strategic considerations. Defense relations, however, naturally involve sensitivities that exceed those of energy ties. Price negotiations are often protracted, and it might take years to complete an order. Any major weapons system, moreover, requires contracts for maintenance, spare parts and potential upgrades. Supplier reliability is a huge concern — as are technology transfers and joint production, which importers value. Consequently, reorienting core defense relationships can be quite disruptive for the importer.

The CAATSA process is full of lofty ambitions. If it succeeds, the rewards for Washington will be nothing less than altering Russia's behavior or curtailing its influence in the international system. But it also carries risks. In today's world, middle powers are increasingly assertive and refuse to tie themselves to any single great power. The United States' reliance on the blunt tool of extraterritoriality could eventually backfire if it's not careful.

[Crafty_Dog]

https://www.jpost.com/Middle-East/Saudi-Arabia-stops-new-business-with-Germany-over-its-pro-Iran-policy-558431

[Crafty_Dog]

After little more than a week of easing trade tensions between the world's two largest economies, the United States is putting down the carrot and reaching for the stick as it attempts to pressure China. The United States has announced that it will soon present the final list of goods that will be hit by tariffs as part of the long-standing case against China's intellectual property practices.
________________________________________
2018 Second-Quarter ForecastGlobal TrendsGlobalization, EvolvedChina in Transition
After a brief period of calm in the fight over trade between the United States and China, Washington has issued a news release laying out the next steps it will take to retaliate against Beijing's policies on intellectual property and technology transfers.

Washington's Next Moves

•   By mid-June, the United States will complete a list of roughly $50 billion worth of Chinese imports that will receive a 25 percent tariff.

•   The United States will announce potential investment restrictions and stronger export controls for Chinese citizens and entities by the end of June, targeting sectors with industrially significant technology.

•   The United States will continue to pursue litigation in the World Trade Organization against China's technology practices.
Now that Washington is increasing the pressure on Beijing, China will be contemplating its response ahead of U.S. Commerce Secretary Wilbur Ross' visit to China during June 2-4. As it does so, China must bear three considerations in mind before responding to the United States.

The Fate of ZTE

While the U.S. export ban on Chinese telecommunications giant ZTE Corp. is more than just a trade issue, removing the ban is a major priority for China in trade talks — even if it comes at the cost of accepting U.S. tariffs. While China can handle tariffs on $50 billion in exports, ZTE has already been significantly damaged, and protecting the tech firm is a major priority for China. The tech giant expects to lose $3.1 billion in sales to the ban, and a settlement package to see it lifted will require a large fine and a management restructuring. Because the ban falls under the U.S. Commerce Department's jurisdiction, it will likely take priority in Ross' upcoming meetings in China. The U.S. Congress has demanded that President Donald Trump do more to pressure ZTE, potentially giving China a small window to negotiate with the administration before Congress steps in.

Potential Pushback

China faces a difficult decision over whether to follow through with a response to U.S. tariffs on $50 billion worth of imports. Doing so would not only undermine China's short-term priority to lift the ban on ZTE but would also risk further retaliation and escalation from the United States. When China announced it would retaliate to tariffs in April, Trump quickly responded by saying he would direct the U.S. trade representative to determine whether to triple the value of Chinese goods targeted with tariffs in retaliation. The rumor mill has gone silent on whether those tariffs are still on the table, but China still needs to think twice about following through with its threat. While Beijing ultimately wants to negotiate and reduce tensions with the United States, responding in kind with measures that target politically sensitive areas of the U.S. economy — such as soybeans — could give China negotiating leverage.

Creating Cooperation

Beijing appears willing to continue offering some concessions. Last week, signs emerged of a potential deal in which China would increase imports from the United States by $200 billion — a figure that was never confirmed — and China has dangled concessions on agricultural imports in talks on ZTE. However, some Chinese negotiators may now be questioning whether the White House truly wants to talk. The Trump administration has come under fire politically for appearing soft on ZTE, and the $200 billion trade agreement was widely perceived as a better deal for China than it was for the United States. The White House may now be backed into a corner as China hawks fly into view to criticize Trump's strategy on China ahead of important midterm elections.

Dates to Watch

•   June 2-4: U.S. Commerce Secretary Wilbur Ross visits China.
•   June 15: The deadline arrives for the United States to present the finished list of $50 billion worth of imports from China that will be hit with a 25 percent tariff.
•   June 30: The deadline arrives for the United States to announce potential investment restrictions and strengthened import controls for Chinese citizens and entities attempting to make deals in sectors with industrially significant technology.

[DougMacG]

Mark Levin asks, if a 25% tariff is good, why isn't a 100% tariff better?
------------------------------------------------
We can build it all here and be all industrialized - like Brazil.

How do you isolate China by declaring war on Canada and Europe?

They won't retaliate.  What?  Ooops!
https://www.cbsnews.com/news/canada-eu-steel-aluminum-tariffs-retaliate/

How does higher steel and aluminum prices 'square with Mr. Trump’s goal of making more cars in America?'

Luckily, American cars have more health care and retiree pensions in them than steel and aluminum...

Nebraska Senator Ben Sasse tweeted, “You don’t treat allies the same way you treat opponents.”

WSJ:  "He aspires to be Ronald Reagan but his tariff folly echoes of Herbert Hoover."

[Crafty_Dog]

And while stabbing us in the back by trading with Iran, they are sanctimonious with us here , , ,

[Crafty_Dog]

http://thehill.com/policy/defense/390330-defense-industry-braces-for-hit-from-trump-tariffs?rnd=1527987117

[Crafty_Dog]

Aluminum and steel are metals that are not only essential for industry to thrive, but they are also needed to build infrastructure and to ensure national security.

Because of the importance of these metals, countries in North America have been cooperating for many decades to guarantee the best possible supply chains for both aluminum and steel.
The History: Aluminum and Steel

Here are some of the major events that involve the two metals, from the perspective of North American trade and cooperation.

1899
The Pittsburgh Reduction Company, later the Aluminum Company of America (Alcoa), begins construction of a power plant and aluminum smelter in Shawinigan Falls, Quebec.

1901
The company produces the first aluminum ever on Canadian soil.

1902
This Canadian division is renamed the Northern Aluminum Company
New Uses & WW1

1903
The Wright brothers use aluminum in their first plane at Kitty Hawk, North Carolina.

1908
The first Model T rolls off the assembly line, and steel is a primary component.

1910
The U.S. and Canadian steel industries surround the Great Lakes region. At this point the U.S., produces more steel than any other country in the world.

1913
The US passes the Underwood Tariff, a general reduction in tariff rates that affected Canadian exporters. Zero or near-zero tariffs were introduced for steel. (The Canadian Encylopedia)

1914
At this point, 80% of American-made cars had aluminum crank and gear cases.

World War I
The Great War breaks out. It's the first ever "modern war", and metals become strategically important in a way like never before. For the first three years, the U.S. helps the Allies — including Canada — which is already at war, by providing supplies.

Steel was crucial for ships, railways, shells, submarines and airplanes. Meanwhile, aluminum was used in explosives, ammunition, and machine guns — and the Liberty V12 engine, which powered Allied planes, was 1/3 aluminum.

During this stretch, America produced three times as much steel as Germany and Austria. By the end of the war, military usage of aluminum is sucking up 90% of all North American production.
Interwar Period

1919
After the war, the interruption of European aluminum shipments to North America drives up Northern Aluminum sales to the United States. In 1919, U.S. aluminum imports from Northern Aluminum totals 5,643 tons, while all European producers add up to 2,360 tons.

1925
After aluminum gains post-war acceptance from consumers, Alcoa uses this new momentum to strike a deal to build one of the world's greatest aluminum complexes in Quebec on the Saguenay River.

These facilities become the base for Northern Aluminum, which changes its name to the Aluminum Company of Canada (Alcan). By 1927, the area includes an entire new company town (Arvida), a 27,000 ton smelter, and a hydro power plant. This complex would eventually become the world's largest aluminum production site for WWII.

1929
The "Roaring Twenties" saw consumer culture take off, with autos and appliances flying off the shelves. Steel and aluminum demand continues to soar.
World War II

1940
Canada and the U.S. establish the Permanent Joint Board on Defense, still in operation today. Near the same time, the Canadian-American defense industrial alliance, known as the Defense Production Sharing Program, is also established.

1941
Canada and the U.S. agree to coordinate production of war materials to reduce duplication, and to allow each country to specialize, with The Hyde Park Declaration of 1941.

The principles of this declaration recognize North America as a single, integrated defense industrial base.

1942
Canada builds the Bagotville airbase to protect the aluminum complex and hydro plants of the Saguenay region, which were crucial in supplying American and Canadian forces. A Hawker Hurricane squadron is permanently stationed, to protect the area.

1945
The Saguenay facilities were so prolific that Canada supplied 40% of the Allies' total aluminum production.

"The record proves that in peaceful commerce the combined efforts of our countries can produce outstanding results. Our trade with each other is far greater than that of any other two nations on earth." — Harry Truman, 33rd U.S. President, 1947
Cold War & North American Integration

1952
The U.S. focuses on Canadian resources after the President's Materials Policy Commission warns of future shortages of various metals, which could make the U.S. dependent on insecure foreign sources during times of conflict.

1956
Canada and the U.S. sign the Defense Production Sharing Agreement, which aims to maintain a balance in trade for defense products. At this point, Canada relies on the U.S. for military technology — and the U.S. relies on Canada for important military inputs.

1959
The St. Lawrence Seaway opens, providing ocean-going vessels access to Canadian and U.S. ports on the Great Lakes. This facilitates the shipping of iron ore, steel, and aluminum.

1965
The Canada-U.S. Auto Pact allows for the integration of the Canadian and US auto industries in a shared North American market. This paves the way for iron ore, steel, and aluminum trade.

1989
The U.S. and Canada sign a free trade agreement, which eventually gets rolled into NAFTA in 1994.

Modern Aluminum and Steel Trade

2007
U.S. Steel buys the Steel Company of Canada (Stelco) for $1.9 billion

Today
The U.S. and Canada are each other's best international customer for a variety of goods — including steel and aluminum.

[Crafty_Dog]

second post of the morning:

By Jacob L. Shapiro

An already eventful week in geopolitics has ended with a flurry of activity. Washington, already unexpectedly slap-happy with tariffs this week, upped the ante again on May 31 when it announced it would no longer exempt Canada, Mexico and the European Union from steel and aluminum tariffs. The announcement, which rattled global markets, was met with widespread condemnation from the countries targeted. The move comes just one day after Japanese Prime Minister Shinzo Abe characterized a U.S. proposal to impose tariffs on U.S. imports of Japanese motor vehicles as “incomprehensible and unacceptable.” And it comes just two days after the White House made a surprise announcement that it would indeed place a 25 percent tariff on $50 billion worth of Chinese goods and impose restrictions on Chinese investments in U.S. high-tech industries.

The cheap and easy conclusion from this is to say the winds of a trade war are blowing strongly once more. The truth is less dramatic and more complicated. The European Commission, for example, talked up the severity of its response, but talk is cheap. The EU’s actual plan to retaliate is to levy tariffs on $7.5 billion worth of U.S. goods, or a paltry 0.5 percent of U.S. exports. In any case, there is no indication that U.S. President Donald Trump plans to levy tariffs on other goods, nor is there any evidence to suggest he has the power to do so currently. As for Canada and Mexico, these tariffs are more of a ploy in NAFTA negotiations than they are a prelude to a trade war.

Still, these countries have reason to be angry. The reason for the steel and aluminum tariffs isn’t Canada, Mexico or the EU. It’s China. Over the past few decades, Chinese production of steel and aluminum has soared, but China could neither consume what it produced nor afford to lay off the workers who produced it. Beijing dumped the leftover metals into foreign markets, depressing prices and driving U.S. producers out of business. Punishing Canada, Mexico and the EU doesn’t fix Chinese dumping, nor does it enhance national security, which is the legal basis of the tariffs. What it does is improve Trump’s image among his support base, to which he pledged to put “America First.” The merits of the policy are for others to debate. Suffice it to say, the policy will complicate relations with U.S. partners and raise prices for U.S. consumers.

(click to enlarge)

Responsible though China may be, the hysteria surrounding the tariffs far exceeds the affect they will have. After all, $50 billion worth of Chinese exports is roughly 2 percent of China’s total exports to the world. More important yet often overlooked are the restrictions the U.S. has threatened to put on Chinese investments in U.S. high-tech industries. China’s need to move its exports up the value chain is matched only by its desperation to acquire the technology and expertise needed to do so. Because of the structural inconsistencies in the Chinese economy, Beijing doesn’t have time for that technical know-how to evolve organically: It has to cut to the front of the line. (U.S.-China trade relations have also become tied to the North Korea negotiations, so it’s no coincidence that when one is schizophrenic, so is the other.)

(click to enlarge)

Despite its comparative advantage over China, the U.S. is doing its best to shoot itself in the foot. Last week, U.S. Treasury Secretary Steven Mnuchin said the U.S.-China trade war was “on hold.” A few days later, tariffs and restrictions on investment were back on the table, and on May 30, a White House trade adviser called the treasury secretary’s remarks an “unfortunate soundbite.” The U.S. commerce secretary is due in Beijing this weekend to discuss the matter – and yet the White House press secretary says all of this is up to Trump and no one else. Perhaps this mixed messaging is a tactic to keep Beijing off kilter. But if the White House’s public contradictions reflect an inability to clearly define U.S. interests, then the Chinese could use it to their advantage.

U.S.-China relations are not only about trade, of course. They are increasingly defined by competition at sea. According to a spokesman from the Chinese Defense Ministry, China now possesses a fully operational and combat-ready carrier battle group – a much bolder claim than Beijing is wont to issue. An aircraft carrier is just one ship. Its strategic value comes not from the ship itself but from the creation of a larger, coordinated battle group built around the carrier’s air power. China has no experience in carrier operations, but the fact that it has been undertaking drills on an antiquated (if refurbished) Soviet ship is a reminder that the Chinese navy is improving as quickly as it can.

(click to enlarge)

The United States will not sit idly by as this happens. Hence why, just last week, a U.S. defense contractor announced it had successfully tested two long-range anti-ship missiles, striking a moving vessel from a B-1B strategic bomber. The missiles will be integrated into U.S. bombers and fighter aircraft over the next two years. The move is notable because of what it means for the future of war. Since World War II, U.S. naval power has been focused on its own carrier battle groups. But in an age of precision-guided munitions, carrier battle groups can make for better targets than assets. Whereas carriers are tremendously expensive – they cost billions of dollars to produce and millions to operate daily, not to mention all the vessels and aircraft that accompany them – a long-range anti-ship missile such as the one the U.S. tested costs roughly $3 million. And even the best missile defense systems cannot always ensure a carrier’s successful defense.

[Crafty_Dog]

Third post of the morning:

June 3, 2018 8:02 p.m. ET
115 COMMENTS

The Trump administration showed no sign of backing down from restrictive tariffs in the face of pushback from allies and China over the weekend, isolating the U.S. and complicating the president’s meeting later this week with leaders of Washington’s staunchest partners.

Top finance officials from the Group of Seven leading nations met in Canada, where the non-U.S. members issued a public rebuke of Washington’s new steel and aluminum tariffs. Those six—the host Canada, along with France, Germany, Italy, Japan and the U.K.—adopted a formal statement Saturday expressing their “unanimous concern and disappointment.”

The following day in China, Beijing said it wouldn’t abide by any agreement to buy more U.S. products without assurances that the U.S. wouldn’t go ahead with plans to hit it with tariffs on $50 billion on Chinese imports.

But even with retaliatory moves under way in China as well as in Europe and North America, there was no sign over the weekend that the administration was wary of inching closer to a trade war.

“When you’re almost 800 Billion Dollars a year down on Trade, you can’t lose a Trade War!” President Donald Trump said in a Twitter message Saturday. “The U.S. has been ripped off by other countries for years on Trade, time to get smart!”
Related

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The disputes come just as the Trump administration has its arms full of difficult negotiating tasks. Most immediately, Mr. Trump himself now must face leaders of countries who have termed his policies extreme, unwise and in some cases illegal when he arrives in Quebec for a summit of G-7 heads of state scheduled for Friday and Saturday.

That will be followed by a planned summit with North Korea in Singapore just three days later, on June 12. Mr. Trump also is facing European opposition to his push to rewrite the 2015 Iran nuclear deal, and is planning for a summit with Russian President Vladimir Putin.

Still, the push to impose tariffs is causing the most immediate friction. The White House has said the tariffs imposed last week—25% on steel and 10% on aluminum from Canada, Mexico and the European Union—were designed to address the role steel imports have played in undermining the viability of the U.S. steel industry, without which the country would have difficulty mobilizing for its defense.

The administration has signaled its intent to use a similar security argument to affix tariffs on cars from Germany and Japan, and industrial supplies from China.

In response to the tariffs, the administration absorbed one punch after another. Canadian Prime Minister Justin Trudeau called the U.S. move “frankly insulting and unacceptable” in a televised interview Sunday, while his foreign-affairs minister compared it to pre-Depression U.S. policies.
Trade Tensions Intensify as Allies Rebuke U.S., Testing Trump Ahead of G-7

“We know that beggar-thy-neighbor policies don’t work. That was the lesson of the 1920s and the 1930s,” said the minister, Chrystia Freeland, on CNN. “And I really hope people will take some time to reflect on the lessons of history, and not go down that path again.”

Mário Centeno, the Portuguese finance minister who participates at the G-7 by virtue of being president of the Eurogroup, the association of eurozone finance ministers, described the U.S. position within the G-7 in stark terms.

“We can say the U.S. went into the tariff issue alone and they remain alone around the table,” said Mr. Centeno in an interview.

With U.S. lawmakers set to return from a Memorial Day break, many top Republicans such as Sen. Orrin Hatch, chairman of the Senate Finance Committee, are warning the administration to change course. In March, more than 100 congressional Republicans urged Mr. Trump in a letter to avoid tariffs.

The decision to impose tariffs contributed to volatility in global financial markets and led to predictions of potentially adverse economic impacts.

Economists warned that retaliation leading to increased trade barriers on the order of those that existed in the early 1990s could cost thousands of American jobs and even point the U.S. toward recession. Business groups said the number of jobs lost, in the worst case scenario, could climb into the millions.

As the weekend’s dust was settling, Mr. Trump’s top economic adviser, Lawrence Kudlow, played down the eruption. He said tariffs are necessary to close loopholes and “correct several decades of abuse” in global trade, telling Fox News that Mr. Trudeau, in particular, was overreacting to a “family feud.”

“The president has a quiver of tools, and tariffs are part of that quiver,” he told The Wall Street Journal.

The G-7 gathering was held for finance chiefs in advance of the summit of those countries’ top leaders. The G-7, a club of industrialized nations formed around common interests, rarely issues such strong condemnation aimed at one of its members.

More unlikely is the fact that the target of the criticism is the U.S., which has done more than any other country to establish the free-trade principles upon which the global economy functions today.

“I do not ever recall an instance where the U.S. was singled out for rebuke,” said Daniel Price, managing director of Rock Creek Global Advisors, who represented the George W. Bush administration for G-7, G-20 and Asia-Pacific Economic Cooperation summits. “Traditionally, the U.S. has been a driver of G-7 unity, and typically leads efforts to reach consensus. On trade, the U.S. has quite dramatically become a source of discord and division.”

As the source of the consternation, Mr. Trump now must face G-7 leaders in five days’ time. As he does, other countries are adopting a wary stance even if they have so far been spared by Mr. Trump.

“Trump is trying to get rid of bilateral trade deficits,” said former U.S. Trade Representative Carla Hills, a Republican critic of the Trump administration’s trade strategy. “He’s lining up [trade disputes] one by one.”

Ms. Hills said she thinks the administration has taken the wrong strategy on China by fighting first with allies over steel and aluminum, especially given that U.S. complaints about China mirrored those of Washington’s friends.

“It would have been more effective if we joined with six of our closest allies and acted together,” she said. “Instead, we went after our allies and acted unilaterally” on China.

Treasury Secretary Steven Mnuchin, who attended the G-7 finance officials’ meeting, denied the U.S. was left outside the consensus on all matters and insisted Washington is playing a central role. “I don’t think in any way the U.S. is abandoning its leadership in the global economy,” Mr. Mnuchin said.

“These are our most important allies,” Mr. Mnuchin said. “We’ve had longstanding relationships with all these countries that are very important across all different aspects.”

—Lingling Wei in Beijing and Dave Michaels and Harriet Torry in Washington contributed to this article.

Write to Josh Zumbrun at Josh.Zumbrun@wsj.com and Bob Davis at bob.davis@wsj.com

[Crafty_Dog]

Three years ago, the steel mill outside the small city of Smederevo, Serbia, appeared headed for the scrap heap.

The Serbian government, which owned the mill, had stopped subsidizing it after six straight years of losses. Hemorrhaging cash, it struggled to buy spare parts and raw materials such as iron ore.

“It was like trying to drive a car without tires,” says Siniša Prelić, a union leader at the factory.

Now production is hitting all-time highs under its new owner, Hesteel Group, a Chinese state-owned steel producer. Exports from the plant, which is backed by tens of millions of dollars from Chinese state banks and investment funds, are surging. And it has started shipping steel to the U.S.

As the Trump administration ramps up its fight against Chinese steel and Commerce Secretary Wilbur Ross ended trade talks with Beijing over the weekend without a settlement, U.S. officials are confronting a strategic shift from China’s state-backed manufacturers. For the past several years, they have been shutting production at home and expanding overseas, fueled by tens of billions of dollars from Chinese state-owned lenders and funds.
Global Expansion
Chinese steelmakers have been buying and building plants overseas, fueled by tens of billions of dollars from Chinese state-owned lenders and funds.

Chinese overseas steel projects, in millions of metric tons of production capacity

Operational

Malaysia

3.5

Indonesia

3.0

Serbia

2.2

Under construction

Indonesia

6.0

India

2.0

Texas

0.5

Planned

Brazil

10.0

Indonesia

7.5

Bangladesh

2.0

Note: Projects for Tsingshan, Alliance Steel, Hesteel, Kunming Iron and Steel Holding Company, CBSteel
Shaanxi Iron & Steel Group, Tsingshan, Tianjin Pipe, Delong Holdings

Sources: Xinhua; Maranhão State of Brazil; the companies

By owning production abroad, Chinese steelmakers aim to gain largely unfettered access to global markets. Their factories back in China are constrained by steep tariffs imposed by the U.S. and numerous other countries—largely before President Donald Trump took office—to stop Chinese steelmakers from dumping excess production onto world markets. But their factories outside China face few so-called antidumping tariffs.

The Trump administration in March jolted the global trading system by imposing additional tariffs of 25% on all imported steel and 10% on aluminum, a move aimed at ratcheting up pressure on China to shut domestic steel and aluminum plants. (Last week, those tariffs were extended to Canada, Mexico and the European Union.) The EU is considering its own tariffs to stop metals exports blocked by the U.S. tariffs from flooding into Europe.

Even though the new U.S. tariffs apply to Chinese steelmakers that moved production abroad, the moves are still paying off. The Trump tariff rate is much lower than existing U.S. antidumping tariffs on steel produced inside China, which often exceeded 200%.

A spokesman for Hesteel declined to comment. China’s Ministry of Industry and Information Technology, which oversees the steel and aluminum industries, didn’t respond to inquiries.

Chinese overcapacity has depressed global steel prices and wreaked havoc on China’s competitors. After cajoling Beijing to cut domestic capacity, Western officials have watched with exasperation as Chinese companies boost production around the world. And Western industry executives worry the overseas investments are helping Chinese steelmakers avoid the antidumping tariffs that governments have imposed to protect their companies against allegedly unfair Chinese trade practices.
Chinese steel production rose sevenfold between 2000 and 2013. A worker helps load steel rods at a plant in Hebei province.
Chinese steel production rose sevenfold between 2000 and 2013. A worker helps load steel rods at a plant in Hebei province. Photo: Kevin Frayer/Getty Images

China’s steel-production boom took off around the turn of the century as Beijing threw its support behind a sector seen as vital to the nation’s emergence as a global economic power. The 2008 financial crisis prompted Beijing to undertake an economic stimulus program that included the construction of hundreds of new steel plants. Chinese steel production rose sevenfold between 2000 and 2013, when it accounted for half of all global capacity.

By 2013, China’s domestic economy was slowing, leading Chinese steel and aluminum producers to flood global markets and drive down prices. The average price of Chinese steel exports fell by about 50% between 2011 and 2016.

Governments around the world responded by imposing more than 130 antidumping tariffs against Chinese metals manufacturers, mostly on steel, depriving the domestic market of an important outlet.

Beijing responded by ordering capacity cuts: a net of 150 million tons of annual steel capacity is slated to be shut between 2016 and 2020, as are aluminum plants that were built without government approval. At the same time, in 2014, the government launched a plan, called International Capacity Cooperation, that enlisted Chinese state financial institutions to help manufacturers add production overseas.

Analysts and Western government and industry officials say Chinese manufacturers are receiving hundreds of billions of dollars of state support to build and purchase plants on foreign soil, through money provided by institutions such as China Development Bank, Bank of China and funds like China Investment Corp. The overseas plants are likely to be tapped as exclusive suppliers for the “One Belt, One Road” initiative, Beijing’s trillion-dollar infrastructure plan to project economic influence across Eurasia and Africa.

“China is just moving whole industrial clusters to external geographies and then continuing to overproduce steel, aluminum, cement, plate glass, textiles, etc.,” says Tristan Kenderdine, research director at Future Risk, a consulting firm that tracks China’s overseas investments. “None of this is economically viable under a supply-demand regime without state subsidies.”
Big Steel in ChinaBeijing has sharply increased domestic steel-production capacity and has made far more steel than it hasused inside the country.Sources: World Steel Association (production, use); Group of 20 nations and the Organization for Economic Cooperation andDevelopment (capacity)
.billion metric tonsDomestic productionDomestic useDomestic capacity2007’08’09’10’11’12’13’14’15’16’170.30.40.50.60.70.80.91.01.11.2

Chinese steel companies have signed agreements to build plants in Malaysia, Pakistan, India and elsewhere.

In northern Brazil, a Chinese consortium is expected to break ground later this year on an $8 billion project to build one of the world’s biggest steel plants, expanding Brazil’s potential steel output even though the industry there operates at less than 70% of capacity.

“This is total nonsense, with all the idle capacity that we have,” says Alexandre Lyra, chairman of the Brazilian Steel Institute, which represents Brazilian producers.

Chinese companies also are building new steel mills in Indonesia. Last year, Tsingshan Group Holdings, a state-backed steel producer based in Wenzhou on China’s southeastern coast, opened a two-million-ton stainless-steel plant on the Indonesian island of Sulawesi that accounts for 4% of the world’s stainless-steel production. The mill, built using a $570 million loan from the China Development Bank, is now pushing down prices from Asia to the U.S., industry executives and analysts say.

“We are seeing tenders in the area from Tsingshan at very, very, competitive prices,” Miguel Ferrandis Torres, financial director at stainless-steel company Acerinox , told analysts in April. Tsingshan is likely losing money on those shipments from its Indonesian plant, Mr. Torres said.

Tsingshan declined to comment.

Tsingshan’s product is entering the U.S. through a joint venture with Pittsburgh-based stainless-steel producer Allegheny Technologies Inc. The joint venture is restarting a stainless-steel rolling plant in western Pennsylvania that Allegheny had shut in 2016 partly because of pressure from inexpensive Chinese imports. The new company is importing 300,000 metric tons of semifinished stainless-steel slabs from Tsingshan’s Indonesian plant—replacing slab Allegheny made in a now-closed production line—and processing them into sheets for products ranging from household appliances to medical equipment.

That put downward pressure on U.S. stainless-steel prices last year, industry executives say. “We’re moving from being a high-cost producer, which we’ve been for a while, to being the low-cost producer in the market,” Robert Wetherbee, an Allegheny executive, told analysts in November.

The Trump tariffs that came into force in March hit the stainless steel Tsingshan was importing from Indonesia to its joint-venture plant in Pennsylvania. Allegheny has asked the Trump administration for an exemption from the tariffs on those imports.

Tsingshan is expanding its Indonesian plant, and Jiangsu Delong, a Chinese producer based in Jiangsu province, is building another plant nearby. Those projects alone will increase global stainless-steel capacity by 9% from 2017 levels, according to Michael Finch, a steel analyst at  CRU Group in London, even though the stainless-steel industry has significant spare capacity.
Hebei province, a pollution-choked region near Beijing, is home to steelmaking operations like this one in Qianan.
Hebei province, a pollution-choked region near Beijing, is home to steelmaking operations like this one in Qianan. Photo: Ng Han Guan/Associated Press

In 2014, officials from Hebei province, a pollution-choked steelmaking region near Beijing, began hunting for overseas investments for the province’s most important company: Hebei Iron & Steel Group, renamed Hesteel Group in 2016.

When Hebei officials approached the Serbian government in 2014 about investment opportunities in the country, Belgrade immediately thought of the Železara Smederevo steel company, which had a mill on the Danube River, say people familiar with the deal.

The Serbian government had purchased the plant in 2012 for $1 from United States Steel Corp. After shutting the plant for several months, Belgrade restarted it to make it attractive for potential buyers, pumping tens of millions of dollars into it to keep it alive.

But with its public finances deteriorating, Serbia in 2014 sought a standby loan facility from the International Monetary Fund, which along with the European Commission, ordered it to stop subsidizing the steel company.

In early 2015, the Serbian government pulled the plug on subsidies for Železara, says Bojan Bojkovic, who was in charge of efforts to sell the mill for the Serbian government. “A lot of people, especially so-called economists, wanted to shut it down immediately,” he says.

Meanwhile, in March 2015, Hesteel signed an agreement with China Investment Corp., which has more than $200 billion in foreign assets, to fund Hesteel’s overseas expansion.
Beijing touted the $54 million acquisition of the steel plant in Serbia as one of China’s flagship overseas investments.
Beijing touted the $54 million acquisition of the steel plant in Serbia as one of China’s flagship overseas investments. Photo: Nemanja Cabric/Xinhua/ZUMA PRESS

During the talks with the Serbians, Hesteel pledged to invest at least $300 million in the plant over the next three years. Beijing touted the €46-million ($54 million) acquisition as one of China’s flagship overseas investments. Chinese President Xi Jinping visited the mill for the June 2016 signing ceremony.

Hesteel executives have said that they quickly turned around the money-losing plant after taking control in June 2016. Serbian corporate records show an operating loss of $34 million over the next six months. Records for 2017 aren’t yet available.

“This is all part of a huge political initiative,” says  Markus Taube, professor of East Asian economic studies at the Mercator School of Management in Duisburg, Germany. “They are extremely insensitive to losses.”

The EU for years has applied tariffs to low-price Chinese steel exports. Now, Hesteel’s Serbian plant can export tariff-free into the 28-nation bloc.

“We feel like the Serbian plant is a Trojan horse,” says Sonia Nalpantidou, a trade-policy expert with Eurofer, a trade association representing EU steel producers.

At a steel expo in Beijing last month, a “Hesteel of the World” banner hung near the company’s booth. Pins in a map marked countries where Hesteel had invested—Serbia, Macedonia, Switzerland, South Africa, Australia and the U.S. A company representative said overseas expansion is now a core strategy. The company is planning to build more plants in regions such as North America, she said, and plans to derive 20% of revenue from non-Chinese markets by 2020.

“Products made in Europe shouldn’t be subject to European tariffs,” the representative said.

Late last year, Hesteel offered $1.5 billion for a large steel mill in Slovakia owned by United States Steel, according to a person familiar with the talks. The Slovak prime minister said last month that U.S. Steel wouldn’t sell the plant to Hesteel. A U.S. Steel spokeswoman declined to comment.
After purchasing the plant in Serbia, Hesteel began selling its output onto the U.S. market.
After purchasing the plant in Serbia, Hesteel began selling its output onto the U.S. market. Photo: Marko Risovic for The Wall Street Journal

After purchasing the plant in Serbia, Hesteel began selling its output, including a sheet-steel product called wide hot-rolled coil, onto the U.S. market through Duferco, a Swiss trading company in which it owns a 51% stake.

Since 2001, China’s domestic producers of that product have faced antidumping tariffs of more than 64% at U.S. borders, effectively shutting them out of the market. Hesteel’s Serbian plant could export to the U.S. with minimal tariffs—until the additional Trump tariffs took effect earlier this year.

In March, one of the Serbian plant’s U.S. customers, Priefert Ranch Equipment of Mt. Pleasant, Texas, asked the Trump administration for an exemption from the tariff to import 28,000 metric tons of steel sheet annually made at the plant. Priefert argued that it has long relied on overseas steel mills to supply product that domestic mills don’t produce. Priefert executives didn’t respond to a request for comment. The Trump administration hasn’t yet decided on the request.

“We want to be the world’s Hesteel,” Yu Yong, the company’s chairman, said when signed the deal to buy the Serbian plant. He pledged to make the Serbia plant “the most competitive steelmaker in Europe.”

Write to Matthew Dalton at Matthew.Dalton@wsj.com and Lingling Wei at lingling.wei@wsj.com

[DougMacG]

Good information.  I find it incongruent that China is making money hand over fist by massively dumping product below cost (they make it up on volume?), and that the Chinese government is forcing US businesses out of business that governments in the US already forced out of business.

Big mining controversy in MN that has nearly turned MN from bluest blue to narrowest of red:
https://www.mprnews.org/story/2018/01/05/4-things-to-know-about-polymet-mine

If we don't want to produce materials here, why not buy from overseas as cheaply as we can?

[Crafty_Dog]

The Trade Deficit in Goods and Services Came in at $46.2 Billion in April To view this article, Click Here
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 6/6/2018

The trade deficit in goods and services came in at $46.2 billion in April, much smaller than the consensus expected $49.0 billion.

Exports rose $0.6 billion, led by fuel oil, soybeans and corn. Imports fell $0.4 billion, led by cellphones & other household goods, autos, and pharmaceuticals.

In the last year, exports are up 9.9% while imports are up 8.0%.

Compared to a year ago, the monthly trade deficit is $0.1 billion larger; after adjusting for inflation, the "real" trade deficit in goods is unchanged from a year ago. The "real" change is the trade indicator most important for measuring real GDP.

Implications: The trade deficit fell to a seven-month low in April, coming in at $46.2 billion. As a result, it now looks like the direct effects of a shrinking trade deficit will add almost a full percentage point to real GDP growth in the second quarter. In turn, that means our long-held forecast for a real GDP growth rate of 4.0% in Q2 is probably too low. We're now lifting that forecast to 4.5% and a growth rate of 5.0% is even possible. This helps explain why the job market has been so strong lately and adds to our confidence that real GDP will grow north of 3% this year, which would be the first that's happened since 2005. Exports grew by $0.6 billion in April to a new all-time record high; imports fell $0.4 billion. The strength in exports in April was driven by fuel oil, soybeans and corn. Meanwhile, imports fell mostly due to the cellphones & other household goods. In the past year, exports are up 9.9% while imports are up 8.0%, signaling healthy gains in the overall volume of international trade. While some are worried about protectionism from Washington, we continue to believe this is a negotiating tactic, and the chances of an all-out trade war are slim. Most likely, what will ultimately come from all the chaos will be better trade agreements for the United States. According to the World Trade Organization, average tariffs in the US are 3.5% compared to 5.2% in the EU, 9.9% in China, 4.1% in Canada and 7.0% in Mexico. It's time for tariffs to be lowered around the world, and the US holds a lot of power. Take NAFTA for example. In 2017, Canada exported $300 billion to the US. Its next biggest importer was China at only $20 billion. Mexico exported $314 billion to the US. Its next biggest importer? Canada at only $29 billion. Eventually a deal will be done. Moreover, many of the policies President Trump has passed, including cutting tax rates and allowing for construction of more energy infrastructure, which will make the US an even stronger magnet for capital from abroad. We will continue to watch trade policy as it develops, but don't see any reason yet to sound alarm bells.

[Crafty_Dog]

The Illusion of Free Trade
Jun 7, 2018
By George Friedman

The United States’ decision to impose tariffs on steel and aluminum imported from certain countries has added to the fears of a trade war. Some believe that these tariffs are a dangerous move by the U.S. because they will invite retaliation and thus could lead to a massive breakdown of trade. The problem with this way of thinking, however, is that it focuses primarily on formal barriers to trade and ignores informal and indirect barriers. Even if there is a free trade agreement between two countries, it does not necessarily mean that businesses in both countries will be able to trade with each other without impediments, as is often assumed.

Governments have a range of tools available, formal and informal, designed to mitigate the effects of free trade. In other words, a free trade agreement will eventually evolve into something very different. For example, regulations can be put in place that impose massive additional costs on an exporting country, forcing increases in prices. This wouldn’t involve the imposition of tariffs, but it would make it more difficult for exporters to compete with domestic manufacturers. Antitrust laws can be implemented that fine companies and force them to cut back their market share. The cost of domestic production can be reduced by relaxing labor laws. Countries may also enter into agreements knowing full well that their consumers have little interest in certain imports, such as Japanese consumers spurning American cars. And exporters may be forced to sell products in a country through certain wholesalers that dominate the domestic market, and having to do that may slash their revenue.

Free trade, in its purest form, is said to be financially beneficial to all countries. That may be true, but this assumption ignores three vital variables. The first is timing. When will the benefits will show themselves? It could take years or even decades. The second is short-term vs. long-term impact. Some industries may become uncompetitive and even collapse before others flourish. The third is is how patterns of economic activity change based on foreign competition. Some businesses will win, others will lose.
 
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Free trade is not only an economic process but also a political one. The destruction of an industry can destroy the livelihoods of millions of people, even if the country’s gross domestic product surges. In economics, the assumption is that individuals will pursue their self-interest. Oddly, economists tend to assume that they will – or at least ought to – pursue those interests only through economic activity. But people can also pursue their self-interest politically. A government that negotiates a free trade agreement that damages this generation with the promise of better things later is likely to face serious political repercussions. The next government will take a different approach.

Economics is a subset of politics, and the political system moves to protect the interests of citizens to maintain social stability and, in democracies, keep governments in place. The focus on tariffs misses the reality of international trade, which has both an economic dimension, focused on increasing the wealth of nations, and a political dimension, focused on assuring that the wealth doesn’t flow into the hands of a few while the rest are left devastated.

The United States is not yet in this extreme condition, but it has entered into a series of trade agreements that, while beneficial on the surface, have had some negative consequences. The most important consequence has been the transfer of factories out of the U.S. to low-wage countries. By the law of comparative advantage, this should in the long run benefit the United States. But it will do so at a massive cost to one sector. GDP might rise, but that in no way indicates that wealth would be distributed in a way that the political system can endure.

Every government has to consider three factors when entering into a trade agreement. The first is the benefit to an industry that will have access to a new market. The second is the damage the agreement will do to those who will lose their jobs. The third, and trickiest, is how the foreign government with whom the trade deal is agreed will use non-tariff tools to shift the agreement to their advantage and, by definition, against their trading partner.

People shouldn’t worry about a new trade war emerging because a constant and intense guerrilla war is already underway in every trade regime to undermine the agreement and reshape it through subtle intrusions. This is why multilateral trade agreements have grown so troubling. A trade agreement that creates a single regime encompassing drastically different economies is inherently implausible. The non-tariff trade barriers in each country, not to mention the challenges of monitoring and enforcing the agreement, create mindboggling hurdles. The World Trade Organization can be used to settle some disagreements, but its decisions can be difficult to enforce.

Free trade is rarely free, and when it is free, it imposes costs in unexpected places. The decision of the U.S. to force a renegotiation of trade relations is a result of the fact that certain sectors of the U.S. economy have been hurt by prior trade regimes, and the U.S. is now using the political process to pursue its self-interest. This is not new, nor is the surprise of those who have benefitted from the old regime or who are ideologically committed to the illusion of free trade. It is part of an ongoing shift in economic relations driven by political realities.

The post The Illusion of Free Trade appeared first on Geopolitical Futures.

[DougMacG]

"Free trade, in its purest form, is said to be financially beneficial to all countries. That may be true, but this assumption ignores three vital variables. The first is timing. When will the benefits will show themselves? It could take years or even decades. The second is short-term vs. long-term impact. Some industries may become uncompetitive and even collapse before others flourish. The third is is how patterns of economic activity change based on foreign competition. Some businesses will win, others will lose."

Yes, the evils and dangers of runaway economic freedom!  Friedman IMHO mistakes treaties that are not free trade with free trade.

I look forward to the sequel analysis, the alternatives to free trade where central governments make the decisions that replace individual free choice.  Ivy league technocrats and crony-bribed officials decide for us which businesses and industries to protect, how much for how long.  Consumers suffer until the inevitable result of becoming an uncompetitive, dysfunctional third world economy sets in with restricted economic freedoms and all people, businesses and industries decidedly worse off.

Why not instead use the Heritage index as a guide, https://www.heritage.org/index/ranking  Look toward the top and the bottom of trade freedom https://www.heritage.org/index/explore and see who you want to emulate.  Hong Kong, Singapore, Switzerland or Ethiopia, Bangladesh, Niger, just for examples.   Which are the rich countries at the bottom of the trade freedom index, North Korea?  The world leader in protecting domestic industries from foreign competition is not rich.  Results are all over the globe and throughout history.  We don't have to wait for the long term to know the result.

If you fail at making horse shoes, you can make brake shoes, or install imported ones, not starve to death in a growing, prosperous, dynamic economy.

I'll take my chances with the winners and losers of freedom over a planned and controlled economy any day.