U.S. Trade Panel Fiddles While Rome Burns

http://www.reuters.com/article/politicsNews/idUSTRE5A50QN20091106

The above-linked Reuters article reports on actions by the U.S. International Trade Commission to open investigations into unfair trade practices by China and Taiwan. 

The total value of the imports in question is about $260 million.  By comparison, the total trade deficit with China and Taiwan combined in 2008 was about $280 billion.  These investigations typically take a couple of years.  If this is the Obama administration’s plan for attacking the trade imbalance with these countries, at this rate it will take over two thousand years to restore a balance of trade, and that’s assuming that China and Taiwan don’t increase exports of other products in the meantime. 

It’s just more of the same pointless dithering on trade that we’ve seen for decades, certainly not the “change we can believe in” that we were promised.  Just another example of trade policy shaped by half-assed 18th century trade theories formulated by “economists” who were clueless about the role of population density disparities in driving global trade imbalances.

Obama to Tackle Currency Valuations in Asia Trip. Yawn.

 

http://www.reuters.com/article/politicsNews/idUSTRE5A55F520091106

As reported in the above-linked Reuters article, President Obama will challenge Asian nations to “do their part” in rebalancing global trade during his trip to Asia this month, and will be especially critical of China for refusing to allow market forces to determine the value of their currency.

U.S. President Barack Obama will seek to reinforce the U.S. desire for more balanced global growth during his trip to Asia this month, administration officials said on Friday…. The value of China’s currency, the yuan, is also expected to come up during Obama’s visit on November 15-19.

The yuan has consistently been a focus in U.S.-China trade disputes as U.S. critics say China intentionally keeps its currency undervalued to gain advantages. China says its stable exchange rate helps its exporters and promotes stability in the global economy.

“It is an integral part of U.S. policy that China should be moving toward a market-based value for its currency,” Bader said.

Steinberg is one of the key architects of the Obama administration’s China policy. In an indication that Obama plans to raise the issue of currencies with Chinese President Hu Jintao, he said the administration wants to see China address some of the policies “that artificially promote exports” and “their overall approach to macroeconomic policy.”

This is the same worn out approach to trade that the U.S. has taken for decades, with absolutely zero results.  There are no results because currency valuations have virtually nothing to do with global trade imbalances.  The influence of currency valuations is dwarfed by the role of population disparities in driving such imbalances. 

Consider the evidence.  Since the early ’70s, the dollar has fallen by over 300% vs. the Japanese yen.  Yet, contrary to economic theory that says such a devaluation makes American exports cheaper and Japanese imports more expensive, our trade deficit with Japan actually exploded to record levels in 2006 before the global recession hit.  And a couple of years ago, the Chinese yuan rose by 20% when the Chinese unpegged it from the dollar briefly.  The result?  Our trade deficit with China continued to worsen. 

In the past year, the dollar has fallen dramatically vs. both the yen and the euro.  But has anyone heard of Japanese or European automakers raising their prices to offset the decline of the dollar?  On the contrary, the Japanese have actually been cutting prices to maintain their market share. 

The fact is that every nation will do whatever is necessary to maintain the economic status quo.  Just as the U.S. will resort to government stimulus and deficit spending to prop up the economy, overpopulated nations who are desperately dependent on exports to the U.S. to sustain their economies will do anything and everything to keep those exports going.  Currency valuations be damned.  They’ll just keep cutting costs to maintain market share. 

Einstein said that doing the same thing over and over again while expecting different results is the very definition of insanity.  That’s exactly what the U.S. has been doing in trade negotiations for decades, and now the Obama administration is carrying on the tradition.  That’s not ”change we can believe in.”  It’s status quo – the same trade policy side show we’ve watched being played out over and over and over again – a token gesture to give the appearance of doing something while, in fact, doing absolutely nothing.    The whole thing is a big joke and it makes me sick.  Once again, when the Americans leave, Asian leaders will be rolling in the aisles with laughter and more Americans will be lining up for unemployment.

Unemployment Jumps to 11.7%

 

http://www.bls.gov/news.release/empsit.nr0.htm

The Bureau of Labor Statistics (BLS) announced this morning that its official unemployment rate jumped from 9.8% in September to 10.2% in October.  (U6 – the broader measure of unemployment, jumped to 17.5%.)  But they continue to rely upon an unexplainable phenomena that I call the “mysteriously vanishing U.S. labor force” to hold down the numbers.  In spite of the fact that the U.S. population grew by 263,000  last month, the BLS says that the labor force shrank by 31,000.  It seems that, the deeper a recession gets, the more people are suddenly able to thrive without a source of income. 

Non-farm payrolls shrank by 190,000 jobs – the headline number in this morning’s report.  But the fact is that total jobs fell by 589,000.  Once again, manufacturing took the biggest hit. 

My calculation of unemployment is based upon the labor force consisting of a steady percentage of the population, which actually correllated very well with the BLS data until the recession yet, at which point the BLS became motivated to sugar-coat the data.  Using that method, U3 unemployment has jumped to 11.7% while U6 has soared to 20.9%.  Here’s my calculation:

Unemployment Calculation PDF

Taken together with GDP data (see “3rd Quarter GDP Up, Erosion in Underlying Economy Continues“), the evidence is clear that the government stimulus program, while propping up the economy, is failing to stimulate the real underlying economy.  Take that stimulus away and we’ll be in a world of hurt unless, of course, the administration decides to do something meaningful to address our failed trade policy.  But I don’t see that happening in the foreseeable future. 

So, suck it up, Americans!  The Great Recession (Great Depression II, sans government stimulus) marches on.  The change we believed in hasn’t happened yet and those who had the audacity to hope, it seems, were simply being audacious.

Obama on Trade: “If Germany can do it, why can’t we?”

http://www.reuters.com/article/newsOne/idUSTRE59U0N220091102

With joblessness continuing to escalate, Obama challenged his economic team on Monday to come up with a new economic growth model and turned his attention to trade and exports.  Give him credit.  Instead of swallowing the line that our trade deficit is an inevitable consequence of low wages in foreign countries and eschewing the usual pissing and moaning about exchange rates, he asked an incisive question:

U.S. PresidentBarack Obama warned on Monday that more U.S. job losses lay ahead despite a turnaround in the economy, and he called for a new “post bubble growth model” with greater focus on U.S. exports.

“If Germany, a wealthy, highly unionized industrial nation, can generate 40 percent of its economy as export-based, then it seems to me that there is something we’re missing that they are doing right, and we have got to figure that out,” he told a meeting of his Economic Recovery Advisory Board.

Indeed.  Why can Germany generate so much of its gross domestic product (GDP) through manufacturing for export?  The same question could be asked about Japan, Ireland, Denmark, Switzerland, Korea and a whole host of other nations, none of whom have significantly lower labor costs or better productivity than the U.S.  Nevertheless, the U.S. has a huge trade deficit in manufactured products with all of them.

The answer is that all have two things in common.  First of all, all of these nations are more densely populated than the U.S.  Most are badly overpopulated, making them incapable of per capita consumption at a rate that enables them to absorb the productive capacity of their own labor forces, much less able to consume imports from a nation like the U.S.

The second thing that all have in common is a huge market where per capita consumption is high and where the government is too dumb to implement trade policy designed to assure a balance of trade – the United States.

The question that Obama should be asking is not “What is Germany doing right?”  Rather, he should be asking “What are we doing wrong?”  The answer lies in trade policy that fails to account for the effect of extreme population densities on per capita consumption and global trade imbalances.

Obama went on to question why we can’t have the kind of economy we once enjoyed, with strong manufacturing and exports, and emphasized that big trade deficits can no longer be sustained:

“Are there mechanisms that we can start putting in place where we see the kind of growth that used to characterize the U.S. economy — export-driven growth, manufacturing growth,” he demanded of the panel, which included business leaders as well as former Federal Reserve Chairman Paul Volcker.

He said past U.S. growth had been “debt-driven” and that was no longer feasible. With the United States running record budget deficits as it spends furiously to try to stimulate the economy, Obama said it is going to be vital to find innovative new ways to finance growth, and the old approach would not do.

“The kinds of current account deficits, trade deficits we were developing were not ones that would serve as a model for long-term economic prosperity,” Obama said.

It’s refreshing to hear a president who recognizes the role of trade in the demise of American manufacturing and the economy as a whole.  He understands that it can’t go on but, predictably, his approach of chiding other nations to start buying more American products has yielded zero results.  He’s frustrated and clueless, and his economic team is of no help since, to a man, they’re free trade cheerleaders.  So he thinks it’s a matter of competing harder:

“Part of what we want is an aggressive trade policy that says we can compete, we’re not afraid of competing, we want to make sure we are competing in a fair way, and that other countries are not seeing the U.S. markets as simply the engine for their growth, without any reciprocity,” he said.

It’s not a question of being competitive.  No nation on earth has more aggressively cut labor costs and improved productivity than the U.S., all to no effect.  Any effort to identify some magical ingredient in Germany’s manufacturing or to mimic them is doomed to failure.  Unlike Germany, we have no other country like the U.S. to serve as our patsy customer, as we do for Germany.  Boosting exports is now something that’s within our control.  The only way that exports can rise is if other nations start buying more American-made products.  It’s not going to happen.

President Obama, here’s an idea:  instead of trying concoct a global economy where Germany, China, Japan and Korea manufacture everything we use, while we manufacture everything for someone else, how about an economy where we all just manufacture our own stuff?  Imagine the oil burned in transoceanic shipping that could be saved!  Trade imbalances are eliminated and Americans are put back to work in high-paying manufacturing jobs.  Problem solved!  What will Chinese, German and Japanese labor forces do?  That’s their problem.  Put tariffs back in our trade policy tool bag and make it happen.  Start being a president for Americans and do what’s right for American workers.

China Disingenuous about Re-Balancing Global Trade

 

http://www.reuters.com/article/ousivMolt/idUSTRE59Q0HN20091027

Just in case anyone was deluded into thinking that China was genuinely interested in restoring balance to global trade, along comes this blunt refusal by a Chinese trade official to consider anything that will slow the growth of Chinese exports:

Speaking at a separate forum in Beijing, Jiang Jianjun, a deputy director with the Ministry of Commerce’s Department of Foreign Trade, cited China’s rising share of global output and its swelling foreign exchange reserves as pressures on the yuan to strengthen.

“However, according to our projections, until there’s a noticeable improvement in exports, the exchange rate will not see a major adjustment,” Jiang said.

He said it would take two or three years for China’s combined exports and imports to regain pre-crisis levels.

Of course, exchange rates have nothing to do with trade imbalances, but that’s irrelevant.  Both the U.S. and China think that they do, and China’s refusal to allow any further strengthening of the yuan is proof positive that they have no interest whatsoever in re-balancing trade.  Give China credit.  They understand how to make trade work to their advantage.  It helps their cause that the people across the trade table from them are complete fools.

Hey, Asia! Want to Reduce Your Dependency on Exports to the U.S.?

http://www.reuters.com/article/worldNews/idUSTRE59N0HW20091025

The above-linked Reuters article was too good to let pass without comment.  It seems that Asian leaders have gotten together to discuss how to go about reducing their dependence on exports to the U.S. in order to correct global trade imbalances.

Asia-Pacific leaders called on Sunday for regional-wide free trade and other measures to reduce dependence on the United States and big Western markets as Asia leads the way out of the global economic downturn.

… Thai Prime Minister Abhisit Vejjajiva, host of the meetings, said Asia clearly needed a new growth model leaning less on big Western trading partners and more on Asia-wide trade pacts. The global financial crisis, he said, bore this out.

“The old growth model, where simply put we have to rely on consumption in the West for goods and services produced here, we feel will no longer serve us as we move to the future,” Abhisit told a news conference.

There’s no doubt that leaders now understand that persistent trade imbalances can’t be sustained – that they ultimately lead to economic collapse.  They believe that through a regional Asian trade bloc, they can boost their economies and stimulate domestic consumption to such an extent that they will have no capacity for supplying America’s need for products.  Apparently, they see a day when a customer at a Toyota dealer is simply turned away with the explanation “Sorry.  We don’t have any more cars available to sell.”  That must be what they envision because, unless they stop selling to the American market, the trade imbalance will persist.

The very idea that they are genuinely anxious to abandon their dependence on exports to the U.S. is laughable.  If anything, they would like nothing better than for the U.S. to boost its imports.  Imagine if the U.S. took steps to re-balance trade and break its dependency on imports from Asia.  They’d be howling bloody murder, calling us protectionists and complaining to the World Trade Organization.

Hey, Asia!  Want to cut your dependency on the U.S. and re-balance trade?  It’s easy!  Just start closing your Toyota, Nissan, Honda, Suzuki, Hyundai and Kia dealerships in the U.S.  When WalMart places orders for container ships-full of Chinese products to stock their shelves, politely reject the orders and suggest that we make the products ourselves.  Problem solved!  Or here’s another idea:  start buying as much from us as we buy from you.

We all know it’d never, ever, ever happen.  It’s all just another ploy to buy more time to sustain the trade imbalance they’ve enjoyed for decades at Americans’ expense.  Talk, talk, talk.  For decades we’ve listened to them talk about lowering trade barriers, ending currency manipulation and protecting intellectual property.  Now it’s talk about stimulating their domestic economies.  That should be good for another decade or so of more talk, and we all know that talk is the most we can expect from America’s cowardly leadership.

The only way that global trade imbalances, especially America’s huge trade deficit in manufactured goods, will ever be corrected is through tariffs imposed by the U.S., not just on Asian nations but on all over-populated nations, forcing the needed correction and bringing millions and millions of high-paying manufacturing jobs back to the U.S.

Manufacturing: Poised for Rebound or More Decline?

 

http://www.reuters.com/article/ousivMolt/idUSTRE59E4WJ20091015

The above-linked Reuters article reports on statements by the Manufacturers Alliance regarding its latest release of its monthly manufacturing index.  The index jumped nicely in September to a reading of 38, from its low of 24 in June.  So manufacturing is rebounding, right?  That’s what the Manufacturers Alliance and the Reuters article would lead you to believe. 

But, as former British Prime Minister Benjamin Disraeli famously said, there are three kinds of lies:  “lies, damnable lies and statistics.”  Statistics can be twisted so support any position.  In this case, yes, the manufacturing index improved.  But there’s just one problem:  any reading below 50 indicates contraction.  So, although the index improved from 24 to 38, what it really means is that conditions in the manufacturing sector continue to get worse, not better, but at a slower rate.  Does that sound like a rebound to you?  Of course not. 

The only part of the index that improved above 50 was the “expectations” part of the index – what the survey respondents expect to happen next year.  It seems they expect conditions to improve.  But there’s no evidence of improvement to support it.  It’s just pure hope and optimism – all part of a grand plan to boost consumer confidence by hyping “green shoots” in the economy while ignoring reality. 

Eventually, manufacturing will rebound from the level it’s at today, but not to the level it was at before the recession began.  The decades-long decline in manufacturing has been driven by idiotic trade policy that traded away our market without gaining access to equivalent foreign markets, and that decline will continue for lack of courage on the part of our leadership to make the changes necessary to restore a balance of trade.

Structural Unemployment

 

http://www.reuters.com/article/ousiv/idUSTRE5955NE20091006

It’s a basic tenet of economics that economies tend to return to full employment following the temporary disruptions of recessions.  But, as reported in the linked Reuters article, economists are beginning to worry about “structural unemployment” – high levels of unemployment that will persist even after an economic “recovery.” 

Millions of American job-hunters risk permanent unemployment as industries undergo radical change and some skills become irrelevant in the wake of the worst U.S. economic recession in 70 years.There are troubling signs that unemployment in the United States is taking on a structural dimension, though the extent of it may not become clear until the severe downturn that started in December 2007 finally ends, analysts said.

Structural unemployment has been gathering steam for decades, as the out-bound container ships that appeared to be returning empty to China, Japan, Germany and Korea were instead actually loaded with American jobs.  So where were these analysts and economists as all this was going on?  They were busy manning the brooms, sweeping the unemployment issue under rugs and transforming the American economy into a two-legged stool, teetering on the housing and services sectors while the manufacturing sector was steadily sawed away. 

It worked for a while, as housing and retail were juiced with credit, made possible by lax or non-existent lending standards.  But once everyone’s bank accounts were drained dry, the stool tipped and the whole system collapsed. 

“The figures reflect the fact that some of the jobs lost are probably lost for good and highlight that unemployment is rising more because of structural changes in the economy than in past recessions,” said Tony Crescenzi, strategist and portfolio manager at Pimco in Newport Beach, California.

The jobs aren’t “lost for good.”  They were carried overseas on ships floating on a sea of flawed trade policy.  If we just open our markets to these enormous populations, the jobs we provide them can prime the pump of their economies and they’ll soon be buying as much from us as we buy from them, it was assumed.  Well, it didn’t prime the pump.  Those jobs were poured down a rat hole.  We didn’t understand that those densely populated economies, instead of being fertile grounds for exports, were merely vast labor forces desperate for employment.  There’s not enough export market there because their over-crowding makes it impossible for them to consume at anywhere near the level required to absorb their own domestic productive capacity, let alone imports from the U.S.  And worsening over-crowding here in America, stoked by immigration, is making matters worse.

But not understanding this, economists grasp at straws to explain this new phenomenon of structural unemployment:

“That does make one to wonder about long-term unemployment, what you might call structural unemployment,” said Heather Boushey, senior economist at the Center for American Progress.

… Annual vehicle sales have dropped from a peak of nearly 17 million vehicles in 2005, while housing starts have fallen from an annual rate of around 2.3 million units in January 2006.

… Analysts reckon vehicle sales and new home construction will probably not return to those lofty levels, meaning that workers laid off from these sectors have a slim chance of getting their jobs back.

… “That means there is excess capacity of millions in terms of what could be produced. The jobs lost there might be lost for good because we won’t get back to 16 or 17 million car sales in a very long time,” said Pimco’s Crescenzi.

The logic is that people will stay unemployed because they don’t have enough income to buy things.  They don’t have enough income because they’re unemployed.  When will economists stop chasing their tails and consider the possibility that they’re over-looking something?  Perhaps people are unemployed because per capita consumption is declining while productivity is rising.  Perhaps such effects can actually be imported through free trade.  Perhaps population growth is a poor crutch for economic growth.  Perhaps, economists, closing your minds to the ramifications of population growth wasn’t such a hot idea after all. 

Structural unemployment is real, rooted in the extreme population densities found throughout Asia and much of Europe.  It is the responsibility of these nations to address the cause of their structural unemployment.  It is not our responsibility to import it.

August Trade Deficit in Non-Petroleum Goods Rises to Highest Level Since January

 

http://www.census.gov/foreign-trade/Press-Release/current_press_release/ft900.pdf

The BEA (Bureau of Economic Analysis) released the August results for international trade in goods and services this morning.  As is always the case, the headline number gets all the attention and the headline number was good – the trade deficit declined to $30.7 billion in August, down from a revised $31.9 billion in July and a bit better than expectations for a rise to $33.0 billion.  Let the party begin!

But the news for American workers isn’t good.  All of the decline (and more) is explained by a reduction in oil imports and a tiny increase in the services surplus.  (“Services” are largely paperwork transfers of money that involve few jobs.)  The bad news is that the deficit in non-petroleum goods – in other words, manufactured products (where all the jobs are, or rather were) – actually rose by $0.7 billion to $24.3 billion, the highest level since Jauuary, when international trade was in significant decline as a result of the economic collapse.  (See exhibit 9 on page 14 of the BEA report, link provided above.)

And our cumulative trade deficit, since our last surplus in 1975, has now topped $9.6 trillion (in current dollars).

If the Obama administration and congressional leaders are looking a way to reduce our soaring unemployment, fixing our misguided trade policy would be the perfect place to start.

Reshape Global Economy? What Will You Do, Mr. President?

 

http://www.reuters.com/article/newsOne/idUSTRE58G34Z20090921?sp=true

The good news is that President Obama understands that global trade imbalances – especially America’s enormous trade deficit - is what collapsed the global economy, and he will push the G20 at the meeting in Pittsburgh to reshape the global economy:

U.S. President Barack Obama said on Sunday he would push world leaders this week for a reshaping of the global economy in response to the deepest financial crisis in decades.

The bad news is that he, like everyone else – including economists – is clueless as to the root cause of the imbalance:

… Obama said the U.S. economy was recovering, even if unemployment remained high, and now was the time to rebalance the global economy after decades of U.S. over-consumption.

Overconsumption in the U.S. is a myth, perpetrated by images of fat Americans returning from the mall with their gas-guzzling SUVs filled to the roof-line.  While this may be an accurate portrait of the top 2-3% of wage-earners, reality for the vast majority of Americans is quite different.  When American families’ median income is something in the range of $48,000, how much money is left for “over-consumption” after paying the mortgage (or rent), putting food on the table, paying the utilities and buying health care?  Precious little. 

The problem with our trade imbalance isn’t that Americans over-consume.  The problem is that virtually everything we do consume is foreign-made.  Would President Obama have us stop consuming altogether?  What would we wear?  Every stitch of clothing sold in this country is foreign.  Would he have us stop maintaining our homes?  Nearly everything on the shelves at Lowe’s and Home Depot is foreign made.  Would he have us stop maintaining our cars?  Try finding an American-made auto part.  Should we stop replacing burned-out televisions?  There hasn’t been an American-made television in decades.

We have no choice but to continue buying foreign-made products, perpetuating the global trade imbalances.  Nothing is going to change until Obama, or some subsequent president with the guts to do it, finally says to the WTO (World Trade Organization) “enough is enough.”  “It’s clear the rest of the world won’t voluntarily eliminate its dependence on exports to America, so we’re putting tariffs back in our trade policy tool box.”  Only then will there be any hope of rebuilding the manufacturing sector of our economy and fixing the trade imbalances that have brought us to our knees.

Obama understands the problem.  He truly does, as evidenced by this last statement:

“We can’t go back to the era where the Chinese or the Germans or other countries just are selling everything to us, we’re taking out a bunch of credit card debt or home equity loans, but we’re not selling anything to them,” Obama said in an interview with CNN television.

OK, Mr. President, the question now is what are you going to do about it?  Talk, talk, talk and asking other nations to fix the problem for you isn’t action, it’s shirking your responsibility.  What are YOU going to do? 

One final comment about the following paragraph is in order:

For years before the financial crisis erupted in 2007, economists had warned of the dangers of imbalances in the global economy — namely huge trade surpluses and currency reserves built up by exporters like China, and similarly big deficits in the United States and other economies.

What a crock.  Economists’ zeal for one of their pet 18th century theory, Ricardo’s principle of comparative advantage, is what led to the creation of this globalized mess in the first place.  For anyone to claim that economists have been “warning of the dangers” is laughable and the epitome of historical revisionism.  If the U.S. ever does take real action to unwind the mess, it’ll be over the howls of protest from economists. 

The only good news here is that Washington’s patience with globalization’s parasitic predation on the American market is clearly wearing thin.   But real action still seems to be a big leap from where we are today.