It’s the Economy Stupid

By John J. Metzler

UNITED NATIONS—Back in Ronald Reagan’s time, the underlining philosophical mantra of the extraordinary economic expansion was that “a rising tide lifts all boats.”  Namely, as entrepreneurialism and enterprise were encouraged, the results would create the rising tide of progress.  But later, in the early 1990’s slowdown, President Bill Clinton rose to power on a  simple but still memorable quip floated by his communications guru James Carville, “It’s the Economy Stupid.” Such remains a tried and true political dictum.

The International Monetary Fund (IMF) predicts wider global growth based on the expanding American economy.  Despite the chafe and flying feathers from both Twitter storms and the   usual Congressional gridlock, President Donald Trump has created the conditions for the rising tide; high Consumer Confidence, Business Confidence and both business and personal tax cuts.  The stock market has soared.

The undertow of unemployment which was a bane of the previous Administration has turned and now the U.S. jobless rate stands at a seventeen year low of 4.1 percent.  Significantly, 2.5 million jobs have been created, 200,000 in the crucial manufacturing sector alone.   The American economy grew at an impressive 2.3 percent in 2017.

As the President touted in his State of the Union Address, “This is our new American moment. There has never been a better time to start living the American Dream.”

Nonetheless, the ill-winds of Protectionism can whip up a gale even on seemingly calm waters.

I’m not talking about our lopsided China trade in which last year’s deficit with Beijing reached $344 billion, only a bit smaller than the high of $375 billion in 2015.

Trade pacts have predictably come under suspicion.  President Trump stated, “The era of       economic surrender is over…  From now on we expect our trading relationships to be fair and to be reciprocal.  We will work to fix bad trade deals and we will negotiate news ones.”  While specifically not mentioning China, nor the NAFTA deal with Canada and Mexico, the underlying tone echoes protectionism.

Take the North American Free Trade Agreement (NAFTA), adopted by the Clinton Administration in 1994.  There’s huge cross border commerce with both Canada and Mexico.

Yet NAFTA is being renegotiated.  Just a day after the State of the Union, Canada’s Foreign Minister Chrystia Freeland was here in New York and fully conceded NAFTA should be     “modernized and improved.”  She cited the example of cross border auto parts trade in which NAFTA provisions still deal with Cassette Decks in new cars!

Speaking at the prestigious Council on Foreign Relations, Minister Freeland views trade pacts as a “win-win” and not “a Zero-sum game; one guy wins one guy loses.”  She stressed, “We really sincerely think a trade relationship is a Win-Win…Why would you Trade if it was not good for both parties?  We’re kind of like Adam Smith there.”

She claimed that amid tough negotiations with the U.S. her government has a “Plan A,  but we have a Plan B , C, D, E and F too.”  In other words, Ottawa really wants a continued deal with Washington. Canada is the world’s tenth largest economy.

The U.S. trade with Canada stands at $535 billion with a small deficit of $15 billion last year.

Bilateral trade with Mexico reached $512 billion with a manageable deficit of $66 billion.

But China has now displaced Canada as the USA’s largest trading partner.

Viewing the bigger picture of trade and foreign policy Minister Freeland asserted, “We think the world is stronger when the U.S. is at the table.” Fully Agreed.

But what of the Elephant in the Room? India’s economy has seen a growth spurt and now stands proudly as the world’s Fifth largest economy!  The positive can-do policies of the

Modi government combined with the hard work and entrepreneurialism of the Indian people have brought about this milestone.  India was once shackled with burdensome state socialism; today there’s a growing commercial spirit.

India has surpassed both the United Kingdom (the former colonial power) and France to edge into Fifth Place. That’s standing in the lineup with the USA, China, Japan, Germany and India.  Talk about a changing world!

Expanding U.S. trade with India has reached $68 billion with a $21 billion deficit.

Seen another way, the NAFTA deficits stand at $81 billion, again a shadow of the $344 billion imbalance with China!  While massive trade deficits pose a threat to national security as well as    financial strength, free but fair trade, will speed the flow of commerce and offer workers a win-win deal.

John J. Metzler is a United Nations correspondent covering diplomatic and defense issues. He is the author of Divided Dynamism The Diplomacy of Separated Nations:  Germany, Korea, China.

{ 4 comments… read them below or add one }

Willem Post February 12, 2018 at 2:37 pm

US-Korea Trade Agreement, signed by Obama in 2012, enabled Korea to increase its exports to the US, whereas US exports to Korea were stagnant. See table 2A. Tens of thousands of jobs were created in Korea, whereas near zero jobs were created in the US.
http://www.epi.org/blog/u-s-korea-trade-deal-resulted-in-growing-trade-deficits-and-more-than-95000-lost-u-s-jobs/

US exports of motor vehicles and parts to Korea increased by less than $1 billion between 2011 and 2015, but U.S. imports from Korea increased $10.6 billion. As a result, the trade deficit in vehicles and parts increased $9.6 billion in the first four years.

The growth of the vehicles and parts deficit was responsible for 85% of the increase in the US-Korea manufacturing trade deficit, and nearly 63.7% of the increase in the total US-Korea trade deficit between 2011 and 2015.

Alarmingly, the agreement has not taken full effect and there still retain some important US tariffs that protect our domestic auto industry. When they expire in 2021, our trade deficit with Korea will undoubtedly worsen.

It is utterly astounding, after decades of negotiating trade agreements, US/Obama negotiators again were completely outsmarted by Koreans, or they deliberately compromised US commercial interests, which borders on treason.

At 10,000 jobs per billion dollars of exports, Korea gained about 150,000 jobs, mostly in manufacturing, the more lucrative part of the value chain. The US further reorganized its economy to distribute, sell and service foreign goods, likely with no net gain in jobs.

Trump and others call it a horrible agreement for the US. In reality, it is much worse. It is completely abhorrent and unacceptable. It should be immediately renegotiated.

Table 2A 2011 2012 2013 2014 2015
Korea 56.7 58.9 62.4 69.5 71.8
US 43.5 43.3 41.7 44.5 43.5
Deficit 13.2 16.6 20.7 25.0 28.3

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Willem Post February 12, 2018 at 2:38 pm

Canada and its CSeries Plane Building Program: The CSeries program, started in 2004, $5.4 billion was spent as of February 2015 (likely much more by now), created three planes; the CS100 seats 108 – 133, the CS300 seats 130 – 160, and the CS500 seats 160 – 180, development date not yet determined. The CS 300 and 500 are direct competitors of the Boeing 737 and Airbus A320.

Bombardier had received a $3 billion “launch” subsidy from the Canadian government to develop and set up assembly of the CSeries planes in Canada. In the past, Airbus, a French “national champion”, had received similar “launch” subsidies from the French government.

Bombardier tried to sell 75 CSeries planes to Delta Airlines at a much larger than usual discount, made possible by the subsidies. Boeing objected. The US Commerce Department agreed with Boeing and imposed a 220% countervailing duty and 80% anti-dumping duty. In retaliation, Canada cancelled a planned F/A-18 fighter plane purchase; the planes were to be built by Boeing. Instead, Canada is buying similar fighter planes from Australia.

Airbus comes to the rescue! Airbus has acquired a 50.01% stake in the CSeries program (no money was paid). Bombardier will own 31%, and Investissement Quebec will own 19%. Airbus will provide the program with procurement, sales and marketing and customer support expertise. The agreement brings together Airbus’ global reach and scale, and EU-backed political clout with the CSeries planes. Airbus could sell those planes all over the world and avert US tariffs, except may be in the US.

After the Airbus takeover of the CSeries program, Delta Airlines, a patriotic company, increased its order to 100 planes, and placed it with Airbus. The takeover, the Delta order, and the contested subsidy remain to be resolved by a US and/or an international court.
https://en.wikipedia.org/wiki/Bombardier_CSeries

The CSeries planes will be assembled with parts from Canadian, the EU (wings from Northern Ireland), China and the US (engines from Pratt & Whitney), etc., as before. However, final assembly will be in the Airbus assembly plant in Mobile, Alabama, to enhance US content (relatively low-skill assembly jobs), which likely would facilitate the sale of the CSeries planes to US, Canadian and Mexican airlines without having to pay import duties, an example of the EU, etc., taking advantage of Boeing and NAFTA.

This whole episode also is an example of Canada, the EU and Australia ganging up on the US. It would be preposterous for Canada to think Boeing would not object. Canada likely calculated, if push came to shove, the US would cave, as usual.

Trump had declared the time of taking advantage of the US is over, i.e., putting the US and US workers first. It should now be obvious why the EU, Canada, Mexico, etc., were so opposed to Trump being elected.
https://www.ft.com/content/d3094604-dc63-11e7-a039-c64b1c09b482

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Willem Post February 12, 2018 at 2:39 pm

The Value Chain Regarding Cars: German companies make the materials, and design and build the factories to assemble cars. The design, engineering and testing of a Mercedes car and the parts and subassemblies are all done in Germany. Some cars are sold in Europe, and some are shipped, usually on European ships, to Mercedes-owned distribution centers in the US, and from there to foreign car dealers who sell the cars to end users.

The US gets involved at the tail end of the value chain. The real money and skilled jobs are at the front end of the value chain. The German response when pressed to import more US cars: “The US should build better cars”, or, regarding US trade deficits, “it is the natural development of markets”, or some other inane platitude.

Mexico has bent over backwards to accommodate car companies of Germany, Japan and Korea, and has big trade surpluses with the US as a result. German car assembly plants in Mexico use parts from the EU, US and elsewhere, to assemble cars, such as the Mercedes models, that are exported to the US duty free, because of NAFTA, and to the EU duty free, because of the bilateral EU/Mexico trade agreement.

– If that same car, using the same parts, were assembled in a Mercedes plant in the US, it could not be exported to the EU duty free, because of a lack of bilateral EU/US trade agreement; it would be subject to WTO tariffs.
– If that same car, using the same parts, were assembled in a plant in the EU, and exported to the US, it would be subject to WTO tariffs.
– If the US insists on more US content of imported cars (as part of a revised NAFTA), Daimler-Benz would merely ship an engine assembly plant to the US, send the engines to Mexico, and import cars as before. The US role would remain essentially unchanged, i.e., to sell and service the cars, a low-skill, low-margin part of the value chain.

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Willem Post February 12, 2018 at 2:41 pm

NAFTA, signed by Clinton in 1993, allowed the EU and East Asia to have bilateral trade agreements with Mexico and Canada, which, over time, became advantageous to them and disadvantageous to the US. Regarding US manufacturing jobs, Ross Perot called NAFTA “the giant sucking sound”. NAFTA, to its disadvantage, does not act as a trading bloc, unlike the EU.

In case of the car industry, NAFTA enabled EU and East Asian global companies to:

1) Build plants for manufacturing car parts, mostly in Mexico.
2) Import parts near-duty-free into Canada and Mexico (per bilateral agreements).
3) Assemble entire cars in Mexico and Canada for import, duty free, into the US.

By design, the US-made parts content of these cars, designed abroad, was kept minimal to maximize jobs in Europe, East Asia, Mexico and Canada, to the disadvantage of US workers. Any exported US-made car parts, or entire cars, would face European and East Asian tariff and regulation walls. Try importing a Harley Davidson into Italy, or a US car into Korea and Japan.

The adversities of NAFTA further increased the US trade deficits in goods from $132.4 billion in 1993 to $752.5 billion in 2016, and reduced well-paying, steady, US manufacturing jobs to lower levels than they would have been.

China into the WTO, signed by Clinton in 2001, enabled China to have the advantageous status of “developing nation”, i.e., allowed China to restrict its imports, while building up its exports and foreign currency reserves. China is far from being an underdeveloped nation. See URL.
https://www.chonday.com/27755/railchaiengi5/

This further increased the US trade deficits in goods from $422.4 billion in 2001 to $752.5 billion in 2016, and reduced well-paying, steady, US manufacturing jobs to lower levels than they could have been.

The US response effectively amounted to near nothing, as it became bogged down in the quagmires of Vietnam, Iraq, Afghanistan, etc., adventures that wasted several trillion dollars, instead of being invested in infrastructures to improve economic and living conditions.

History shows, the cumulative result of trade pacts, bilateral and multilateral, led to decades of increasing US trade deficits ever since 1971, the demise of US trade unions, and rustbelt conditions in many urban areas of the US.

Trump’s call to renegotiate trade agreements likely will be slow-walked by “trading partners” until he is out of office, as it would upset their present advantageous situation, relative to the US, which is producing lucrative gains.

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