It may be an American farewell to the WTO building on the shores of Lake Geneva real soon.

As I've written in a previous post, it is unlikely that the United States will win a case against its proposed tariffs on imported steel (Trump mentions 25%) and aluminum (10%) if one is brought by the affected exporting countries. While there is a clause as I've also mentioned for applying such tariffs if the nebulous "national security" reason is invoked, [a] there is no real precedent for doing so and [b] it's unlikely to be sustained since American defense industries only represent 3% of steel demand.

But, consider this: What if Trump is going into this fully knowing that he will be ruled against? This could be a political ploy that works in favor of his "war on globalists" Bannonite shtick. If the WTO is "against America" as a losing ruling would indicate, then why not just leave altogether? That's how MarketWatch's Greg Robb sees how things may pan out:

There is concern among trade experts that President Donald Trump’s plan to impose tariffs on foreign steel and aluminum may eventually give the administration an excuse to walk out of the World Trade Organization entirely.

It is not difficult to sketch out a scenario where the Trump administration would just say “that’s it, we are leaving,” said Jennifer Hillman, a fellow at the Institute of International Economic Law at Georgetown University, on a conference call with reporters sponsored by the Atlantic Council. Trump is planning to justify the sweeping tariffs on the grounds that the foreign imports threaten national security.

Foreign government are likely to quickly go to the WTO and ask that the tariffs be ruled illegal. Hillman said the U.S. may counter by saying it was taking the action under Article 21 of the General Agreement on Tariffs and Trade, which Hillman called the untested “third rail” of trade laws. Essentially, the article says that some binding tariff agreements can be broken during wartime.

That is, a "biased" losing ruling--which is the generally expected outcome--would be the pretense to end American participation at the WTO:

The WTO panel might rule anyway, setting up a standoff. This suggests to some that the whole reason to go down the national security route is really to create a crisis so the U.S. can withdraw from the WTO, Hillman said.

It was previously unthinkable that something like this could happen since the Americans of old came up with the entire idea of a WTO. With Trump, the impossible has a way of becoming the probable. Let's see if the Republicans can rein in their "rogue" president as times have changed...and we haven't even gotten around to talking about the fate of NAFTA yet.

Yay! Cheaper GAP vest soon care of...American politicians?

I will soon have (rather lots) more to say about the upcoming Trump tariffs on steel and aluminum. Since the US Trade Representative has not yet finalized the terms as to whether some countries or US domestic industries buying from abroad are exempt among other details, there is still some uncertainty about their ultimate form. That is, the full extent of the economic terror Trump will unleash on global markets is still up in the air.

In the meantime, though, consider this: the American congress is considering legislation that will cut tariffs on a grab-bag of imported goods currently falling under the miscellaneous tariff bill. So, it's like a push-pull set of messages from the American executive and legislature that's got us foreigners rather confused. A handful of protectionist US lawmakers still want to keep it largely intact, though:

Even as President Trump threatens to slap protective tariffs on steel and aluminum, lawmakers are moving forward with legislation to lower trade barriers on hundreds of other products, from chemicals to toasters, in a bid to lower costs for U.S. companies and consumers.

Supporters of the so-called miscellaneous tariff bill, which unanimously passed the House of Representatives in January, say it would boost the economy by getting rid of tariffs designed to protect U.S. industries that no longer exist. The National Association of Manufacturers says U.S. companies pay hundreds of millions of dollars each year on unnecessary import fees.

Critics say that miscellaneous tariff bills, which began decades ago as modest efforts to help U.S. manufacturers, have in recent years become sprawling packages of tariff reductions that undercut domestic producers without the means to defend their interests in Washington.

Ohio Senator Sherrod Brown, a Democrat who worked to get several products removed from the current bill, said Congress should do a better job to ensure tariff reductions do not impede U.S. producers. “Miscellaneous Tariff Bills should help, not hurt American manufacturers,” Brown said in a statement to Reuters.

Miscellaneous tariff bills were originally conceived in the 1980s as a way of lowering costs for U.S. manufacturers that could not get chemicals and other component products from domestic sources. The original point of the efforts“was to encourage domestic manufacturing,” recalls Jennifer Hillman, who worked on the legislation as a Senate staffer in the 1980s and 1990s.

All but two of the 163 items in a 1999 version of the bill, for example, were used in the manufacturing process, according to a House Ways and Means Committee report. Since then, Congress has broadened successive tariff bills to include many finished products that can go straight to store shelves.

Only 55 percent of the items in the current bill are“intermediate goods” used in manufacturing, according to applications filed with the International Trade Commission. Many of the rest are finished consumer products. 

Trudeau's ploy to save NAFTA consists of going around Trump.

If there ever was a misleadingly titled article, consider this one from Bloomberg on Canadian PM Justin Trudeau seeing a "clear path forward" on NAFTA. You see, the path he's taken is to largely bypass the Americans actually responsible for (re)negotiating trade deals, namely Trump and his trade representative Robert Lighthizer. Instead, Trudeau has taken his case directly to [a] representatives whose constituents will lose out from NAFTA's demise and [b] companies presumably with strong lobbying arms who would also be negatively affected:

Trudeau’s government has been attempting to win support from U.S. lawmakers and businesses to keep Trump from pulling out of the North American Free Trade Agreement, as he’s repeatedly threatened to do. Canadian efforts also come amid signs U.S. Trade Representative Robert Lighthizer is growing more frustrated with the country.

“There is a clear path forward and we’re working very hard together on that path,” Trudeau said Saturday in Los Angeles. He spoke alongside Mayor Eric Garcetti, one of many prominent Democrats he met with. Canada wants to “ensure that we can move forward in a way that is a win-win for all of us.”

Garcetti hailed Canadian investment in his city and said Trudeau’s trip was well-received. “This is deeply important work the prime minister is doing.”

Canada's NAFTA game plan was already spelled out sometime ago. If anything, this is not a "clear path forward" for a number of reasons. First, as I've mentioned, Trudeau's path appears more circuitous than direct through bypassing the formal counterparties to the NAFTA re(negotiations)--Trump, Lighthizer, and others in the executive branch. So, he's trying to raise support in a roundabout manner even if you can argue that Trudeau is actually appealing to those with a greater stake here--namely, NAFTA-participating regions and companies.

Second, despite me and many other trade commentators believing that only the US Congress can undo NAFTA having put in into effect, there is no guarantee that [i] Trump will not try to get out of the deal single-handedly if talks do not yield progress and [ii] Congress can successfully overrule Trump if he does announce the US is leaving NAFTA.

Trudeau acknowledges as much. From his Grand Tour of America:

At the University of Chicago on Feb. 7, Trudeau said he was “legitimately concerned about the future of Nafta...” Friday in Los Angeles, Trudeau warned he didn’t “think anyone can now entirely predict or understand” the impacts on the three countries if Nafta were to end.

To be fair, Trudeau's administration has just filed an unprecedented Pretty Much Everyone Else vs. USA case at the WTO that has soured trade relations between the two countries. For WTO cases, you typically argue for your own trade interests, not for everyone's against some big, bad country. If Trump's trade negotiators like inserting "poison pills" during ongoing NAFTA talks, then Canada's shoving some pretty unsavory stuff down US throats, too, at the WTO.

Ultimately, I don't think Trudeau buys that the path forward is clear, either.

Being a disordered personality of the first order, Trump has acted as a cheereleader for both rising stock valuations and trade protectionism despite the latter being anathema to the former in the opinion of most conventional businesspersons. Insofar as American businesses with operations abroad favor a relatively open and predictable environment for international trade, further moves Trump makes to antagonize the United States' trade partners may make stocks drop even further than they have in recent days.

Speaking of which, Trump's minders (babysitters for us critics) have been able to hold protectionist policies--if not necessarily rhetoric--in check by precisely making the argument that outsized stock market gains until relatively recently have been made possible by not erecting more trade barriers. The problem is that with the stock market now tanking, it is harder to make the argument that rising stock markets and trade openness go together. Axios' Jonathan Swan writes:

• One of the strongest arguments Gary Cohn and Steven Mnuchin have been making to Trump to persuade him not to blow up NAFTA or take hardline protectionist trade actions is 'Mr. President, the economy is booming and the stock market is setting records under your leadership. Why would you risk that with these trade actions?'"
• "My question: if they no longer have that argument, what else do they have in their quivers to persuade Trump not to follow his most hardline instincts on trade?

Also keep in mind that, in contrast to Trump's campaign promises to reduce to the US trade deficit, it's been exploding as of late, and we can only expect it to rise further due to recent tax cuts passed that will further increase the US budget deficit and put even greater upward pressure on the external deficit:

The U.S. trade deficit jumped to the highest level in nine years, according to a Department of Commerce report on Tuesday. Despite President Donald Trump’s repeated promise to shrink trade deficits, it rose 12.1% to $566 billion during his first year in office and leaped 5.1% in December alone. 

And this may be just the beginning of an upward trend following Trump’s tax cuts, according to economists. Derek Scissors, resident scholar at American Enterprise Institute calculates the tax cuts may boost the trade deficit by $200 billion. A BofA Merrill Lynch Global Research report also expects the share of the trade deficit in GDP to grow 0.2 percentage points by 2020.

So, if Trump no longer buys the argument that stock market will do well because of avoiding trade protectionism that upsets the status quo, what happens? It might set the stage for more protectionism over the coming months:

The Trump administration is working on trade measures that will make the recent tariffs on solar panels and washing machines look minor by comparison. At best, these potential measures could protect the U.S. from unfair foreign competition. At worst, they could ignite trade wars that end up harming everyone.

China in particular is in Trump’s crosshairs and might well fight back against any effort to restrict its exports. “I have been told by certain officials that yes, definitely, there will be retaliation” from China if the U.S. slaps new tariffs on Chinese-made products, William Zarit, chairman of the American Chamber of Commerce in China, said at a briefing in Beijing on Jan. 30.

Couple a falling stock market with a soaring trade deficit under Trump and, however misguided his ideas are about their causes, expect the blustering fellow to make even harder moves against trade openness through China-aimed sanctions and the like.

When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you've got to get up and dance. We're still dancing - Former Citibank CEO Charles Prince (2007)

At Davos, Barclays CEO Jes Staley expressed something that's been on my mind as of late: the world economy circa early 2018 sure looks a lot like the pre-subprime crisis / global financial crisis one. I'd even go one step further with this comparison: instead of looking like 2006, the world economy looks more like that closer to the eve of that cataclysmic event of a decade ago. Prior to the aforesaid event, there was some doubt as to whether a United States whose share of global economic activity is declining still mattered. After a localized problem in the US housing industry eventually led to problems in the broader world economy, this debate is a largely settled one: America still matters.

In this light, let us consider how the United States is doing at the current time and what its economic conditions mean for the rest of the world economy.  From the exuberance exhibited by many market participants, things are going swimmingly and may do so for the next 11 years or so. Like Charles Prince in 2007, people are in full party mode in 2018. Dance, dance, dance. It's a "nonstop euphoric cabaret." Have things improved significantly since then in its largest economy? And, have global economic imbalances righted themselves since then as to no longer pose a threat? The subtitle of this blog aside, I have strong doubts. Let us consider eight indications that matters haven't really improved:

I. A High and Rising Budget Deficit

Before Trump's election, forecasts for the United States' fiscal situation were already looking dire due to foregoing health and pensions obligations of an aging society (the so-called "mandatory" spending). Although some debate surrounds whether or not Trump's recently-passed tax cuts will boost economic growth--I have strong misgivings--the consensus is that it will only increase the United States' debt pile.

Actually, the 2001 and 2003 Bush-era tax cuts were made at a time when the US fiscal outlook was not as dire. From 1998 to 2001, the Clinton-era budget surpluses suggested that the country could begin reducing its national debt going forward, but we know what's happened since then. The difference with the Trump-era legislation is not so much its content--more of (unfunded) tax cuts absent tax reform--but its timing. Amid a worsening fiscal picture instead of an improved one largely inherited by George W. Bush, the Republican Party made a bad situation worse.

II. A High and Rising External Deficit

Dick Cheney famously said that "deficits don't matter." Despite alluding that these deficits do matter during his inaugural address, Trump has actually not done anything substantial to correct these deficits. (Starting trade wars doesn't count.) With regard to America's external deficit, it's actually become worse under Trump. Even if he continually bemoans how little the US exports relative to what it imports, they're, er, doing even more of the latter as of late.

In part, it's due to Trump not having any grasp of basic international economics. By worsening the United States' fiscal position, further government dissavings should, all else equal, result in a widening current account deficit. The most recent US trade deficit illustrates this phenomenon neatly. It's been rising as of late, with the goods deficit reaching $70B in November 2017 and a towering $71.6B in December 2017. From 2005 to 2008, the United States ran trade deficits larger than $700B annually, including services. To be fair, the US is running larger services surpluses nowadays than in 2005-2008. Even if the overall trade deficit is smaller relative to GDP as a result, the overall trajectory is the same: onward and upwards.

III. A Plummeting Dollar

Can you believe that Bush 42 officials actually stuck to "strong dollar" policy shtick? The combination of high and rising budget and external deficits would have been consistent with a weaker dollar, and that's what actually happened way back when the Euro reached higher than $1.50. Nowadays, of course, America's finance guy doesn't even bother with the pretense of having a "strong dollar" policy. Still, rhetoric matters less than actual policy, and the same dollar-toxic combination is very much in evidence.

Just as in 2008, the dollar is going where economic theory suggests it should--downwards. (Note that others also highlight increased global capital flows as a reason for dollar weakness. That the dollar strengthened in the wake of the global financial crisis is consistent with this interpretation.)

IV. A Rising Oil Price 

Since oil is denominated in dollars, demand for its should increase as the currency depreciates and others can buy more of the stuff for less with their respective currencies. The average price of a barrel of oil averaged over $100 in 2008; this time frame is one of continually rising oil prices as well vis-a-vis a plummeting dollar. It's not so much that high oil prices "caused" a global financial crisis, it's that it fits in with the current pattern of the world economy circa early 2018. That is, commodity prices are being buoyed by a weak greenback.

V. A Soaring Stock Market

Many adopted a sanguine outlook on asset valuations--like equity shares--during a time when the United States had the aforementioned high and rising twin deficits as well as a weak dollar. The premise of this exuberance largely resembles that of a decade ago. In fact, the then-US Treasury secretary cited global conditions that were better than ever right before things headed south:

Just how red-hot is the current worldwide expansion? "This is far and away the strongest global economy I've seen in my business lifetime," U.S. Treasury Secretary Hank Paulson declared on a recent visit to Fortune's offices [July 12, 2007; my emphases].

Maybe deficits don't matter. Maybe economic fundamentals don't matter, either. Just be mindful though of when folks were last saying the same sorts of things.

VI. A Movement Towards Financial Market Deregulation

Despite savaging bankers during his campaign, Trump has been as friendly to banks as you could possibly imagine, from cutting their taxes drastically to beginning to roll back crisis-era regulations meant to lower the possibility of another global financial crisis. With the pro-regulation Janet Yellen out of the way, the stage is set for further rollbacks on regulations set by the Federal Reserve.

VII. Dissavings-Fueled Household Consumption
In a truly "healthy" economy, additional household spending is funded by additional earnings. People spend more because they earn more. However, what if much of this spending is the result of dissavings? Obviously, there is an ultimate floor here since folks cannot deplete their savings forever to spend. In the run-up to the crisis, household savings were razor-thin, even becoming negative during some months. Is the story any different in 2018? I am afraid that it's not. The savings rate Stateside has just fallen to its third-lowest on record:

Overall, economic growth climbed by 2.6 percent on a quarterly basis at the end of 2018, data released Friday showed. The expansion was driven in large part by personal consumption, which picked up substantially in the fourth quarter -- a move that came as the savings rate slumped to 2.6 percent as a share of disposable income, its third-lowest on record.

Around 70% of American GDP is composed of consumer spending. If increases in consumer spending as of late have been driven by dissavings--other commentators note that the amount of increases in consumer spending has been approximately matched by falls in savings--then household consumption will inevitably fall back absent real income growth to continue elevated spending levels.

VIII. Growing Household Indebtedness

The last piece of the puzzle is overall household indebtedness. To no one's surprise, the United States' total household debt has eclipsed its pre-financial-crisis era highs reached in the third quarter of 2008. To be sure, the form of debt is rather different this time around: instead of housing loans during the subprime mess, the worrisome components this time around are student loans, auto loans, and credit card debt to a lesser extent. The intuition, however, is the same: monies going towards servicing these debts reduces disposable income in a consumer-driven economy. So, as these debt levels rise even further, consumer spending would be expected to take a concomitant hit.
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One saying is that something unsustainable has to, by definition, stop. Another saying goes the higher they rise, the more they have to fall. I have a bad feeling we're about to reach the sudden stop, and that the higher people push things without justification, then the dislocations that will result from returning asset valuations and the rest back to more reasonable levels will be larger.

It's hard to say that it's *only* a US phenomena here insofar as (1) the rest of the world is still funding American profligacy and (2) the rest of the world still relies on the United States as the consumer of last resort. Colloquially speaking, what happens economically in America does not stay in America. In all these respects, the world economy today is similar to the pre-crisis one, and sensible sorts will at least take caution in its possible implications.

1/30 UPDATE: The US household savings rate keeps dropping. For December 2017, it's reported to have fallen further to 2.4%. I really do worry about how America's fate often has negative implications for the rest for the world.

1/31 UPDATE: Also see this summary of risk factors identified by the World Economic forum. Many are similar to those identified above.

Here are the washing machine tariffs just imposed by Trump.

Together with the rest of the world, I've long been waiting for the real Donald Trump--as his Twitter handle describes--to show up in the international trade arena. There is much on his plate at the start of 2018, from deciding of courses of action to take on the dumping of several products as well as determining the future of US trade agreements like NAFTA and the Korea-US Free Trade Agreement (NAFTA)--both of which are under discussion with American counterparts.

On Monday, we got our first installment of the trade-hating Trump as the US Trade Representative (USTR) unveiled fairly substantial tariffs on imported goods US manufacturers made complaints about--namely, solar cells and washing machines. Tariff rates of up to 50% are nothing to sneeze at. To be sure, these are not exclusively China-exported goods. Other affected countries like Mexico and South Korea are expressing discontent. (Quite a few Korean-brand washing machines made in Mexico are destined for the US market.) Actually, China is not among the largest exporters to America of washing machines. That said, trade observers have little doubt which country was in the USTR's crosshairs when announcing these tariffs to stop a "surge" of dastardly imports:

The Chinese Commerce Ministry on Tuesday expressed "strong dissatisfaction" over the move, saying it "aggravates the global trade environment."

The tariff of 30% on foreign solar panels is a blow for China, the world's biggest supplier of the products. Beijing has been widely accused of heavily subsidizing its domestic solar industry and flooding global markets with cheap panels...

The Chinese Commerce Ministry called the U.S. process that led to the tariffs "an abuse" of the trade measures available to the Trump administration. In its investigations, the U.S. International Trade Commission determined that imports of solar panels and washers had hurt American companies.

Once more, consider the loaded term "trade war." To correctly be described as such, we need a couple of things to happen. First, there needs to be tit-for-tat retaliatory action by the concerned parties. So, how can China get back at America? Let's just say there are countless ways, beginning with actions on US goods as the obvious targets:

China hasn’t been shy about threatening U.S. corporate interests. A Communist Party newspaper warned in late 2016 that a trade war would have economic consequences. "Boeing orders will be replaced by Airbus," the Global Times said in an editorial. "U.S. auto and iPhone sales in China will suffer a setback, and U.S. soybean and maize imports will be halted."

The list of primary targets include U.S. exports to China of airplanes by Boeing Co., Apple Inc. products and soybean, says Michael Every, head of financial market research at Rabobank Group in Hong Kong.

"Chinese think-tanks are likely scrambling to identify the industries in the President’s support base that will lose out the most should it come down to a bare-knuckle fight," says Pauline Loong, managing director at research firm Asia-Analytica in Hong Kong. Boeing, the largest U.S. exporter, has long been a key bellwether for trade relations. Xi gave Boeing a $38 billion order on a 2015 plant visit in Seattle.

Keep in mind that many of the buyers of American goods are inevitably state-owned enterprises given their sheer number and centrality in China's economy. Additionally, even privately-owned Chinese firms can be leaned on more readily by the authorities to stick to the party line on not complaining about retaliatory actions pursued by the government even if these actions go against private firms' economic fortunes.

Another way China can go about exacting punishment that Western observers haven't talked about by and large is to discourage Chinese tourists from visiting your country. See the case of South Korea and China's displeasure over it deploying American-made missile defense systems (THAAD).

Out of those nearly 76 million foreign visitors to the US in 2016, fully half came from Canada and Mexico. China accounted for just 3 million. But then look at the spending: those Chinese tourists spent US$33 billion – almost as much as Canadians and Mexicans combined.

If the 3 million Chinese who visited the US in 2016 spent US$33 billion, the arithmetic is clear: for every 1 million Chinese that choose not to travel to the US, but to travel elsewhere, that implies a US$11 billion annual loss in tourism revenue to the US economy.

The Chinese can easily pick and choose how to retaliate against American--or, perhaps more accurately, Trumpian--protectionism. My impression is that the Chinese are shrewd rather than stupid; they know which industries to target to get back the most at Trump voters to inflict maximum pain on the person they consider their chief antagonist here. The excuses for taking action are many, but (public) safety has been a perennial PRC favorite, especially for food imports. Failing to comply with PRC licensing requirements is another.

The tourism route is particularly interesting since service exports like it are where the United States has a surplus to help make up for its chronic goods deficit. A benefit of running a state where firms are more mindful of the will of the state is that trade measures are more easily facilitated. So, the Chinese authorities could easily pressure package tour operators like the case of South Korea into getting rid of the US as a travel destination.

It's really up to the United States how much farther they want to ratchet up this trade skirmish, with Trump's decision on other products pending like steel and aluminum which are being considered on "national security" grounds.

The US has mounted its opening attack and established its positions. Meanwhile, the Chinese are monitoring how far the Yanks will go before deciding how to push the foreign devils back. In trade war as in conventional war, I am afraid there are no real "victors."

Unga bunga...build the wall...it's all the same.

A few days ago--before the US government shutdown became inevitable at least--Donald Trump was announced as an attendee at the annual Davos shindig of global movers and shakers. Obviously, the leader of the world's wealthiest country hobnobbing with the elites of this world makes sense. However, once you factor in the attitudes and behaviors of Trump, things become rather more interesting. What exactly do Trump and Malala Yousafzai have in common...except that he'd want to ban the Muslim woman from America like all the rest?

In most ways, Trump espouses views opposite of the cosmopolitan (the proper Bannonite-Trumpist insult is "globalist") Davos crowd: Trump is parochial instead of global in his outlook on politics and economics as well as bigoted instead of multiracial in terms of cultural disposition. His social attitudes are, of course, also decidedly prehistoric in championing white, male supremacy on a regular basis. If you grew up watching Hanna-Barbera cartoons, you will know exactly what I mean when I say Trump is Captain Caveman to the regular Davos attendees who are--or at least claim to be--more progressive like the futuristic Jetsons.

So this is the setup we have for Trump attending Davos--or at least until the government shutdown put some uncertainty as to his attendance:

Donald Trump was set to be the first U.S. president to attend the World Economic Forum in Davos, Switzerland, in nearly two decades, but the government shutdown might have scrambled those plans. White House budget chief Mick Mulvaney said Saturday that Trump's plans to travel to Davos next week are up in the air while Congress scrambles to strike a deal to fund the federal government."We're taking Davos, from the president's perspective and the Cabinet's perspective, on a day-by-day basis," Mulvaney told reporters during an impromptu briefing.

With a theme of "Creating a Shared Future in a Fractured World" [this is too funny for an event Trump will attend], this year's event would certainly generate considerably more interest from the attendance of the person doing more than his fair share of the fracturing by withdrawing from or threatening to withdraw from any number of trade arrangements; denying the shared menace of climate change; proposing to wall off the United States from foreigners; and generally withdrawing his country from institutions of global governance.

Old school European internationalists are also set to attend to counteract Trumpism. I believe that this part is the interesting one since Trump's absence would given them sole voice, albeit at an event that US audiences usually ignore:

European leaders will be out in force at the World Economic Forum in Davos this week to defend multilateralism before U.S. President Donald Trump arrives to deliver his “America First” message...

The charge will be led by French President Emmanuel Macron, the new star of European politics, who in an audacious move, has invited many of the business leaders who will be in Davos to the Palace of Versailles on Monday to press them to invest in France.

When he speaks in Davos on Wednesday, the former investment banker will offer his own “diagnosis” of globalization and set out a vision for addressing widening inequalities, global warming and the rise of nationalism, his advisers say. “I don’t think Macron will be able to resist being the counter-Trump,” said Robin Niblett, director of the Chatham House think tank in London. Macron will be joined by German Chancellor Angela Merkel, returning to the world stage after months of political limbo at home

In years past, the French have often been those critical of global economic elites. Neoliberalism and all that jazz. With Trump and Macron--a former investment banker, mind you--the United States and France appear to have switched places with the former now led by a self-styled protectionist and the latter by an unabashed internationalist.

Times change. While Trump likes the opportunity presented here to poke a finger in the eye of the so-called globalists as he is wont, it may yet backfire: his prehistoric views may further alienate very influential people around the world just as the United States' international reputation is in the dumpster thanks to him. Showcasing ignorance proudly is Trump in excelsis. Then again, being "America First" is a play to domestic audiences first and foremost, so even if he offends his hosts and their progressive sensibilities, it may not matter to Trump for as long as it plays well to his political supporters espousing similarly Trumpian views.

But will he be able to attend? The dynamics of the government shutdown--whether it approaches resolution, as well as its optics--should the president be seen as fleeing the arena when the action is at its peak--will help determine his presence or absence. As they used to say on TV, stay tuned for the continuing misadventures of Captain Caveman, I mean...Donald Trump.

Can the UK join these Pacific nations in a regional FTA? It's far-fetched.

I am utterly befuddled by British officials giving lip service to the idea that they wish to join the Trans-Pacific Partnership (TPP) deserted last year by the United States. Now formally known as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership or CPTPP with its 11 remaining parties working towards an agreement, its inclusion of the UK would be an eyebrow-raiser in many respects.

First off, and this is quite obvious, the UK is an outsider in geographic and organizational terms. Since it's neither in Asia or in the Pacific Ocean, it is obviously not qualified to be in the Asia-Pacific Economic Cooperation (APEC) which all CPTPP members are part of and which gave rise to the idea of a TPP. Or so I believe...

Britain is reportedly exploring joining the Trans Pacific-Partnership (TPP), as part of efforts to map out its trade future after Brexit. Ministers have held informal talks on joining the proposed free trade group that includes 11 countries bordering the Pacific Ocean, according to the Financial Times. And International Trade Secretary Liam Fox has not ruled out the UK joining the TPP.

Its qualifications to join CPTPP aside, the economic rationale may not be there despite Asian countries which form its backbone being faster-growing than mature European economies. Having complained about "Brussels" shaping UK policy without meaningful input, how do you think Asian countries would regard a European Johnny-come-lately making a long list of demands to join an FTA it isn't a natural fit for? Simply put, it would likely receive next to no concessions:

However, the very possibility of the UK entering into these talks has drawn criticism. Labour MP and Open Britain supporter Chuka Umunna says new trade deals "would not come close to making up for lost trade with the EU after a hard Brexit".

And if the UK did join the TPP, it risks holding "little leverage" in talks, according to Aaron Connelly, research fellow at the Lowy Institute for International Policy. He says nations are highly unlikely to reopen negotiations on sensitive matters, simply to accommodate the UK. Given the urgency to seal a deal, Mr Connelly warns the UK would be a "price taker" on the terms of the pact, particularly in areas like pharmaceuticals, state-owned enterprises, labour and the environment. "If Brexit was about symbolically taking back control in these areas, then joining the TPP would do little to accomplish that," he added.

If the UK was in such a hurry to get out of its region's integration effort, why is it in such a rush to get into another one where it doesn't geographically belong? That is the question. To most impartial observers, it was better off staying in the grouping where it already was instead of thinking the grass is greener on the other side of the world. Sure, it can make a bilateral FTA with CPTPP member countries if and when the latter is formed, but its chances of being a CPTPP "founding" member are rather iffy.

And the award for best trade villain goes to...

Trumpian idiocy is endangering perfectly good trade deals with Mexico and Canada [NAFTA] as well as with South Korea [KORUS FTA]. The anti-heroes here are two economic illiterates, the vulgarian ignoramus Donald Trump and his Reagan-era trade "enforcer" Robert Lighthizer. To them, the reason for massive US trade deficits is so easy to understand: other countries taking unfair advantage of "gullible" US leaders. For them, the golden age of America--when its manufacturing was strong--is just some kind of protectionist policy away:

For the administration, the core belief is that the trade deficit has caused widespread manufacturing job losses in the US and stagnant wages, which would be reversed by closing the deficit. The administration has set reducing the $64bn annual goods trade deficit with Mexico in particular as the main goal of the renegotiation of the North American Free Trade Agreement now under way. Mr Lighthizer, similarly, is pointing to a persistent bilateral trade deficit with South Korea as he seeks to renegotiate an agreement with Seoul that took effect in 2012. 

Economists possessing any intelligence, however, understand that massive US external deficits are more the products of the US dollar's unique position in the international monetary system and America's lack of savings. Once more, the US current account balance reflects a shortfall of savings relative to investment caused especially by government dissavings (expenditures far exceed income) and low household savings. In a highly integrated world economy, American firms which have become intertwined in global productions chains also stand to lose if Trump gets his way in walling off the US from international trade:

Anne Krueger, who served as the top US official at the IMF and as the World Bank’s chief economist, argues that the dollar’s status as the world’s reserve currency bears more responsibility for the current account deficit than any trade agreement. Also to blame, she says, are the US’s low savings rate and its persistent government budget deficits. The situation is made more complicated by the globalisation of supply chains, which has helped drive down the cost of complicated manufactured goods such as cars.

More than half of US imports are either parts or raw materials, making them crucial to exports. That means cracking down on imports — such as those of steel or auto parts — can hurt US manufacturers and exporters further up the value chain. “If we cut off our deficit with Mexico by cutting off imports of auto parts, then we’re going to be cutting off our own exports,” Ms Krueger says.

This "low savings" argument is well-known and is continually repeated by Stephen Roach. Krueger adds color to this argument by reiterating that, instead of blowing up the US budget deficit further with massive, unfunded tax cuts, Trump should aim to belt-tighten the government purse or--good heavens--raise taxes to narrow the external deficit:

If the trade deficit is the Trump administration’s primary concern, the better option, she argues, would be for Mr Trump and his administration to do the opposite of what they are planning to do and focus on incentives for consumers to save or to improve the US fiscal position — either by raising taxes, cutting spending or a combination of the two. Instead, the administration last week unveiled a plan for tax cuts that most economists expect to weaken the US fiscal position.

The frustrating reality for economists like Ms Krueger has long been that the politics of trade usually run counter to what they see as the obvious economic truths. But Mr Trump may be confronting a new lesson on the link between politics and economics. Nine months into his presidency his attempts to rewrite the rules of global commerce have done more to increase the US trade deficit than to cut it. And for that there may well be a political price.

It's the simplest of single-equation economics. Some people just don't get it...and probably never will.

Mexico should put Trump and his protectionista Lighthizer in their place by getting the US congress to stop this idiocy.

I make no bones that I am far more sympathetic to Mexico than Trump's USA at the ongoing North American Free Trade Agreement (NAFTA) "renegotiations." What US Trade Representative Robert Lighthizer is attempting to do is actually beggar-thy-neighbor masquerading as an "update" of NAFTA. Let's not mince words here: No self-respecting nation would agree to such one-sided stipulations--especially to replace ones that aren't so lopsided.

Among other things on the American negotiators' wish list:

• A US proposal to protect its seasonal produce;
• A sunset clause floated by the US that would kill NAFTA after five years unless the three parties renegotiated;
• US insistence on using the pact to cut its $64.3bn trade deficit with Mexico;
• US desire to see higher US [50%!] and North American content [85% from 60%], so-called rules of origin, in car parts
• Also, a 5-year "sunset clause" if an extension is not successfully renegotiated

The last three are especially egregious for what is ostensibly a "free trade" agreement: Isn't the market supposed to determine where things are made by whom to sell to others? Moreover, why should a regional trade agreement have stipulations for minimum content from one country and not the others instead of having just regional rules of origin? Maybe they should rename it the NA4USAFTA if the Mexicans and Canadians are dumb enough to agree to such unfair giveaways. The sunset clause makes no sense to the others since it's only meant to facilitate piling on more stipulations favorable largely or solely to the US.

In short, the US wants the others to swallow "poison pills" that are thoroughly unpalatable for its benefit--the very definition of mercantilism. What, then, should Mexico do? I've written about the options it can use before, but also consider who will make the ultimate decision on behalf of the United States to leave NAFTA. That's right, it's not Trump but Congress according to international trade law specialist Joel Trachtman:

Many members of Congress work under the fundamental misunderstanding that the president has the power, on his own, to terminate NAFTA. They are unaware that under the Commerce Clause of the Constitution, while the president is the negotiator and signer of trade agreements, he is not the “decider.” Power to approve, and to terminate U.S. participation in, trade agreements is assigned to Congress[...]

And yet, the Supreme Court has said, in the 1994 case of Barclays v. California, that “the Constitution expressly grants Congress, not the president, the power to “regulate commerce with foreign nations.” If the president, acting alone, were to terminate U.S. participation in NAFTA, he would be imposing regulation on commerce, without congressional participation.

Having assented to these agreements, only congress can undo them. Indeed, the legislature should probably make it eminently clear to Trump that he should not pretend to be able to exit NAFTA using executive power:

While Congress can make specific delegations of powers to the president in the field of trade, it has steadfastly avoided delegating power to the president to terminate trade agreements. So there is little basis for an argument of implicit delegation by virtue of the inclusion in these agreements of clauses allowing the member countries to withdraw.

If President Trump proposes to give notice to terminate NAFTA without congressional approval, U.S. exporters, and U.S. consumers, and perhaps also U.S. members of Congress, should sue. Before we reach that point, Congress could pass legislation specifically denying the president authority to terminate these trade agreements, in order to avoid uncertainty. It has the power, and the responsibility, to do so. The Founders wisely determined that Congress, not the president, is the “decider” in the field of trade.

The Mexicans are right to lobby US firms with continental operations. However, they should also lobby lawmakers to assert their primacy on matters of undoing trade agreements. It is unlikely that a majority wound want to kill NAFTA, so Mexico should start the ball rolling in this respect, too. The Canadian President Justin Trudeau is doing so already even if his country has less to lose for reasons I'll discuss more in another post.

Aside from refusing to be force-fed Trump's s--t, they should appeal to those whose voice really matters for this issue.

Will Delta really fly Bombardier CS100s? Of Canada has trade "friends" like the US, who needs enemies...

When it comes to capital-intensive businesses, commercial aircraft is among the most demanding of sheer funding. Especially when it comes to developing all-new models, the level of research and development required equates to a lot of money spent. Today's case in point is Canadian jetliner manufacturer Bombardier. Its niche is jets smaller than the smallest offerings of the industry titans Boeing [737] and Airbus [A320]. You'd think that not competing directly with them puts it in a safe spot, but no:

Boeing’s beef with Bombardier concerns the CS100 jet, which has slightly more than 100 seats, a market niche that Boeing executives were once pretty sniffy about, possibly with good reason. Bombardier ran into all kinds of financial difficulties developing and trying to sell the innovative C Series, which led to a $1 billion bailout by Quebec in 2015. Bombardier persisted, yet no sooner had Delta thrown it a lifeline by placing a firm order for a few dozen C Series jets, Boeing fired off a complaint to the U.S. government.

Boeing’s fear, as its legal complaint makes clear, is that one day Bombardier will become a much stronger competitor. But Boeing’s aircraft sales are eight times larger than Bombardier's today. Taking legal action makes Boeing seem like both the playground bully and the class snitch.

Interestingly enough, it appears the first major trade war of the Trump administration will not be against China or Mexico, the usual targets of his anti-trade rhetoric. Instead, it will be against supposedly friendly Canada. To make a long story short, Boeing (which doesn't make the same-sized jets, again) complained to the US Commerce department that Bombardier received substantial subsidies in launching its latest mode, the CS100. Being then asked that tariffs be applied on Bombardier CS100s being sold Stateside. In this activity they were more than successful:

The U.S. Commerce Department’s decision to tag Bombardier Inc.’s newest plane with retaliatory tariffs of more than 200 per cent[219.6% to be exact] was a blatant abuse of power. The complainant, Boeing Co., had asked for only an 80-per-cent penalty. Wilbur Ross, the commerce secretary, went bigger to remind the world that he could. “The U.S. values its relationships with Canada, but even our closest allies must play by the rules,” Ross said in a press release.

You read that right: the Commerce department almost tripled the tariff Being sought since it wanted to make an example of these Canadian trade miscreants:

Ross’s move was the equivalent of the schoolyard tough smearing a Cheez Whiz sandwich on the face of an innocent. He used the Bombardier press release to remind that his department had initiated 65 trade-related investigations since Inauguration Day, a 44 percent increase from the same period a year earlier. Economic historians have a term for this sort of behaviour: beggar-thy-neighbour. It comes from the Great Depression, when countries resorted to tariffs to “protect” jobs and only ended up making things worse.

Note that this is just an initial ruling; the ultimate tariff applied (if any) may be lower. However, rest assured that the Canadians are understandably outraged. At stake is an order for 125 CS100s ordered by the US-headquartered Delta Airlines. We're entering trade war territory as Canadian government figures are threatening to rescind a defense contract to buy 18 F-18 Super Hornet jet fighters from Boeing:

[Canadian Foreign Minister] Freeland also repeated the threat to cancel the Liberal government's planned sole-source purchase of Boeing Super Hornet jet fighters. The Liberal government has been clear that this case "very much has a bearing" on the decision to buy the warplanes, said Freeland. "The government of Canada cannot treat, as a trusted partner, a company which is attacking our aerospace sector."

Prime Minister Justin Trudeau was even more blunt. Speaking two weeks ago beside British Prime Minister Theresa May, Trudeau said the fighter deal is all but dead. "We won't do business with a company that's busy trying to sue us and trying to put our aerospace workers out of business,'' he said.

I mentioned that it's not only the US against Canada, but also the US against the UK. You see, Bombardier has wing assembly operations in Northern Ireland, and Ulster would lose a lot of economic opportunities if the US mega-tariff holds. With May's government relying on the support of Northern Irish lawmakers--and her attempts to build a relationship with Trump--in mind, the result is disappointing:

It’s no wonder Theresa May says she’s “bitterly disappointed” by the U.S. Commerce Department’s decision to impose punitive import duties on Bombardier Inc.’s new jetliner. It hurts the U.K. prime minister in several ways at once. First, it’s a blow to a big employer: More than 4,000 work for the company in Belfast, Northern Ireland, where the plane’s wings are built. Second, Northern Ireland is a sensitive area for British politics: It is only because May’s Conservatives have the support of 10 lawmakers from the region that she’s able to govern.  

Third, it’s a personal embarrassment: After spending political capital at home to try to build a close relationship with Donald Trump, she raised the issue with him both by phone and in person, with no obvious result.

Going forward, the UK is said to be reconsidering awarding more defense contracts to Boeing:

British defence minister Michael Fallon has also criticised Boeing. He ruled out cancelling existing orders with Boeing for nine P-8 spy planes and 50 Apache helicopters, but added the U.S. firm was seeking other UK contracts. 

Boeing has risen since 2000 from a relatively minor defence supplier to become one of Britain’s top five following the purchase of C-17 transporters and Apache attack helicopters, according to defence analyst Francis Tusa.

The game commences. Whether Canada and likely the UK take the US to the WTO for a complaint will depend on what tariff is ultimately applied to the Bombardier CS100 Stateside.

The Yanqui villain is on the left. The Canadian [C] and Mexican [R] protagonists seek to defuse his worst tendencies.

The commencement of the NAFTA renegotiation has been, if nothing else, an opportunity for the Trump administration to engage in grandstanding about how the protectionist president is fed up with Canada and Mexico not competing on a level playing field. Aside from running trade surpluses with the United States (which reveals the extent America is being "taken advantage" of), both stand accused of stealing American jobs (i.e., whenever US multinationals hire workers anywhere except the US). Hence US Trade Representative Robert Lighthizer's tale of woe at the beginning of negotiations:

We cannot ignore the huge trade deficits, the lost manufacturing jobs, the businesses that have closed or moved because of incentives -- intended or not -- in the current agreement.

The numbers are clear. The U.S. Government has certified that at least 700,000 Americans have lost their jobs due to changing trade flows resulting from NAFTA. Many people believe that number is much, much bigger than that. In 1993, when NAFTA was approved, the United States and Mexico experienced relatively balanced trade. However since then, we have had persistent trade deficits – in the last year totaling nearly $57 billion. In the auto sector alone, the U.S. has a $68 billion deficit with Mexico.  Thousands of American factory workers have lost their jobs because of these provisions. In recent years, we have seen some improvement in our trade balance with Canada.  But over the last ten years, our deficit in goods has exceeded $365 billion.

[Sniff] the vile things these foreigners are doing! To no one's real surprise, though, it appears that the US grandstanders do not really have a game plan:

In this case, however, the entire NAFTA renegotiation process is happening only because Donald Trump campaigned on doing it and insisted on formally triggering the treaty’s renegotiation provision back in mid-May. But with the [Trump] administration in a state of semi-permanent chaos, top officials not focused on the issue, and the White House’s leading trade protectionist unceremoniously fired [Steve Bannon], Trump does not appear to be well-positioned to secure any kind of meaningful concessions from Canada.

The Canadians, on the other hand, are not fooling around since their mission is rather more serious than catering to the ego of an economic populist and his minions. They do have a game plan to preserve the benefits which have come through this agreement. In stark contrast to US ineptitude, they've designated a veteran team to respond rapidly to the mental disturbances of Trump and company. One of the ways to accomplish Canadian objectives is to appeal to Americans who have a stake in maintaining the current deal:

According to Alexander Panetta of the Canadian Press, Prime Minister Justin Trudeau “has created an election-style nerve center to handle White House-related challenges” during the NAFTA renegotiation process. The team features eight staffers, including “two former trade officials, two senior PMO officials, an ambassador, a writer, a cabinet minister.”

The goal is to be able to push back on both a strategic and tactical level to presidential negotiating ploys, including social media threats to pull out of NAFTA altogether in order to gain leverage. One of the goals of the team in the prime minister’s office is to coordinate follow-up, if necessary, with the broad and deep range of American stakeholders beyond Trump whom Trudeau has spent months cultivating.

As Max Fisher reported in June, “Canadian officials have fanned out across the United States, meeting with mayors, governors, members of Congress and business leaders on matters from trade to the environment.” At meetings with local officials, Canadian ministers “travel armed with data on the precise dollar amount and number of jobs supported by Canadian firms and trade in that area,” cultivating current and potential allies to push back against Trump’s demands. 

Canada also has a clear list of negotiating objectives, including both key NAFTA provisions that Trudeau’s government is committed to keeping and aspirations to win more access for Canadian companies to state and local government contracts and more access for Canadian professionals like computer programmers to jobs in the United States. The US negotiating posture, by contrast, heavily emphasizes a couple of demands that appear to be symbolic, meaningless, or unworkable.

Actually, the barbs from Trump have already begun as negotiations are underway. Trump told a Phoenix, Arizona rally that the US will probably withdraw from NAFTA. However, Canadians and Mexicans are taking him less seriously by the day, as they should. Remember, the US president does not have sole discretion whether to withdraw from a trade deal like NAFTA. Instead, congress does. As long as the Canadians strategically appeal to American benefiting from the arrangement--and congresspersons who represent them--it does not make sense to count NAFTA out.

The weight of evidence suggests the Canadians understand their predicament and how to get a favorable result by appealing to US constituencies who've benefited from regional trade. Alas, the same cannot be said for Trump and company.The good guys here, the Canadians, stand a good chance of winning since they are much better prepared.

Of course Qatar knows the WTO. The current [?] WTO negotiations were initiated in the capital of Doha.

I am fascinated with the blockade on Qatar by fellow Gulf Cooperation Council (GCC) countries Saudi Arabia, the United Arab Emirates, and Bahrain, supposedly for supporting "terror." For the country where most 9/11 attackers came from and which has funded fundamentalist education throughout the world, Saudi Arabia is particularly noteworthy. My belief is closer in line with those who believe Qatar acts more as a neutral ground for those wary of Middle East authoritarianism--even if these folks may include Hamas and Hezbollah who have representative offices in Qatar.

There is also the not-so-small issue of broadcast network al-Jazeera, which is widely viewed not just in the region but throughout the world. Its continuous criticism of other GCC countries rankles the others, and I must also point out that Qatar is not entirely faultless in its media coverage. After all, Qatar is just like the rest of them: As yet another absolute monarchy, Qatar is hardly a bastion of democracy. As al-Jazeera viewers would note, Qatar's leaders--who set up the network in the first place--are never criticized.

Having failed so far diplomatically in resolving this dispute--the United States which has bases in Qatar but nonetheless was bashed by Trump as a state sponsor of terror has been of little use--Qatar now turns to international organizations to help its cause:

Qatar has lodged a formal complaint with the World Trade Organisation against the “illegal siege” imposed by four Arab neighbours that have accused the Gulf state of sponsoring terrorism. The complaint, lodged with the WTO’s dispute-settlement body, described the embargo as “unprecedented”, accusing Saudi Arabia, the United Arab Emirates, Egypt and Bahrain of “violating the WTO’s core laws and conventions on trade of goods and services, and trade-related aspects of intellectual property,” the ministry of economy and commerce said in a statement on Monday.

On June 5, the quartet of Arab allies cut off air, sea and land links to their gas-rich neighbour, closing off airspace to Qatar-bound flights, refusing to handle goods bound for the gas-rich state and cutting diplomatic ties. While Qatar has shifted supply chains, bringing in food from Turkey and Iran and using Omani ports, its imports nonetheless slumped 40 per cent in June as the embargo hit home. “The arbitrary measures taken by the siege countries are a clear violation of the provisions and conventions of international trade law,” said Sheikh Ahmed bin Jassem bin Mohammed Al Thani, the minister of economy and commerce. “Furthermore, the illegal siege is unprecedented in the framework of economic blocs.”