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Dueling Free Trade Agreements

By: Clyde Prestowitz Friday September 14, 2012 2:13 am

Originally posted on Clyde V. Prestowitz on Trade

Are Free Trade Agreements (FTAs) really about free trade or are they just war by other means?

Signs: WTF TPP. TPP: A Backroom Deal for the 1%

Anti-TPP Rally in Leesburg, Virginia (Photo: GlobalTradeWatch / Flickr)

The 14th round of negotiations for the Trans Pacific Partnership (TPP) was launched last week in the Virginia suburbs of Washington D.C. If concluded, the deal would establish what it calls “free trade” between the United States, Canada, Mexico, Peru, Chile, New Zealand, Australia, Malaysia, Brunei, Singapore, and Vietnam. It would be the biggest FTA of which the United States is a member.

Just the week before, however, agreement on the start of negotiations for a Comprehensive Regional Economic Partnership (CREP) was announced in Siem Reap, Cambodia. This deal would be between the ten members of the Association of Southeast Asian States (ASEAN) plus New Zealand, Australia, India, China, Japan, and South Korea. In other words, six of the TPP countries would be in CREP and that could grow to eight if Japan and Korea join TPP as has been rumored. So the outliers would be the countries of the Americas (United States, Canada, Mexico, Peru, Chile) and the Asian giants, India and China.

But wait. It gets even more complicated. The annual meeting of the Asia Pacific Economic Cooperation (APEC) (one wants to say “forum” but it really just stops with Cooperation) is has just concluded in Vladivostok. This twenty one member grouping of Asia Pacific countries pledge in 1994 at Bogor, Indonesia to achieve free trade and investment between its developed country members by 2010 and between all members by 2020. So presumably all the members of CREP and TPP except India (which is not a member of APEC) already enjoy free trade among themselves or will do so by 2020.

Nevertheless, the apparent desire for free trade is so strong that still other groupings are moving ahead with other agreements. Even as they fight over who owns which reefs, rocks, and small islands in the waters between them, China, South Korea, and Japan are committed in principle to negotiating an FTA among themselves. China also has an FTA with ASEAN and Japan has a comprehensive economic partnership agreement with ASEAN.

Of course, all of these countries have long been members of the World Trade Organization (WTO) and thus, presumably, already pledged to universal free trade.


Facing the Truth About Trade

By: Clyde Prestowitz Wednesday August 15, 2012 1:19 pm

Crossposted from Clyde V. Prestowitz on Trade

In October 2010, the EU and South Korea celebrated conclusion of a bilateral Free Trade Agreement between themselves. This was widely hailed as another major step along the way to complete globalization, and American policy makers hurried to avoid losing out on trade goodies by quickly negotiating a similar deal that was just concluded in March, 2012.

A Yellow Peugot Sports Car

Did 'free trade' doom the Peugot? (Photo: Santosh TR / Flickr)

But wait. Now it seems that the E.U.-Korean deal didn’t flatten the world after all. Reuters reported this week that France has asked EU officials to request that Korea give advanced warning of planned car exports to the European markets. This is the first step toward possible reintroduction of tariffs on car imports. It comes in the face of a contracting European auto market, rapidly rising European unemployment, an announcement by Peugot of major factory closing plans that will result in extensive layoffs of workers, and a 34 percent surge in imports from Korea in the wake of the Free Trade Agreement.

This is not really surprising. Anyone who thought the FTA would produce free trade in autos had to be daft. Look, the governments of both the EU and Korea have been heavily involved in the development and preservation of their auto industries from the beginning. At various times they have been investors in their auto industries. These industries are in the too big to fail category and are thus politically sensitive. For these and other reasons they will not have free trade no matter how much negotiators might wish that they will.

Yesterday, the Financial Times ran a full page article on the global aircraft industry, emphasizing that China’s fledgling aircraft industry might be the one that will eventually break the duopoly of Boeing and Airbus. The article cited two reasons for thinking that China’s Comac might succeed where so many others have failed. One was the willingness of the Chinese authorities to spend whatever is necessary to become a world class aircraft producer. The other was the fact that China itself will be the biggest single market for aircraft over the next decade or so and is likely to buy Chinese wherever possible.

Of course, China is a member of the World Trade Organization (WTO) and as such nominally committed to free trade – except where it’s not. Nor should we single out China. Boeing and Airbus did not result from some immaculate conception. Both have been and are the object of substantial government protection and assistance in a variety of ways.

The truth is that free trade is impossible in a wide variety of industries characterized by capital and technology intensity, economies of scale, oligopolistic structures, cross border investment, high costs of entry and exit, sensitivity to exchange rate fluctuations, and close connection to national security objectives and/or to national pride. It is impossible under these conditions because they violate all the key assumptions of neo-classical free trade doctrine.

We really need to stop peddling free trade fiction and start facing the truth about globalization.

It Really Is the Jobs

By: Clyde Prestowitz Tuesday August 7, 2012 6:21 pm

Crossposted from Clyde V. Prestowitz on Trade

Most leading economists argue that the U.S. economy is suffering from weakness of demand. This has long been Paul Krugman‘s theme. Joe Stiglitz along with many other well known names seem to agree. I myself do certainly believe that if billionaires from outer space suddenly appeared and began to buy lots of American produced and provided goods, services, and real estate, the outlook for the U.S. economy would be much brighter than it is.

A shiny new smartphone

In order to generate jobs, we must domestically produce goods in high demand (Photo: LGEPR / Flickr)

But I have been trying to think about this problem in the context of the current European crisis. One of the stock economist prescriptions for resolution of that situation is for Germany to go on a stimulus binge. This, it is said, would create demand in Germany that could be, at least in part, satisfied by exports from the so called “peripheral” European economies like Greece, Spain, Italy, Portugal, Ireland, and even France. These economies would then see a rise in their own domestic demand as workers found new jobs and started spending from their new pay checks, and this in turn would create new demand and jobs in a virtuous circle.

Sounds beautiful and logical, but I keep running into a difficult question: What exactly is it that the peripheral economies are going to sell to the Germans? Cars? But everybody in Europe wants a German car. Electronics? But with a few exceptions, the Europeans get their electronics from Asia. The Spanish have over 25 percent unemployment because their main product was housing and that doesn’t export too well. My point is that that while more German stimulus, demand, and even, to a certain degree, inflation might be more desirable than not, it isn’t fully clear that such stimulus would actually solve or even greatly alleviate the unemployment in the peripheral countries. This is because they don’t make or provide much of what the Germans buy. German stimulus might do a lot for the Chinese, Japanese, or South Korean economies, but not nearly as much for the Greek economy. In this instance, the problem is more than just one of insufficient demand. It is also inadequate and inappropriate economic structure. How a country produces wealth matters and the level of demand may have little to do with it.

Now let’s look at this from the perspective of the United States. As I have said before, it’s not entirely true that we suffer a paucity of demand. We have trade and current account deficits of more than 3 percent of GDP, a level generally considered by economists to be unsustainable in the long term. That means we are consuming (demanding) 3 percent more than we produce. We are borrowing from foreign lenders to fund the purchase of that 3 percent of GDP that we consume in excess of what we produce. Does that sound like lack of demand to you ?

What’s happening is that our demand is leaking abroad. The best example is the cash for clunkers program we operated a few years ago. People replaced their clunkers largely with imports. So the demand for new cars was there, but it was filled by foreign producers rather than domestic ones.

Euroland Should Invade Germany

By: Clyde Prestowitz Wednesday June 27, 2012 2:01 pm

Crossposted from Clyde V. Prestowitz on Trade

A World War I tank in a museum.

Time to take this out of the museum? (Photo: Joe McGowan / Flickr)

As the fateful month of August approaches in Europe, the time has come for the countries of Euroland to consider reversing the procedure and timetable of World War I. That is to say, that France, Italy, Spain, and all rest of the Euro-15 should plan to invade and occupy Germany.

Of course, none of the European countries are quite the military powers that they used to be, but France has more capability than any of the others including Germany and it has an independent nuclear force. So, in alliance with the others, France should be able relatively easily to overcome Germany resistance. Recall that in World War I, the German Schlieffen plan of invasion sent German troops through neutral Belgium into France. Now, Belgium is no longer neutral and would willingly, nay, enthusiastically, open its roads and provide support for a French thrust into Germany. Recall also that the road to hostilities in World War II began with the German remilitarization of the Rhineland. Hitler sent troops in under orders to withdraw immediately if there was any sign of a French reaction. Sadly, there was no such reaction and the German troops stayed. Hitler later said it had been the most nervous night of his life. He had gambled and won.

French Prime Minister Francois Hollande and his Euroland allies could try a similar move. They could send troops into the Rhineland with orders to high-tail it out at the first sign of German resistance. But if there is no resistance, they just keep marching until they occupy the German Central Bank and the German Finance Ministry in Berlin. There they direct the German officials to agree to support measures for a European Bank Union and a Europe-wide sharing of financial risk in conjunction with the kinds of reform and austerity measures already underway in Italy and Spain.

Back to Japan’s Future

By: Clyde Prestowitz Tuesday June 26, 2012 3:25 pm

Crossposted from Clyde V. Prestowitz on Trade.

An elderly couple wait to cross a street in Japan.

Japan faces a crisis caused by its aging population (photo: Imagesbyk2 photography / flickr).

As one of Washington’s leading trade negotiators during the 1980s period of intense U.S.-Japan economic friction, I was sometimes labeled a “Japan basher” because of my analysis of how Japan’s industrial policies were distorting global trade and undermining key U.S. industries.

After recently attending several conferences in Tokyo and interviewing a variety of business, academic, political, and media leaders, I am now urging a comeback of the old Japan. As it faces increasingly difficult prospects, Tokyo needs an effective industrial policy and would do well to consult its old playbook on the route back to its future.

At the moment, the country is drifting dangerously with neither a clear understanding of what has gone wrong nor a clear strategy for fixing the problems. All the talk of “two lost decades” is mostly misleading and beside the point. Over those two decades, visitors to Japan have not found Japanese living standards dropping compared to those of Europe and the United States and investment in critical Japanese infrastructure and R&D has outpaced that of America. Moreover, the truth is that if you compare U.S and Japanese average annual GDP growth from 1990 through 2011 and adjust for differentials in inflation and population growth, the results are about the same. The United States had higher ups, but it also had lower downs that evened out close to Japan’s average. Of course, the United States had positive population growth while Japan’s population was shrinking. So in terms of absolute, unadjusted GDP growth, America comes out ahead. On the other hand, in terms of per capita GDP growth, Japan comes out ahead, and in terms of productivity growth per capita, Japan also comes out a bit ahead.

Much is also made of Japan’s national debt at over 200 percent of GDP being far above that of Greece. But Japan’s interest rates are close to zero because money is flooding into Japan as a safe haven. Investors don’t seem to think of Japan and Greece as being in the same boat for the very good reason that it is not. More than 90 percent of Japan’s debt is funded from within Japan as compared to, say the United States, which funds more than half its national debt from foreign sources.

Whatever Japan can do, the Koreans can do better

By: Clyde Prestowitz Monday June 11, 2012 3:56 pm

Reprinted from Clyde V. Prestowitz on Trade

An assembly line in a North Korean Shoe Factory.

Korean Shoe Factory, 1972 (Photo: Thomas Fisher Rare Book Library / Flickr)

In 1979, Harvard professor Ezra Vogel’s book Japan As Number One became a runaway best seller in both Japan and the United States. After a swing through Asia the past two weeks, it’s clear to me that Ezra needs to do a rewrite with a new title: Korea as Number One.

The South Koreans have long been confident that anything the Japanese can do, they can do better, but now they’re proving it. In the 1970s-80s, the likes of Sony, Panasonic, Sharp, Toshiba, Hitache, NEC, and Fujitsu killed off RCA, Motorola, and the rest of the American consumer electronics industry and came close to killing off Intel and closing down the U.S. semiconductor industry from which Silicon Valley takes its name. Yet, today, it’s the Japanese who are on the ropes as the likes of Samsung, LG, and Hynix have seized the high ground. Whereas Sony used to be the king of TV, now it’s Samsung. Developed initially in the United States in response to military needs, the market for flat panel electronic displays was quickly taken over by the Japanese who out-invested the American producers and whose dominance of television and then of VCR production gave them an in-house source of demand for mass production and its related economies of scale.

Indeed, the VCR is a classic example. America’s Ampex developed the initial professional video tape recording technology, but never got a consumer product off the ground as the Japanese preempted the market through quick, massive investment. Because VCRs were massive users of semiconductor memory chips, the dominance of the VCR business coupled with use of the same tactics in the semiconductor industry gave the Japanese producers a strong position from which to attack the Silicon Valley chip makers. In 1984-85, many U.S. companies left the business and the Japanese became the dominant players in DRAMS (dynamic random access memories).

Say it again: It’s the trade deficit, stupid

By: Clyde Prestowitz Wednesday June 6, 2012 7:11 pm

Crossposted from Clyde V. Prestowitz on Trade

GE CEO Jeffrey Immelt

GE CEO Jeffrey Immelt (Photo: Garrett Fitzgerald / Wikimedia Commons)

The latest uptick in the unemployment rate is bad news for the U.S. economy and really bad news for Barack Obama’s reelection prospects. But maybe this will realert him to the fact that it’s still “the economy, stupid” and that the name of the game always should have been and remains jobs, jobs, jobs.

So how does the U.S. get jobs? The usual route is some kind of government stimulus package to fund “shovel ready” infrastructure projects and tax cuts to stimulate consumption spending. But that’s already been done, and in view of the budget deficit of both the federal and state governments, it’s not going to happen again now.

There is a second route, and the Obama administration should lose no time in taking it. That is to reduce the U.S. trade deficit. Yes, I know about the administration’s export-doubling policy, and it’s an unobjectionable policy so far as it goes. But the uptick in unemployment followed an uptick in the monthly U.S. trade deficit even though U.S. exports were up. The point is that if imports are rising faster than exports, it doesn’t matter whether you double, triple, or quadruple exports — you’re still going to lose jobs. So the focus has to be on reducing imports as well as on increasing exports.

In this regard, the administration is its own worst enemy, or perhaps I should say that the Treasury Department is the worst enemy of the administration. Last month Treasury again had the opportunity officially to declare what everyone has known for a long time: that China is manipulating its currency in violation of IMF and WTO rules. As it has consistently done for the past several years, Treasury ducked. This is just plain submission to intimidation. Treasury Secretary Tim Geithner has regularly said that China is intervening in currency markets and that it needs to allow its currency to appreciate. He thus knows full well that China is manipulating its currency. But he won’t make an official complaint because he fears a backlash from China. Well, the problem with that is that it’s going to get his boss a backlash from American voters.

Another example of the administration shooting itself in the foot is GE CEO Jeff Immelt. He’s chairman of the President’s Council on Jobs and Competitiveness. When he took that position I thought it meant he was going to work on creating jobs and making America more competitive. But he too yielded to intimidation when he announced that GE would move its avionics operations into a joint venture with China’s state-owned AVIC. Now keep in mind that avionics are not labor-intensive. So this decision was not made in order to take advantage of China’s cheap labor. It was made because the Chinese made it clear that if GE wanted to sell avionics in China it better damn well make the avionics in China.