The Great Depression was a seminal event that upended the political and economic ideologies of its day. Ardent free marketers who opposed any government intervention in the economy was upended by John Maynard Keynes ideas that advocated government intervention.
70 years onwards, the 2008 crash ushered in an era of low economic growth despite massive, coordinated efforts by governments worldwide to stimulate and restore growth.
The Obama era that coincided with this ear is noted for its below norm growth of 2%. In this context, slow growth accentuated the problems of “factor mobility”: a fact that mainstream economist is beginning to recognize.
Rather than adjust seamlessly, a recent study by Autor, Dorn and Hanson from the NBER largely confirmed Trump’s view that trade is a problem for US job losses: “[E]mployment has fallen in U.S. industries more exposed to import competition, as expected, but offsetting employment gains in other industries have yet to materialize.”, the authors stated.
It could have been said by Donald J. Trump.
Mr. Trump is on record as demanding that trade deals being re-negotiated — as with many politicians before they take office.
But if the deals are reopened, that also means that the benefits from the pending deals (TPP & TIPP) are also foregone as they too, will be back on the table.
The author is of the opinion that in this case, the Priesthood will prevail on the TPP / T-IPP because it does not involve the biggest source of trade friction presently: China.
Trump is likely to call for a review of NAFTA which has never been done.
Post review, Trump will likely turn to some of the tried and true instruments of US policy to rebalance trade: forcing offending countries like China and Mexico to substantially appreciate their currencies. He might make some face saving calls for countries like Japan and Korea to buy more from the US, but bona fide trade retaliation will likely be limited.
Indeed, if allies raised their defense spending and acquired more US military equipment, it may be more than enough to satisfy Trump.
Does Trump really need to renegotiate trade treaties?
During the 1980s and 1990s, the USTR was extremely aggressive in pursuing campaigns against countries like Japan, Taiwan, etc. to ensure market access and acceptance / protection of institutions like Intellectual Property Rights. Those campaigns went hand in hand with demands for currency appreciation.
But somewhere along the line, for much of the 2000s, these kind of campaigns, except for calls for Chinese yuan appreciation, petered out particularly with respect to China. The 2015 USTR Report to Congress on China’s WTO Compliance noted: “China appears to be in compliance with its trading rights commitments in most areas.” (p.23)
What is wrong with this picture?
China Trade: The Gorilla in the Room.
By far the most egregious offender of intellectual property rights and the purveyor of unfair trade is China. What trade statistics fail to even enumerate, let alone quantify is the sheer scale of foregone / lost revenues from intellectual property theft from China.
Many companies elect to remain silent in the face of the issues in China, whether it is outright, rampant theft of intellectual property, or systematic state sponsored hacking for commercial secrets. Techniques like forced transfer of knowhow and technology, the use of “anti-monopoly” laws to extort from firms, or crackdowns on “corruption” are widely used.
The extent of these losses is only occasionally revealed, for example, when Steve Ballmer of Microsoft let it be known that their revenues in 2011 from China is about the same as the Netherlands. That is to say, 5% of US revenues when the market is in theory the same size. Ballmer noted that on a revenue per PC basis, India pays six times more than China.
Trump, while he may not have the trade deficit issue fully explained, did highlight how successive US Administrations have failed to use the leverage the US and allies do have with China.
It is clear that problems of this scale and magnitude cannot be simply fixed by forcing the Chinese Yuan to appreciate.
The Trump Administration would have to find new ways to deal with these problems.
Low Hanging Fruits: Enforce Existing Laws
Neither Trump and Clinton have drawn attention to the mechanics of enforcing existing trade agreements and laws.
The US, as the world’s largest market, still has considerable clout. But such clout is not well used.
The process of enforcement of existing laws against importations of goods and services based on pirated intellectual property is antiquated and cumbersome.
Organizations like the US International Trade Commission charged with investigating trade cases of import injury, IP theft, etc. operate a cumbersome, slow, and costly process that make it effectively inaccessible to a majority of small to medium sized US businesses injured by trade. Customs officers, likewise, are overwhelmed by the task with concerns about the highest priority issues — with enforcement of IP theft a relatively low priority.
The problem is not about hiring more officials to enforce the law, as is often advocated by politicians.
The issue is a management one of looking hard at existing processes, modernizing and simplifying it, then automating the process (applying technologies as needed) and lowering the “minimum cost” of accessing the service, and finally, monitoring cycle time and effectiveness.
And once the process begins, continuously monitoring and improving it over time.
These are basic business management issues that would be familiar to any businessmen who have run a major operation.
Yet, no candidate for public office in recent memory have raised this issue.
Trump has focused on the need to address the trade deals: renovation is not the only path he might pursue.
Actually, enforcing provisions where appropriate and managing trade processes in a modern business manner are important as well.
Beyond modernization of Public Administration in general, and the administration of investigation of trade complaints and their enforcement, the logical next step is to coordinate the upgrading and enforcement of existing trade laws with all OECD members.
As a group, OECD has sufficient clout to take on China and be heard.
Perhaps it is time for OECD to create a NATO for trade?
Danny Lam is an independent analyst based in Calgary.
For a recent New York Times articles which addresses some of the same issues raised by Lam click here.
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