October 2020

October 30, 2020 5:34PM

Why Bother Assessing the U.S.-China Phase One Trade Deal, Anyway?

Of course, the Trump administration is going to exaggerate claims about the success of its “Phase One” trade deal with China. That’s no surprise. And, of course, Trump’s detractors won’t let the administration get away with such claims. Exposing Trump’s trade follies—“tariffs are taxes,” “tariffs haven’t brought back supply chains or manufacturing jobs,” “farmers have been pummeled,” “trade wars are neither good nor easy to win”—is just too much fun to resist.

But, at some point—like now, for instance—the unity we pro‐​trade, pro‐​globalization voices find in our opposition to Trump’s trade policy must give way to a serious debate about what, exactly, trade policy toward China should look like after Trump. Unless the Biden folks are considering some form of continuation of Trump’s Phase One deal—a devastatingly bad idea that Biden should disavow—there is little purpose (other than rubbing Trump’s nose in it) in demonstrating how the objectives have not been met.

It’s easy to criticize policies you don’t like, but much harder to move from favored policy generalities to specifics. We need to start putting some meat on the bones of those general slogans—aspirational statements like “we must work with allies,” “restore U.S. leadership,” and “reform the World Trade Organization”—that have been bandied about as placeholders for specific, realistic policy objectives, strategies, and tactics.

If you think we must “work with allies” to try to rein in some of Beijing’s objectionable behavior, then the success or failure of the Phase One trade deal is irrelevant. The deal must be terminated, period. Why? Because the deal sanctions discrimination against European, Japanese, Korean, Canadian, Australian, Indian, and all other countries’ exporters. It is an arrangement that formally puts U.S. suppliers on a more favorable footing with Chinese buyers—that is, with the Chinese government. Working with allies requires a globalist, not a nationalist approach.

How can we effectively “work with allies” to discipline China’s behavior while, at the same time, expecting those allies to accept being squeezed out of the China market by our bilateral trade deal? We can’t because the trade deal is the antithesis of working with allies. If the United States and the European Union are going to have any chance of showing a united front against a Chinese government that has succeeded over the years in driving wedge’s between the western powers, the Phase One deal—that ill‐​conceived edifice of America‐​first nationalism—cannot stand. So why measure and make such a big deal about progress or the lack thereof…unless Biden’s team is contemplating continuity?

If you think the United States should “show leadership” or “lead on trade,” as the tweets echo ad nauseum without elaborating on exactly where to lead, then U.S. policymakers and opinion leaders should eschew and speak out against these kinds of discriminatory, managed trade deals. Otherwise, U.S. leadership will continue to set bad examples, encouraging other countries to emulate our transactional, bilateral, deal cutting. We should want the United States to lead on trade, but in a liberalizing, non‐​discriminatory direction. Right, Joe?

If you consider the Trump administration’s assault on the World Trade Organization—its strangling of the Appellate Body, threats to withdraw, and refusal to endorse a new Director General—to be terrible mistakes and believe the United States should commit to reforming the World Trade Organization, then you must regard the U.S.-China trade war and the Phase One trade deal, both conducted in violation of the rules of the WTO, as ongoing impediments to reform.

Whether the Phase One trade deal has lived up to its objectives is, arguably, a question of empirical interest at most—unless Biden’s team is considering some form of continuation. Of course that choice would short‐​circuit the general goals of working with allies, showing leadership, and reforming the WTO.

October 30, 2020 4:47PM

Selling Nostalgia

Back in July when I first assessed the Trump administration’s plan to turn Kodak into a pharmaceutical company via a $765 million taxpayer loan, I was skeptical. Since that time, the government’s plan to revive the historically‐​mismanaged company has collapsed due to a toxic combination of poor planning and execution (and some questionable stock trades) — all delightfully documented in a new episode of the Slate’s “Tales of Modern Capitalism.” The whole podcast is worth your time, but it’s the finale which shows why we should be skeptical — of not only the Kodak transaction itself but also the trendy rush among American policymakers to embrace industrial policy more broadly:

There is a reasonable explanation for most of Kodak’s behavior, but the optics of executives and board members loading up on shares ahead of a clearly market moving announcement, even if they thought there was a lot of doubt about whether that announcement would happen until the last minute, the optics of a beaten up company trying to present itself as the answer to one of America’s great strategic problems. All of that adds up to the picture of a pretty shabby industrial policy. And I don’t think that it is yet proven that it was dirtier than that. But I think it is a reminder that when governments and businesses try to come together, it’s often rushed, it’s often poorly thought through, and there’s often a whiff of crony capitalism.

In the end, what happened here might have been less about some deeply nefarious plot and more about typical low level government corruption, maybe mixed with Donald Trump’s characteristic knee jerk affinity for a once glamorous American brand, one that, by the way, also happened to be a big sponsor of The Apprentice.

I think the fact is every American is familiar with the Kodak brand. Even now, decades after we’ll put away our film cameras, it still has a power that’s far larger than its commercial clout. And so it’s an interesting idea that you can take this great American brand, which isn’t a great American business anymore, and turn it into a great American business again.

Back in its 20th century heyday, at the height of its success, Kodak wasn’t really selling cameras in film. It was selling nostalgia. All its ads were about how important it is to capture a good feeling and make a hard copy of it before it inevitably disappears, which makes it fitting that the company itself is now banking on nostalgia to save it. Eastman Kodak has very little going for it as an industrial enterprise at this point. What it has is the nostalgia its name evokes. Any recovery for the company will almost certainly be dependent on Americans fond memories of the brand at its peak. No wonder Kodak wants to invite us to dust off that old photo album and relive the great times we spent together.

Politicians and pundits embrace a similar nostalgia when they dream of using subsidies and protectionism to recreate the industrial economy that existed in America during Kodak’s prime. But while nostalgia may make for great advertising and good politics, today’s Kodak shows why it makes for bad policy — especially when it’s financed by tomorrow’s taxpayers.

October 30, 2020 2:49PM

Needed: A Better U.S. Negotiating Strategy for Dealing with North Korea

On October 28, 2020, it was my pleasure and honor to be a panelist at a symposium sponsored by the Center for the National Interest, “Time to Accept North Korea as a Nuclear Weapons State? It’s hard to imagine a current topic with greater importance in international affairs. Unfortunately, it is increasingly clear that U.S. diplomacy regarding the nuclear issue has been stuck on autopilot for the past three decades, despite a marked lack of constructive results. Unless that approach changes dramatically, prospects for success going forward are no better.

U.S. policy has been a model of consistency throughout five administrations, Republican and Democrat, liberal and conservative. Washington’s demand is that North Korea accept a complete, verifiable, and irreversible end to its nuclear weapons program. The concessions that U.S. leaders have offered in exchange for Pyongyang’s capitulation amount to a grudging, partial, and very gradual easing of the draconian economic sanctions that both the United States and (primarily because of U.S. pressure) the United Nations have imposed on North Korea over the decades.

As I’ve explained elsewhere, it is exceedingly improbable that any North Korean government will ever accept such an agreement. Pyongyang has two especially powerful incentives to retain its small nuclear arsenal, expand its size, and develop more sophisticated delivery systems—including ICBM’s capable of reaching the American homeland. Having a nuclear‐​weapons capability automatically puts even a small, poor country in a new, more influential category in world affairs. North Korean leaders know this, and they desire to exploit the opportunity for greater prestige and power.

Those leaders have an even more compelling reason not to give up their country’s nukes; they have witnessed how the United States treats nonnuclear adversaries, and it is not a pretty sight. Washington has forcibly ousted numerous regimes deemed obstacles to U.S. geostrategic or geopolitical objectives. From the CIA coups against the governments of Iran and Guatemala in the 1950s to the regime‐​change wars launched against Saddam Hussein, Muammar Qaddafi, and Bashar al‐​Assad in the twenty‐​first century, U.S. conduct has remained consistently aggressive.

The U.S.-led war against Qaddafi especially made an indelible impression on North Korean thinking. The Libyan strongman had concluded an agreement with the United States and its Western allies to relinquish his country’s embryonic nuclear program in exchange for being readmitted to international diplomatic and economic bodies that the West dominated. Less than a decade later, those powers double‐​crossed Qaddafi, assisting insurgents to overthrow his regime. Qaddafi himself ended up tortured and killed.

If North Korean leaders previously harbored any willingness to give up their new nuclear deterrent for paper promises, the Libya episode eradicated such thinking. They view nuclear weapons as their only reliable means of preventing the United States from pursuing a forcible regime‐​change campaign with their government in the cross‐​hairs.

The odds are against a scenario in which they abandon that assumption. However, if U.S. policymakers have any hope that they will do so, Washington must drastically totally refashion its negotiating strategy. Instead of continuing to insist that Pyongyang implement denuclearization as precondition for (very gradual) normalization of relations, U.S. policymakers need to view normalization as a process that might eventually lead to denuclearization. In other words, U.S. leaders have gotten the sequence of necessary diplomatic steps backwards.

President Trump’s outreach to Kim Jong‐​un was an important change, but the benefits were vitiated by continuing to demand that Pyongyang agree to denuclearization as a precondition for additional progress. Instead, Washington should proposed a series of interim agreements to build interaction and at least a modicum of trust. Such measures would include a treaty formally ending the state of war on the Korean Peninsula, diplomatic recognition of North Korea, with the establishment of embassies in Washington and Pyongyang and consulates in at least two other U.S. and North Korean cities; and at least a partial lifting of economic sanctions.

It is uncertain whether or not those moves would create sufficient trust between North Korea and the United States so that Pyongyang would then agree to (gradually) decommission its nuclear arsenal and abandon its quest for ICBMs. It is entirely possible that the United States and the rest of the world may have to learn to live with North Korea as the latest member of the global nuclear weapons club, as it had to do previously with Pakistan. Nevertheless, the pursuit of a rapprochement with denuclearization as the end product rather than a precondition is at least worth a try.

Moreover, even if Pyongyang ultimately will not budge on the nuclear issue, East Asia and the rest of the world will be a safer place if a decent, normal relationship between the United States and North Korea can be established. One thing is readily apparent: the current U.S. approach based on trying to isolate North Korea and penalize it with ever‐​tightening sanctions has not worked, is not working, and will not work. The situation cries out for an entirely new policy.

October 30, 2020 2:12PM

State and Local Tax Revenues Are Rising

A Wall Street Journal news piece this week was titled “U.S. States Face Biggest Cash Crisis Since the Great Depression.” But new data from the U.S. Bureau of Economic Analysis suggest that the Journal headline and story were needless scaremongering. The BEA data (Table 3.3) for the third quarter of 2020 show that aggregate state and local sales, property, and individual income tax revenues are all rising.

Overall state and local tax revenues hit a peak in the first quarter of 2020, fell in the second quarter, and bounced back in the third. Here are the revenue changes from first to second quarter and second to third quarter. Sales and excise taxes fell 11.0 percent then rose 7.3 percent. Property taxes rose 1.1 percent then rose another 1.1 percent. Individual income taxes rose 0.7 percent then rose another 2.0 percent.

The BEA has corporate income tax revenues falling 13.6 percent in the second quarter but don’t provide an estimate for the third quarter. To calculate a figure for overall tax revenues, I’ve assumed that third quarter corporate tax revenues are the same as the second quarter. (Corporate taxes are less than 4 percent of total state and local taxes).

With that assumption, total state and local tax revenues fell 4.7 percent in the second quarter but then rose 3.3 percent in the third quarter, as shown in the chart below. Total tax revenues are still below the peak but headed upward.

The chart also shows BEA data for (current plus capital) federal aid to state and local governments. Since the data is annualized, I’ve divided by four to consider actual dollar changes by quarter. In the second quarter, total state and local tax revenues fell $23 billion but federal aid to states spiked $193 billion, thus vastly overwhelming the tax revenue loss. Federal aid is now falling toward normal levels, but CBO data (p. 34) show that there is still more than $150 billion in emergency state aid for health care and education to be spent in federal fiscal year 2021.

In sum, state and local tax revenues are rising and there is still federal cash in the pipeline. Congress does not need to pass any more emergency state aid.

More on the state and local fiscal situation here and here, and critiques of media stories on the topic here, here, and here.

October 30, 2020 2:11PM

Laughter, Liberty, and M*A*S*H

M*A*S*H 1977 cast

Growing up in the 1970s and ‘80s, my favorite TV show was (and remains today) M*A*S*H. Not only is the series funny and creative, it is also emotionally moving and morally educational. And, I believe, it is a show that libertarians and other classical liberals —whether they are on the left or right of the U.S. political spectrum—should especially enjoy and appreciate.

When the series was in production, and even today, critics chastised M*A*S*H for being “lefty” and “progressive” (particularly in its later seasons). In fact, the show’s liberalism is of the classical variety, repeatedly depicting the dangers of government power, the benefits of markets and private property, and deep appreciation of the individual and of civil liberties. And, of course, it regularly displays the misery of war and the cruelty of compulsory military service.

Consider this bit by draftee Max Klinger (played by Jamie Farr) on why he keeps trying to get discharged from the Army:

Why? Well, there’s — there’s lots of reasons.

I guess death tops the list. I don’t want to die.

And I don’t want to look at other people while they do it.

And I don’t want to be told where to stand while it happens to me.

And I don’t want to be told how to do it to somebody else.

And I ain’t gonna. Period. That’s it. I’m gettin’ out.

I’ve written an essay on the classical liberalism of M*A*S*H for the organization Liberty Fund. It will appear as a series of short posts on their popular blog Econlog. The first installment runs today; you can read it here.

(That venue is highly appropriate; series star Wayne Rogers, who played “Trapper” John McIntyre, attended Liberty Fund seminars.)

If you’ve never seen “television’s finest half‐​hour,” now is a great time to discover it. And if you’re a long‐​time fan, you’ll have even more reason to appreciate the exploits of the 4077th Mobile Army Surgical Hospital.

October 30, 2020 9:58AM

Is the U.S.-China “Phase One” Trade Deal Working?

Last week, the Office of the U.S. Trade Representative (USTR) and the U.S. Department of Agriculture (USDA) issued a report on the implementation of the agriculture provisions in the U.S.-China Phase One Economic and Trade Agreement, claiming that the deal “is delivering historic results for American agriculture.” Are they right about these results? Chad Bown of the Peterson Institute looked at the numbers, and found otherwise:

Despite a recent report from the Trump administration suggesting otherwise, US farm exports to China have not yet kept up with the phase one commitments. Though better than manufacturing, it took until September for farm exports to reach pre‐​trade war levels again … . Through September, they stood at only 65 percent of their seasonally adjusted targets.

Manufacturing and energy exports to China did even worse.

How does the Trump administration justify its claims? To some extent, it may be due to certain products for which China has promised to make purchases, but for which there have not been actual exports under these commitments yet. These promises may or may not actually come through (more on that later), but the existence of these promised sales can be used to make the data look more positive than it actually is.

It also may be that for some products, there actually have been increases in exports, for one reason or another. Let’s take a look at one of those, beef, which is a product we’ve been following for a while now. The USTR/USDA report says the following about beef:

U.S. beef exports to China have tripled.

The Phase One Agreement eliminated many longstanding structural barriers that hampered access for U.S. beef to China. As a result, 2020 exports of U.S. beef and beef products to China through August are up 118 percent compared to the same period in 2019 and are already more than triple the total for U.S. beef exports to China in all of 2017. In addition, as of October 8, 2020, total accumulated beef sales to China in 2020 were over 25 times greater than those accumulated over the same period in 2017.

They are not necessarily wrong, but there’s more to the story. As we’ve explained in our prior examination of this issue, U.S. beef exports to China have gone up a bit in recent years, but they are still far less that what is exported to China by other countries. Here is some data on Chinese beef imports from 2016 to 2019, broken down by country:

So yes, U.S. beef exports to China have been increasing, but they aren’t making much of a dent in the market relative to other countries’ exports.

It may also be important to note the difference between “exports” and “sales.” The report says that beef “exports” are up 118 percent compared to 2019. It then notes that “accumulated beef sales to China in 2020 were over 25 times greater than those accumulated over the same period in 2017.” But sales are not necessarily the same thing as exports, as purchase commitments don’t always come through. Here’s an illustration from a recent Washington Post story:

The deal seemed like great news for Montana ranchers: Chinese retailer JD​.com had promised to buy $200 million worth of beef and spend an additional $100 million building a slaughterhouse in the state.

But nearly three years after the accord was announced on the sidelines of President Trump’s first official trip to Beijing, the big orders have yet to materialize and there’s no sign of any new meatpacking plant.

Many of the deals, including JD.com’s, were nonbinding memorandums rather than legally enforceable contracts. Under its agreement, JD​.com pledged to import a total of $200 million in Montana beef from companies belonging to the Montana Stockgrowers Association (MSGA) for online sales to Chinese consumers.

JD​.com officials were enthusiastic about the deal as it came together, seeing it as offering a competitive edge over Alibaba, said James Green, who was the senior trade official at the U.S. Embassy in Beijing at the time.

“But by a couple of weeks afterward, they literally were not answering phone calls from the embassy. It seemed pretty clear this was a figment of someone’s imagination or was maybe an aspirational deal,” Green said. “They were not that serious about the specifics of it.”

As time goes on, we will have a clearer sense of just how much U.S. exports of manufactured goods, agriculture, energy and services to China actually increased. As of right now, though, it does not look like the numbers will match what was promised in the phase one deal. 

The phase one deal’s reliance on massive purchase commitments by China may be its biggest flaw. These commitments often generate press releases about the big sales to come, but the deal did not do enough on what was really needed: Lower tariffs and other trade barriers to allow producers to compete in the Chinese market. If trade liberalization had been the focus of the deal, rather than just the smaller part that it was, the long‐​term results might have been better.

October 29, 2020 3:46PM

V‐​Shaped Recovery

The Bureau of Economic Analysis released estimates of third quarter gross domestic product (GDP) today. The headline is that GDP jumped 33.1 percent from the second quarter at an annualized rate.

That statistic is hard to appreciate, so I charted the underlying GDP data from BEA Table 1.1.6. The chart shows GDP in the BEA’s 2012 constant dollars.

You can see the sharp drop in the second quarter of 2020 and the sharp rise in the third quarter. It is a V‐​shaped recovery so far. However, we’ve still got more climbing to get to the peak reached in the fourth quarter of 2019.