President Trump and the global multilateral order

President Trump is destroying the multilateral trading system, which previous US administrations have done so much to promote, and on which the world’s continued prosperity depends. He is doing so as an “American Firster”, thereby setting an example for the revival of nationalisms around the world.

This is the nub of the case against Trump, and it is  rests on the proposition that he appeals to irrational passions. Take the example of his administration’s slapping tariffs on products exported out of China.

The China-US bilateral trade relationship.

The China market holds huge potential for US corporate sales. By 2025, the Chinese middle class will exceed the entire population of the US, providing US companies with a huge and lucrative customer base that has to potential to boost employment and economic growth.

As of 2015, up to 2.6 million jobs in the US depended on the China trade.  US exports of goods and services that year equaled $165 billion, representing 7.3% of all US exports. By 2030, this figure is expected to quadruple.

China’s exports to the US may be presently four times US exports to China, but many of those exports are comprised of foreign-produced components delivered for final assembly in China. The biggest importer to the US is Walmart.

In other words, the US trade deficit is largely the result of US corporate strategies to supply the US market from lower-wage production platforms, like Mexico or China.

The Trump administration argues that since China’s entry to the WTO in 2001, the US has lost 55,000 factories and up to 6 million jobs due to corporate outsourcing. But the counterpart is that US manufacturing productivity has outstripped that of most advanced industrial economies, including Germany, while rising wage costs in China, combined with a rising yuan, has reduced Chinese workers’ competitiveness.

US factories remain up to 90% more productive than Chinese manufacturers, a trend which may well be accentuated with further technological innovations.

Both of these trends indicate that US corporate boards have sound financial reasons to consider “reshoring” production, or not going abroad in the first place.

Trump versus the EU.

Trump has been no less critical of the EU. In fact, Trump on his visit to Europe singled out Germany as particularly guilty of mercantilist trade practices.

The administration is not listening to German business proposals that the US and the EU join forces in pressurizing China to change.

The Obama administration’s policy to deal with Chinese state-capitalism was to propose the TTIP-the TransAtlantic Trade and Investment Partnership, the companion agreement to the Trans-Pacific Partnership(TPP).

Both of these initiatives ran into opposition on multiple grounds, not least that they  strengthened the powers of supranational authorities and multinational lobbies at the expense of national democracies.

By binning both of these proposals, that would have abolished almost all trans-Atlantic and trans-Pacific tariffs, Trump, his critics maintain, damaged the US economy, and risked alienating the US’ prime trading partners.

There is a degree of resentment in Germany at the Trump administration’s charges. The US current account deficit of 2.3% US gdp, the argument runs, is not the result of unfair trade practices by EU trade partners. It is because the US does not save enough to finance requirements at home, borrows abroad, and thereby pulls in imports.

In any case, if the current account is broken down, the EU’s surplus in goods is offset by  a surplus in services and a large surplus in income, reflecting the importance of the EU to US companies’ bottom line. The EU is a net importer of US technology and of US services.

Furthermore, Trump has gone out of his way to break up the EU. He has been a prime supporter of Brexit, and his ambassador to Berlin is reported as having offered German car companies to abolish all car tariffs between the two countries on a bilateral basis.

Just as the EU 27 have appointed Michel Barnier as the point man for negotiations with the UK on Brexit, so the EU has insisted that it is the only interlocutor for trade deals with third parties. Chancellor Merkel labelled both the UK and the US as “third parties” prior to the June 23, 2016 vote on Brexit.

Special pleading.

Both of these arguments on US-China, and US-EU trade relations, share the same assumption: Trump is a bilateral bull in the multilateral global china shop.

The arguments conceal as much as they reveal. Take the EU first. The EU runs a growing trade surplus with the rest of the world, and with the US, not just because of low US savings rates: it runs a growing trade surplus because the EU’s internal consumption and growth is low, requiring surplus production to be sold on to world markets.

The reason why consumption is too low in the EU is political:the stand-off between Germany and France since 2010, which precipitated Europe into seven long years of self-imposed recession, and from which the continent is only slowly, and fitfully, emerging.

The case of China is quite different: Beijing implemented a massive deficit-spending programme to counter the downturn induced by the 2008-2010 global financial crash, and greatly contributed to maintaining the world’s economic activity. Though China’s growth rates are on a long-term downward trend, the country has still registered impressive performances over the intervening years.

What has changed in the US is attitudes to China and the EU, and not without reason. China’s strategy for WTO entry was couched in  Marxist-Leninist-Maoist terms. The natural allies of China’s open door policy, Beijing reasoned, was US capital: US multinationals would rush to China to ensure access to the world’s potentially largest market, and as a low wage cost platform to export to the rest of the world.

US finance capital would be kept happy by investing the vast trade surplus accumulated by China between 2001 and 2010 in US T bonds. This avalanche of savings onto Wall Street and the City kept interest rates low, fueled a prolonged boom, kept  financial markets humming, and not least, financed Chinese exports.

Complaints in China that the US-China deal was weighted in the US favour were registered but not acted on because the prime objective of policy was, and is, to keep the job-creating machine on the mainland turning as fast as possible.

Keeping the job-creating machine turning was also the rationale behind China’s deficit spending spree post-2009. While US Nobel prize winners, such as Paul Krugman or Joseph Stiglitz, berated Germany for running a China-size surplus, and beggaring its EU “partners”, the Keynesian policies of China helped to sharply reduce China’s trade surplus from an unsustainable trade surplus of 10% or more of gdp, to a much more sustainable, but still sizeable trade surplus of 2% gdp.

Seen through Keynesian eyes, Europe and Germany in particular are in the dock. China has entered the US dock for specific reasons of its own.

US attitudes on China have been transformed.

The transformation began under Obama’s Presidency. As Gideon Rachman, the FT international affairs writer, points out in his excellent account, Zero Sum World: Politics, Power and Prosperity after the Crash, Atlantic Books, 2010, the prolonged boom-interspersed with localized financial crashes and downturns,  was framed by two key events: Deng Xiao Ping’s Open Door policy for China launched in 1978, and the global financial crash of 2008.

Over those thirty years, the presiding assumption of international affairs held that the world was on a glidepath to convergence in economic policy, political institutions, living standards, and business norms. Globalisation, it was held, was a public good.

On his first visit to China after his election to the US Presidency in November 2008, Obama stuck to the win-win dogma. His team entertained the idea of a close China-US alliance, a G-2, to take a lead in dealing with the global challenges of trade, international finance, climate change and economic development. But he found China unco-operative on all issues.

It was not just that Beijing was engaged in an ambitious military build up, actively challenging US relations with Japan and Taiwan, and its position in the South China Seas, and in South East Asia. The Pentagon for some time had been publishing an annual report on China, detailing China’s build up as a potential challenger to US global primacy.

What changed was the attitude of leading US free market economists to China’s trade practices. The trade deficit with China, they argued, was due to manipulation of the currency and the pursuit of beggar-they-neighbour policies, which were putting American workers on the dole.

At Davos, in January 2010, Larry Summers, Obama’s chief economic adviser, told the assembled dignitaries that one in five US male workers aged between 25 and 55 were unemployed. In the 1960s, he pointed out, 95% of that demographic was employed.

The rationale for Obama’s support for the trans-Pacific and trans-Atlantic partnerships on trade were the same as those that inspired the Thatcher and Mitterrand governments in the 1980s to back the EU’s single market policy: free trade between independent nations required supranational governance, with the powers to bring offenders to book.

By the 2016 presidential elections, there was no groundswell of political support for supranational solutions to trade. The partnerships withered on the vine, but the underlying animosities flourished.

The Trump administration thesis.

The thesis is spelt out in a series of reports from the USTR, the White House and the Pentagon. Here are the relevant urls:

https://ustr.gov/sites/default/files/files/Press/Reports/China%202017%20WTO%20Report.pdf

https://www.whitehouse.gov/wp-content/uploads/2018/06/FINAL-China-Technology-Report-6.18.18-PDF.pdf

https://www.defense.gov/Portals/1/Documents/pubs/2017_China_Military_Power_Report.PDF?ver=2017-06-06-141328-770

The nub of the economic argument is that China remains a state-led economy, and is incompatible with open, market-oriented policies. The Report of the Trump White House Office of Trade and Manufacturing is titled “How China’s Economic Aggression  threatens the technology and Intellectual Property of the US and the World”. The Department of Defense report states that:

“China’s military modernization is targeting capabilities with the potential to degrade core U.S. military-technological advantages. To support this modernization, China uses a variety of methods to acquire foreign military and dual-use technologies, including cyber theft, targeted foreign direct investment, and exploitation of the access of private Chinese nationals to such technologies. Several cases emerged in 2016 of China using its intelligence services, and employing other illicit approaches that violate U.S. laws and export controls, to obtain national security and export-restricted technologies, controlled equipment, and other materials.”

Globalisation, in other words, is only good for America if countries do not cheat. But they do, and China is the prime sinner, followed in the Trump administration’s demonology by Germany.Here is the USTR on China’s alleged abuse of its membership of WTO.

“After its accession to the World Trade Organization (WTO) in 2001, China was supposed to revise hundreds of laws, regulations and other measures to bring them into conformity with its WTO obligations, as required by the terms set forth in its Protocol of Accession. U.S. policymakers hoped that the terms set forth in China’s Protocol of Accession would dismantle existing state-led policies and practices that were incompatible with an international trading system expressly based on open, market-oriented policies and rooted in the principles of nondiscrimination, market access, reciprocity, fairness and transparency. But those hopes were disappointed. China largely remains a state-led economy today, and the United States and other trading partners continue to encounter serious problems with China’s trade regime.

Meanwhile, China has used the imprimatur of WTO membership to become a dominant player in international trade. Given these facts, it seems clear that the United States erred in supporting China’s entry into the WTO on terms that have proven to be ineffective in securing China’s embrace of an open, marketoriented trade regime. Furthermore, it is now clear that the WTO rules are not sufficient to constrain China’s market-distorting behavior. While some problematic policies and practices being pursued by the Chinese government have been found by WTO panels or the Appellate Body to run afoul of China’s WTO obligations, many of the most troubling ones are not directly disciplined by WTO rules or the additional commitments that China made in its Protocol of Accession. The reality is that the WTO rules were not formulated with a state-led economy in mind, and while the extra commitments that China made in its Protocol of Accession disciplined certain stateled policies and practices existing in 2001, the Chinese government has since replaced them with more sophisticated – and still very troubling – policies and practices. Today, almost two decades after it pledged to support the multilateral trading system of the WTO, the Chinese government pursues a wide array of continually evolving interventionist policies and practices aimed at limiting market access for imported goods and services and foreign manufacturers and services suppliers. At the same time, China offers substantial government guidance, resources and regulatory support to Chinese industries, including through initiatives designed to extract advanced technologies from foreign companies in sectors across the economy. The principal beneficiaries of China’s policies and practices are Chinese state-owned enterprises and other significant domestic companies attempting to move up the economic value chain. As a result, markets all over the world are less efficient than they should be.”

What to make of the Trump  trade and foreign policies.

The first is that Trump’s trade policies do not reject multilateralism or free trade. Quite the contrary, they are presented as supportive of the post-1945 international order. What they do  state is that multilateralism can only work if all countries in the system play the game. It is understood that the concept of a “level playing field” is never in effect attainable, but that it is desirable as an objective to which all countries should strive, given their local concerns and priorities. What Trump is stating is in effect no more than previous Presidents have stated: there have to be common rules, and if those rules are to be credible, they have to be monitored, supervised and broadly implemented.

China and Germany, Trump is saying, are in their different ways, not playing by the rules of the game. Rather they are playing by the rules of China First and Germany First. In the case of China, the party-state is seen as in effect pursuing class war in a world of nation states: Mao’s world was one where the struggle for power and resources between classes and states was conducted 24/7, 52 weeks a year, year-in-year-out; President Xi’s China is seen as having adapted Mao’s conviction to the conduct of business in the world as it is. In the dialectical-materialist worldview, there is nothing random about world events.(See Kevin Rudd, “Xi Jinping’s Vision for Global Governance”, Project Syndicate, July 15, 2018.(https://www.project-syndicate.org/commentary/xi-jinping-has-a-coherent-global-vision-by-kevin-rudd-2018-07)

In the case of Germany, the Trump White House points out that Germany has run a trade surplus since 1951. This has not been by chance, but by policy. The policy has been consistently inspired by the experience of Weimar, when Germany ran trade and current account deficits, became dependent on capital imports, and proved maximally vulnerable to the crash of October 1929. The policy was renewed with vigour in 2003, when the Schroeder government drove down wages via labour market reform, had corporations emphasise productivity rises, kept consumption under wraps, and-with the benefit of membership in the Euro-watched the trade surplus soar.  Timothy Garton Ash’s book on German reunification held the sub-title “in the name of Europe”.

On trade, the exchange rate and much else Trump is telling Chancellor Merkel, crudely: don’t insult our intelligence. Your policies may be in the name of Europe, but they are in fact Germany First.

Trump is also the beneficiary of liberal supranationalism, as pursued by Obama, Merkel, Blair-Brown, and Cameron-Osborne. Liberal supranationalism, already under strain from global imbalances in an open world economy, fell on two hurdles: one was the effort to create trans-Pacific and trans-Atlantic economic areas, under strengthened supranational governance. Both initiatives succumbed to their lack of inherent legitimacy. Nation states accept a certain amount of obligations under international co-operation; but how much depends very much on preferences, circumstances and above all on support.

Where liberal supranationalism failed most of all was on immigration. Blair-Brown, followed by Cameron-Osborne, Hollande-Macron, and finally by Merkel in 2015, opened the doors wide to mass immigration from the Mid-East and Africa. Like Obama, western European leaders turned a blind eye to mass, in effect uncontrolled immigration.  “Populist” revolt was the result. Its punch came from the anger felt that the world élites, gathering in Davos every January, talked with forked tongues: they considered the world as a labour market, but pretended that they didn’t.

They lied.  Trump gets his popularity by saying what he thinks, crudely, and his audience is not liberal economic professors, the readers of The Wall Street Journal, The  Financial Times, The Economist, Le Monde,or Der Spiegel. His audience is white working class America. White working class America feels not without reason that its jobs were exported by US multinationals to China and Mexico.  The northern English white working class thinks along similar lines, as does the French working class-previously voting Communist and now voting Le Pen.

Merkel’s failure was even more visible. “Wir schaffen es”, she said in August 2015, opening the gates to one million immigrants, thereby making a Leave vote in the forthcoming UK referendum that much more likely. She erred because the German nation defines itself in terms of descent and culture: the people from the Mid East and Africa can only be considered as Germans by a frontal challenge to the beliefs of the German people.

The common feature to all this is that nations matter. Liberal supranationalists are convinced nations are the problem. More than a problem, they are a reality. Sound policy has to be predicated on reality.

Getting back to reality is not the same as tearing down the multilateral order. Quite the contrary. The way back to the multilateral order is the path away from liberal supranationalism, in other words away from utopian policy. Trump is doing the world a favour by pointing out the obvious.

The implications of Trump.

For China, the implication is that Beijing has much to gain by co-operating with the US. Economists argue that Trump is irrational. He is not. His electoral base has been hurting.His policies are in part explained in language they understand. That is its rationale. At the same time, he couches his tweets and side-swipes in recognisably liberal language: free trade is the best, if everything else is equal; but it is not, and multilateral organisations can only do so much. If they aspire to supranational authority, as with the EU and Obama’s trade partnerships, they step outside the bounds of national democratic surveillance. They lack legitimacy. Only national states are legitimate.

For Germany and the EU, Trump never ceases to point out that the EU is in effect floating somewhere between its member states and a USE, in a zone of virtual semi-reality. He is thereby challenging the foundations of the EU, and its identification of “nationalism” as the main problem. The nationalism which France and others never cease to fret about is German.

The problem is that the EU’s supranationalism has given German nationalism one big boost: on money and culture. Trump is pointing that out too. On his recent visit, he is also saying: if Germany is so god-dammed devious as to become 70°% dependent in the future on Russian gas and oil, why the hell should the US pay to protect it from Russia.

Merkel responded that thanks to German unification, eastern Germany is now part of an independent Germany, and an independent Germany has the right to pursue an independent policy. Trump says the same for the US. In a multilateral, not a supranational order.