Trump Should Hang Tough Against China

It’s time to face facts: China is a renegade nation preying upon America

 

By Peter Morici, Ph.D.

June 24, 2019 (First Published in MarketWatch)

The President Donald Trump enjoys bipartisan support for his tough posture toward China but Democrats and farm-state Republicans could join business leaders opposing his tariffs if he fails to persuade President Xi Jinping to agree to serious negotiations when they meet at the June 28-29 G-20 Summit.

That’s foolish. Americans should be prepared for Trump’s tariffs to become permanent and to disengage from China, find new markets for agricultural commodities, and learn to make or purchase elsewhere those things that we import from China.

At the center of the impasse is Beijing’s refusal to change its laws to lock in commitments to end forced technology transfers by foreign companies investing in China, outright theft of American patents and trade secrets, export subsidies, and industrial policies that target U.S. competitive advantages.

World Trade Organization rules

World Trade Organization rules are premised on the principle that trade should be based on comparative advantage to raise incomes and wages among all nations. It requires all governments – including China-to conform their domestic laws to effect those commitments.

China says it won’t change its laws as a matter of sovereignty and honor. Nonsense – we are engaged in these negotiations because it did not keep its word to change its laws and abide by commitments it made when it signed onto the WTO in 2001.

Equally disingenuous is the Chinese offer to lock in commitments via regulatory changes – directives issued by its central government. Beijing bears the burden of its history on that score – for example, its broken commitments to rein in subsidies for high-tech firms.

In Xi’s mind, China is riding the great arc of history to a place where it makes the rules, and supplicants like the Europeans, Americans and Asian neighbors adhere to its vision. China – the omniscient, omnipresent and omnipotent state – dominates, and the leader of the Chinese Communist Party sits atop a throne of empire.

China doesn’t play by the rules

China doesn’t play by the rules of other civilized nations – on trade, on the sanctity of international waters or on its obligation to restrain rogue states like North Korea.

It’s time to label China for what it is – a renegade state.

China doesn’t send terrorists to explode our buildings but instead dispatches a host of pirates to steal our technology, jobs and prosperity, and to sap our strength to one day dictate the terms of our surrender.

Honorable people understand if they lie, intelligent folks will stop taking them at their word but in Xi’s kleptocracy, America is led by fools – he absolutely underestimates U.S. chief negotiator Robert Lighthizer.

Trump faces a lot of pressure

Trump faces a lot of pressure to come up with a deal – Democrats will hammer him in the 2020 election and appeal to farmers hit by retaliation and low-income workers bearing higher prices at Walmart WMT, +0.73% for backpacks, baseball mitts and beer.

Tall tales abound – Moody’s Analytics sees the threat of another recession – but Wells Fargo estimates the most that the additional tariffs levied this month on $200 billion in imports from China could raise the consumer price index is 0.15%.

However, that is if the Chinese yuan USDCNH, +0.2215%  does not fall substantially, as it did with previous tariffs, Chinese producers do not absorb a portion of the tariffs, as many did with previous levies, and new producers do not emerge elsewhere in Asia, as they are eager to do if U.S. businesses believe the tariffs are more or less permanent.

Bottom line

The bottom line is that prices are likely to go up no more than 0.1% thanks to recent tariffs and if the president imposes tariffs on the remaining $290 in Chinese imports, that figure jumps to about 0.35%.

Overall, that translates into price increases the equivalent of an 8 to 27 cent increase in the price of gasoline but thinly spread across all prices. It is hard to believe, as many economists and traders seem to believe, that sort of increase in prices could take the economy tanking into a recession.

The real danger in all this is that Trump settles for half a deal – promises but no enforceable commitments. The theft of America’s family jewels – leadership in artificial intelligence – would be a far greater loss than some soybean exports or paying a bit more for consumer items whose production could be moved to Vietnam or even Kansas.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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Why the Fed Should Ditch Its 2% Inflation Target

Spending, not Inflation, Drives Growth and Prosperity

 

By Peter Morici, Ph.D.

June 17, 2019 (First Published in MarketWatch)

The Federal Reserve is charged by Congress to accomplish full employment and stable prices.

For economists, these objectives pose a tradeoff, and the Fed targets 2% inflation as a compromise.

All this is premised on economic theories rendered obsolete by the globalization of many goods and services markets, capital mobility, and resulting wage arbitrage.

The Phillips Curve postulates that as unemployment falls, workers get more bargaining power and push up wages and prices. Economists believe near-zero inflation is not sustainable because as average inflation gets too low, prices for discretionary items such as new cars and dry cleaning could actually fall – this would make businesses in those industries reluctant to invest, and plunge the economy into recession.

Currently, with unemployment near historic lows, U.S. inflation remains fairly tame.

Hard pressed

With Chinese growth increasingly challenged, competitors elsewhere in Asia eager to snatch its manufacturing export industries. and the EU stuck in a malaise, U.S. businesses that face international competition are hard pressed to raise prices and pass along wage increases. Most pressure to push U.S. inflation up to 2% appears to be from the recent tariffs and international oil markets. The latter are aided by U.S. restrictions on new pipeline construction that would better move shale oil to refineries, sanctions against Iraq, the meltdown in Venezuela and the recent Russian-OPEC alliance to manage oil production.

None of those have much to do with domestic labor markets.

Four other factors also have unhinged inflation from the observed unemployment rate.

First, the observed unemployment rate, 3.6%, may not reflect a lot of hidden slack in labor markets.

During Barack Obama’s presidency, adult labor force participation fell dramatically, helped by more generous Medicaid, food stamps, and Social Security disability benefits. The Trump Administration is tightening up these programs as it can and that is pushing prime-age adults back to work.

More seniors are working

Second, more seniors are working these days because they are healthier than their parents were, and due to the demise of many defined-benefit pensions and the low interest paid on CDs and high grade bonds.

Third, the increasingly prominent technology sector uses fewer buildings and machines to create value than old-line, heavy manufacturing did. Software and autos both require expensive R&D but making more copies of a new app does not entail the same costly capital investment as increased demand for SUVs.

Fourth, Amazon.com and smartphone apps permit consumers to compare prices more easily, plus consumers are less loyal to big brands, limiting the ability of those businesses to increase prices.

In addition, economists believe clarity from Fed policymakers about future plans for interest rates can provide an anchor for inflation and encourage business investment. Except when the Fed expresses its policy intentions, it usually cautions future actions will depend on events as those develop. Earlier this year, the Fed scotched plans to raise interest rates further in response to stock and bond market turbulence – such behavior make the Fed’s communications about policy intentions nearly useless for long-range business planning and investment.

Influential macroeconomists

Influential macroeconomists employ models that reduce the U.S. economy to a handful of equations – with little or no consideration of the above mentioned forces. Some purport to show if the Fed would merely communicate a preference for inflation above 2%, the economy would get more inflation and stronger growth.

That’s silly. Instead, it would be better for the Fed to target a growth rate for overall nominal spending at 4.5% or 5% – that adds up to 2.5% to 3% for real growth and 2% for inflation. That would imply a target rate of inflation above 2% when growth is subpar and below 2% when the economy is robust.

The Fed should take some unconventional steps to boost spending as needed. It could offer seniors and others access to interest-bearing accounts it now limits to banks, hedge funds, and money managers – when spending is slack, inject cash directly into consumer accounts. And it could purchase state and municipal bonds for new infrastructure projects as the economy slows.

Spending, not inflation, drives growth and prosperity and that’s where the Fed should focus.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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Globalizing the Federal Reserve and Monetary Policy 

U.S. Monetary Policy Must Be Realigned to Reflect the Reality of Managing the Global Currency

 

By Peter Morici, Ph.D.

June 5, 2019 (First Published in The Washington Times)

The Federal Reserve’s principal tools – adjusting short term interest rates and quantitative easing for accomplishing 2 percent inflation and low unemployment – are radically out of sync with a global economy that relies on the dollar. It’s high time U.S. monetary policy be realigned to reflect the reality of managing the global currency.

Since the financial crisis, inflation has unhinged from Fed policy. Annual movements in the consumer price index, less food and energy, have largely fluctuated between 1 and 2 percent whether unemployment exceeded 10 percent, the Fed set short rates near zero and it bought long term Treasuries and mortgage backed securities, or unemployment fell below 4 percent, the Fed raised short rates and ran down its balance sheet.

With the U.S. economy so open – not just to imports of manufactures from China but also products from emerging Asian nations eager to replace the Middle Kingdom’s cheap hands and an increasing array of services from places like India thanks to the Internet – the global supplies of labor, capital and technology remain remarkably plentiful despite low U.S. unemployment and stronger growth.

President Trump’s tariffs won’t change much. If iPhones aren’t assembled in China, production will move elsewhere – and services are immune from tariffs and many border regulations.

To lubricate global supply chains and hedge uncertainty, businesses and investors everywhere have turned to the dollar as the one major currency that is well managed – not subject to arbitrary regulation like the Chinese yuan – and likely to hold its value – not threatened with extinction from political upheavals like the euro.

Dominated in dollars

More than 40 percent of all cross border trade and 60 percent of international debt financing is denominated in dollars, even though the United States is less than one-fifth of the global economy. Foreign banks, businesses and individual investors of all sizes now hold dollar denominated securities, monetarizing U.S. foreign policy.

Whereas China throws billions around through its Belt and Road Initiative – attempting to win friends but alienating many governments with high-handed tactics – U.S. banks – for example, Citibank – have built transnational payment systems that provide the plumbing for global commerce and finance. And the Treasury Department can turn the valve on rogue regimes like Iran and terrorist groups with financial sanctions.

Sadly, U.S. monetary policy has not been similarly globalized making it substantially impotent.

With such recognition that monetary policy must be executed on the global stage – and not merely on the trading floors for U.S. bonds in New York – the Fed’s efforts to make effectively accomplish its goals would not be frustrated by its current xenophobic mentality.

Historically, the Fed raised the bank overnight lending rate – the so called Federal Funds rate – when it wanted to tap the breaks on growth and inflation. In the 20th century, this would push up rates for short-term business loan rates and long rates on Treasury securities, corporate debt and mortgages.

Access higher U.S. yields

These days, when long rates move up, all those foreign actors holding dollars abroad can use the Citibank pipeline and similar facilities to access higher U.S. yields and push those rates back down. When Ben Bernanke raised the federal funds rate in 2004-2006, longer-term Treasury rates hardly budged, and when the Fed pushed up short rates three times in 2017, long rates were similarly stubborn.

Foreign monetary authorities hold over $5 trillion in U.S. Treasury and mortgage backed securities, corporate bonds and stocks to back up their currencies and they purchase and sell these to lower or raise the value of their currency against the dollar to stimulate or break their domestic economies and influence interest rates on U.S. securities.

Last year, as the Trump administration imposed tariffs on Chinese goods, Chinese monetary authorities permitted the yuan to fall against the dollar, partially frustrating U.S. efforts to reduce imports and boost manufacturing.

The Fed – despite controlling the supply of one truly global currency – does not have similarly large holdings of highly rated German, Japanese, Chinese and other major currency securities but it should. Then as it sells U.S. securities – as it has recently with the potential to raise long term rates – it could sell foreign securities to also push up rates on those debt instruments. This would mitigate the flood of foreign investors into U.S. securities and permit U.S. long rates to rise with more certainty.

The same would apply when it undertakes quantitative easing to boost the economy.

With such recognition that monetary policy must be executed on the global stage – and not merely on the trading floors for U.S. bonds in New York – the Fed’s efforts to make effectively accomplish its goals would not be frustrated by its current xenophobic mentality.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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Trade Deal with China Is Impossible

By Peter Morici, Ph.D.

May 30, 2019 (First Published in The Hill)

President Trump has bipartisan support for his new tariffs and sanctions on Huawei to obtain an enforceable trade agreement with China. The latter simply is not possible, and Americans should gird for a commercial cold war. The Chinese development strategy flaunts the Western rules for international competition that it agreed to abide by when it joined the World Trade Organization. Those require China, like other governments including the United States, to shape domestic law in order to comply.

Huawei is the poster child for renegade behavior. Beijing limits market access for foreign competitors of its network of backbone technology products, showers it with subsidies, and turns a blind eye to its industrial espionage apparatus noteworthy for its militaristic discipline. With those, Huawei can offer Western telecommunications services higher quality components at 30 percent lower prices than Western suppliers. For less dominant Chinese competitors, Beijing pressures foreign companies that are seeking market access to form joint ventures and transfer proprietary technology, and engages in brazen state sponsored industrial espionage.

The accession agreement China signed when it joined the World Trade Organization in 2001 was supposed to deal with most of those practices, but President Xi Jinping has cultivated regulatory and business cultures that make an enforceable agreement virtually impossible. Compliance with the World Trade Organization rules would have required Communist Party leaders to encourage young members, state owned enterprises, and private entrepreneurs to embrace Western norms of honesty and integrity when dealing with foreigners and show respect for intellectual property.

Major existential threat

Instead, thanks to the internationally distributed nature of networking, artificial intelligence, and other new cutting edge technologies, along with the challenges of firewalling Western product and software designs, the Chinese kleptocracy poses a major existential threat to democratic capitalism. Given its capabilities in artificial intelligence and market size, if everything China invents is respected by Western law and businesses but what Western firms invent is stolen with impunity, the United States could indeed fall to China much as Greece did to Rome.

It is time to join the commercial cold war on China.

Contempt for foreign property rights is so deeply imbedded in Chinese political and business cultures that the real negotiating partners are not at the table and President Xi cannot deliver them. These are Chinese senior bureaucrats, state owned enterprises, and military and private business chieftains. China signed an agreement in 2015 to end state sponsored industrial espionage. Chinese pirates simply redirected their energies toward more vulnerable targets across Europe and Asia. As the Obama administration wound down, the Chinese turned their sights on American targets again. The Justice Department indicted employees of the Chinese cybersecurity firm Boyusec for hacking a number of American companies. However, too many Chinese businesses, their executives, and their state sponsors remain beyond the effective jurisdiction of American courts.

The real competition is in super computing, space exploration, and artificial intelligence that will deliver military dominance in the several decades and offer possibilities for explosive growth akin to electricity and automation in the 20th century. The same kinds of artificial intelligence that drives market analytics and facial recognition to track web surfing and personal movements to generate targeted advertisements and for police to anticipate criminal acts could enable the Chinese and Russian militaries to anticipate the tactics and neutralize the effectiveness of the United States Navy and Air Force, and ultimately destroy Americn civic institutions and markets if our country allows either vault into the lead.

Running out the clock

President Xi has proven quite adroit at running out the clock on the presumption that President Trump well may be in office for one term. Former Vice President Joe Biden, the leading Democratic hopeful, seems to believe China poses few threats. President Xi managed to burn the first year and a half of the Trump administration with the diplomatic agenda and then brought Ambassador Robert Lighthizer to the brink of a trade deal earlier this year only to once again balk at changing Chinese law to make its system nominally compatible with international commitments.

It is time to join the commercial cold war on China. The United States must fully implement the sanctions against Huawei and other technology pirates, implement a system of auction quotas that limit imports from China to the value of exports to China, and develop aggressive national strategies within advanced computing, space exploration, and artificial intelligence that ensure national survival. The real danger lies not from Beijing but rather in pressures from members of Congress who are not willing to accept higher prices for clothing and gadgets and lost farm exports and pass up the opportunity to make those an issue for 2020.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)

 

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Trump’s Economic Miracle

What Trump’s Naysayers Miss in the Economy Is Growing Differently than in the Past

 

 

By Peter Morici, Ph.D.

May 15, 2019 (First Published in WashingtonTimes.com)

Welcome to the Trump prosperity – the 3 percent GDP growth accomplished since the recent tax cuts and assault on abusive government regulation took hold are just a prelude of what could be accomplished if the endless Democratic attacks don’t bring down the administration and the organized left – the mainstream media, radical feminists and socialists – don’t highjack our personal liberties and destroy American capitalism.

Soon after President Trump was elected, the naysayers in the liberal-dominated economics profession told us the economy could not accomplish sustained 3 percent to 4 percent growth because of slowing productivity and labor force growth. The standard droll was all the good things had been invented – to them smartphone apps are nice amusements but are not productivity enhancing in the manner of moving assembly line. A slowing birth rate and aging population meant we simply could not add a lot of new workers once unemployment was pushed down below 4 percent.

Profoundly different ways

Now they are telling us Mr. Trump’s 3 percent growth over the last year is a sugar high – the jolt of the tax cuts temporarily goosed consumer spending – but businesses are not investing in new machinery as promised. What they miss is that the economy is growing in profoundly different ways than in the past.

Last year, the number of new automobiles and new homes sold – the engines of late-20th century prosperity – essentially flatlined. Younger Americans are learning to drive and moving up to car and home ownership at later ages for interrelated reasons – folks in their teens and 20s have social media to congregate, Amazon to purchase necessities and Uber to get around. Burdensome university tuition and student debt delay big-ticket purchases, marriage and children, and building sites near urban job centers are scarcer and more expensive.

Although investment in machinery to make more cars, houses and other traditional stuff are growing slowly, other forms of consumer and business spending are taking off.

Artificial intelligence devices and software in homes and businesses – productivity enhancing smartphone/tablet apps and computer programs – are multiplying like bees in anticipation of spring pollen.

Nearly 12.7 percent

Last year, the GDP originating from the motor vehicle and parts sectors jumped nearly 12.7 percent. With the number of vehicles sold virtually constant, much of the additional value is for safety and experience-enhancing technologies that automakers are putting into dashboards.

Businesses these days do need some machinery and computers as platforms for new technology, but the truly big investments are tougher to measure – those are in-house training for employees. As businesses grow, especially in the services sector, they are buying robots and scanners, but they need workers with new skills to maintain them and manage the software. Instead of firing workers with outdated skills and seeking new hires, businesses are combing employee databases for folks who are more adaptive and willing to learn and training them up.

Walmart is restructuring to employ fewer but more highly-paid store managers and more consumer-responsive sales associates. And persistently stronger growth and greater reliance on technology rather than brawn are creating new opportunities for women, older workers and the disabled.

These are helping sustain the adult labor force participation rate, which declined rather precipitously during the Obama years as many sought refuge in the expanding social safety net.

Growth potential

The growth potential for the economy is simply the sum of productivity and labor force growth – during the Obama years those sunk to 1.0 and 0.5 percent – but thanks to artificial intelligence and broader opportunities, those jumped to 2.4 percent and 1.0 percent for the year ending the first quarter of 2019.

Those can be sustained if Congress stops blocking everything Trump and compromises on a solid infrastructure program that includes enhancing technology access as well as the usual roads and bridges, and immigration reform to emphasize skilled workers similar to point systems in Canada and Australia, which face similar skills challenges.

During the Reagan-Bush-Clinton era, the nation endured long periods of divided government and deep ideological divisions between the left in the Democratic Party and conservative Republicans. But politicians did quaint things like accept the outcome of elections, sustain good humor by refraining from vitriolic remarks aimed at opponents and worked on solutions that improved the lives of ordinary working folks.

Economic growth averaged 3.4 percent for two decades – exactly the potential that the sum of Mr. Trump’s recent labor force and productivity growth implies.

 

Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and seven-time winner of the MarketWatch best forecaster award in competition with 41 other top economists. (See his economic forecasts here.)