America First: The Good And Bad Of It, Part 3

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America First: The Good And Bad Of It, Part 3
By David Stockman. Posted On Wednesday, January 25th, 2017
Donald Trump was totally correct in canceling Obama's Trans-Pacific Partnership (TPP) agreement. It isn't a free trade deal at all. It's a Swamp creature from the law firms and lobbies of the Imperial City that will not generate any new US exports or breadwinner jobs in Flyover America----only full-employment for the beltway racketeers who concocted it.

Indeed, the very idea that 6,000 pages of dense legalese and a Rube Goldberg contraption for managing the flow of commerce between the 12 signatory nations has anything to do with free trade is a telling commentary on the corruption of capitalism in America and the world. And the fact that it was negotiated in secret over more than half a decade by 600 high-priced private lawyers and lobbyists is proof positive that globalism has nothing to do with capitalism or democracy.

Besides that, the whole enterprise is not the big breakthrough for expanded trade that it's cracked-up to be by the mainstream press. It is essentially the Son-of-NAFTA plus another chapter in the book of perpetual trade negotiations with Japan that always lead exactly nowhere.

What we mean is that the TPP purportedly liberalizes US trade amounting to $1.5 trillion (combined US exports and imports in 2015) with the 11 other participant nations. But $1.1 trillion (73%) of that trade is with Mexico and Canada which was already liberalized by NAFTA 25 years ago, including the complete elimination of all tariffs and most other barriers.

TPP adds virtually nothing to the North American single market that already exists; it amounts to selling a used car twice.

Another $200 billion (13%) is with Japan, which has been making trade "concessions" to US negotiators for decades. But Japan's large surpluses with the US never diminish and the relative volume of US exports continues to decline owing to the hidden walls of Japan Inc. that are impossible to penetrate notwithstanding endless promises about "market openings".

In fact, US exports to Japan back in 1995 were $64 billion and amounted to 0.8% of America's GDP. Despite two decades of inflation, US exports in 2015 had declined to $62 billion and amounted to only 0.3% of GDP. As we lay out below, the problem with Japan and the rest of the Asian mercantilists is not bad trade arrangements and restrictive rules anyway; it's currency manipulation.

Even then, the other eight participants in TPP are essentially occupants of a diminutive sidecar. Peru, Chile, New Zealand, Australia, Brunei and Singapore plus two emerging  Asian mercantilists---Vietnam and Malaysia----account for only $100 billion of US exports while imports are just $120 billion. The tiny $20 billion trade deficit with this group is neither here nor there with respect to the growth and jobs travails of the US economy-----even if TPP would pump-up export volumes with partners where the trade equation is already essentially balanced.

But it won't do even that much. That's because tariff levels imposed by most of these countries are already very low for most products and US exports of heavy machinery and equipment to primary producers like Australia and Chile are already at historic peaks. In fact, they are now destined to decline as the overhang of global mining and processing capacity fuels a sharp contraction in worldwide CapEx.

For instance, the US signed an bilateral free trade agreement with Australia in 2005 which eliminated 99% of its duties on US manufactured exports and 100% of its duties on agricultural exports!

So what kind of Lilly is Washington gilding in this case? Indeed, the US has a massive trade surplus with Australia owing to the export of heavy mining machinery by Caterpillar and the like. Exports to Australia  actually grew from $8 billion in 1990 to $15 billion in 2005 and then peaked at $31 billion in 2012.

But that was due to the world's raging CapEx cycle and the massive expansion of Australian investment in iron ore, coal, aluminum, gold, copper and other minerals----including the related mining transportation infrastructure and port facilities ----that was needed to fill the industrial maw of China. Accordingly, booming sales of US capital goods to Australian miners resulted in peak year exports (2012) amounting to triple US imports of just $9.5 billion.

The point here is that the US already has free trade with Australia, and its rise and fall is driven by global commodity and CapEx cycles, not managed trade deals confected by a fraternity of Washington racketeers and paper-shufflers.

US exports to Australia and Australian exports to the US, 2004-2013.

Since the global CapEx peak in 2012, however, US exports to Australia have declined by about 20% and will continue to drop in the immediate future as Australia's the massively overbuilt mining sector adjusts to shrinking commodity demand. In fact, the same is true for three other members of the TPP---Peru,  Chile and New Zealand.

During 2015, US exports to these three countries of $28 billion were nearly double the $18 billion of imports from them. But trade with these three countries is now shrinking. US exports are down 12% since 2012 and the trade surplus has shrunk by 21% but that's not due to trade restrictions; it's owing to a decline in the global commodity and CapEx cycle.

At the end of the day, the one trade account that will benefit from TPP is that of Vietnam. That's right----it already has a massive $31 billion trade surplus with the US that has been growing like wildfire and would have become even larger under TPP.

Thus, in 2015 the US imported $38 billion of textiles and apparel and other labor intensive manufactures compared to just $7.1 billion of exports to Vietnam. Moreover, last year's import level was more than double the $15 billion of 2010 and 48X more than the $800 million imported from Vietnam in the year 2000.

Here's the thing. Vietnam has become the new go to venue for ultra-low manufacturing wages, and under even a honest global monetary system it would run a large trade surplus with the US owing to comparative advantage. But it would also have experienced a robust exchange rate appreciation that would have significantly mitigated the explosive growth of its exports to the US.

But like all other Asian mercantilist exporters--led by China and Japan---it has artificially pegged its exchange rate to keep the dollar value of its wages uneconomically low. There is no other way to explain the 14X increase in its foreign exchange reserved just since 1995.

Contrary to the blather of the Wall Street/Washington Keynesian economists, these giant FX reserves are not a measure of  financial management prudence or economic growth virtue. They are the flat-out consequence of exchange rate manipulation---or just plain old cheating and abuse of the international trading and monetary system.

Vietnam Foreign Exchange Reserves

 

The same story is true for Japan, which is the grand-daddy of the mercantilist currency manipulation game. Since 1989 its FX reserves have erupted by more than $1 trillion. Yet this would never happen on the free market. Instead, Japan's exchange rate would have soared and its giant exports and trade surpluses would have been sharply curtailed.

Yet the only thing the TPP really did was make it even easier for the Japanese auto industry to ship vehicles and components to North America in return for a reduction in tariffs on beef and pork that will end up being a rounding error the great scheme of things.

That is, the US imports about $55 billion of Japanese autos and parts per year compared to just $2 billion of exports. That massively on-sided trade in autos compares to about $15 billion of beef and pork exports to Japan, which might have grown by a couple billion under TPP, at best. Famously, a Japanese trade minister explained the Japanese "stomach" is not designed to digest American beef some years ago, and that pretty much explains everything.

The fact is, Japan Inc. has been making trade "concessions" for years including the infamous "voluntary" auto quotas during the Reagan era. But Japan's exports to the US are always and invariably 2X its imports from the US. And 6,000 pages of TPP make-work for the K-Street lobbies and law firms would not have made a dimes worth of difference.

Japan Foreign Exchange Reserves

Even then, however, canceling a con job like TPP is not going to reduce US imports or the off-shoring of good jobs. That's because the real problem is not bad trade deals, but bad monetary policy at the Fed.

The latter has drastically inflated domestic wages and costs over the past three decades, causing good jobs to be off-shored and drastically shrinking inflation-adjusted wages in domestic sectors faced by the China Price for goods and the India Price for services.

Stated differently, the problem is not bad deals from the USTR and the Departments of State and Commerce. It's free money from the mad money printers in the Eccles Building that account for the hollowing out of Flyover America.

It is that cardinal problem which we will explore next----staring with the fact that Donald Trump has already been taken hostage by the Wall Street casino and its central bank patrons.