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US-China trade war? Not likely

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Commenting on recent the US and China tit-for-tat tariff disputes, Prof. Larry Backer says that the deep structures of economic integration cannot be undone by a series of shocks with offers of renegotiation.

As the US and China ratchet up a tit-for-tat tariff dispute, it has been said often in the last few weeks that no one wins a trade war.

The issue was discussed with Larry Backer, Professor of Law and International Affairs in Penn State University.

How will President Trump’s decision to boost tariffs impact US domestic steel and aluminum producers?

My apologies, the answer to this question will be the longest of this interview precisely because the simplest questions may pose the subtlest problems. In contrast to many experts, and others, who might be eager to provide a simple and direct answer to this simple and direct question, I can only offer complexity and contingency. At the greatest level of generalization, it is not clear, even to experts and policymakers, whether the tariff boost will have a positive or negative effect. Steel and aluminum production are now part of integrated production chains only a portion of which concerns steel and aluminum production. The idea appears to be that the tariffs will protect US based steel and aluminum production by making the import of like products more expensive—and thus US producers will substitute domestic production over foreign. That may well work for domestic production and consumption but may not work for domestic production for export—especially where other states match the tariff to equalize pricing (and reduce the foreign subsidy) that the tariff represents. And yet domestic production and consumption is an important element of US macro-economic policy and may produce positive short-term effects in terms of domestic investment and employment.

Yet the tariff discussion must also be understood within a more complex context produced by the deep embedding within global production and ownership chains. The key here is that there is no identity between the location of production (in this case steel and aluminum production) and the nationality of ownership (that is, the “citizenship” of the apex enterprise that owns or controls the steel or aluminum production chain with respect to which production might be located in any number of states). It has been reported, for example, that some US companies may be negatively affected because they are subsidiaries of foreign enterprises from which, for example they receive steel for finishing and then export. And the effect will have little to do with the nationality of the owners of steel production. Consider the irony of these tariffs if, as a result, foreign owned enterprises establish factories in the US for steel production, boosting US production while repatriating the profits of that enterprise back to the home states of parent company. That insight, in turn, produces some variations in the answer to the question you posed.

Larry Backer

First, even if the tariffs have an effect (positive or negative), it is not clear that the extent of that effect will be large. Again, the issue of tariffs can only be viewed in a vacuum within the cloistered towers of those who find such detached analysis useful for purposes of advancing policy without relation to real world effects. Thus, the amplitude of the effect may be difficult to distill apart from the ecology within which tariffs may have both direct and indirect effects.  This provides an opportunity to seek to distill effects using a variety of techniques all of which will be dependent of a set of assumptions and approaches that might well skew the results in ways that serve objectives. These effects, of course, are further complicated by the distinction between the effects on domestic production (an objective of the tariffs, of course) and the effects of the nationality of the benefits of this production. It is not clear how one deals with the situation where domestic production increases (and increases local economies) while the profits of that production are repatriated elsewhere.

Second, even if there is significant effect, it is not clear whether the effect will be generally felt or will affect different parts of the country, and different industrial sectors differently. To speak of the effects of the tariff boost generally produces an answer that aggregates effect. But aggregated effects only serve political interests, it does not reflect the reality within a large country like ours.  It is much more likely that the effects will be felt differently, positively and negatively in different parts of the country and with respect to different industries and companies. Yet that might well have been the point—to ensure a targeted boost to economic activity within specific portions of the US with the hope that this boost in activity will then have indirect effect over a broader area.

Third, the answer to the question must take into account the time horizons for change and the sectors with respect to which differing time horizons might matter. Thus, for example, to the extent that the tariff is meant to foster greater steel and aluminum production, that effect will take years to be felt in terms of actual significant increases in production. Also important here is the question whether that production can be sustained. Tariffs as subsidies may have an immediate effect on decisions to invest in production (and hire labor to aid in its production), but eventually the sector and the heightened production will have to be economically viable—especially since over the middle and long term global consumers and producers may adjust their activities to take the tariffs into account.

Fourth, on the other hand, the immediate effects of the tariffs have already been felt—not in the changes to the location of steel and aluminum production (inside or outside the US), but in the reactions of financial markets, lenders, political leaders and the like. And perhaps that is the most telling part of tariff policy in the contemporary age—tariffs appear to have greater effects on global finance than on global production, on the allocation or distribution of the placement of portions of the production of commodities (in the long term), and on its value in mobilizing mass opinion to some political end or other. In that respect, tariffs may not pose the same problems that they produced a century ago in the European inter-War period. Globalization has substantially reduced the power of tariffs precisely because the borders necessary to make them effective have been substantially eroded—and it is unlikely that they will be reconstructed in the manner of 1920s thinking.

Fifth, the impact will vary from the short to the long term. Most people may be tempted to consider the question in light of immediate or short-term impact. Indeed, global analytics have tended to increasingly favor short term thinking and reaction rather than long term or strategic responses or adjustment. And the short-term impact—politically—will be significant. One sees that already as the “usual suspects” have already aligned themselves and their media outlets to amplify their support or opposition to the tariffs, and to begin to seek to mobilize mass opinion to some end or other. Yet it is the long term strategic adjustments that are far more important and most likely to be missed by a media and analytic culture with a short attention span.

How will it actually impact the aluminum and steel industries globally then?

There are two answers here. The direct answer is that impact will be a function of the way industry and states respond. Industry might be able to avoid the effects of the tariff by strategic shifting of the operations of their global production chains to minimize the effects of the tariffs—but such adjustments might take time. States, on the other hand, are less flexible. They will either support their own industries or risk losing them. If they do not reciprocate tariffs, they might be induced to apply enough support to their industries to wash out the price effects of tariffs. The indirect answer, however, may be more important. The impact to states and enterprises will depend on the ability of both to mitigate the effects of tariffs through changes in the ownership of the producers of tariffed goods. Thus, for example, if Chinese enterprises own or can acquire (direct or indirectly) steel and aluminum production facilities in the US, the net effect of the tariff will be small. Over the long term, and in the absence of waivers from tariff, there may be a gradual shift of production—but not necessarily to the US Instead the shift may move production to other states which have successfully negotiated tariff waivers.

You’ve mentioned some of the beneficiaries behind his decision are their other internal or external beneficiaries in addition to the companies in America, or is it just wholly these American companies who are going to benefit from this decision?

What is an American company today? The notion of national companies is now essentially obsolete in a context in which most economic activity is connected to global flows of production. Companies of a variety of nationalities are organized to manage and participate in global production (in steel and aluminum and other products). The economic enterprise that tends to manage or control the process of production and the role of other enterprises within that production process tends to be characterized as the representative or incarnation of a multinational enterprise, and to lend its nationality to that system of global production. But realistically, that represents an oversimplification of the realities of production. Thus, American apex companies may benefit from the tariffs.

On the other hand, US apex companies who have invested heavily in steel and aluminum production enterprises outside the US may suffer. Conversely, a Russian or Chinese enterprise that owned steel or aluminum production facilities in the US might profit significantly from the tariffs.  Because of this quite large divide between the nationality of the place of production and the nationality of the ownership of production (up the production chain) it is difficult in many cases to point to a generalizable nationality for winners and losers.  And that is the great insight of this effort—states can control generally the production of things within their territory and use their borders to exact a cost of entry (or exit).  But that control of the consequences of production within or outside a state has absolutely nothing to say about the nationality for the beneficiaries of these policies.  If all steel production abroad is owned by US companies, then steel import tariffs would affect US companies negatively because it adds costs to their global allocation of the elements of their production chains.

How much will this decision to increase tariffs affect countries like China, Japan and South Korea then?

There are two questions here.  The first deals with reciprocal tariffs. This is a simple one—if the US raises tariffs on aluminum and steel, then other countries would seek to do the same on US steel and aluminum. Yet the impact on the US may be negligible if it is a net importer of these products. And thus, more effective may be what I might call retaliatory tariffs. Thus, if the US imposes tariffs on steel and aluminum that affects national industries elsewhere, those states might impose duties on US agricultural products or some other product in a sector where US exports are large. But in a global economy that might only produce short term pain, as those in control of production chains can, at some cost, realign their trade routes in ways that might soften the blows of tariffs. And again, where one thinks only of short term effect, one misses the essential element of a more benign long-term effect within a global context in which capital and investment still moves fairly freely. And, indeed, rather than approach the imposition of tariffs with retaliatory tariffs, China, Japan and Korea would be better off buying US: steel manufacturers, increasing production of un-tariffed steel and then exporting that commodity for finishing in their own home states.

How likely is the European Union to retaliate by imposing tariffs on US products?

This is an excellent question.  While the initial emotional response, one fanned by the global media, might have tilted toward retaliatory tariffs on vulnerable US products, that course may not be followed once tempers are calmed.  The principle reason for this is that the Trump Administration has made it clear that it would entertain bilateral negotiations on waivers of tariffs.  This is not a small matter.  Indeed, one can see in this Tariff imposition-negotiated waiver approach an essential feature of the Trump Administration’s movement away from its old approach of globalized system building multilateralism to the new America First Initiative. Thus, consider the dynamics of the tariff imposition in context.  The United States has commenced building its own trade network in a manner that links up with the US enterprise’s management or control of certain production chains.

That requires a reorienting of trade relations from a multilateral form without a center to an aggregated bilateral form with the US at the center.  To effect this reorientation of the foundations of trade the US must first re-center its position in global trade networks (not all of them but those of vital interest or with respect to which there is an ambition). To that end, certain shocks are necessary. These include withdrawal form multilateral agreements (including Paris and TPP) and the disruption of old free trade alignments. But mere withdrawal does not produce re-centering—the offer to renegotiate the terms of bilateral relations (and in the process restore relations or waive action) is the driving element of realignment. At the end of the process, if carried out systematically and with a clear long term vision, the US might well produce a trading system that looks substantially the same as the Chinese One Belt One Road Initiative. If that is the case, then the future of global trade is not manifested in tariffs, but through these tariff and other shocks, a new global trade system, built around control of production chains, will emerge in which most roads lead either to Washington, or to Beijing.

Will Mr. Trump’s acts result in a trade war between the US and world’s other economic powers? What can be the consequences of such possible war for world?

No trade war is likely. The deep structures of economic integration cannot be undone by a series of shocks with offers of renegotiation. And trade war does not seem to be the intent (though one must disregard certain of the President’s tweets to acquire assurance on that point). And America First Initiative is not the same as the isolationist policies adopted from near the end of the 1920s—it is rather the reverse, the effort to encourage muscular expansion but now oriented from key home states, rather than by building a community of similarly situated actors all competing in the global markets for engagement with portions of emerging production chains. And indeed, while the ineptitude of national leaders might, through comedies of errors and personal vanity, move key states toward trade wars, the result would not further state power. Trade wars are particularly dangerous in contemporary politics precisely because they would produce two types of instability. First, trade wars would produce instability among the lower reaches of production chains. Those states would suffer substantial impacts in employment that would lead to political unrest, and more likely substantial migration that would then destabilize neighbors and eventually the apex states to which migration will flow, particularly in the West. Second, trade wars would destabilize apex nations as well. The stability of the political orders in the United States and China depend in large part on the fulfillment of a promise of a baseline economic prosperity. Where that disappears then both states might well be subject to the vagaries of populism which, though it might not overthrow either’s system in a formal sense, would substantially corrupt them.

The US and the Europeans cooperation after world war was based on trade, security and military regimes like NATO. Don’t you think possible trade war between the US and Europe can spill over other security and military fields, too?

I agree, of course, that a trade war would spill over to other vectors of state to state relations. But only suicidal states and mad leaders without substantial popular or institutional checks, could possibly move the US-EU relationship dangerously in that direction. The US and its European allies have had tiffs and have made grand gestures of disapproval against each other with some regularity since the 1960s. One need only remember the antics of Charles De Gaulle (quite effective both within Europe and in the effect on NATO relations). And in any case, the bad behavior of states on the periphery of the US-EU “entente” may ensure the strength of the core alliance militarily and work against economic policy foolishness.

Rising of rightist in Europe is a threat to the future of the EU and from the other side this can result in more independent trade relation without the EU considerations. Considering this fact how do you see the future of EU?

Many people fear the ghosts of the past, and even more people believe that it is important to fight past battles over and over.  But like the analogy with the trade wars of the 1920s, analogies with the rise of fascist movements in Europe in the 1930s may be misapplied in this case. Yes, indeed, the ultra-right movements have risen again after several generations of muscular suppression in Europe, and ridicule (effective) in the US But that suppression, in part, might well have contributed to the re-emergence of the virus of right wing extremism in the face of a largely unchecked left wing extremism that has tended to be the darling of the political and intellectual sets in the US and Europe since the great social rebellions of 1968.

That cultural moment plays differently in Eastern Europe, of course, and produces a return to the comforts of authoritarian nationalism that can easily be characterized as either left or right to suit the agenda of the commentator. At some point balance must be restored, of course, or the EU will flounder. And that may be likely in the medium term. For the moment, however, the rise of rightists as against an unchecked culture of leftism may produce the sort of instability that marked the early Weimar Republic. But at its base, the EU is suffering a version of 2nd generation malaise. The rising elite never experienced the trauma that produced European solidarity in the face of a half century during which Europe virtually committed suicide. They do not know hunger, and fear, nor do they worry about the penetration of larger powers to undermine their own autonomy and independence (those are worries left for the detritus of empire). And thus, they can indulge the privilege of dismissing the institutional structures on which their own prosperity and security are based. To that end, indeed, it is not the rise of the right, but the effects of ennui, that may have a substantial deleterious effect on the solidity of the EU.

The US also recently imposed tariffs and other measures against the People’s Republic of China.  Do you see the possibility of a trade war or more adversarial relations between the US and China with respect to trade issues?

I would suggest that the recent and very quick tariff exchange between the United States and the People’s Republic of China illustrates the character of these tariff moves by the Trump Administration and the way that they have been received once governments finish producing the appropriate responses required for public consumption by their internal and external audiences. Consider what happened when in mid-March 2018 President Trump moved to levy tariffs on up to $60 billion of Chinese imports, in addition to those imposed on solar panels, steel and aluminum. Initially, the Chinese reacted aggressively and publicly in the expected way, utilizing all of their networks to aid in that effort. The Chinese indicated an intention to levy tariffs on about $3 billion of US imports, including soybeans or aircraft, major trade goods.

The effect was immediate—global financial markets fell dramatically over the course of a week. Yet, after the necessary public drama, one discovered that the tariffs imposed on both sides appeared to serve as an invitation for both the US and China to begin to renegotiate their trade relations. The Americans sent a letter indicating the changes that they sought in the wake of the tariff impositions, with an emphasis on trade and intellectual property issues, including what for the US amounted to coercive technology and know-how transfer rules. Premier Li Keqiang spoke publicly about the need for China and the United States to continue negotiations and reiterated pledges to better open their internal markets and perhaps to target purchases of specified US goods. Negotiations continue.

When news leaked of those steps, global markets responded appropriately. And thus one can begin to see the contours of the way in which tariffs have become an instrument rather than the objective of trade policy. The US may now use tariffs as a critically important tool in the reframing of US trade policy in the form of the “America First” Initiative. The object is not to destroy trade—the US President and his advisors have been very clear about that (it is only that people have chosen not to listen)—but to reframe the basis of the global trading system from the forms that emerged after the 2nd World War to a new form whose characteristics will be shaped both by the Chinese One Belt One Road Initiative and its American counterpart, the “America First” Initiative.

It was the Iranian leadership itself which almost a decade ago pointed to the end of the post-World War II era and its structures.  Few paid attention at the time.  That was a pity. For it seems that in retrospect they were correct and that the global community will continue to see manifestations of the new system emerge as the first order powers realign their visions, reach accommodations with each other and reorder the hierarchies of power and production for the first part of this century.

First published in our partner Mehr News Agency

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Belarus: Strengthening Foundations for Sustainable Recovery

MD Staff

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The speed of economic recovery has accelerated in early 2018, but the foundations for solid growth need to be strengthened, says the latest World Bank Economic Update on Belarus.

The economic outlook remains challenging due to external financing needs and unaddressed domestic structural bottlenecks. Improved household consumption and investment activity, along with a gradual increase in exports, will help the economy to grow, but unlikely above three percent per annum over the medium term.

“The only way for ordinary Belarusians to have better incomes in the long run is to increase productivity, which requires structural change. While macroeconomic adjustment has brought stability, only structural change will bring solid growth to the country,” said Alex Kremer, World Bank Country Manager for Belarus. “Inflation has hit a record low in Belarus, driving the costs of domestic borrowing down. However, real wages are now again outpacing productivity, with the risks of worsening cost competitiveness and generating cost-push inflation.”

A Special Topic Note of the World Bank Economic Update follows the findings of the latest World Bank report, The Changing Wealth of Nations 2018, which measures national wealth, composed of produced, natural, and human capital, and net foreign assets. Economic development comes from a country’s wealth, especially from human capital – skills and knowledge.

“Belarus has a good composition of wealth for an upper middle-income country. The per capita level of human capital exceeds both Moldova and Ukraine. However, the accumulation of physical capital has coincided with a deterioration in the country’s net foreign asset position,” noted Kiryl Haiduk, World Bank Economist. “Belarus needs to rely less on foreign borrowing and strengthen the domestic financial system, export more, and strengthen economic institutions that improve the efficiency of available physical and human capital.”

Since the Republic of Belarus joined the World Bank in 1992, lending commitments to the country have totaled US$1.7 billion. In addition, grant financing totaling US$31 million has been provided, including to programs involving civil society partners. The active investment lending portfolio financed by the World Bank in Belarus includes eight operations totaling US$790 million.

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Economic Growth in Africa Rebounds, But Not Fast Enough

MD Staff

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Sub-Saharan Africa’s growth is projected to reach 3.1 percent in 2018, and to average 3.6 percent in 2019–20, says Africa’s Pulse, a bi-annual analysis of the state of African economies conducted by the World Bank, released today.

The growth forecasts are premised on expectations that oil and metals prices will remain stable, and that governments in the region will implement reforms to address macroeconomic imbalances and boost investment.

“Growth has rebounded in Sub-Saharan Africa, but not fast enough. We are still far from pre-crisis growth levels,” said Albert G. Zeufack, World Bank Chief Economist for the Africa Region. “African Governments must speed up and deepen macroeconomic and structural reforms to achieve high and sustained levels of growth.”

The moderate pace of economic expansion reflects the gradual pick-up in growth in the region’s three largest economies, Nigeria, Angola and South Africa. Elsewhere, economic activity will pick up in some metals exporters, as mining production and investment rise. Among non-resource intensive countries, solid growth, supported by infrastructure investment, will continue in the West African Economic and Monetary Union (WAEMU), led by Côte d’Ivoire and Senegal. Growth prospects have strengthened in most of East Africa, owing to improving agriculture sector growth following droughts and a rebound in private sector credit growth; in Ethiopia, growth will remain high, as government-led infrastructure investment continues.

For many African countries, the economic recovery is vulnerable to fluctuations in commodity prices and production,” said Punam Chuhan-Pole, World Bank Lead Economist and the author of the report.  “This underscores the need for countries to build resilience by pushing diversification strategies to the top of the policy agenda.”

Public debt relative to GDP is rising in the region, and the composition of debt has changed, as countries have shifted away from traditional concessional sources of financing toward more market-based ones. Higher debt burdens and the increasing exposure to market risks raise concerns about debt sustainability: 18 countries were classified at high-risk of debt distress in March 2018, compared with eight in 2013.

“By fully embracing technology and leveraging innovation, Africa can boost productivity across and within sectors, and accelerate growth,” said Zeufack.

This issue of Africa’s Pulse has a special focus on the role of innovation in accelerating electrification in Sub-Saharan Africa, and its implications of achieving inclusive economic growth and poverty reduction. The report finds that achieving universal electrification in Sub-Saharan Africa will require a combination of solutions involving the national grid, as well as “mini-grids” and “micro-grids” serving small concentrations of electricity users, and off-grid home-scale systems. Improving regulation of the electricity sector and better management of utilities remain key to success.

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Multilateral Development Banks Present Study on Technology’s Impact on Jobs

MD Staff

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Rapid technological progress provides a golden opportunity for emerging and developing economies to grow faster and attain higher levels of prosperity. However, some disruptive technologies could displace human labor, widen income inequality, and contribute to greater informality in the workforce. Tapping new technologies in a way that maximizes benefits, mitigates adverse effects, and shares benefits among all citizens will require public-private cooperation and smart public policy.

That is one of the main conclusions of a new study, The Future of Work: Regional Perspectives, released today by four regional multilateral development institutions: the African Development Bank (AfDB), the Asian Development Bank (ADB), the European Bank for Reconstruction and Development (EBRD), and the Inter-American Development Bank (IDB).

The study, which was presented at a seminar hosted 19 April at the IDB in Washington, D.C., explores the potential impact of technology in global labor markets and identifies concrete actions countries can take to prepare for the changing nature of jobs and leverage the benefits of emerging technologies.

The Future of Work: Regional Perspectives analyzes the challenges and opportunities presented by artificial intelligence, machine learning, and robotics in what is known as the Fourth Industrial Revolution. Potential challenges include increased inequality and the elimination of jobs, as well as the high degree of uncertainty brought about by technological change and automation. The greatest opportunities come from gains in economic growth that can result from increased productivity, efficiency, and lower operating costs.

The study includes chapters focusing on how new technological developments already are affecting labor markets in each region.

In the case of Asia and the Pacific, ADB research shows that even in the face of advances in areas such as robotics and artificial intelligence, there are compelling reasons to be optimistic about the region’s job prospects. New technologies often automate only some tasks of a job, not the whole. Moreover, job automation goes ahead only where it is both technically and economically feasible. Perhaps most importantly, rising demand—itself the result of the productivity benefits that new technologies bring—offsets job displacement driven by automation and contributes to the creation of new professions.

“ADB’s research shows that countries in Asia will fare well as new technology is introduced into the workplace, improving productivity, lowering production costs, and raising demand,” said Yasuyuki Sawada, ADB’s Chief Economist. “To ensure that everyone can benefit from new technologies, policymakers will need to pursue education reforms that promote lifelong learning, maintain labor market flexibility, strengthen social protection systems, and reduce income inequality.”

The publication was launched with a panel discussion featuring senior officials of the four regional development banks leading the study: Luis Alberto Moreno (IDB President), Charles O. Boamah (AfDB Senior Vice-President), Takehiko Nakao (ADB President), and Suma Chakrabarti (EBRD President). They were joined by Susan Lund (Lead of the McKinsey Global Institute) and Pagés, one of the co-authors.

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