Tag: Economy
Security and trade post-election
The Center for Strategic and International Studies November 14 hosted two panels on the midterm elections’ implications for the trans-Atlantic agenda and trade policy. The first featured a discussion with Senator Chris Murphy (D-CT) and the second a conversation between CSIS experts Louis Lauter, Vice President for Congressional and Government Affairs, and William Alan Reinsch, Senior Adviser and Scholl Chair in International Business. Heather A. Conley, Senior Vice President for Europe, Eurasia, and the Arctic and the Director of the Europe Program at CSIS, moderated.
President Trump’s current threat to leave the 1987 Intermediate-Range Nuclear Forces (INF) Treaty set the tone for the first discussion. Murphy framed the move as consistent with a broader agenda from the anti-institutionalists in the Administration to withdraw from multilateral organizations, with the spotlight on NATO after the President’s threatening comments last summer.
Murphy highlighted that there is a tendency in Congress to separate the President’s actions and statements from the Administration. While the President is launching rhetorical assaults against NATO, under the surface NATO cooperation continues. Many Republican colleagues have favored this approach, creating an atmosphere complacency. Murphy cautioned that the President should be taken at his word. Congress should prevent an executive withdrawal from NATO. The Senator introduced a failed bill back in July that would have required Congressional consent. There might be more interest in the Democratic-controlled House once Congress reconvenes.
Murphy warned that US foreign policy has become too sanctions dependent. There is a need to create and use alternative Congressional foreign policy instruments, a recommendation echoed by Lauter in his recent study on Congressional foreign policy preferences. The Senator recently introduced the European Energy Security and Diversification Act to finance energy infrastructure in Europe as a means to promote independence from Russia. He also pointed to the need to fund fragile democracies in the region.
Trump’s distancing the US from its NATO allies should be seen as part of a general trend towards isolationism and nationalism, in contrast to French President Macron’s vision for multilateralism and internationalism to solve global problems. Trump’s America First message still resonates with large swaths of the country, prompting Murphy to state that until we fix our domestic politics and economy, politicians will be able to sell Trump’s message in regions that have seen losses in jobs such as manufacturing.
While Reinsch pointed out that trade is low on the average voter’s motivations, Murphy underlined the connection between global institutions/alliances and the strength of the American economy and jobs. Trump’s threatening posture towards NATO does not exist in an economic vacuum. Macron has been urging Europe to become more militarily and technologically autonomous, in part by favoring European defense contractors over American ones, in response to Trump’s criticism of NATO. The steel and aluminum tariffs imposed on the EU make the situation worse.
The political divide between skeptics and supporters of liberalized international trade rests more within parties than between them, according to Reinsch and Lauter’s recent studies. Lauter’s study of the pre-election Congress’ foreign policy preferences found that Congress was fairly internationalist, with Reinsch elaborating that trade was less a partisan issue and more a regional one. The coasts tend to be pro-trade while skeptics dominate the Midwest, as demonstrated in the mixed reactions to Trump’s tariffs on the EU.
A post-election survey of incoming Democrats looked at their public statements on the issue. Twenty-four of fifty-five surveyed said nothing about trade following the election. Twenty-one made pro-trade statements, and eight anti-trade statements. While Democrats may hold the USMCA (the NAFTA replacement) hostage for political reasons, Reinsch predicted that the new Congress will include many pro-trade representatives. It is too soon to write a general obituary for trade agreements.
China is the regional challenge that will likely continue to enjoy bipartisan support, evidenced in the reaction to the Administration’s 301 report on China. The question will be how this is handled moving forward in light of Trump’s relationship with the WTO. While he has rejected appointments of new judges for its dispute appellate body and is willing to go beyond the WTO to achieve policy goals, Reinsch emphasized that the Europeans and Japanese want to address concerns over China within the context of the WTO.
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The flim flam election
Here are just a few of the nonsense claims I am hearing a few days before the American midterm elections, which will decide the January majorities in the House and Senate as well as control of state legislatures and governors:
- The migrant caravan in southern Mexico is a threat to the national security of the United States. It is not. The few thousand mostly women and children walking north are still at least a month away from the Texas border. Judging from past “caravans” of this sort, fewer than half will arrive there and present themselves as asylum-seekers, a claim that will be adjudicated on a case-by-case basis in accordance with US law. There is no evidence at all that there are “unknown Middle Easterners” and gang members in the group, as President Trump has claimed.
- George Soros and other Democrats financed the migrant caravan. There is also no evidence whatsoever for this claim. In Latin America, Soros’ Open Society Foundation addresses mainly governance and human rights, focused on Brazil, Mexico, and Colombia. I’d guess the program is far more likely to contribute to people staying in their home countries than leaving them, by addressing local grievances and improving government performance.
- The US military deployment will protect us. No, because the US military is not allowed to do so inside the US. Nor will it fire, as President Trump has suggested, on stone throwers. The 5000 or so troops he is ordering to the border (supposedly to be increased later) will do support tasks for Customs and Border Protection, which has handled similar caravans in the past without much strain. This is an unnecessary and costly deployment ordered purely for political reasons: to show the President is doing something about the threat he has hyped.
- President Trump has negotiated a great nuclear agreement with North Korea. There is no nuclear agreement with Pyongyang, only a one-page statement that is not as strong as previous North Korean commitments to denuclearization. Kim Jong-un has stiffed Secretary Pompeo, who has been trying to convert that very general commitment into a real agreement. The lovefest has produced no offspring. The North Koreans have not even produced a rudimentary inventory of their nuclear program, never mind signed up to the kind of detailed constraints that Obama imposed on Iran in the nuclear deal from which Trump has withdrawn.
- The US-Mexico-Canada Agreement (USMCA) is much better than the lousy North American Free Trade Agreement (NAFTA) and is already having an impact. The two are basically the same, with some updates that include both things the US wanted and things Mexico and Canada wanted. USMCA doesn’t go into effect until 2020. NAFTA governs trade until then.
- Trump has been great for the economy. The economy is good, largely due to the almost eight years of growth under President Obama. The employment gains and fall in unemployment since January 2017 are nothing more than continuation of the what was already happening:
But there are storm clouds on the horizon: short-term interest rates and inflation are headed up, the stock market is teetering, and the Trump tariff war is endangering US exports and increasing the price of US imports.
7. The Republicans will provide better health care, with insurance for people with pre-existing conditions. This proposition doesn’t pass the laugh test. The Administration is determined to annihilate the Affordable Care Act (Obamacare). Without Obamacare, which ensures that healthy people have incentives to sign up for health insurance, there is no way to cover pre-existing conditions except by charging market rates that will eliminate coverage for most people with them. No one should be fooled.
This is the flim flam election: a test of whether Americans can see through the lies and realize that they have been conned. I’m not predicting the outcome, but I will canvas over the weekend in Virginia’s 8th Congressional District and hope everyone I know will be trying to get the vote out.
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The expansion is ending, not soaring
The New York Times this morning wonders why the “booming” economy isn’t redounding to benefit Republican politicians. Here’s a try at an answer: the economy is not booming:
It is in fact growing at about the same rate it has grown since 2010, when the deep recession induced by the 2008 financial crisis ended. Nor is there a dramatic change in unemployment, which likewise has been tending downwards, albeit at a gradually slowing rate since 2010:
source: tradingeconomics.com
The supposed change in America’s economic performance since President Trump came to office is a myth.
The only thing soaring at the moment is the national debt:
source: tradingeconomics.com
This is due to the Trump tax cut for the rich and a massive budget deal that increased the deficit, which had shrunk dramatically during President Obama’s two terms after ballooning during the 2008 recession:
source: tradingeconomics.com
The economy is not soaring. It is reaching its limits: unemployment can’t go much lower and inflation is rising:
The Administration’s draconian limits on immigration and its taxes on American production and consumption (also known as tariffs), as well as the ballooning budget deficit, are going to increase pressure on wages and prices, which the Fed will need to counter by increasing interest rates. Foreign tariff retaliation will also hurt U.S. production.
So if American voters are not paying much attention to the economy, it’s not because they are ignoring its stellar performance. It’s because they understand that the helmsman is reckless and the current performance is unsustainable. The stock market, which recovered well under Obama and accelerated a bit in Trump’s first year, swooned earlier this year and is now recovering, but only so far to about the same level as in January:
source: tradingeconomics.com
It is only a matter of time before the market sees what the public already does: that the limits to this long expansion are not far away.
This pessimistic macroeconomic outlook comes on top of a lot of other problems: Administration-induced increases in the cost of health insurance as well as reductions in coverage, forest fires and storms causing massive unprogrammed state expenditures and Federal relief, unproductive trade negotiations, and deregulation that threatens environmental and financial harm to consumers.
Hold on tight. The roller coaster is near its peak and readying for the downhill slide. The expansion is ending, not soaring.
PS: Nouriel Roubini and Brunello Rosa offer a more professional and global argument along the same lines at Project Syndicate today.
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Trump’s Turkey shoot
After weeks of silence and inaction on the issue of Syria, President Trump has finally done something that will affect the outcome of the Syrian civil war. The influence will not be positive.
Using his favorite policy platform – Twitter – Trump announced Friday that as the Turkish Lira “slides rapidly downward against our very strong Dollar,” the United States will increase tariffs on Turkish steel and aluminum. As the New York Times reports, his 50 percent tariff on steel will “effectively [price] Turkish steel out of the American market, which [accounts] for 13 percent of Turkey’s steel exports.”
The run on the Lira, which has been brewing for the past few weeks, is now fully in gear. The self-fulfilling prophecy of foreign-exchange traders selling the Lira before it further loses value, hence depreciating the currency, is in full force. Investors are instead rushing to short the Lira, amplifying the detrimental effect on its value. President Trump boasting about how “strong” the dollar is – which, seeing how uncompetitive American exports are as a result, is not a good thing – does not help.
What does this mean for the countries around Turkey? In the past twenty years, through their “zero-problems” foreign policy and aim for broader strategic influence in the Middle East, Turkey has been increasing its exports to Arab states. Turkish trade with the Middle East and the Gulf increased by 22.1 percent in 2017 alone. As the Lira continues to plummet and Erdoğan continues to shake confidence in the independence of Turkey’s Central Bank, Turkey’s economic strife will have repercussions across the region. It might even cause a domino effect by rattling investor confidence in other economically struggling countries in the region, such as Jordan.
The issue here is what Turkey’s economic troubles, and President Trump’s decision to pile on at the worst possible time, mean for the conflict in Syria. This is particularly salient in the Northern region of Idlib. After Russia and the Syrian government “liberated” the south of Syria of opposition fighters in June and July, Idlib is the last region in Syria with an active Arab military opposition to Assad – IS pockets of influence in the south and the east notwithstanding. During regime attacks on rebel strongholds in Homs in 2014-15, Aleppo in 2016, and Eastern Ghouta and Deraa in 2018, many opposition militias struck deals with the Syrian regime for safe passage to Idlib in exchange for their surrender. The same goes for a significant number of internally displaced persons, who fled regime-held areas and headed for Idlib in the hopes of protection from Assad or the opportunity to leave Syria for Turkey.
The result is that the Idlib region is currently home to more than 2.5 million people, up from 750,000 before the beginning of the war. Idlib is also home to a number of Turkey-sponsored political and military groups, as Turkey hopes to maintain Idlib as a zone of influence for the foreseeable future; it has already spent considerable sums of money in reconstruction efforts, in the hopes that it can return Syrian refugees currently in Turkey to Idlib – despite the fact that most of them are not from Idlib. As the last remaining rebel stronghold, Idlib is also the next military target for the Syrian government
Speculation abounds that the only thing stopping Assad from launching his offensive on Idlib is Russian calls for restraint, as well as a Turkish “red line” warning the Syrian government not to invade Idlib. This is where Turkey’s economic woes become important, particularly as they can be attributed to American actions.
Trump’s tweet will only increase animosity between the US and an economically desperate Turkey. As a result, Turkey is likely to accelerate its turn towards economic cooperation with Russia, with whom they signed a gas pipeline deal in July. Economic cooperation, however, comes with strings attached, and it is likely that Russia will use its greater economic leverage to defuse the chances of a Syrian-Turkish conflict. This would result in Turkish withdrawal from Idlib, and – as Middle East Institute scholar Charles Lister details – a military and humanitarian crisis on a scale unlike anything seen in the Syrian civil war so far should Assad attack the overcrowded region of Idlib.
There is much to criticize about Turkey’s role in Syria. They have sponsored salafist and jihadist groups, encouraged ethnic conflict between the Arabs and the Kurds in the north, and impeded American efforts to liberate eastern Syria from IS by attacking the Kurds in Efrin in January. Trump’s administration, however, is not attempting to influence Turkey’s behavior in Syria in a positive manner, or even to punish Turkey for their actions in Syria. Instead, Trump is kicking Turkey while it is down, meaning that Trump’s first active contribution to the conflict in Syria is somehow worse than America’s inaction in the past few months. As usual, it will be the Syrian population that suffers the most.
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Cautious optimism
Iraq is in transition. With the territorial defeat of ISIS having been completed in late 2017, the reconstruction and political renewal of the country is in full swing. In February, the Kuwait International Conference for Reconstruction of Iraq mobilized almost $30 billion of international support. On Thursday, the Iraqi government held a major oil and gas bidding round aimed at further revitalizing the sector, particularly in areas previously controlled by Islamist insurgents. Moreover, on May 12, Iraq is scheduled to hold its next parliamentary elections, which will act as a stress test for a democracy trying to recover from the ISIS surge. Notwithstanding the positive developments in recent months, Iraq faces a long and stony road ahead in terms of rebuilding and recovery.
On April 26, the Atlantic Council organized a panel addressing the country’s multiple challenges and opportunities, including the role the energy sector can play in enabling recovery. The discussion featured Iraqi Ambassador to the US Fareed Yasseen, Hafez Ghanem, Vice President for Middle East and North Africa at the World Bank, Majid Jafar, CEO of Crescent Petroleum, Ben Van Heuvelen, Editor in Chief of the Iraq Oil Report, and Ellen Scholl, Director of the Global Energy Center at the Atlantic Council, as the moderator. Atlantic Council’s President and CEO Frederick Kempe gave an introductory statement.
The Kuwait Conference was a major success for Iraq. Yasseen stresses its huge symbolic value, both due to its location and turnout. The Kuwaiti leadership showed enormous goodwill to host the event, which has opened a new chapter in relations between the Gulf country and Iraq. Participation exceeded all expectations. Instead of an estimated 500 participants, more than 2000 people showed up. Hafez Ghanem likewise emphasizes that the massive participation, especially of private sector actors, was a huge accomplishment. This demonstrates that there is trust in Iraq.
Hope is justified. Yasseen points out that there is true willingness on the side of Iraqi decision makers to move forward, despite its problems. Iraq has a plan and commitment to implement reforms. The upcoming elections—which are much less sectarian and polarized than previous political contests—will not derail this process; rather, everyone in Iraq is committed to reforming the country. Jafar confirms the ambassador’s assessment. Considering where Iraq used to stand two years ago, we have already seen much progress. The outlook for the country is positive.
Iraq has to pursue wide-scale reforms. Ghanem argues that the country has to adopt a two-fold economic transformation. First, it has to reduce its dependency on oil, both in terms of revenues and mentality. Iraq needs to drop it rentier state attitude and move toward a more productive economy. Second, the country has to scale down its overblown public sector and become more private-sector friendly. Reconstruction will only be successful if this step is made, as most of the $80 billion needed has to come from private investors. Jafar also calls for a downsizing of the public sector. He stresses that the climate for investment has to be improved substantially. Most investors are not deterred by security concerns or political instability, but complain about administrative banalities such as problems with visas, complex administrative processes, and the complex customs system. Corruption compounds theses issues.
Ben van Heuvelen calls for caution. Despite positive signs, Iraq’s situation remains tense. The bidding round on Thursday was a success, but problems stand out. In particular, experienced global oil companies shied away from the auction. Firms that have already had real exposure to the costs of doing business in Iraq are still skeptical. Moreover, the country’s overall security situation continues to be problematic. ISIS has been defeated, but the Islamist insurgency is still ongoing. Iraqi security forces do not posses the capabilities required to establish a deterrent presence throughout all the liberated areas. Although there is no major ISIS threat to the oil sector, instability puts a drain on the budget and inhibits investment. For example, planned pipeline projects to Turkey and Jordan cannot be implemented in the current security climate.
Iraqis and international investors have regained confidence in the country. There is legitimate reason to assume that Iraq will recover from the ISIS nightmare and move towards stability. However, this process will be tedious and arduous, and setbacks will certainly occur.
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A game of chicken
President Trump thinks a trade war will be easy to win.
When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!
Like so much of what he says, that is false.
Let’s consider the warring parties. The US still has the larger economy, but exports much less to China than it imports from China. Trump has tweeted we therefore have less to lose. But that nonsense is based on the notion that imports represent losses and exports represent gains. That just isn’t true: for everything sold by China in the US, there is a willing buyer. Ditto in China: for everything the US sells there, there is also a willing buyer. US imports of Chinese goods and services, and Chinese imports of US goods and services, are a net plus for consumers in both countries, no matter what their impact on producers.
So the question is not who has less to lose, but rather the more canonical one in negotiation theory: who has a better alternative to a negotiated agreement (BATNA)? It is true that China will run out of US products it can levy tariffs on faster than the US will run out of products it can levy tariffs on, but that really doesn’t matter. China is a highly centralized polity that has lots of levers it can pull to hurt US companies doing business in China, which by the way are also main importers of US products. The US government will have a harder time doing this, because it lacks the same degree of control over American media, business associations, consumer groups, and politicians. Trump is already getting a lot of backlash against the tariffs from the agricultural sector, which the Chinese have targeted with their retaliation.
Centralized control is however also a vulnerability for China. At the national level, there are no “safety valves” to release social and political pressures that build up against the tariffs. Trump may lose big in the November election, in part because he has precipitated a big trade war, but he will remain in power (unless impeached and removed from office for other reasons). Xi Jinping has no election he can lose but still hold on to power, free media that can air grievances, or civil society to pressure his regime. Discontent could go directly to the street, especially if the trade war precipitates China’s first post-Communist recession. An autocracy has one main instrument–the security forces–to use against its people in the street. Tienanmen hinted how risky and deadly its use can be.
So who is more resilient? Is it the liberal democracy with limited presidential control that allows for dissent, protest, and political opposition? Or is it the autocracy that controls the levers of power but leaves no room for dissent, protest, an political opposition? I would prefer not to find out, but I’ll enjoy that luxury only if Xi or Trump backs down.
My bet is on Trump to flinch first. He is all bully and bluster, not to mention the damage that the tariffs will do to China’s willingness to be helpful with North Korea and to the American economy. Xi has consolidated power and can’t flinch without losing face in a way that would put his hold on power at risk. His lack of resiliency means he has reason to be more inflexible, not less. In the short run, he has the advantage in a game of chicken. He’ll do his best, by targeting the tariffs against those states that voted for Trump, to make sure we never get to the long term. The US stock and labor markets are already signaling distress at the consequences, and the Fed will have to consider raising rates to counter the inflationary impact of the tariffs as well as the recent tax cut and budget deal. Trump will need to have more staying power than he has demonstrated on many issues so far to win this game of chicken.
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