TRADING PLACES

Free trade is not based on utility, but on justice. ~ Edmund Burke

This weekend China’s President Xi Jinping is meeting with our president at his Mar-a-Lago resort. A key discussion topic will be trade between the 2 nations. This face-to-face meeting represents a substantial test for  Mr. Trump for several reasons. First, the US and China are the world’s 2 largest economies. Second, each man has very different perspectives on how to conduct international trade with each other, let alone the broader features of their economic and political firmaments and mutual interests. These challenges lead The Economist to cleverly christen this inaugural meeting Spar-a-Lago.

Our golfer-in-chief unfortunately will not be carting with Mr. Xi along his fairways, clubs at the ready. Officially, the Chinese government takes a sub-par view of golf, considering it a game for rich capitalists. Perhaps the 2 men can relax and create personal connection during a game of bocce ball instead?

They have plenty of trade issues to discuss. In 2016 the US exported $169.8 billion (B) of goods and services to China. We imported almost 3 times as much; $497.6B of imported goods and services from China. The US trade deficit with China isn’t recent. It has been negative for 31 years ever since Reagan was president, as shown in the figure below.

US-China Balance of Trade, 1985-2016 (10⁹ $)

Source: Economist.com, DOC/BEA

Overall, the current US balance of trade (BoT; exports minus imports) deficit with China is $309.8B. Mitigating the US-China trade deficit would be useful for us, depending on how it’s done. The president and Congress have power to change policies that can influence some but not all aspects of our BoT. During the past 3 years the appreciation of the US dollar relative to other key currencies like the Yuan and Euro – that neither the president nor Congress can effect – has not helped US exports.

Beyond the US and the Middle Kingdom, international trade anxieties are affecting other trading nations. The largest concern is that trade growth has slowed; the high-output growth engine of globalization-related trade has braked. As we already know, the political winds are shifting, causing international trade’s sails to luff in the doldrums of no supportive breezes. The World Trade Organization (WTO) expects that trade will remain “sluggish” and grew just 2.8% in 2016, like it did in 2015. Over the last decade, world trade growth has lagged world GDP growth. The world’s real GDP grew 3.0% in 2016. Average annual world real GDP growth between 2000 and 2016 was 3.0%; between 2000 and 2010 it was higher, 3.9%.

The post-WWII orthodoxy of increasing trade to improve nations’ growth and development is crumbling. Talk of tariffs and other protectionist policies is cresting these days, as individual nation’s economic growth has faltered and domestic-centered populism rises.

In addition to the general reduction in GDP growth mentioned above,  there are more specific reasons for this decrease in trade. First, growth of the BRICS (Brazil, Russia, India, China and South Africa) has slowed. These nations are the world’s largest emerging markets. Their collective economic growth has slowed from 9% in 2010 to about 4% in 2015. By 2015, 3 of the BRICS (China, Russia, and South Africa) had slower growth for at least 3 consecutive years and Brazil remains in a significant recession. Brazil’s GDP dropped 3.2% in 2016, it contracted 3.8% in 2015. Long-term growth expectations in these 5 key economies have been repeatedly downgraded since 2010. This lack of growth affects both our exports and imports. Second, imports into developing nations stagnated, growing only 0.2% in 2016, according to the WTO.

Mr. Trump has spewed several ill-considered actions for dealing with the threatening, hostile world he sees beyond our boundaries, including abolishing “unfair” trade agreements like the North American Free Trade Agreement (NAFTA), placing punitive tariffs on imports and restricting our borders.  

The pre-election Trumpian “action plan” included withdrawing from NAFTA that the candidate called “The worst trade deal maybe ever signed anywhere, but certainly ever signed in this country.” After becoming president, his extreme language has become less bellicose. Now he’s apparently willing to renegotiate, but hasn’t specified what that means; imagine our surprise. Time may tell.

In numerous public pronouncements the president has said he’s considering large tariffs on imports from countries like China and Mexico. Sometimes he’s mentioned a 45% tariff, other times a 10% tariff. Like all too many of his impulse-driven communications, they’re literally spread all over the map without substance. These specious ideas characterize his disjointed, no-dots-connected approach to creating policies that will hardly enhance our nation’s greatness. They’ll probably have the opposite effect. He seems oblivious to the likelihood that if he imposes tariffs on Chinese, Mexican and other nation’s imports these countries will retaliate with their own tariffs on our exports. In his fantasy world, US tariffs will only bring back low- and medium-skilled manufacturing employment; not higher prices on imported consumer goods and services, not curtailed exports from the ensuing trade war.

American companies that have used China and Mexico as a production base would struggle to revamp their supply chains. If US firms brought production back home to escape the tariffs, prices would increase dramatically and take considerable time to set up. As a consequence of much higher tariffs, Goldman Sachs estimates that the cost of producing clothing domestically would increase by over 40% and smartphones by over 35%. None of these consequences seems to concern Mr. Trump.

His muddled, myopic mind doesn’t see any connection between exports and imports. They are completely separate from each other, not mutually bound by trade agreements and economic reality.

The president seems equally unaware that the ultimate objective of bilateral and multilateral trade agreements is to benefit every signatory and that the negotiations to reach agreement will always involve trade-offs that need to be recognized and made. Trade agreements are founded on the world being a positive-sum game, where each party can gain. Should trade agreements be reviewed and modified over time? Surely, but Mr. Trump’s world view is at best zero-sum.

That zero-sum concept is not supported by historical facts. For example, under NAFTA US farmers – who most likely voted for Trump in large numbers – have exported significant amounts of corn and other ag commodities. In 2016 these farmers sold 13.8 million metric tons of corn to Mexico. Corn exports to Mexico have increased 5.5% every year since NAFTA was implemented in 1994. Mexico has said if the US walks away from NAFTA or imposes tariffs on Mexican goods, it will buy corn from other exporters including Argentina, not the US. How are you going to explain that in Dubuque or Omaha Mr. President?

Then there’s Trump’s Wall. Building the Wall along the US-Mexican border was a prominent specter in Trump’s candidacy. When mentioned in his campaign speeches, it wasn’t a question of if, but how tall and how long it would be – and, of course, that Mexico would pay for it. The Wall was only one piece of Mr. Trump’s actions to close our borders.

Other pieces include his disastrous 2-part orders to stop people from 8 (then 7) principally Muslim nations as well as other visa-holders from entering the US. To date, federal courts have fortunately taught Mr. Trump that his actions are subject to court interpretation; despite his protests (which themselves were cause for public astonishment and distain).

But back to The Wall. The total length of the US-Mexico border is 1,989 miles. It’s been difficult for anyone outside the White House to get specific information about Mr. Trump’s plan for the Wall. Until Jan. 20, Mr. Trump's border wall existed only as campaign rhetoric not supported by a real plan for building or paying for it. Its length and height depended on to whom and where he was talking. Now that he’s president, a plan appears to be arising. In mid-March the Department of Homeland Security (DHS) issued a request that stipulated the wall must be 30ft high, look good from the US side and be hard to climb or cut through. It must take at least 1 hour to cut through. The request apparently didn’t state how long the wall should be. Irony abounds beyond walls because some of the firms that may submit bids are minority-owned, Hispanic companies.  

Others have speculated that the Wall could be up to one-half of the border’s length, with natural barriers such as the Rio Grande River taking up the rest of the length. Guestimated costs range from $12 to $21 billion. The President’s draft budget, which was sent to Congress last month and generated scathing reviews, indicates only about $2.9 billion is now earmarked for the Wall — most of which will come from sizeable cuts to key agencies within the DHS, like the Coast Guard. Oh, will the bill eventually be sent to Mexican President Enrique Peña Nieto, as Mr. Trump proclaimed dozens of times? Nope, he was just kidding in trolling for votes. US taxpayers appear to be on the hook, which is no laughing matter at all.

The president’s international trade policies are quixotic at best; they are misdirected and inconsistent. It’s hard to see such policies as the product of reasoned, competent, coordinated analysis. This goes beyond just trade. Such concern was reflected in a recent column by David Brooks where he stated, “Trump’s greatest achievements are in the field of ignorance. … It’s not so much that he isn’t well informed; it’s that he is prodigiously learned in the sort of knowledge that doesn’t accord with the facts of our current dimension.” Trading places with Mr. Trump would involve more than relocating to 1600 Pennsylvania Avenue. Fasten your seat belts and resist.

DEVELOPMENTAL BLUES

Development is an endurance exercise with incremental improvements. ~ Sri M. Indrawati  

The self-inflicted tumult created by the 45th president has whelmed our policy-making and politics during the 74 days since he was inaugurated is completely evident to all but Micro-Man himself. His and his acolytes’ myopia limits their vituperative policy considerations only to domestic affairs and not the 195 nations beyond the US. After all, it’s “make [only] America great again” isn’t it? An exception to this domestic bias includes the impending social and economic disaster connected with the Mexican border wall.

His limited view of our world is reflected by his proposed 32% reduction in funding for the State Department and other development programs. The media’s reaction to the president’s punishing budget reductions didn’t adequately acknowledge the fiscal fact that it is not the president but Congress that ultimately determines appropriations and expenditures for the federal government. The president proposes; the Congress acts. Given how badly he mishandled his push for the contaminated replacement to Obamacare, I have no doubt his proposed budget will drastically change. As one prominent Republican Senator concluded about the president’s proposed budget reductions, “They’re dead on arrival.” We’ll see about his conclusion during the coming months of budget negotiations.

The president’s overly inward focus has given me a case of the developmental blues. The rest of the world continues to exist, remains vital to our interests, and should not be summarily dismissed as it has been by Micro-Man.

Like other interesting economics topics, opinions about the efficiency and effectiveness of economic development vary considerably. Economic development is multi-dimensional and refers to improving the welfare and status of a nation’s people, including their health, well-being, education and livelihood.

Some analysts despair about the state of development of many countries, especially because so much economic, political and personal effort has been expended in attempting to improve the lives of people in "lesser-developed countries" (LDCs). Other analysts are more optimistic, saying that some developing nations have realized important gains in crucial facets of their social and human advancement.

At the risk of considerably simplifying alternative strategies for economic development, a more liberal prescriptive approach can be characterized as “interventionist,” another more conservative approach focusses on “market-led” policies. Liberal discussions about how to aid LDCs often express a preference for collectively-focused policy approaches that enhance public sector intervention in markets in order to encourage growth and development. More conservative approaches emphasize strengthening market forces in a nation’s economy, including adopting low-tax rate policies, trade liberalization, deregulation and privatization of state enterprises.

Interventionist policy adherents frequently mention that free-market strategies can often harm the poor and do nothing to mitigate the potentially damaging influences of having multi-national (or transnational) corporations assume too large a role in development, via market-led strategies perhaps based on the disdained Washington Consensus.

Unfortunately, neither centrally-dispatched, interventionist policies, nor market-based strategies are wearing developmental white hats. That's why you could also color me developmentally blue from a prescriptive policy perspective. Left unsaid is the unsettling notion that despite more than 65 years of effort, economists and policy-makers still sadly lack a definitive idea about how to answer the central question, "What works in development?" These herculean efforts include the formation of international organizations devoted to promoting and facilitating economic development and growth like the World Bank (WB), the International Monetary Fund (IMF), and the United Nations Development Programme (UNDP) and spending billions and billions of dollars in this quest.

In 2000 the UN created 8 Millennial Development Goals (MDGs) – such as decreasing extreme poverty, reducing child mortality and achieving universal primary education – to be achieved by 2015 via 21 targets. The MDGs guided the UNDP and many nations’ development efforts. Not every MDG objective was achieved, but many were fruitful. The efforts of the Chinese and Indian governments to reduce extreme poverty (people living on less than $1.25/day) in their nations were singularly successful. 

After 2015 the UN moved on and now has another, much more numerous and more ambitious series of goals, entitled Sustainable Development Goals (SDGs), which are built on the MDG foundation.

The 8 MDGs have been superseded by 17 much more expansive SDGs. The SDGs are described here.

It should be no surprise that the UN more than doubled its list of development goals – that’s the nature of setting public objectives over time and the nature of bureaucracy. Regrettably, more than doubling the number of goals will involve some degree of diminishing returns, given that the UN’s and WB’s development budgets haven’t doubled, nor have the sources of aid grown to support the SDGs’ achievement beyond these international agencies. Talk about scarce resources being spread ever more thinly.

Given their larger number, it’s hard to imagine the world’s efforts –especially LDCs and donor nations –can possibly be focused and intense enough to succeed in achieving each and every SDG. These SDGs have a total of 169 targets, 8 times as many as the MDGs. Take for example, the first SDG, “End poverty in all its forms everywhere” [Emphasis added.] that has 6 individual targets. The corresponding MDG was, “Eradicate extreme poverty and hunger.” The new poverty goal is essentially unconditional; to eradicate every form of poverty everywhere on Earth by 2030. It’s a worthy, but realistically unattainable objective.

Unfortunately, and despite our huge collective efforts to date, the answer to the fundamental question “What works for development” largely remains; we don't really know what works. In this sense, the development glass is half-empty.

David Brooks summarized development economics' lack of insight in a New York Times column dealing with the development enigma surrounding Haiti, "The Underlying Tragedy." We don't really know how developing nations can create sustainable development – and be aided by already-developed nations in this mission to enhance the lives of all their citizens. This is true for both macro- and micro-aid strategies, as well as indigenous and external plans. We don't yet unmistakably know how to target, structure and spend financial aid so that it will reduce poverty and create longer-term economic and social improvement for all citizens.

Needless to say, this is a regrettable situation because it implies we don't really understand with any specificity how well-meaning decision-makers can provide broadly-applicable ways for needful nations to augment their development status. Brooks' article mentions that perhaps a nation's culture is a more telling indicator for why some countries are more successful than others in their quest for development. Yet changing cultural norms in the name of economic development is a much more disputed prospect, and fraught with far more unease and uncertainty than merely improving ineffective or inefficient institutions, infrastructure and even markets (that in and of themselves embody huge challenges). Unsurprisingly, few publicly-funded projects directly mention changing cultural norms as a mechanism for achieving economic development goals, even though such indigenous norms may not outwardly be consistent with enhanced development. So, if the development glass is indeed half-empty, how should we proceed; what's the alternative?

We, the already-developed world of G-7 or G-20 nations, must continue promoting (and funding) effective economic development, but unambiguously consistent solutions for development still await discovery. Hopefully, we will gain more insight about what works for economic development as a new generation of clever economists as well as political and social scientists tackles these abundant challenges.

A more positive rejoinder to the above "half-empty" argument can be made using a different perspective. This alternative is discussed in David Leonhardt's column in the New York Times, "For the Poor, A Message of Hope." Leonhardt talks some about Liberia and its significant economic development struggles. Liberia's per capita income has decreased by an astonishing 80% to as little as $210 [that’s $0.58/day] since 1980, one of the world's very lowest. However, development economist Charles Kenny argues that contrary to the popularly-held general belief, nations in Africa like Liberia have actually attained some success and improvement in recent decades, even if their economic growth hasn't distinguished itself. Kenny argues in his book, Getting Better, "the biggest success of development has not been making people richer but, rather, has been making the things that really matter – things like health and education – cheaper and more widely available." Furthermore, the UN's 1st Millennium Development Goal (to halve the portion of world population living in dire poverty by 2015) was impressively achieved 5 years early largely through efforts in India and China. It can be done.

So instead of focusing on the dismal state of Liberia's (and other nations') per capita income, we should change our perspective and acknowledge that other, non-economic factors have progressed from development aid. For example, average life expectancy has improved significantly in many developing nations. In 1990 Ethiopia’s life expectancy at birth was 47.9 years; by 2008 it increased substantially to 64 years. Also, Ethiopia’s infant mortality, although still elevated, has been reduced by 50% to 67 deaths/1000 births in 2009. Ethiopia increased its primary school enrollment ratio from 21.7 in 1990 to 89.3 in 2007. These improvements are significant and impressive.

In concentrating on economic numbers (like per-capita income) we've ended up overlooking crucial gains by developing countries' human development, particularly in health and education. Sure, these gains are all relative to a very low historic base, but they represent noteworthy, meaningful improvements in many people's lives. The gains in life expectancy since 1980 have been highest in the Middle East and North Africa (12.2 years), South Asia had the second largest gain (9.6 years) and Latin America is third (8.1 years). Still, 12 nations have life expectancy less than 55 years; and Sub-Saharan Africa's gain since 1980 is a disappointing 4.0 yrs. [As a point of reference, Leonhardt mentions that estimated life expectancy during the Stone Age (approximately 200,000 years ago) was 34 years.[1]] These advances are also in spite of the modern-day scourges in Africa and other locales of HIV/AIDS and Ebola that many people, including Mr. Kenny, believe are akin to the 14th century Plague that killed 30-60% of Europe's population.

Thus, we should look more closely at which development programs actually do work, rather than asking whether any work or not. Fortunately, some do work. It appears that development of the "basics" – health, education, communications and transport (HECT) – have provided a growing number of counties with demonstrable improvement. Indeed, programs that concentrate on HECT broadening and deepening can also eventually even impart economic progress; since healthier, more educated, more connected people will be more productive and economically vital.

Needless to say, there is still too much room for improvement in how development can be successfully created to be complacent, but we should remember that the development glass is indeed half-full. We should focus on human, HECT-based development through our efforts, rather than more narrowly-focused economic development. And most important for myopic, disjointed folks like Mr. Trump, our history is replete with evidence that when we help improve the economic status and welfare of other nations’ peoples, American citizens – including corn farmers in Iowa – benefit as well.

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[1] It's a mystery to me how archaeologists can determine Stone Age life expectancy, but then they probably wonder how we economists calculate cross-price elasticity of demand and purchasing power parity.