My column in last Tuesday’s Washington Times about President Obama’s new declared goal of doubling U.S. exports in five years presented plenty of reasons for skepticism that the target could be reached, and that it would become the boon for job creation the White House anticipates.  Here’s the link:  http://washingtontimes.com/news/2010/feb/02/tonelson-doubling-exports-or-double-talk/

I even noted that the President failed to make the most elementary distinctions – like whether he meant gross exports or net exports.  In other words, did he realize that doubling exports without limiting imports enough to shrink the trade deficit is the only way to ensure that trade expansion creates any new employment at home at all, much less the two million jobs he has in mind?

It’s hard to say.  At a meeting last week, one of his top advisors tried to laugh off the issue, claiming that of course Obama meant net exports.  But no one should take this for granted. After all, his immediate  predecessors stubbornly refused to acknowledge the job-killing effects of net imports, and Obama and his aides have often used their sound-bites nearly verbatim to justify clinging to the trade policy status quo.

Unfortunately, the editor’s axe fell a little more heavily on the column than I expected, and some important data and analysis were left on the newsroom floor.  

They further strengthen the case for skepticism.  For example, net exports several times doubled in five years during the super-strong dollar years of the 1980s, as well as during the 1960s and early 1970s, as the published article noted.  After 1990, however, the doubling of net exports stopped cold.  Indeed, since then, and down to the present, net exports have fallen by more than 80 percent – i.e., the U.S. trade deficit has more than quintupled.

The picture looks even gloomier when inflation-adjusted trade flows are examined – and inflation-adjusted figures are key because these are the measures of the economy’s size and growth (or contraction) that really count. The President didn’t mention this distinction in his State of the Union, either.

But in past decades, when every inflation-adjusted measure of U.S. trade was also a much smaller share of economic activity than today, real net exports never doubled over any five-year span. The quickest doublings occurred during the 1980s, when several times doubling was achieved in eight years. By the early 1990s, however, these rates had risen to 13 and 14 years, and all doubling completely stopped in 1994.

Until 2009, that is. From 2005 until last year, the real trade deficit plunged from $722.7 to $353.8 billion – more than halving. The reason, however, shouldn’t cheer anyone. The U.S. economy officially plunged into the Great Recession at the end of 2007, domestic consumption nosedived, and real imports in particular dropped nearly 17 percent from their 2007 high. (Real exports decreased five percent as well.) Worse, the nation’s previous best net export-boosting performances correlate strongly with recessions, too.

Finally, Obama’s export-doubling rhetoric ignores the biggest realities about our global economy – not only since the economic and financial crisis broke out, but in recent decades.  Principally, America’s trade competitors were loathe to import from the United States robustly – especially on a net basis – even when times were good around the world.  Now, with “uncertain” being the kindest way to describe the world’s prospects, these countries are going to become more enthusiastic about U.S. products?  

Moreover, the dollar has been in especially strong rally mode against the Euro in recent weeks, as global investors have started worrying about the soaring debts of the weaker Eurozone economies.  Leaving aside the possible ripple effect on global growth of Europe’s troubles, and the short-term future of U.S, exports looks pretty unpromising.  After all, this financial cloud will hang over Greece, Portugal, Spain, and the stronger European Union partners who would need to bail them out for the foreseeable future.  And Europe has been one of the most foreign markets for U.S. goods – relatively speaking, of course.

All of which means that Obama’s overall recovery strategy is going nowhere – in terms of its ability to restore genuine economic and financial health to the U.S. economy – unless he acknowledges the trade-related reality staring him in the face since his election:  The only way to generate new jobs and  growth without further supercharging the budget deficit and America’s debts is to start substituting domestically produced goods for America’s imports.  As has long been the case, the Biggest Emerging Market is the one right under his nose.


 

After nearly falling out of my chair, I couldn’t help but chuckle when I read Robert Aliber’s op-ed in the Dec. 8 Financial Times calling for tariffs on U.S. imports from China to counter Beijing’s currency manipulation.  It wasn’t only because Aliber has been a mainstay of the “Chicago school” – the free-market enthusiasts who have long clustered on the University of Chicago's economics and business  faculties.  It was also because he was singing a much different tune about a decade ago, when I had dinner with him in Washington, D.C.  

Aliber had taught and mentored a friend of mine at the B-school, and we all got together one night on one of his periodic trips to the nation’s capital.  It was a very pleasant evening, but he did spend a great deal of time patiently (but not condescendingly or dismissively) explaining to me why I shouldn’t worry so much about America’s massive trade deficits and the future of a manufacturing base key to our ongoing prosperity.  

Market forces would ensure that all would turn out for the best, the American economy was much stronger and more resilient than I realized, and government interference in the situation could only be highly counterproductive.  A specialist on exchange rates and international financial flows, he was especially sanguine about the future of the dollar as a genuine global currency.

What a surprise, then, to read in the op-ed passages that describe today’s international trade imbalances as “far too large” and the America’s deficit with China as “unsustainable.”  How amazing to see him worried that “the low value for the currency facilitates China's move up the technological ladder, since imports of high-technology products from the US, Japan, Germany and other industrial countries are stalled while domestic production of similar goods is increased.”

How stunning to read his complaint that “Americans have been patient - too patient - in accepting the loss of several million US manufacturing jobs because of China's determined pursuit of mindless mercantilist policies” – not to mention his belief that “China's currency protectionism has more of an impact on American manufacturing employment than US fiscal policy.”

How completely mind-blowing to encounter his recommendation that Washington not only tariff the estimated Chinese content of Chinese goods sent to the United States, but raise the tariff monthly until the bilateral trade imbalance comes way down.  

How thankful I was to hear his advice to the Obama administration that imposing this tariff “would be much more significant as a jobs-creation measure than anything else it could adopt.”  

And how gratifying to see this academic star make the longstanding U.S. Business and Industry Council argument that, for all the talk about the clout created by China’s role as “America’s banker,” Beijing would quickly realize that its desperate need to maintain employment and political stability make China “much more dependent on access to the US market than Americans are dependent on Chinese goods.”

Not that Aliber’s article was perfect.  In my view, he underestimates the Chinese content of its manufactured goods; therefore, a higher tariff is in order.  But the piece could indicate that even pillars of the country’s economic orthodoxy are starting to recognize the dangers of clinging to current U.S. trade and globalization policies.  

I think I’ll drop him a line thanking him for his insights – and try like heck to avoid reminding him “I told you so.”  More important, if someone from the free market Right like Aliber can read the writing on the wall about disastrous U.S. free trade policies, what excuse do President Obama's and Congress' Democratic leadership have?  
 

The New York Times’ editorial on the current “Jobless Recovery” last Sunday was useful – but not mainly for summarizing in detail the nation’s still-grim employment picture.  Rather, it was mainly useful for (a) unwittingly identifying the main flaw in the favored recovery strategies of the White House, Congressional Democrats, and so much of the punditocracy, and (b) once again spotlighting the big globalization-related blind spot in the conventional wisdom surrounding the economic crisis.    

Here’s the key passage in the editorial – “At no time in post-World War II America has it been more difficult to find a job, to plan for the future, or — for tens of millions of Americans — to merely get by.”  True enough in toto.  And it seems reasonable for the Times to conclude, as have so many others, that the best remedy for now is “more stimulus spending and government programs.”

But here’s the rub.  This “public option” will undoubtedly help many Americans “find a job” and “merely get by.”  But “plan for the future”?  Honestly.  Promoting such planning is exactly where government-created jobs will be least effective.  And the reasons would be obvious had the crisis not so completely discombobulated so many otherwise intelligent (though hidebound) observers of the economy.  

Yes, especially in this day and age, even before the recession, private sector jobs have been chancy enough.  How many times have we heard that lifetime employment is dead in this economically dynamic era, and that Americans should be prepared to change jobs and even careers frequently during their working lives?  And obviously, in normal times, the public sector offers a lot more job security.

But government-created stimulus jobs?  Private employment is a model of stability in comparison.  For such government-created jobs are the constructs of politicians.  And even those who don’t write off our elected leaders as hopelessly capricious have to concede that these kinds of government jobs are emergency jobs, and unlikely to survive normality’s return.

Why does this matter?  Because the Times is right to value jobs that allow Americans to plan with some confidence.  Without them, truly durable levels of borrowing and spending will remain distant dreams, as will durable levels of production and real wealth creation.  

But assuming that government-created stimulus jobs can fill the predictability bill shows just how incoherent much prominent economic thinking has become.  Such thinking undercuts a main justification for free market systems in the first place -- a goal that even few to the left of center want to achieve.  

Ironically, there is a highly reliable way to create jobs during this crisis without more deficit-widening stimulus spending.  It involves transforming our trade policies to foster the replacement of imported goods with domestically produced goods – made of course by American workers.  But the dogmatic trade extremists at the Times Editorial Board clearly won’t go there.  Neither will the equally dogmatic trade extremists of the Obama administration or occupying the Democrats’ leadership posts in Congress.  

Luckily for such Democrats and liberals, most Republicans and conservatives are equally blinkered.  This bipartisan brain-lock looks like the most bearish economic indicator of all.  
    




 

...Not that I’d ever think of saying “I told you so,” but President Obama’s decision last weekend to declare the swine flu epidemic a national emergency raises some important questions for uber-pundit Fareed Zakaria.  As I pointed out in a recent posting, (http://americaneconomicalert.org/blogger_home.asp?Prod_ID=37#3318), last spring, Zakaria insisted that the disease didn’t merit “sky isn’t falling” treatment from the international health authorities and the media, and slimed many of those who disagreed as troglodytes who didn’t realize how safe and secure globalization and international cooperation had made the world.  

But now that the sky is at least raining a few fragments, we can ask why on earth Zakaria assumed at that early point that this new malady would remain relatively benign?  Also, why did he assume that Washington and other governments and institutions would be able to keep a much more dangerous pathogen under control?  Finally, why are we still waiting for a statrement to the effect, “I blew it,” from Zakaria?

...Evidently General Motors CEO Fritz Henderson is just fine with taking tens of billions of dollars of taxpayer bailout money and then offshoring more and more of his company’s production and procurement.  And so far Washington is just fine with these decisions.  Earlier this year, GM decided to choose South Korean firm LG Chem to supply the batteries for its recently announced Chevrolet Volt electric car.  Last week, Bloomberg News reported, Henderson traveled to South Korea to announce, “We’ll continue expanding our supply base here, as Korea has lots of strong, efficient and competitive suppliers.”  Of course, American taxpayers have for decades spent billions and billions of dollars stimulating foreign economies.  Before the economic crisis, however, their contributions were clearly labeled “foreign aid.”

...What is it about sub-Saharan Africa that turns so many supporters and critics alike of current globalization policies into looney tunes?  As reported in an October 5 Forbes feature, the latest is card-carrying globalization cheerleader Glenn Hubbard, the Columbia University economist and chairman of George W. Bush’s White House Council of Economic Advisors.  

Hubbard and a colleague have apparently become determined to “pull Africa out of its desperate poverty.”  Their solution?  A modern version of the Marshall Plan, complete with debt relief for the unilateral opening of markets in the United States and Africa's other trade partners.  One compelling reason to support their idea?  In the words of Forbes reporter Michael Maiello, “[W]here economic reconstruction has utterly failed, terrorists can find root, as Somalia and parts of sub-Saharan Africa demonstrate.”  

There’s this one big hitch, though.  Since sub-Saharan Africa has none of the features that enabled the original Marshall Plan to succeed in post-World War II Western Europe, the Hubbard Plan will need “up to 40 years” to work.  In other words, until these proposals manage to turn sub-Saharan Africa into the kind of economic success it has never been,  we’ll have to hope we can figure out how to safeguard U.S. national security in other ways.
 

There is so much wrong with recent statements on China’s currency manipulation by senior Asian Development Bank official Yolanda Fernandez-Lommen that it’s hard to know where to begin.

“We should not push hard for China to appreciate the currency too fast,” she told Bloomberg News reporter Kevin Hamlin October 16.  “We don’t want to see China, the third largest economy in the world, unstable.”  Fernandez-Lomann, the Bank’s chief China economist, continued, “We were so worried when exports started to decline in China and sone of the export-related factories in coastal areas started to close down and unemployment and migrant workers became an issue.  And we were so concerned all over the world that China might collapse because exports were fading.”

It’s admirable to sympathize with laid-off workers anywhere, but Fernandez-Lomann’s compassion is awfully selective – and morally suspect.  For many of those laid-off Chinese workers got their jobs in the first place because of their government’s protectionist exchange-rate policies.  These give Chinese-produced goods and services major cost advantages in global markets (including China’s) for reasons having nothing to do with free markets and free trade.

And what of the victims of this exchange-rate protectionism outside China?  They include not only American workers and domestic companies, but their counterparts around the world – including in Asia, whose well-being is also supposed to be the ADB’s responsibility.  

After all, as a piece in yesterday’s Wall Street Journal reminded us, China’s yuan is linked to a dollar that recently has been falling steadily against major currencies in Asia as well as other regions.  The other Asians are hardly above manipulation themselves (not to mention every other predatory trade practice conceivable).  But when the dollar weakens against their currencies, so does the yuan – improving China’s competitiveness within the region in the process.

Even more important, Chinese currency manipulation may be staving off economic collapse and political chaos in China for now.  All too quickly, however, that’s likely to become a self-defeating policy.  The reason?  China’s currency manipulation and its resulting lopsided trade and capital flows continue to undermine global economic stability and boost the odds of a lengthy worldwide depression that would dwarf the current slump.  

Among the prime victims would be China itself and the rest of developing Asia, which clearly lack enough domestic demand to fuel adequate levels of growth.  That’s why exports dominate their economic strategies to begin with.

Finally, as the accompanying Bloomberg article revealed, there’s no bigger red herring than Fernandez-Lommen’s concern that China might appreciate “too fast.”  The yuan did rise by 21 percent versus the dollar from the time China first broke the peg in 2005 through July, 2008.  But China’s global surpluses and foreign currency reserves rose much faster, meaning that the degree of yuan undervaluation actually increased in terms of economic fundamentals.  And since mid-2008, the currency has gone nowhere, even though the reserves in particular  continue to swell.  

Therefore, the problem is not that the rest of the world might pressure China to act to quickly.  It’s just the opposite.  And as long as the United States, other major trading powers, and international institutions keep treating China with kid gloves, prospects for real worldwide economic recovery and a soundly based global economy will remain all too bleak.  
 

...That was some shining example of moral equivalence U.S. Trade Representative Ron Kirk gave us this past Wed.  I'm talking about his statement that the high-level U.S.-China trade talks next week would create a opportunity "to identify steps that each side can take to ensure that [trade] is fair, sustainable, and mutually beneficial going forward."  (http://www.ustr.gov/about-us/press-office/press-releases/2009/october/commerce-secretary-gary-locke-and-ustr-ron-kirk-co)  

Does Kirk really believe that the Chinese want trade results that are “fair”?  Can he point to a single action Beijing has taken to ensure that trade is “mutually beneficial”?  And can a government that has worked overtime to amass record surpluses that are endangering the world economy possibly have any clue about sustainability?  

I can almost hear the Chinese negotiators licking their chops.

...Still skeptical that U.S. trade and globalization policies are ruining the economy?  Then consider this report last week from Bloomberg News:  As of October 15, Wal-Mart was the only company in the Standard & Poor’s 500 stock index to have risen since the December, 2007 start of the recession.  In other words, the international economic policies pushed so hard by Wal-Mart and the rest of the outsourcing lobby evidently have forced so many Americans’ incomes so far down that now they can only afford to shop at Wal-Mart.

...Meanwhile, the globalization cheerleaders just grow ever more desperate in their insistence that the economic crisis was caused by everything but globalization policy.  In his latest New York Times column, Thomas L. Friedman opened up new frontiers of fatuousness as he sought to describe the new knowledge and skills that represent American workers’ only real chance of success in the Economy of Tomorrow.  

Quoting noted Harvard economist Lawrence Katz, Friedman sang the praises of “those with the high-end analytical and problem-solving skills who can compete on the world market or game the financial system or deal with new government regulations.”  Even the less well educated can prosper, Katz added, if they “have some interpersonal skills – the salesperson who can deal with customers face to face or the home contractor who can help you redesign your kitchen without going to an architect....”

So that’s the Friedman-Katz recipe for future U.S. economic success:  Turn America into a nation of Wall St. whizzes and lobbyists.  And for whoever doesn’t qualify, there's great money to be made in the housing sector.  Sounds more like the Economy of the Recent Past to me.

...Speaking of dubious new economic strategies, I couldn’t help but notice a common feature – and a common omission – in all those articles about the post-industrial re-birth of Pittsburgh that appeared in the run-up to the G-20 conference in the one-time Steel City.  

As reporters gushed, at the heart of Pittsburgh’s comeback has been the University of Pittsburgh Medical Center.  And they certainly cited some impressive statistics.  For example, UPMC employs 50,000 (nearly a sixth of the city’s population!), spends $8 billion annually, and operates no fewer than 20 hospitals.

This story of a “meds and eds”-led renaissance in an old manufacturing city not-so-coincidentally  resembles many of President Obama’s hopes for the U.S. economy as a whole.  As he ringingly declared, “Pittsburgh stands out as a bold example of how to create new jobs and industries while transitioning to a 21st century economy.”  But these inspiring accounts uniformly left out one inconvenient detail:   The University of Pittsburgh Medical Center is a nonprofit.  That may be a fine business model for the “health care and higher education [sectors that] have replaced steel as the city’s economic engine,” as BusinessWeek put it.  But it’s a heck of a foundation for a capitalist national economy.
 

The more I read about the continuing spread of swine flu, and about all the unexpected characteristics that doctors and victims keep learning about, the more I think of the arrogant and self-serving take on the virus expressed by prominent globalization cheerleader Fareed Zakaria.  

When H1N1 first appeared, this past spring, numerous observers pointed out that America’s vulnerability to this Mexican-born disease was the latest big downside of NAFTA, and argued that maybe commerce between the United States and its southern neighbor needed to be curbed until more was known about the threat.  

Apparently, it was more than Zakaria could abide.  Once the earliest fears of this completely new flu strain failed to materialize, the Newsweek International editor and CNN talk show host plunged into scold mode.  “It certainly looks like another example of crying wolf,” Zakaria wrote in a May opinion column.  (http://newsweek.washingtonpost.com/postglobal/fareed_zakaria/2009/05/the_sky_isnt_falling.html)
Far from achieving pandemic status, swine flu had stricken a bare 4,800 confirmed individuals and killed 61, he noted.  Further, the world owed Mexico a debt of gratitude for reacting “quickly and massively,” bringing “transmission to a halt” by paralyzing its economy, and suffering billions in financial losses (in the words of an expert he quoted).  

“What did we get wrong?” Zakaria asked.  His answer:  Mainly, fear-mongers in the media and even international organizations, as they have done so often before, keep forgetting that our world today features “deep, structural forces” that “create stability.  We have learned from history and built some reasonably effective mechanisms to handle crises.”

Nearly 400,000 cases and more than 4,600 fatalities later, the case for such confidence looks a lot weaker.  But here’s the kicker:  Zakaria believes that “discussions of the global economic crisis” have been similarly warped by “the doomsday industry.”  I.e., critics of the globalization-spawned international economy for which he so enthusiastically shills have been determined to ignore the super job bailout-happy world leaders have done in staving off disaster.  

Let’s hope that Zakaria knows his economics better than his virology.  More important, let’s hope that the world leaders responsible for dealing with the situation recognize the folly of such complacency.

 

I’ve already written about how a combination of surging imports and nonexistent production data are torpedoing the effects of both economy-wide stimulus programs and industry-specific support measures, like Cash for Clunkers.  (See, e.g., my September 22 Washington Times column at http://washingtontimes.com/news/2009/sep/22/tonelson-deference-to-wto-hurts-us/).  Now we’re learning that these same problems could curb the expected environmental benefits of the latest of these policies – the taxpayer-financed consumer rebates Washington will be doling out to encourage the purchase of new, energy efficient major home appliances like refrigerators and dishwashers.

As reported in The New York times yesterday (http://www.nytimes.com/2009/10/19/business/energy-environment/19star.html?_r=1&scp=3&sq=%22Matthew%20L.%20Wald%22&st=cse), the Department of Energy’s vaunted Energy Star system for spotlighting energy-efficient appliances is shot through with loopholes.  Principally, an internal Energy Department audit found that the program allows manufacturers of a wide range of appliances to certify their products’ performance themselves.  And guess what – when tested independently, various products haven’t measured up to Energy Star standards.

Worse, more than garden-variety corporate fraud is at issue.  For all of the goods identified as misleadingly labeled by New York Times reporter Matthew Wald, and by a Consumer Reports investigation last year, come courtesy of South Korean or Chinese producers.  And given that many of these appliance sectors are marked by high and/or rapidly rising import penetration rates, it’s easy to conclude that labeling fraud either is already systemic, or will soon become so.

On September 30, the Times reported, the Energy Department and the Environmental Protection Agency agreed to tackle some of these problems.  And the usual proposals are kicking around – chiefly requiring independent Energy Star certifications for all appliances.  But no set of inspectors – public or private – can possibly test every appliance offered for sale in the United States.  Just as important, many of these products are produced in Asian countries with no tradition of rule of law, much less consumer protection or green-mindedness.  So the usual sampling techniques are highly unlikely to identify all the mislabeled products flooding into the country.  And hiring all the American inspectors that would be needed to monitor Chinese, Korean, and other foreign production facilities on an ongoing basis simply is unaffordable.

The best way to ensure that energy-intensive products are energy efficient is to implement trade policies that would discourage imports and increase domestic production.  All signs, however, indicate that the Obama administration’s fealty to outsourcing and importing interests trumps its commitment to tackling climate change as completely as it trumps its commitment to production-led recovery strategies.
 

...David Barboza’s account in today’s New York Times about how Chinese manufacturers are increasingly dominating world export market was fascinating enough (“In Recession, China Solidifies Its Lead in Global Trade,” http://www.nytimes.com/2009/10/14/business/global/14chinatrade.html?ref=todayspaper).  

But perhaps the most revealing point came toward the end, where Barboza noted that although the International Monetary Fund “is calling on China to...allow its currency to appreciate against other major currencies,” the United States has turned “silent in recent months, analysts say, partly because Washington is trying to improve relations with Beijing at a time when it desperately needs China to purchase American debt.”  

In other words, this is how low our outsourcing-focused trade policies have sunk the nation – it’s so deeply in hock that a multilateral organization is standing up for its true interests more vigorously than its own leaders.  The other side of the coin – this is how spineless, or dominated by outsourcing interests, the Obama administration has become.

...Another critical point emerging from Barboza’s piece is one that I made earlier this year in a piece for Industrytoday.com (“Drugs and Money,” April 21, 2009, http://industrytoday.com/article_view.asp?ArticleID=we166).  To quote Barboza: “China’s market share gains are mostly at the expense of countries like Japan, Italy, Canada, Mexico and Central America.”  And the Open Borders in government and the media (including on the Times editorial board) are still wondering why illegal immigrants keep flooding into the United States even during a downturn?

...Not that the media tripe about China currency issues has abated all that much.  Writing on his blog at Bloombeg.com (http://blogs.reuters.com/commentaries/2009/10/13/dont-worry-about-the-weak-dollar/), John M. Berry claimed that none of the countries victimized by Beijing’s exchange-rate protectionism “has a way to force the Chinese to change their policy.”  

I guess he’s never heard of the Currency Reform for Fair Trade Act of 2009, which not only has been introduced this year in both House and Senate and is endorsed by both Democrats and Republicans, but earlier versions of which have been kicking around on Capitol Hill for several years.  

The bill would use America’s enormous leverage as China’s biggest foreign customer to designate currency manipulation as an illegal subsidy under U.S. trade law.  Thus it would entitle victimized industries to seek offsetting tariffs.  Earth to Berry:  Passing the bill – which was also endorsed by President Obama when he was presidential candidate Obama – may not force a change in Chinese policy.  But since the price of everything exported from China is dramatically affected by currency manipulation, it sure could change the trade flows just as dramatically.

...Latest signs of the apocalypse: BusinessWeek reported in its September 28 issue (“Financial Innovation Under Fire,” by Peter Coy), that housing expert Robert Shiller, co-creator of the widely followed home price index, has launched house price derivatives investment products this year through a business venture.  Just what U.S. housing finance needs – more byzantine complexity.

Meanwhile, Bloomberg reporters Jody Shenn and Dawn Kopecki yesterday broke the news that Wall St. is pressing the Obama administration to include interest-only mortgages in its anti-foreclosure programs.  (“JPMorgan Pitches Interest-Only Mortgages to Boost Obama Plan,” http://www.bloomberg.com/apps/news?pid=20601103&sid=aBnddzF.B8zw)  

Even more impressive Shenn and Kopecki kept a verbal straight face when presenting a JPMorgan banker’s statement that financial institutions “‘understand the concern’ that using the periods to cut payments would mean borrowers’ balances won’t decline and their bills may later jump....”   Translation:  Wall St. still knows a cash cow when it sees one – especially if taxpayers remain on the hook for any losses.

 

The American Enterprise Institute’s Monday conference on export controls sure gave attendees more than they bargained for.  Not only did they get the skinny on the ins and outs of longstanding efforts to change the policies governing the overseas sales of defense-related goods.  They also learned how completely contemptuous Washington-based outsourcing interests can be of the nation’s Main St. manufacturers  

The magic moment came when I asked the conference’s first group of panelists about the U.S. government’s inspections of Chinese enterprises that have been approved by Washington to buy advanced U.S. products and technologies with military potential.  Many export licenses to these entities are approved only if the Chinese agree to American inspections of their premises to ensure that the exports in question are indeed being used for benign purposes.  But a 2002 Government Accounting Office report (“Export Controls: Rapid Advances in China’s Semiconductor Industry Underscore Need for Fundamental Policy Review,”  http://www.gao.gov/new.items/d02620.pdf) revealed that Washington often agreed to Chinese demands for advance notice of these inspections.  

Of course, that sounds like a great way to tell the Chinese exactly how long they have to hide whatever they want to conceal from Washington.  Is this still the case, I asked?  The panelists – who included a Commerce Department official responsible for the program – gave troublingly vague answers.  Much clearer, however, was this point raised by William A. Reinsch, president of the National Foreign Trade Council, an organization of multinational outsourcing companies which has led the private sector charge to gut export controls.

Reinsch – a classic Washington revolving-door case who supervised the Commerce Department’s export control activities during the Clinton years – ended his answer to my question in this way (and I paraphrase):  “Try this experiment, Alan.  Ask your organization’s member companies how they would feel if the Chinese government claimed the right to go through their factories whenever they pleased.”

I was so astonished at the moral equivalence set up by this argument that I failed to make the obvious rejoinder:  If our member companies wanted a Chinese product or technology badly enough, and it possessed enough military potential, then no doubt they’d agree to whatever terms the Chinese government imposed.  And no doubt the Chinese government would be smart enough to capitalize on its leverage and require the strictest possible conditions – an assumption of shrewd Yankee trader competence that clearly couldn’t be made about the U.S. government during Reinsch’s tenure at Commerce, or apparently today.

But the moral equivalence point is worth elaborating on as well.  For Reinsch clearly was equating (a) U.S. Business and Industry Council members devoted to safeguarding their country’s safety and freedom, and to obeying the law, with (b) Chinese entities subsidized, connected, and often outright owned by a government that is often hostile to U.S. interests, and that routinely flouts the agreements it signs.  

In the process, of course, he was accusing domestic companies like USBIC members of hypocrisy.  Talk about adding insult (to upstanding American businesses) to injury (of our nation’s very security).