Wednesday, June 15, 2011

Bringing U.S. Manufacturing Back; Part 3 of 5, U.S. Foreign Policy

Photo Credit - Flickr Creative

When business is booming, the unemployment rate is low, government spending levels are balanced by tax revenue receipts, and the economy is stable, the majority of Americans are not deep in thought about how U.S. foreign policy is affecting their job prospects and income stability.

Manufacturing leaving the U.S. and the recession has resulted in Americans noticing where the products they buy are made.

When productivity levels and wages allow business to remain profitable, and U.S. tax rates allow business to remain globally competitive, U.S. companies are not deep in strategy to compensate for U.S. government intervention into the private sector through foreign or domestic policies. The business strategy lately has resulted in U.S. jobs and production being moved off-shore.

Everyone in the U.S. has come to realize Free Trade Agreements are not always Fair Trade Agreements. Everyone has seen foreign oil prices hold Americans and business, and therefore the entire U.S. economy, hostage and powerless. U.S. foreign policy must support U.S. strategic business planning, good taxpayer benefit money investment, and fair money and trade policy.

Dr. Matthew Lieber shares his thoughts on a few specific U.S. trade and foreign policy questions.

BKH: What is the significance of trade between China and the U.S.?
ML: The U.S.-China trade is at the center of global growth. China’s growth has been a huge positive for the world economy, and the U.S. should continue to play a leading role in integrating China into the world system.

My critique is aimed at the terms and direction of the trade. We should embrace a two-way engagement, but we will be doing the world a service by moving to resolve the imbalances. Presently, third-party competitors such as Japan, Brazil, and South Korea are forced to choose between matching Beijing’s artificial depreciation with the inflation it brings or suffering a competitive disadvantage.

BKH: What should be done by the U.S. regarding China’s currency manipulations against the dollar?
ML: Yuan appreciation would immediately boost U.S. employment, aid U.S. exporters and Chinese consumers, and check a defiant People’s Republic of China (PRC). Efforts under Bush and Obama to persuade China to give up its major competitive advantage have failed.

The U.S. has not exerted a sufficiently forceful economic diplomacy. A “Build China” coalition is bullying U.S. legislators into fear of a trade war and a flawed assessment of the balance of power.

We all love cheap Wal-Mart goods, but massive outsourcing makes us a second-rate economy. The U.S. does have the upper hand. Go ahead China, sell the Treasury Bonds.

Getting tougher would support our long term industrial interests and our principles. There are options from aggressive naming and shaming, multilateral efforts, direct economic steps such as tariffs on Chinese imports or taxes on Chinese assets.

BKH: What is the impact on the U.S. economy, now and in the future, regarding the trade imbalance with China?
ML: In 2010, the US current account deficit from trade in goods and services was $500 billion. This is 3.5% of our Gross Domestic Product (GDP). A full 60% or $300 billion came from our trade with the PRC. The U.S. borrows and consumes, while China saves and exports.

This deficit has survived the recession and is coming back with a vengeance. A major underpinning lies in the PRC’s managed currency regime. Normally, left to market forces, such an imbalance would cause an appreciation of China’s currency against the dollar. PRC intervenes to hold the Yuan to an artificially low exchange rate against the dollar. PRC’s massive purchases of dollars have amassed some $3 trillion in reserves that it stores in US Treasury bonds.

The deficit speeds the deindustrialization of the U.S. It’s not inevitable, for the present pattern appears unfavorable for society and the national interest. The effects of the managed currency regime are socially and politically regressive. It boosts inequality in the US and China; blocks China’s workers from consuming US products, subsidizes Beijing’s favored exporters; and enriches Communist elites denying workplace rights.

BKH: Is it possible for China and the U.S. to maintain a good relationship with continued Chinese human rights violations and intellectual property (IP) theft?
ML: International relations scholars debate whether the U.S.-China relationship will evolve into one of partnership or one of enmity. In reality, the relationship is extremely multifaceted, with mutual dependence and a range of cooperation, tension and confrontation depending upon the issue.

Human rights are a perpetual source of disagreement, whereas IP appears to offer some hope for improvement. As China continues to grow, the chances increase that its leadership will recognize the need to reduce or at least confine IP theft.

BKH: What is your opinion of the alliance offered to Pakistan and Iran by China?
ML: These moves, while short of an alliance, are part of a great power game on a Eurasian chessboard aimed at countering U.S. influence and perceived threats from India, Russia and Israel – a game that is complicated by nuclear strategy and internal politics.

Diplomatically, China has partnered with Pakistan to balance against India. It shares interests in energy and domestic control with Iran. Nuclear strategy is about acquisition and regime survival. The spaces on the chessboard are not whole but marked by ethnic separatists and other groups committed to asymmetric warfare. Dueling states partner with these non-state actors, but China prefers to work with established states.

BKH: What is your opinion of Russia building pipe lines across Europe?
ML: Since I am not expert on this, I would just ask three questions related to issues of security, leverage and competition. Security: will the flows be reliable and what territories does it pass through? Leverage: what if any are the risks that Russia would stop flows and sacrifice revenues to advance its political ends? Competition: what impact does the pipeline have on the U.S. backed pipeline from Azerbaijan through Turkey to the Mediterranean?

BKH: What impact will the “Arab Spring 2011” have on the U.S. economic outlook?
ML: It’s difficult to know for sure, but we should watch closely the oil markets and the political situation in Saudi Arabia. Consider the sequence of political and economic events: booming Asian growth boosts grain and fuel prices, which help spur youth-led wave of revolt against Middle Eastern governments unable to raise subsidies, which leads to rebellion then intervention in Libya and further pressure on oil prices.

Perhaps at some point a correction to the high oil prices occurs. Generally the Middle Eastern states, other than oil, have not been integrated in the world economy. The fate of the reform movements will affect the future of terrorism and prospects for peace. But it’s hard to pinpoint further market effects.

BKH: What role should U.S. foreign policy be in promoting democracy in authoritarian countries?
ML: Democracy promotion always sounds good, but the more we go ballistic, the less our efforts succeed. It makes sense for the US to provide moral support for those resisting tyranny. We must avoid direct interventions that backfire and discredit us reducing our influence.

It is not our role to decide the form or face of foreign governments. Instead, a strategy of technical support and international partnership is most consistent with our enlightened self-interest. In practice, each case involves distinct prospects and complications.

Least auspiciously, in Libya, an oil-rich dictator terrorized tribal opponents and spurred the ongoing allied effort to topple him. In Pakistan, a divided government stands shakily over a torn society mired in poverty and fundamentalism. In Egypt, a dictatorship cooperated with the U.S. but failed its people and ultimately crumbled - not much of an ally, and the best reform bet of the three.

We should support a process for building the institutions of democracy and law that ensure competitive elections, full participation and economic reform.

BKH: With the U.S., and Europe for that matter, tackling crushing debt, how should liberation from dictators and democracy promotion be funded?
ML: Austerity actually is an opportunity to do so more smartly, not with a heavy hand. The most effective political strategy for democracy promotion will also be the most efficient. Occupying more countries is not an option, fortunately, nor is pouring more money into them. Foreign aid is a miniscule budget item, so it should not be a political target.

In some places like Pakistan and Afghanistan, we will need to reduce our footprint, but it is equally important to maintain smaller-scale programs that have shown the best results. These keep US prestige alive and continue to deliver U.S. intelligence even after big operations are done.

BKH: What is the impact ultimately on the U.S. being favorable to doing business and trade deals with radical Islamic or communists led countries?
ML: Short of total war with a country, trade policy offers a means of engagement as well as a punitive option in the case of sanctions. Domestic politics play a large role in determining whether the U.S. engages with an ideological foe or not, a fact evident in our contrasting treatment of China and Cuba.

Sanctions offer more political appeal as a meaningful symbolic move than direct material power, especially over time as we see with the ineffectiveness in Cuba. The largely ineffective record of economic sanctions has shifted the policy community to targeted sanctions, which can be effective security instruments if U.S. authorities use them carefully and discriminately.

BKH: What is your opinion of Venezuela working with Iran to support missiles securing a U.S. missile launch range?
ML: Venezuela is lamely attempting to bandwagon against the U.S. Presidents Chavez and Ahmedinijad naturally both gain in prestige when they meet bilaterally or stand together at the U.N. in open defiance of their great superpower foe.

We should keep a close eye on the Iran dealings, but not overreact. Mostly it sounds like a far-fledged scenario convenient for military contractors. Venezuela’s greatest weapon is its oil resource, but Chavez’ has misused it and mismanaged the economy. In the international arena, he has not been able to match the political savvy of his role model Fidel.

BKH: Should the U.S. continue financial foreign aid to countries aiding U.S. military enemies or those working for U.S. economic destruction?
ML: This sure sounds like a bad idea. The US needs to review its Pakistan strategy. Foreign aid offers a means of exerting leverage, but that is overrated. Generally, foreign aid should be managed and evaluated in relation to development objectives.

Ultimately at the bilateral and executive level, it is up to the President and the Ambassador to signal how U.S. foreign aid fits into a country strategy. New research is suggesting many receiving country executives do not want U.S. aid due to the stigma factor. This again points us back in the direction of aid policy on the basis of program merits and outcomes.

BKH: What are the global economic blocks and alliances emerging in reality?
ML: The “rise of the rest” refers to the emergence of formerly peripheral economies in the non-western developing areas. In the 1960s, the economic miracle was West Germany. It was Japan in the 1980s. It was Mexico and Russia, then South Korea and Brazil, in the 1990s. In the 2000s, it is India, China, and Indonesia.

The U.S. and fellow Organization for Economic Cooperation and Development (OECD) economies must recognize and carefully accommodate new growth. We see such adjustments taking place in the respect accorded to developing country concerns over the selection of the next International Monetary Fund (IMF) Director.

While there are several regional groupings, advances in transport and technology have made trade relations more fluid than the Cold War notion of three blocs. The US must pursue multilateral as well as bilateral strategies, since institutions like the World Trade Organization (WTO) provide a rule-based authority for advancing our interests and legitimizing our leadership.

Letting China in without more conditionality now looks questionable. From a U.S. perspective, the story loses appeal with the onset of “decoupling,” in which the non-western spheres fuel growth and the traditional industrial powers stagnate. But this is a concern to raise confidently not defensively.

BKH: Which countries does the U.S. need to watch most closely to verify fair mutual interests?
ML: Russia. China. Pakistan. Saudi Arabia - In that order.

BKH: What are the three most important emerging negative economic realities the U.S. must counter in a global economy?
ML: The single-most important factors threatening US international competitiveness are internal: healthcare costs, the achievement gap, and industrial erosion. Resolving double-digit healthcare cost growth is fundamental to economic competitiveness and long-run fiscal balances. The achievement gap or low test scores by minority students, feeds an underclass and undermines the entire society.

I am concerned with the national debt but critical of the regressive solutions offered. Comprehensive healthcare reform and innovative no-holds-barred education reform would support an investment-led resurgence.

BKH: What are the three most important emerging positive economic realities the U.S. must actualize in a global economy?
ML: With the victory over Bin Laden and al Qaeda in the same year as the Arab Spring, the U.S. can confidently observe as the Islamic world distinguishes between what happens when you kill 3,000 Americans and what happens when you join a political movement with powerful positive ends.

The expansion of capacities to disseminate information, productivity and entertainment (Facebook, Google, Skype, etc) is a resource for every person within reach of a computing device as well as a strategic industry. The US should ensure competitive and accessible markets.

Having an African-American President and consecutive female Secretary of States across Administrations sends a powerful message to the world and our youth about the land of opportunity. Enhancing our merit-based open society should be a foremost priority.

See also:
Part 1, Who is Professor Matthew Lieber?
Part 2, Global Neighbors & Competitors
Part 4, Competiting Internal Identity
Part 5, Success Realties

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