First, I intentionally made the thread title provocative. This isn’t meant to be a thread about, criticizing, or disparaging Elizabeth Warren. Rather, this thread is more about the political momentum in the United States regarding trade and how that will affect the rest of the world.
You can read Warren’s piece here: https://medium.com/...r-terms-ad861879feca
Warren’s policy stance is decidedly pro-domestic manufacturing, probably to a greater extent than any other 2020 candidate (at least that I’ve seen). But superlatives don’t matter for this thread, it’s all about policy direction and momentum. Let’s go through some of Warren’s suggestions:
Trade negotiators will publicly disclose negotiating drafts and provide the public with an opportunity to comment.
Personally I’m a fan of this idea but let’s think of what this means and how things will play out. How would an intentional market asymmetry between South Korea and the U.S. for… automobiles… play out in the public discourse? Would the UAW say “sure, we’ll let Hyundai manufacture cars/parts abroad and ship them into the U.S. with no regulatory or tariff barriers even though our products can’t be sold in South Korea similarly and are often subject to 200 day “waiting periods” in South Korean ports all in the name of supporting a regional ally”? No, and it’s not hard to fashion similar arguments for a host of products across a host of industries.
Recognize and enforce the core labor rights of the International Labour Organization, like collective bargaining and the elimination of child labor.
Good luck getting that in a trade deal… or enforcing it.
Uphold internationally recognized human rights, as reported in the Department of State’s Country Reports on Human Rights, including the rights of indigenous people, migrant workers, and other vulnerable groups.
Good luck again.
Recognize and enforce religious freedom as reported in the State Department’s Country Reports.
Good luck again.
Eliminate all domestic fossil fuel subsidies.
This is code for “I won’t make a trade deal with China”
Again, I’m not criticizing Warren. I’m not a fan of her, personally, but I am a fan of a lot of the proposals that she puts forward in that op-ed. So with that said, let’s think about what that op-ed is really saying. Do we really think China would comply with any of those conditions? No. Not a chance. In fact most of the world wouldn’t comply with those conditions. Europe could comply with perhaps 90% of those conditions with ease but then you get to the bit about “transparency and public comment” and Warren’s statement that she will “favor American workers.”
I don’t think Warren is naive and believes that American market combined with her policy stance will somehow bring about a utopian world. I think she’s fully aware that her policy stances will favor American manufacturing, reduce America’s trade deficit, and further withdraw the U.S. from the global system.
That’s not a bad thing for the U.S. (I’d argue it’s a good thing) but it is terrible for the rest of the world.
In a recent post, I outlined how the global system got to where we are today. In short, after World War II the U.S. was the last man standing, with ~50% of the world’s GDP, intact and large financial markets, and a Navy larger than the rest of the world combined by a substantial multiple. As such, the U.S. created a new global trade order, one which the world had literally never seen before: everyone who joined the U.S. system would have access to the U.S. consumer market (often asymmetrically so countries could grow above their natural rate and rebuild their economies), access to the U.S. financial market to clear trade transactions, and the U.S. would patrol the world’s oceans to protect the freedom of movement and trade. In addition, the U.S. instituted GATT (now the WTO) which was a process by which countries would gradually lower their tariff and non-tariff trade barriers. There was also the implicit American security guarantee. The only “catch” to joining this new system is that all the members had to agree to American security policy with regards to the USSR.
The whole gambit was a phenomenal success with one hitch: the world became addicted to asymmetrical market access to the U.S. Countries like Germany, South Korea, Japan, and China are desperately dependent on exports to the U.S. for their well-being. In the case of the EU there’s a second-order dependency because if Germany loses its exports to the U.S. it won’t have the funds to underwrite the rest of the EU. Such second-order dependencies are legion throughout the world. If the U.S. exits stage left by simply demanding symmetry or perhaps a modicum of favoritism its trade agreements, the whole system collapses.
The fundamental problem here is that nobody exists to replace the U.S’s role in terms of market demand. China and Germany couldn’t replace the U.S. with each other because both are net exporters. The math doesn’t work.
But it gets worse. Without the U.S. running a trade deficit, there are no dollars escaping the U.S. system out into the wider world and without those dollars a lot of global trade that has nothing to do with the U.S. cannot be settled. Let’s say Australia wants to trade wheat for Argentinian wine. What currency do they use for settlement? The USD. There is no viable alternative.
The Chinese Renminbi will never be a viable alternative for a host of reasons:
- In order to be used as a settlement currency, they have to drop capital controls and the Chinese know that if they drop their capital controls their financial system will implode overnight
- Nobody wants to rely on the Chinese legal system. First, there was an overt government directive passed in the mid-90s which stated that in any legal dispute between a Chinese national and a foreign party, the Chinese court was to rule in favor of the domestic party regardless. Chinese courts have adhered to that directive very consistently. Further, it’s clear that the there’s no transparency or fairness in the Chinese legal system. Those protests in Hong Kong that have been going on for over a month where literally millions of people are out in the streets? They’re fighting an extradition bill which would allow the mainland to basically arrest and extradite whoever they wanted in Hong Kong. For many Hong Kong residents, this is an existential crisis as it would certainly mean the “disappearing” of themselves, a loved one, or a friend. What does it say for the rest of the world when the citizens of Hong Kong don’t trust the mainland’s legal system?
The Euro will never be viable for a host of reasons:
- When the Cypriat banks were “bailed in” in 2014, the EU basically told every multinational company and wealthy individual "your money is not safe in European banks.
- The number of bad assets on the balance sheets of European banks is extraordinary. Simply put, the EU is going to be forced to slowly wall off its financial sector and digest all of its bad debts over the next decade or so (if not longer). Their only other alternative would be a one-off currency devaluation of ~50-60% which doesn’t seam politically feasible.
Circling back to U.S. domestic policy and political candidates, you have to consider how things will play out in the Democratic primary: will any candidate attack Warren’s policy as “protectionist”? I think not. Will any candidate want to appear “weak” on trade or advocate for globalism? I just don’t see how that dialogue plays out well. The U.S. political environment at the moment is very much about who can shout the loudest. Warren has set the bar for trade policy for the Democrats so now candidates will have to gravitate toward her policy stance.
And that leaves Trump.
If China wants a trade deal, their best hope is, ironically, Trump. Personally I don’t see a trade deal with China happening under Trump. You might see trade deals struck with other countries in accordance with what appears to be the U.S.'s new security policy of “ring fencing” China much in the way we did the same thing to the USSR… but then again maybe we won’t.
In any event, I believe we are witnessing the end of this era of global trade. The U.S. will be fine (might even be better off!). The rest of the world? Not so much.
