A Letter to the Republican Party

As a no doubt futile outlet for my frustration with the Republican Party, I have been enclosing the following letter in the return envelops they keep sending me with the request for financial support.

Dear Members of the Republican National Committee,

The Trump administration has had some positive achievements domestically (tax reform, regulatory reforms and court appointments). However, its continued increase in government spending (annual deficits of one trillion or more when the economy is at a cyclical peak) is wrong and unthinkable for Republicans. President Trump’s weakening of America’s support for and role in international organizations, abandonment of the Iran Deal and anti-nuclear proliferation treatises, and war on trade, are bad for America and the world we live in. President Trump’s divisive language is unbecoming of the leader of a great nation, a nation of immigrants. The Republican Party has failed to stand up for these principles and to criticize the President for these offenses.

Even more concerning is your acquiescence to President Trump’s lying, immorality, and corruption. His clearly documented attempted bribery of the President of Ukraine for personal gain is damaging American security interests. His obstruction of Congress’s execution of its constitutional duties is very concerning. These and other acts cross the sadly low bar of acceptable behavior.

For the sake of our deeply divided country, the Senate owes us all an impeachment trial that any honest person will consider fair. President Trump must have every opportunity to explain and defend his behavior and those challenging it must have every opportunity to make their case. President Trump obstructed the House’s efforts to obtain firsthand evidence of the President’s attempt to use his executive authority for personal gain. It is essential that the Senate permit the testimony of those blocked in the House by the President (Bolton, Mulvaney, Mike Duffey).

With your silence you have abandoned me and my continued commitment to limited and sound government. I cannot continue to support the party until you stand up and again defend our principles.

Sincerely,

Warren Coats

To whom or to what am I loyal?

I am an American. I believe strongly and am loyal to the principles of individual freedom and limited government embedded in the American Constitution. I have also been a Republican all of my life because I judged that the Republican Party best reflected the above principles. But in 2016 I changed my party registration to Libertarian because I no longer believed that the Republican Party remained faithful to my political beliefs.

I have followed the testimony in the Impeachment hearings investigating high crimes and misdemeanors by President Trump. Generally, I have relied on press summaries but I watched the live full testimony of Lt. Col. Alexander Vindman, Jenniffer Williams, Ambassador Gordon Sondland, David Holmes and Fiona Hill. Ambassador Sondland was a large contributor to the Trump campaign and was rewarded with the appointment as Ambassador to the European Union, an assignment that included Ukraine. Amb. Sondland has no foreign policy experience. His testimony, however, set a high standard for frankness and openness. He came across as very bright and (now) well informed. In his testimony, however, he obviously wished to justify the role he played in attempting to persuade the Ukrainian President to agree to Trump’s request for a “favor.”

The testimony of Ambassador Sondland and the others (including Bill Taylor, George Kent, and Kurt Volker) left no doubt whatsoever that President Trump, operating through Rudy Giuliani, tried to bribe Ukraine’s new anticorruption President, Volodymyr Zelensky, to publicly announce an investigation of Ukraine’s alleged interference in the 2016 U.S. presidential election and of the Biden’s involvement with the Ukrainian energy company Burisma. Hunter Biden–former Vice President and current Democratic Party presidential candidate Joe Biden’s son–served on the board of Burisma Holdings, a Ukrainian energy company, from 2014 to 2019. “Secretary of State Mike Pompeo, Vice President Pence and acting White House chief of staff Mick Mulvaney were among those whom Ambassador Gordon Sondland said were aware of the pressure on Ukraine for probes that could damage President Trump’s political opponents” Sondland said there was a quid-pro-quo

It is common for our foreign policy relations and aid to be based on quid pro quos. That is to say that we provide aid when conditions are met that we think service American interests. What is involved here, however, is President Trump using American tax payers money and the powers and influence of his office for his personal political advantage. In fact, his actions toward Ukraine are quite contrary to our American interests (which is a stronger, less corrupt Ukraine on the border of Russia). In my opinion the now well known facts of Trump’s behavior visa vie Ukraine is impeachable.

For a while I still held out hope that there would be Republicans on the House Intelligence Committee who would honestly seek the truth of Trump’s behavior. I was sadly disappointed. Congressman Devin Nunes couldn’t get beyond repeating old discredited claims and his demand that the whistleblower testify. The idea that the secondhand claims by the whistleblower of impropriety by Trump would add anything to the firsthand testimony we have now heard doesn’t pass the laugh test. The council leading the questioning for the Republicans is pathetic–a real embarrassment. He seemed to only strengthen the case against Trump.

In my opinion many of the policies being advanced by many of the Democrat presidential candidates need to be effectively countered. I am losing hope that the Republican party is still capable of doing that.

Econ 101: Currency Manipulation

Currency manipulation refers to a country’s interfering with the market’s determination of the exchange rate of its currency in order to favor its exports over its imports. In a world in which people and firms trade and invest across borders, i.e. our world, anything a country does (monetary policy, fiscal policy, industrial policy, trade policy) will potentially affect the exchange rate of its currency for other currencies (real and/or nominal exchange rates). This makes it difficult to define what currency manipulation might mean, but it generally refers to a government’s intervention in the foreign exchange market by buying dollars or other foreign currencies thus depreciating its own currency’s exchange rate. This makes its exports cheaper to foreign buyers and its imports more expensive domestically resulting in a trade surplus (or smaller deficit). While a country’s persistent intervention to buy foreign currencies is clear evidence of currency manipulation, many countries with floating exchange rates intervene temporarily in either direction to prevent excessive volatility of their exchange rates without longer-run interference in the market’s determination of their exchange rate. https://www.youtube.com/watch?v=wE7UkXk_VCo

Any country whose currency is held abroad also must have a current account deficit sufficient to supply the amount of its currency demanded abroad. The US dollar is the world’s primary reserve currency and has experienced current account and trade deficits for that reason. In the first six years of this century (2000-2006) many central banks acted to increase their foreign exchange reserves (largely USD) pushing the US current account deficit from $400 billion per year to $800 billion. https://nationalinterest.org/feature/who-pays-uncle-sams-deficits-26417

When President Trump criticized Federal Reserve Board Chairman Powell for not cutting interest rates enough on July 31, was he trying to depreciate the dollar (currency manipulation) in order to boost American exports, or more generally trying to boost American economic output (to counteract the economic damage he is inflicting with his many trade wars) going into the 2020 Presidential elections? https://wcoats.blog/2019/07/30/is-trump-killing-his-own-re-election/ And can these two be separated?

In the following I compare policy reactions to shocks under three types of exchange rate/monetary policy regimes with an eye on the currency manipulation question. The broad categories of shocks are a) a globally shared recession and b) a single country shock to imports or exports such as from an oil price shock or tariffs, or from changes in capital inflows or out flows such as from a change in the political environment. The three policy regimes are: 1) freely floating exchange rates with no restrictions on capital flows, 2) an adjustable exchange rate peg, and 3) a gold standard with currency board rules. Regimes 1 and 3 are the opposite ends of the range of policy regime options.

If, for example, the US experiences an increase in its inflation rate above its 2 percent target (as could happen but for Trump’s trade wars) and raises its policy interest rate in order to tighten money and constrain the inflation, the exchange rate and market reactions will depend on its policy regime, which for the US is floating exchange rates with an inflation target. Similarly, but in the opposite direction, an oil exporting country experiencing a loss of export revenue from a fall in oil prices might cut its policy interest rate in order to increase domestic investment and make up for the loss of domestic demand. Or in the example currently in our face of Trump’s trade war with China, the imposition by the U.S. of tariffs on China’s imports might lead China to cut its policy interest rates or otherwise make up for the loss of aggregate demand from a reduced trade surplus (or increased trade deficit as China’s current account is currently more or less balanced).

Floating exchange rates

For a synchronized global recession (pretty much what we had in 2008)—all countries will want to lower their monetary policy interest rates in order to stimulate their domestic output. If one country gets out ahead of the others by lowering its interest rates more, its exchange rates will depreciate relative to the others (from capital outflows seeking higher yields abroad) and its stimulus to its output will come partly from an increased trade surplus, thus at the expense of other countries experiencing a trade deficit.

In the US example of tightening its monetary policy, the increase in US interest rates will attract foreign capital, which will appreciate the dollar’s exchange rates producing or increasing a trade deficit. This would increase aggregate demand in the foreign trade surplus countries. To illustrate with the recent easing of monetary policy in the US, the one quarter percent cut in the Federal Reserve’s policy rate on July 31 tends to precipitate a capital outflow as investors chase the relatively higher returns abroad. The increased sale of dollars for other currencies in order to shift investments abroad will depreciate the dollar. A depreciated dollar makes US exports cheaper and imports more expensive thus producing the trade surplus that makes the capital outflow possible, and which adds to domestic aggregate demand. If other countries respond by lowering their own interest rates more, or by direct intervention in the foreign exchange market, to prevent the loss of domestic demand in their own economies, they can set off a vicious cycle. Such situations have been referred to as competitive devaluations. To avoid the fruitless damage of competitive devaluations, countries need to synchronizing policy interest rate cuts in order to avoid exchange rate and trade balance effects.

Similarly, the oil exporter reacting to an oil price decrease induced trade deficit by cutting its monetary policy interest rate will depreciate its exchange rate. This will increase the prices and reduce the purchases of imports while increasing the domestic revenue from its reduced exports thus reducing its trade deficit and increasing (restoring) domestic aggregate demand. This would be appropriate exchange rate and aggregate demand management, not currency manipulation.

What would be the impact on the Chinese exchange rate from the imposition of tariffs by the U.S. on China’s exports to the U.S.? In the absence of any policy response by China, American imports from China would fall as American consumers faced the higher prices from the tariffs. China’s exports and export revenue would fall increasing its trade deficit (or reducing its surplus). The supply of dollars relative to yuan in the foreign exchange market would fall, depreciating the yuan until the trade balance is restored. This is what happened on August 5, 2019, though I do not know whether this was a purely market determined rate or whether China intervened in the FX market. Thus, it is not possible to conclude whether China was manipulating its exchange rate. Sadly this did not keep the US Treasury from labeling as currency manipulation the modest depreciation of the yuan from 6.90 yuan per dollar on Aug 1 to 7.05 on Aug 5.

Pegged exchange rates

With pegged or managed exchange rates the country that cuts its interest rates more than others must intervene in the foreign exchange market in order to maintain its exchange rate peg. There will be no trade balance effect if the monetary increase from the intervention is sterilized (an offsetting sale of domestic securities by the central bank to reabsorb the base money created by the initial FX intervention), but the ability of the rate cutting central bank to continue such intervention is limited by the size of its foreign exchange reserves. The US does not peg its exchange rates and maintains minimal FX reserves. Unsterilized intervention will increase the money supply and prices until the real exchange rate has depreciated enough to restore a balance of payments equilibrium (a trade surplus sufficient to enable the desired capital outflow).

China pegged its exchange rate at about 8.3 yuan per dollar for the decade from 1995-2005. In the last few years of that period China’s negligible trade surplus began to grow. Rather than allow its exchange rate to appreciate in response to market forces, China began to intervene and by 2005, when it abandoned its peg, its modest foreign exchange reserves had risen to around half a trillion USD. The ability of surplus countries to intervene and accumulate reserves without limit reflects the asymmetry of adjustment pressures between deficit and surplus countries noted by Keynes. Over the next nine years China allowed its exchange rate to appreciate to almost 6 yuan per dollar but in order to resist more dramatic appreciation it intervened massively, accumulating almost 4 trillion USD in FX reserves by early 2014. Domestic inflation also contributed to the badly needed real appreciation during this period. Since then China has reversed its interventions to prevent more rapid depreciation of the yuan from market forces, running its FX reserves from 4 trillion down to 3 trillion in 2017 thus keeping its depreciation under 7 yuan per dollar. Since then China’s FX reserves have grown very modestly to about 3.12 trillion USD and while appreciating temporary through mid 2018 its exchange rate remained just under 7 yuan per dollar through Aug 2, 2019. From a high of almost 10% of its GDP in 2007, China’s current account surplus has fallen to 0.4% by the end of 2018.

Hard anchor with currency board rules

Regime (3)—gold standard with currency board rules—is the most interesting because it reflects the market reaction when no monetary policy and thus no currency manipulation is possible. Market interest rates fully reflect market conditions with no input from the central bank. A global recession will result in a fall in market interest rates everywhere as aggregate demand falls below supply. This fall cushions the fall in demand by encouraging investment and facilitates the adjustments in the economy needed for recovery. Interest rates will not necessarily fall by the same amount in all countries and thus the emergence of interest rate differentials could precipitate capital flow. This contributes to global income because it encourages capital to flow to where its return is highest.

A capital outflow from the US to other countries under the classical gold standard would reduce the money supply in the US. For an American to invest abroad in this (gold standard like) regime, she must sell dollars for the foreign currency. Ultimately the Fed must transfer the ownership of gold (or whatever the reserve assets are) to the central bank issuing the currency being purchased (the Hume specie flow mechanism). The reduced money supply will lower prices in the US and thus depreciate the real exchange rate despite the fixed nominal rate. This will increase exports and decrease imports producing the trade surplus needed to finance the capital outflows. In the case of a currency outflow because of a trade deficit, the same specie flow mechanism would also lower prices in the US and thus depreciate the real exchange rate restoring trade balance (with underlying capital flows).

Regime (3) with currency board rules would operate a bit differently. If, for example, China and the U.S. have the same hard anchor (e.g., gold or a basket of commodities or the SDR) and abide by currency board rules, the exchange rate for their respective currencies is fixed. They are effectively in a single currency area and the supply of money will be determined by the public via currency board rules. Cross boarder financial relationships between individuals and firms (and countries) would be determined and evolve in the same ways they do within countries. Capital flows would eventually equilibrate (risk adjusted) interest rates globally.

Taking again the example of a US tax (tariff) on its imports from China, the resulting trade deficit in China (or reduced surplus) precipitates a capital outflow (reduced inflow) from the US to finance it. This tends to shift ownership of Chinese assets to the US. Under a classical gold standard (or other hard anchor) the money supply in China would fall and increase in the US. However, with currency board rules the US and Chinese publics’ will restore whatever level of money they demand at the fixed official price of its anchor (e.g. gold). Any tendency for the dollar price of the anchor in the US to increase would create an arbitrage opportunity that would prevent the increase in the money supply. With different market and central bank prices for the anchor (Gold), the anchor could be purchased at the lower official price at the central bank thus reducing base money and resold in the market at the higher price thus restoring the money supply to its desired level. Currency board rules break the Hume specie flow mechanism.

Conclusion

In floating or managed exchange rate regimes, it is hard to say whether monetary policy induced changes in interest rates are motivated by exchange rate objectives–i.e., are currency manipulation. For globally firmly fixed exchange rates with currency board rules, currency manipulation is not possible, adding to the benefits of such a system. There is no evidence that China has been guilty of currency manipulation for the last four to five years through August 2. It does not seem likely that they are guilty now but we must await more evidence of whether the PBRC has intervened in currency markets since then.

Is Trump killing his own re-election?

The Fed (Federal Open Market Committee) is meeting this week to review and set or reset monetary policy. I don’t know whether it should increase its policy rate, leave it the same or reduce it. https://www.adamsmith.org/blog/returning-to-currencies-with-hard-anchors The market expects a one quarter percent reduction in the rate. President Trump is quoted yesterday as saying it should be reduced more than that. WSJ: the confusing Fed

There are several problems with Trump’s statement. One is that if the Fed reduces the rate, its claim to be reacting to the data and its mandate is undercut by the President’s interference. Is the Fed doing what seems best or responding to political pressure?

But if the U.S. economy is heading South, as it may be, it is probably because of the damaging effects on the U.S. and world economies of Trump’s trade wars with almost everyone but especially with China. Trump’s tariffs have imposed significant costs on the American consumers who pay them with higher prices for targeted imports. More importantly, his trade wars have injected significant uncertainty into the continued viability of the global supply chains that have helped lower costs here and abroad and increased world output. Their retrenchment is lowering world income and pushing many economies, including potentially the U.S. economy into recession. A U.S. recession a year from now will seriously damage Trump’s chances of reelection.

Trump’s wars on trade seem to be motivated by his mistaken belief that the U.S. trade deficit with China, Germany and others reflects unfair trade practices on their part. His misuse of a national security concern to impose protectionist tariffs and restrictions on foreign competitors (protecting inefficient U.S. industries we would be better off allowing competition to shrink) seems motivated by vote buying. https://wcoats.blog/2018/09/28/trade-protection-and-corruption/ The result is a reduction in our income and potentially his electoral defeat. Our trade deficits largely reflect the use of the U.S. dollar in international reserves (which require a deficit to supply them) and our large and growing fiscal deficits (much of which is being financed by China and other trade surplus countries). Trump’s abandonment of government spending restraint is the cause of those twin deficits https://nationalinterest.org/feature/who-pays-uncle-sams-deficits-26417

It’s not that we don’t have real issues with some of China’s trade related practices, but Trump’s approach to addressing them is not productive. Rather than working with the EU and Japan and others who share our concerns to confront China together, he is attacking all of them with threats of more tariffs. Rather than strengthening the WTO, he is weakening it. Rather than using the Trans Pacific Partnership (a significant advance in modern trade agreements) to encourage China to adopt its rules, Trump withdrew the U.S. from the agreement– a huge mistake. The real question is how much more damage will Trump inflict on the world economy before he surrenders and declares victory or is voted out of office. https://wcoats.blog/2019/06/07/the-sources-of-prosperity/

The Sources of Prosperity

I am an economist so I can’t help writing about the virtues of trade in the (futile?) hope that what is obvious to economists might be better understood and appreciated by the general public. https://wcoats.blog/2016/12/22/save-trade/, https://wcoats.blog/2017/01/06/the-liberal-international-order/, https://wcoats.blog/2018/03/03/econ-101-trade-in-very-simple-terms/, https://wcoats.blog/2017/01/06/the-liberal-international-order/, https://wcoats.blog/2019/02/09/tariff-abuse/

So please bear with me one more time. If you join with ten, or a hundred, or a thousand others to cooperatively produce things, you can jointly produce much more than ten times, or one hundred or one thousand times as much as you could all produce individually as one person factories. But that huge increase in productivity and output is not possible unless you can sell your joint output to others for the many other things you need and want to consume that they produce. In short, none of this is possible without trade. The wider the area over which we can trade the greater are the possible gains in productivity from the specialization of labor and capital that a larger market makes possible. The American constitution recognized this when it prohibited restraints on trade between the states (across state lines). The ultimate limit in the size of the market is given by the world itself.

But markets—the “places” or the arrangements through which trade deals (purchase and sales agreements) occur—require trust that deals will be honored. The rule of law, which protects private property and the enforcement of contracts, provides the certainty needed for a manufacturer or other service provider to invest in the productive capacity and facilities needed to generate the promised supply of products that is the foundation of our relative affluence. When trade extends beyond national boundaries the rule of law takes the form of international agreements to rules of the game. Bilateral, multilateral and global trade agreements establish the rule of law within their domains. The World Trade Organization (WTO) was created to oversee this process. The astonishing skyrocketing of the standard of living of the average (even the poorest) earthling rest on, i.e. would not have been possible without, trade.

The uneven but persistent history of trade has seen the protection of less efficient and uncompetitive firms and industries reduced over time via trade agreements that reciprocally reduced the taxation of imports (i.e. tariffs). Starting with President Trump’s misguided withdrawal from the Trans Pacific Partnership (TPP) trade liberalization has been thrown into reverse. Trump vs Adam Smith TPP modernized and further liberalized existing trade agreements between the U.S. and a number of Pacific countries. The agreement was to be between 12 Asian Pacific countries until the U.S. withdrew. It would have provided a strong magnet to further draw China into the global system of rules for increasingly free trade. It was ultimately signed by 11 countries without the U.S. and renamed the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). The US withdrawal from the agreement was a serious mistake.

The United States as well as much of the rest of the world is beginning to pay the costs of Trump’s trade wars. In January of this year Deutsche Bank estimated that Trump’s trade wars have cost the U.S. stock market $5 trillion in forgone returns so far. Costs of trade war “Bloomberg economists Dan Hanson and Tom Orlik have… concluded: If tariffs expand to cover all U.S.-China trade, and markets slump in response, global GDP will take a $600 billion hit in 2021, the year of peak impact.” US China trade war-economic fallout “The import tariffs proposed by President Trump could wipe out the income gains provided by the Republican tax cuts for low- and middle-income earners, Jim Tankersley of The New York Times reported Monday.” ”Trump-Tariffs-Could-Wipe-Out-Tax-Cuts-Most-Americans”

Are Trump’s import taxes old fashioned protectionism (protecting relatively inefficient domestic industries from foreign competition), a legitimate response to national security concerns, or a reflection of Trump’s “famed” negotiating style?

Protectionism

For starters Trump’s steel and aluminum tariffs of 25% and 10% respectively (following his earlier imposition of tariffs on solar panels of 30% and washing machines of 50%) are clearly protectionist and reflect an alarming over reach of executive authority. Using the “authority” given the President under Section 232 of the Trade Expansion Act of 1962, U.S. Department of Commerce found that imports of steel and aluminum “threaten to impair the national security” of the United States. Canadian Prime Minister Justin Trudeau called the claim that reliance on Canadian steel could be considered a national security risk “absurd”. Trump removed these tariffs on Canada and Mexico last month, but they remain in effect on our other friends (e.g., EU) and enemies. On several occasions Trump has threatened to raise tariffs on car’s imported from Europe on the same phony national security grounds.

The patters of trade that minimize costs of production and maximize labor productivity can be complex. While protecting a few inefficient American steel producers and their related jobs might be good for those few firms, it is bad for American consumers and the economy at large. Workers in less productive protected industries are thus not available to work in more productive activities. Moreover, more jobs were lost than saved as the result of high prices and lost sales by steel importing manufactures. One study estimated that these tariffs could result in the loss of 146,000 jobs.[1]

A Peterson Institute for International Economics study estimated that American businesses and consumers paid more than $900,000 a year for each job that was created or saved as a result of the Trump administration’s tariffs on steel and aluminum. The cost for each job saved as a result of the administration’s tariffs on washing machines was $815,000.[2]

National Security

The distinction between legitimate security concerns and protectionism is not always obvious. Trump’s approach is often more protectionist and bargaining chips than concerns for security. An early indication of this was the U.S.’s treatment of ZTE Corp, China’s second largest telecoms gear maker. In April 2018 the U.S. band U.S. companies from selling their products to ZTE in connection with its violation on U.S. restrictions on trade with Iran, Sudan, North Korea, Syria and Cuba. “That means no Qualcomm chips or Android software for its phones, and no American chips or other components for its cellular gear.” NYT The company was effectively shut down and heading for bankruptcy when in early June of 2018 Trump ordered these restrictions lifted to save Chinese jobs!! According to the NYT: “The Trump administration is pressuring China to make trade concessions. It may also need Beijing’s help to strike a deal with North Korea as Washington and Pyongyang plan a high-profile meeting on June 12 in Singapore. Mr. Trump appears to be using ZTE’s punishment as a bargaining chip in negotiations with China, rather than a matter of law enforcement.” What is ZTE–A Chinese Geopolitical Pawn

Trump’s more recent banishment of Huawei, a Chinese tech company leading the world in 5G development, from the American market and efforts to convinces our once British and EU friends to do the same provides another example. In some applications security concerns when dealing with a Chinese company may be justified, but these areas are limited and Huawei has gone to great lengths to allay those concerns. “Google has been arguing that by stopping it from dealing with Huawei, the US risks creating two kinds of Android operating system: the genuine version and a hybrid one. The hybrid one is likely to have more bugs in it than the Google one, and so could put Huawei phones more at risk of being hacked, not least by China.” “Google warns of US national security risk of Huawei ban” FT June 6, 2019

The Trump administration has expressed its anger with the refusal of many other countries to follow its lead thus incurring a diplomatic cost as well as the economic one of restricting access to the best and/or most cost-effective products. The dangers and potential damage of using trade threats for other objections are clearly express by seven former US Ambassadors to Mexico in a joint letter published June 5: Ex US Mexico Ambassadors-Tariffs would destroy partnership we built

Moreover, the US’s exploitation of the importance of the dollar as a reserve and payment currency in forcing its political agenda on the rest of the world has incentivized the EU, Russian, China and others to look for alternatives. As another example of the growing risks of relying on American markets, Alibaba, China’s national champion internet giant whose share are currently only listed on the New York Stock Exchange, will raise its next round of capital on the Hong Kong exchange.

Bargaining

But some of Trump’s threats of tariffs no doubt reflect his approach to a trade negotiation. While it is not the usual approach to a trade negotiation, in which the parties should be looking for win-win reductions in tariffs and other impediments to freer trade, it could occasionally work to achieve greater concessions from the other side than otherwise. There is really little evidence that it has, however. The renegotiated NAFTA, given the new name United States-Mexico-Canada Agreement or USMCA, is no better than a normal review and updating of the existing NAFTA would have been expected to produce. It incorporates most of the updated provisions of the TPP, as was expected. But Trump started the NAFT review and update, by tearing up the old agreement and threatening to revert to the bad old days. Trump’s threated 5% tariff on imports from Mexico if it doesn’t do more to reduce or deal with the flow of refugees across the US Mexican border seems to be a counter example of a threat that worked.

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Donald J. Trump‏Verified account @realDonaldTrump

FollowFollow @realDonaldTrump

On June 10th, the United States will impose a 5% Tariff on all goods coming into our Country from Mexico, until such time as illegal migrants coming through Mexico, and into our Country, STOP. The Tariff will gradually increase until the Illegal Immigration problem is remedied,..

4:30 PM – 30 May 2019

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What if Trump doesn’t back down as China matches each of Trump’s escalations with new tariff increases of their own? Such a true trade war was not a necessary approach to the negotiations and could be terribly detrimental to both economies as well as those of our trading partners. Some of China’s behavior should be challenged. Its theft of intellectual property, state aid to some of its companies, and restrictions on foreign companies operating in China violate the spirit of the competitive deployment of resources to their most productive uses. But these criticisms are shared by most other countries (UK, EU, Japan, Korea, India, etc.). The US should negotiate with China together with these allies. It should use and strengthen the mechanisms of the World Trade Organization rather than ignoring and weakening it.

Even if Trump does backdown, as he generally has in the past, considerable damage has already been done that could take years to undo. The development of the cost saving, productivity enhancing global supply chains took time and were built with confidence in the rules that would apply—the rule of law. These very much included the maximum taxes (tariffs) and other regulations that would apply. The trust in that framework of rules has now been badly damaged.

Supply chains are already being restructured to reduce the risks of US policy shifts. While new arrangements may avoid or reduce these risks, they do so at the cost of efficiency. Refusing to buy Russian booster rockets or Chinese semiconductors because of concerns that the Chinese or Russian government might exploit their companies’ products militarily or to steal our trade secrets, forces us into more expensive and/or inferior products and thus keeps us and the world poorer than otherwise. We had better be sure that the costs are necessary.

[1] Timmons, Heather (March 5, 2018). “Five US jobs will be lost for every new one created by Trump’s steel tariffs”. Quartz (publication).

[2] Long, Heather (2019). “Trump’s steel tariffs cost U.S. consumers $900,000 for every job created, experts say”. The Washington Post.

Oslo: the Play

Yessar Arafat and Warren Coats in the PLO office in Gaza in February 1996.

Last night I saw the Round House Theater’s magnificent production of Oslo, the story of the secret meetings in Norway that led to the establishment of the Palestinian Authority. It was a moving (heart wrenching) and balanced recounting of how these meetings achieved agreement between Israel and the Palestinian Liberation Organization on “land for peace” as it was called at the time after many years of failed official negotiations. I urge you to see it.

We heard the PLO negotiators lay out the Israeli theft of their homes and killings of their people and we heard the Israeli negotiators lay out the Palestinian attacks on Israelis and on the efforts of Jews to establish and secure an Israeli homeland. For perspective, since the second intifada (between September 29, 2000 and January 31, 2018) at least 9,560 Palestinians have been killed by Israelis and 1,248 Israelis have been killed by Palestinians. “The View from the West Bank”

The play focused on the unusual approach of these negotiations, which built on the development of trust and respect between the opposing negotiators and the agreement on achievable steps one step at a time. Between their long negotiating sessions in an isolated room near Oslo, they dinned, drank and bonded together. Unfortunately, the play fails to provide us with an overview of the resulting agreement, which applied the same step by step confidence building approach to the incremental establishment of a Palestinian government (the Palestinian Authority) and withdrawal of Israeli troops from the West Bank and Gaza. The PA was given governance authority for a limited number of functions in order—step by step—to build both institutional capacity and trust.

One of those functions was the establishment of the monetary authority (central bank). I led the IMF team that helped establish the Palestinian Monetary Authority and have many stories to tell of my many visits to Israel and the West Bank and Gaza in 1995-6 plus a number of visits in later years (most recently in December, 2011).

The PMA has developed into a well-run organization of which Palestinians (and those Israelis who see a successful Palestine government as important and necessary for their own security) can be proud. It helped a great deal that the Bank of Israel and PMA developed good relations. Stanley Fischer was the governor of the BoI from 2005-13 and George Abed was governor of the PMA from 2005-7. They had both previously been colleagues at the IMF. “Jerusalem in August 2006”

It is with a broken heart that I watch Israel’s Prime Minister, Benjamin Netanyahu, with help from American President Donald Trump, increasingly abandon the two state solution of the Oslo Agreement for an apartheid single state regime in which “democratic” Jewish control is preserved by denying what would become the majority Palestinian residents their right to vote. “The Future of Israel and Palestine”

Attorney General Barr’s News Conference

I, and everyone I know, want to know the facts of any collusion between Trump and his associates and Russia. I am confident that the Mueller investigation provides them as well as we could expect. Attorney General Barr’s news conference this morning summarizing that report was clear and transparent. He did an exemplary and impressive job. The complaints from some Democrats on the Hill that Barr should not have held this press conference until after they had read Mueller’s report were unfounded and frankly embarrassing. Please let’s move on.

My assessment of Trump’s administration today, which is what we should be debating, is very mixed. Adjusting and lightening the regulatory burdens that have been holding our economy back is largely good in my view (though each must be judged individually) as are the tax reforms making the system simpler and fairer. While the tax reforms did not go far enough, they were a big improvement over the existing tax law.

Trump’s attitude toward trade and the protection of inefficient American firms is ill informed and damaging to American’s economy as a whole (as opposed to coal and steel producers). His bullying and unilateral approach is clumsy, amateurish, and counterproductive. The EU, Canada, Japan and others would be happy to join us in confronting China’s bad trade behavior, if Trump were willing to work together and not busy attacking them as well.

I supported Trump’s campaign promises of restraint in deploying American troops around the world, but he has not delivered. His message to the Senate accompanying his veto of the bill passed by both houses of Congress (54-46 in the Senate and 247-175 in the House) a few weeks ago invoking the War Powers Resolution to end U.S. support of Saudi Arabia’s war in Yemen reflects a truly shocking affront to our Constitution: “This resolution is an unnecessary, dangerous attempt to weaken my constitutional authorities, endangering the lives of American citizens and brave service members, both today and in the future.” The truth is just the opposite. The constitution gives the power to declare war to Congress and the almost blank check congress gave Presidents following 9/11 cannot meaningfully be stretched to include what we are doing in Yemen.

Trump continues to undercut and weaken American leadership in the international organizations and agreements that have contributed so much to post WWII peace and prosperity. This will be increasingly harmful to our and the world’s legitimate interests.

In his spare time, the President thoughtfully advised the French on fighting the fire in Notre Dame. What an embarrassment and fire experts say that his advice was wrong.

Please, let’s fight the real battles and stop wasting time on the phony ones.

Is Rep Ilhan Omar anti-Semitic?

U.S. Congresswoman Ilhan Omar, a Muslim Somalian immigrant, has been insisting that we need to publicly condemn Israel’s mistreatment of Palestinians in the West Bank and Gaza as well as in Israel itself. This mistreatment includes illegally occupying Palestinian land on which Jewish Israeli’s build so called “settlements,” excessive use of force against Palestinians protesting their treatment (since 2000 Israeli soldiers have killed 9 Palestinian, including women and children, for every Israeli killed by a Palestinian), and legally restricting the citizen rights of Israeli Arabs (i.e. imposing apartheid on Palestinians living in Israel) in an effort to keep Israel both democratic and Jewish with a “one state solution” that would make Jews a minority). All of my Jewish friends, including some Israeli Jews, also condemn these horrible acts. The issue is well summarized by Andrew Sullivan: http://nymag.com/intelligencer/2019/03/how-should-we-talk-about-the-israel-lobbys-power.html?utm_source=fb&fbclid=IwAR1B12R8xQ0PTQhRO3u2f0nPO2ssSPmdZCEbbYbnvWNByClY2zuNgXaV9TE

So why is Ms. Omar being condemned as an anti-Semite by some (those who, in my opinion, are simply diverting the conversation away from Israel’s bad behavior)? It seems to arise from her complaints that “‘I am told everyday that I am anti-American if I am not pro-Israel,’ Omar tweeted March 3 in response to critics. ‘I find that to be problematic and I am not alone.’” Washington Post 3/11/2019 https://wapo.st/2TEMzt9. More specifically, and this is where critics have focused, she has complained that the so-called Israel Lobby has blinded American’s to Israel’s bad behavior. “On Feb. 27, Omar told an audience at a town hall event in Washington, D.C., that accusations of anti-Semitism were meant to silence her criticism of Israel and the American Israel Public Affairs Committee.” Ibid. In my opinion the charges of anti-Semitism reported in the above Post article, prove her point.

Some people were particularly offended by her reference to the “Dual loyalty” of many Americans (Jewish and non-Jewish) to both our own country and to Israel. I do not respect anyone who uncritically agrees with anything and everything their hero says or does whether it is Trump, Putin, or Bibi (I like some of Trump’s policies and dislike others, but disrespect the man). The same goes for governments. Given the strong reaction (claims of anti-Semitism) of any criticism of Israel in earlier years in the U.S. (we now see a regression to those days) I was pleasantly surprised on my many visits to Israel that a critical public discussion of Israeli policies and behavior was far more open and honest there. We should not be surprised or concerned that organizations such as American Israel Public Affairs Committee champion a particular point of view. That is what they exist for (just as the Log Cabin Republican’s and other policy oriented groups exist to propagate a point of view). What is unusual is the amazing influence that AIPAC has had on American foreign policy, often against America’s best interest. If you are not aware of this read John Mearsheimer and Stephen Walt’s “The Israel Lobby and U.S. Foreign Policy.”

It is natural and usual for any of us with origins in another country (that would be most of us) to retain sympathies for the fatherland even when condemning bad things it might do. My Russian American friends, for example, can’t help smarting a bit at criticisms of Putin even when they fully agree with them. The country that gave us some of the world’s greatest literature and music has also given us the gulag, etc. But no one, at least no one I know, would dream of calling me anti-Russian when I condemn Putin.

I have not read every word from Rep Omar, but I have not read anything that suggests she is anti-Semitic. She has raised important points about the policies and behavior of the Israeli government. President Trump’s, and for that matter his predecessors for many years, uncritical acceptance of Israel’s outrageous treatment of the Palestinians in their charge, should be challenged. Those diverting the discussion by labeling those of us who condemn Israel’s behavior as anti-Semitic are exploiting America’s very understandable sympathies for the horrors of the holocaust and a long history of anti-Semitism. But such charges and diversion are dishonest and a disservice to the best interests of the United States (and I would say of Israel as well).

Tariff Abuse

The U.S. constitution gives Congress the authority to enact and control tariffs (taxes on American consumers of imported goods and services). Over the years Congress has increasingly delegated that authority to the executive branch (the President) under certain specified circumstances. Section 232 of the Trade Expansion Act of 1962 gives the President the authority to restrict (impose tariffs on) imports that threaten national security without the need for congressional approval.

Last year President Trump imposed a 25 percent tariff on steel imports and a 10 percent tariff on aluminum on the grounds, confirmed upon the President’s prompting by the Commerce Department, that relying on steel from Canada and the EU (fellow NATO members) was a threat to our national security. If this were a skit on “Saturday Night Live” we would have a good laugh, but unfortunately it is for real. It is the launching of a very ill-advised trade war by a President who had promised when campaigning for office to reign in executive overreach. Sen. Ben Sasse, Republican from Nebraska, called Trump’s decision “dumb.”

Trump’s stated motive was to restore American jobs to an industry in which we are relatively inefficient. The few additional workers in steel and aluminum resulting from these tariffs were outweighed by the loss of jobs in industries dependent on these now more expensive metals as inputs. Bestowing financial favors on a selected group to the detriment of the rest of us can rightly be called corruption. https://wcoats.blog/2018/09/28/trade-protection-and-corruption/ Such policies do not reflect America First. They reflect My Friends First.

Trump has apparently asked the Commerce Department to “evaluate” whether importing cars is a national security threat that would allow him to impose tariffs on them without Congressional consent. So much for rolling back executive overreach and any consideration of the national interest.

Both Republicans and Democrats may have had enough of this. “While the Trump Administration ponders whether to claim that imported Volkswagens threaten national security, some on Capitol Hill are trying again to rein in the President’s tariff powers.” WSJ: “Two-bills-to-defend-free-trade”

Two bills have been introduced in the House that would shift the responsibility of determining if an import is a national security risk from the Commerce Department, which naturally leans toward protecting American commerce, to the Defense Department, which should better understand real security risks. “The stronger bill was introduced last week by Senator Pat Toomey, the Pennsylvania Republican…. Mr. Toomey’s bill would require Congress’s blessing. Once a tariff is proposed, lawmakers have 60 days to pass a privileged resolution—no Senate filibuster to block consideration—authorizing it. No approval, no tariff.” WSJ 2/9/2019 A somewhat weaker bill has been introduced by Senator Rob Portman, Republican from Ohio, on the grounds that it has a better chance of passing over a Presidential veto.

Please write your congressional representatives to support one of these bills (preferably the Toomey bill) before this President fights another war that we all lose.

The Wall: Form or Substance?

Most Americans support legal immigration into the United States (preferably more and better targeted than now) and oppose illegal entry. Controversy has arisen over how best to limit the illegal sort (to say the least).

The border between the U.S. and Mexico runs almost 2 thousand miles. By 2009 580 miles of fence or wall had been built for the purpose of reducing illegal entry of people and drugs. This grew to 654 miles by 2017. Leaving aside the many controversies over the environmental impacts of fencing a border that runs through Indian reservations, and environmentally sensitive areas (“In April 2008, the Department of Homeland Security announced plans to waive more than 30 environmental and cultural laws to speed construction of the barrier.” Wikipedia), we must ask whether a fence/wall on even half of the border will significantly reduce, much less stop, illegal entry into the U.S. and whether it is the most cost-effective way of doing so (electronic “fences” are also now being deployed). The Economist magazine estimated that it may have “reduced the number of Mexican citizens living in America by only 0.6%.” “The-big-beautiful-border-wall-America-built-ten-years-ago” About half of all illegal emigrants arrived in the U.S. legally by boat or plane and overstayed their visas.

Where there is a will, there is a way. Illegal immigration is reduced when conditions (incomes and security) in a potential immigrant’s home country are improved, when legal channels of immigration widened, and when illegal entry and residence are made less attractive (riskier).

While the North American Free Trade Agreement (NAFTA), which came into effect in 1994, benefited the United States, it improved living standards in Mexico and Canada as well, President Trump’s condemnations notwithstanding. Over its first 20 years Mexican trade with the U.S. and Canada more than doubled. (Burfisher, Mary E; Robinson, Sherman; Thierfelder, Karen (2001-02-01). “The Impact of NAFTA on the United States”. Journal of Economic Perspectives. 15 (1):125 44. CiteSeerX 10.1.1.516.6543. doi:10.1257/jep.15.1.125. ISSN 0895-3309.) Per capita income (GPD) in Mexico increased 37% and in the U.S. 52% between 1993 and 2017.

An example of Trump’s misuse of data was provided by his statement during his recent State of the Union Address when he claimed that: “One in three women is sexually assaulted on the long journey north”, referring to the Mexican caravans to the U.S. border. The data comes from the Doctors Without Borders, who reported that of the 57 women caravaners who sought their medical care one third “said they were “sexually abused” on the journey, not “sexually assaulted” as Trump says.” This is not even in the same ball park. “Fact-checking-president-trumps-state-union-address”

On multiple occasions over the last 20 years sensible bipartisan immigration reform laws were proposed but never passed. We badly need to adopt some such reforms in order to meet the labor market needs of the U.S. economy and to settle the legal status of earlier illegal immigrants (including the Dreamers). See my earlier comments on such reforms: https://wcoats.blog/2017/02/12/illegal-aliens/ https://wcoats.blog/2018/01/11/our-dysfunctional-congress/

The most challenging component of the policies to reduce illegal immigration are policies to make illegal status as unattractive as possible. In short, a barrier to illegal status that immigrants can’t climb over, tunnel under, or walk around. Illegal status should be very unattractive. Illegal residence should not have access to any, other than emergency, welfare services. People generally immigrate to the U.S. in search of a better life. That generally means a better paying job than they could find at home. Employers who hire undocumented workers should be heavily fined (especially if the employer happens to be the President of the United States). Efforts to deny services and jobs to illegal immigrants should not intrude on the privacy and lives of legal residents however recently they might have arrived. Our conflicted approaches of overlooking illegal status, reflects our failure to have adopted sensible laws for legal immigration.

America is an attractive place to live and we have benefited greatly from the best and the brightest who have chosen to come here (legally). For our own sake and for the sake of those who might come we need to improve the process and widen the door for legal immigration while making the illegal sort less attractive.

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