Re: [Salon] IMPORTANT ARTICLE IN THE WSJ on LIGHTHIZER entitled: " He Helped Trump Remake Global Trade. His Work Isn’t Done."

I am not sure that Warren is right on this. We should all check, but in April, China off-loaded about $22 billion. My understanding is that the Chinese want to reduce their dollar exposure. It is a bit difficult for them because their dollar holdings are very large and any signal to the market that they are abandoning the dollar could cause it to fall dramatically thereby greatly reducing the value of China’s own holdings. The trick here is to off-load dollars quietly, without drawing much market attention. A tricky maneuver, the danger of which might actually strengthen Lighthizer’s hand. In a sense, China may be hoist on its own Petard.

From: Warren Coats <wcoats@gmail.com>
Sent: Monday, May 13, 2024 2:21 PM
To: Pat Mulloy <pamulloy@aol.com>
Cc: John B. Henry <jhenry@drystonecapital.com>; Bruce Fein <bruce@feinpoints.com>; Chas Freeman <salon@committeefortherepublic.org>; Paul Horne <horne.jp@verizon.net>; Robert C. Randolph <rrandolph@csradr.com>; Clyde Prestowitz <presto@econstrat.org>
Subject: Re: IMPORTANT ARTICLE IN THE WSJ on LIGHTHIZER entitled: " He Helped Trump Remake Global Trade. His Work Isn’t Done."

Pat,

Lighthizer is a lawyer, not an economist and it shows. He did not once mention the huge US fiscal deficits that China helps finance. What would happen if somehow China eliminated its trade surpluses without the US eliminating its federal budget deficits? Private domestic US investment would have to be crowed out and interest rates pushed up.

I would hate to see him return to his trade position.

Warren Coats
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On May 13, 2024, at 8:08 AM, Pat Mulloy <pamulloy@aol.com> wrote:

As Warren Buffet out it in his 2003 article in Fortune Magazine: " The Trade Deficit is Going to Sell the Country Out from Under Us."

"

Pat

He Helped Trump Remake Global Trade. His Work Isn’t Done.

For Robert Lighthizer, penalizing unfair trade is no longer enough; he has a plan to eliminate deficits altogether

Greg Ip May 13, 2024 at 5:30 am

Despite the change in policy since 2016, global-trade imbalances persist, notably the U.S. deficit and China’s surplus. Lighthizer thinks the elimination of these imbalances via tariffs, and perhaps other tools such as capital controls, ought to be the overarching goal of U.S. trade policy.

“I have migrated from thinking we need superficial fair trade to realizing that that is unachievable, and what we really need is balanced trade,” Lighthizer said in an interview in Palm Beach, Fla., where he lives a few miles from Mar-a-Lago. “Not balanced every year and with every country, but over time and globally.”

He added: “Every country should be exporting in order to import. If you’re running chronic surpluses for decades, then you are by definition a protectionist. You’re engaging in industrial policy to help yourself, you’re transferring resources from your consumers to your producers, you’re trying to … acquire other countries’ assets.”

These used to be called beggar-thy-neighbor policies, he said, “and they have to stop.”

Lighthizer makes it clear he is speaking only for himself, not for Trump. Nonetheless, his opinions matter. He remains an adviser and his name has been floated for positions in a second Trump administration.

From the early 1990s until 2016, presidents of both parties pursued freer trade in the belief that consumers would have access to cheaper goods and U.S. workers could sell to bigger markets. Trade pacts would also strengthen political and strategic ties with the U.S.

Lighthizer, who got his start serving President Ronald Reagan, never bought into either premise. “No one really believes in [free trade] outside the Anglo-American world, and no one practices it,” he wrote in “No Trade is Free: Changing Course, Taking on China, and Helping America’s Workers.” In deals struck from the 1990s on, “American policy makers effectively decided to let the rest of the world make our trade policy.”

Mainstream thought has moved in Lighthizer’s direction. Even economists acknowledge that the shrinking U.S. manufacturing base, partly due to trade, has had collateral costs: “deaths of despair” in communities devastated by lost factory jobs, and dependence on China for products vital to economic and military security.

Trade Representative Robert Lighthizer and other Trump administration officials at 2019 trade talks in Washington with a delegation from China. Photo: Chip Somodevilla/Getty Images

Economists still disagree with Lighthizer on deficits, which they see as the natural outcome when a high-saving country like China trades with a high-consuming country like the U.S.

Lighthizer agrees that deficits reflect savings differentials, but not that they are natural. Rather, they result from other countries’ policies that suppress consumption and subsidize exports. An example: Germany’s early-2000s labor reforms which, along with the adoption of the euro, suppressed German wages and rewarded exporters.

An important influence is Peking University finance professor Michael Pettis, who has written extensively on how China’s suppression of consumption dictates that it run a trade surplus and other countries run deficits. As deficit countries lose incomes, they must either accept higher unemployment or increase debt to replace lost spending power.

Mainstream economists increasingly agree China’s surpluses are harmful. “When the global market is flooded by artificially cheap Chinese products, the viability of American and other foreign firms is put into question,” U.S. Treasury Secretary Janet Yellen, an economist, said in Beijing last month.

What to do? Yellen suggested China expand retirement benefits or spend more on education to bolster consumption. Beijing politely dismissed her complaints as protectionism.

Lighthizer said a surplus results from a range of policies such as the banking system, the labor system and industrial policy. That’s why he backs Trump’s proposed universal tariff of 10% plus a higher tariff on China, not as a bargaining chip over a specific trade barrier, but to eliminate the U.S.’s structural deficit.

The Trump administration imposed tariffs on hundreds of billions of dollars in Chinese goods after decades of free-trade policy. Photo: Drew Angerer/Getty Images

This would potentially involve a sweeping, and disruptive, reordering of supply chains and consumption patterns built over decades, though tariff changes typically come with a notice and phase-in period to ease adjustment.

Many economists doubt it would work. They say tariffs reduce trade deficits when exchange rates are fixed, as under the gold standard. When exchange rates are flexible, tariffs drive up the dollar by bolstering domestic production, prices and interest rates, while reducing demand for foreign currency to buy imports. The higher dollar offsets the tariff’s impact on imports and reduces exports.

Lighthizer says such predictions are based on flawed models, arguing the dollar is driven by capital flows and its reserve status, not trade.

Nonetheless, a strong dollar does tend to widen the trade deficit. One possible response is currency intervention, such as the 1985 Plaza Accord, in which the U.S. and its allies intervened to weaken the dollar. Lighthizer is doubtful: “The global situation is very different than in 1985.” He adds: “No policy adviser that I know of is working on a plan to weaken the dollar.”

The Federal Reserve could in theory deter dollar inflows by holding down interest rates. But Lighthizer said interfering with monetary policy is risky. “It’s a great accomplishment that America eventually got to an independent Federal Reserve system. The last thing I’d suggest is to do anything to change it.”

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There are two other possibilities. Warren Buffett proposes that imports require a certificate issued only with a corresponding export. Doug Irwin, a trade economist at Dartmouth College, said that would require massive government intervention that wipes out most trade.

The other is a “market access charge” on any country investing the proceeds of its trade surplus into U.S. assets such as Treasury bills. “Tariffs across the board punish everyone equally,” Pettis said in an interview. “Imposing a capital tax hits only countries with excess savings.”

This amounts to reimposing capital controls, which the U.S. had largely abandoned by the 1980s. Controls, though, could destabilize the Treasury market, and prove difficult to enforce.

Though open to both ideas, Lighthizer prefers the simplicity, flexibility and familiarity of tariffs.

Another problem: Truly reining in China’s surpluses would require all its trading partners to act together. But if the U.S. is hitting everyone with tariffs, it might invite retaliation, rather than cooperation. Allies may conclude the U.S. commitment to their security has diminished and hedge their bets by cozying up to China.

Lighthizer doubts others will retaliate, and says it is possible a group of like-minded countries could eventually organize a better trading system. He also calls security alliances “very good for America and very good for the world. NATO is essential. Alliances in Asia are very important.”

But he also thinks the U.S. has been wrong to assume that trade relations determine countries’ choice of friends. “People pick their friends based on who they think can help protect them and who is going to win,” he says. “China’s whole pitch is, ‘The time of America, democracy and freedom has gone, ours is the way of the future, join us.’ The thing that makes friends and allies is to have the best economy, best military and the best technology in the world.”

Robert Lighthizer’s name has been floated for positions in a second Trump administration. Photo: Drew Angerer/Getty Images

Write to Greg Ip at greg.ip@wsj.com