The Financial Express

Sclerosis, misdiagnoses bedevil US economy

| Updated: June 21, 2018 22:47:57

Sclerosis, misdiagnoses bedevil US economy

Much was learned from the May 2018 China-US trade relationship. Beginning with a spat, it experienced a brief ceasefire, before returning to the embedded antagonisms. To wit, the United States has long been itching to slap tariffs on China's exports, most definitively for chopping off its humongous surpluses, while China, gigantically engaged in building the world's infrastructures around its own interests, seems determined to extract more from the world's largest market using its low-wage exports for as long as it can. Yet, for as long as the puzzling Korean crisis persists, China will remain behind the Pyongyang policy-making levers, and the United States cannot but refrain from firing the first shot. After all, China balances both global trade rivalries and security pursuits as the United States once used to, much to growing US discomfort.

The brief negotiations ended with only the United States jumping up in delight when the sole reason to do so was China agreeing to buy more farm products. Since China will remain a farm importer for quite some time more, and particularly from the United States, China did not have to 'jump' with the deal, indeed was left more perplexed at US behaviour than before. As the month ended, the United States returned to its quarrelsome mood with Chinese trade again.

Just like any other circling game, the central issue in the malaise has been completely ignored. Donald J. Trump understands trade only as much as it matters in the polling booth. Voters have by and large reduced the sinking US economic plight to one factor: massive low-wage imports. It fuels the growing anti-foreigner US temperament. Chinese low-wage imports, combined with its growing global salience, coincides with the United States independently losing economic  steam, evident in terms of its capacity to fund major overseas projects like China, purchase foreign goods without imposing strings, and function anywhere on this planet without any ideological filters. Trump drew the only logical conclusion of an untrained economist: slap tariffs if China cannot control its low-priced exports, the heavy-handedness coming from being the superpower and the tariff solution from myopic interpretations.

An entire volume can be written on what is missing, but only two suffice to portray the unfolding sclerosis: repeating the Japan-bashing approach of the 1970s and 1980s against China in this century; and a vicious US economic cycle contrasting China's more virtuous trajectory. Trade wars are, as they were then, the wrong medicine at the wrong time for the wrong patient: outwitting the adversary in the market is the way to go, not the recourse to a political solution. US introversion only helps China advance to the next sector of hi-tech progress that the Trump administration falsely believes is an untouchable US monopoly (and which he hopes to wield mercilessly against China at some point, that is, after he has taken the manufacturing sector out of the rut).

How Japan went from being the second largest US trading partner (and having the world's second largest economy) into what looks like a permanent recession from 1990 has been wrongly interpreted by Washington officials as resulting from punitive US trade measures, resulting in numerous miscues. China's global ascendancy was misunderstood as part of a global welfare enhancement during the euphoric 1990s, and dismissed as no more than another 'emerging' country. Japan's industrial machine was allowed to bog itself down against a creeping demographic ghost, when a far-sighted US policy would have been to team up with Japan to balance China's growth. Even less attention was paid to coincidental features surrounding the Soviet collapse: behind diverting attention from security to competitive economics (neoliberalism, rather than protectionism), the birth of the fourth industrial revolution (based on artificial intelligence), was falsely interpreted as a long-term US monopoly, while the immediate fruits from the computer-based third industrial revolution, built upon the computer-based Internet of Things, also exposed another area of benign neglect.

Potentially rewarding back-burner developments, such as these, led the United States to extract more mileage from actual areas of perceived strength, at least as it mattered in the polling booth: the manufacture-based tariff-anchored front-burner trade issues. As the Trump administration kept harping about off-shore production laying US workers off, China took some giant strides by narrowing its technological taps, at first with manufacture, then the Internet sector, and eventually artificial intelligence. Behind US finger-pointing, China diligently reinvented every relevant wheel, and with enormously more governmental involvement, whereas the US slippage proved to be more structural than industrial, therefore beyond correction by tariffs. China only hastened its destiny as the 'world's largest economy'.

Until only about 2-3 years ago, Apple, Amazon, Facebook, Google, and Microsoft dominated and monopolised their arenas, giving the United States the advantage that no other country had the infrastructure to deliver, at least soon enough: it was believed this alone would compensate for all the ongoing manufacturing shortfalls. The underlying problem was economic: that the manufacturing sector accounted for more jobs, a huge chunk of it blue-collar at a time when the lavishly protected US worker, given all the Social Security perks, began shifting allegiance from the Democrat to the Republican Party (and no wonder why many more Democrats are conservatives than Republicans liberal).

It spawned a political problem of electoral candidates vacillating over policies to win the needed votes. In turn, the seed of today's other scourge, the widening intellectual gap, was sown: fewer and fewer US students get the required education to serve as a potential innovator in the money-making, gross domestic production (GDP)-boosting computer and artificial intelligence (AI) industries, but a far larger blue-collar working community, commanding more electoral power, must hide behind high tariffs to sustain their high wages.

The result has been the China-US competitive edge inverting rapidly. Best shown through innovation expenditures, the United States, which used to spend up to $18 billion on AI innovation when China could only muster 2.0 billion five years ago, has already fallen far behind China's $150 billion currently earmarked on that front.

Eventually, even the much neglected demographic ghost will do the United States what it has done to Japan and West European countries: dip below the level needed for a functional competitive economy unless massive labour imports can be made at a time of seething populism. Unemployment has fallen to historically low levels (below 4.0 per cent), but so too labour participation and productivity rates:  participation rates are among the lowest in the Organisation for Cooperation and Economic Development (OECD), productivity, even with Internet and AI monopolies, has fallen from 2.4 per cent annually in the first quarter-century after World War II, to an annual average of 2.0 per cent for the last 20th Century quarter, and thence only 1.0 per cent in the 21st Century thus far.

It will take visionary leaders with two feet on the ground, not to mention both hands on the steering wheel of global leadership, to pull the United States out of this rut, someone of the FDR (Franklin Delano Roosevelt) stature, not the Trump-type mincemeat-maker.

Dr. Imtiaz A. Hussain is Professor & Head of the newly-built Department of Global Studies & Governance at Independent University, Bangladesh.

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