Britain’s latest Brexit strategy: any deal will do

As the clock ticks, the UK’s position only grows weaker

Philip Stephens

Xavier Bettel has given us a wounding description of Brexit. As an EU member, the Luxembourg prime minister observed, Britain was forever asking for opt-outs. “Now they are out, and want a load of opt-ins.”

There you have it. Mr Bettel captures precisely the abiding sense of superiority that persuades Britain it can stand above the rest of Europe alongside its recurring fear of being left behind.

Boris Johnson speaks of Brexit as a “liberation”. The foreign secretary is among those English nationalists who never step out of the nostalgic haze of victory in the second world war. Others were subjugated; Britain stood alone. Yet there Mr Johnson was in Brussels this week tipping his hat to the “defeated” in the hope of enlisting their support against Vladimir Putin’s Russia.

Technically, Britain is not yet “out” of the EU, but the conclusion of a draft transition agreement with the remaining 27 members would take Theresa May’s government a stride closer to the exit. The prime minister is determined to walk through it in March 2019. Just to be sure, she has a fail-safe approach: to take just about any deal she is offered.

The story of the first phase of Article 50 negotiations was a procession of capitulations. British demands collided with European realities and Mrs May retreated at every turn. The second phase will be much the same except that, as the clock ticks faster, she will be even quicker to abandon her positions.

Only this month the prime minister set out at great length the opt-ins, concessions and exemptions she required of the EU27 in the post-Brexit world. Never mind. These “cake-and-eat” demands — segmenting the single market, privileged access for the City of London and bespoke customs arrangements — were made in the sure knowledge they will soon enough have to be abandoned.

Michel Barnier, the head of the commission’s negotiating team, has quite sensibly rested his position on the logic of Mrs May’s rejection of the single market and customs union and her refusal to accept the jurisdiction of the European Court of Justice. That leaves the only plausible trade arrangement as one akin to those enjoyed by Canada and South Korea. If Britain is willing to pay, it may also secure associate membership of a handful of EU agencies.

By the government’s own lights, this outcome falls far short of the national interest. Philip Hammond, the chancellor, has demanded an accord covering financial services. Mrs May has other priorities. Politics must trump economics, and the interests of the Conservative party those of the nation. Supply chains, investment and jobs cannot be allowed to get in the way of her efforts to avoid a Tory ruptura.

The timetable has room for only six months more of talks. Everything has to be wrapped up by November to allow time for ratification. The best that can be achieved in such a short period is a statement of a set of broad principles to shape the future relationship. Hammering out a workable economic arrangement will be left for the transition, which in turn will need to be extended.

For Mrs May, the vaguer the autumn accord the better. A fuzzy statement of intent will be sold as all things to all sides — to her party’s nationalists as a clean break with the wicked EU, and to pro-European Tories as the precursor to a close and strong relationship. Anything too specific and Mrs May would risk stirring rebellion in parliament.

Things could still go wrong. MPs could vote to stay in a customs union. The government’s reckless indifference to the impact of Brexit on the Northern Ireland peace settlement faces exposure. A draft agreement with the EU27 includes a commitment to avoid a hard border between the North and the Irish Republic. Mrs May has yet to say how this can be reconciled with a departure from the single market and customs union.

For hardline Brexiters, none of this matters. Mr Johnson dismisses the Irish border as akin to the boundary between two London boroughs. The likes of Mr Johnson hold the Brexit prize too important to be held hostage to peace and prosperity across the Irish Sea. They have their sights set on the supposed restoration of national sovereignty.

There is a snag. More, really, than a snag. The repatriation of sovereignty is in large measure a chimera. As Mr Putin has reminded us, Britain cannot banish the facts of interdependence. In any event, in order to reclaim this claimed sovereignty, the Brexiters must suppress the will of, well, the parliament they promise to empower. Most MPs, including those on the Tory side, think Brexit will be bad for Britain. So, incidentally, do a majority of cabinet ministers. At the very least they want to soften the blow. But they are told by the prime minister they must vote for the good of party before country.

Perhaps there is a precedent. I cannot recall it. When last did Britain’s elected representatives take a decision that they fully expected would make the nation poorer, less influential and less secure? The cynicism takes one’s breath away.

There is an answer. A prime minister of principle would offer a free vote. Parliament should be charged with mapping the contours of Britain’s future relationship with its own continent. MPs should also be empowered to put the terms to the people in a second referendum. That really would be taking back control. Strange that the self-appointed champions of parliamentary sovereignty argue otherwise.

French travellers face rail strike chaos as unions test Macron

Half of essential staff down tools as workers protest over planned SNCF overhaul

David Keohane in Paris

Commuters cross the tracks at a crowded train station in central Paris on Tuesday, the first day of a programme of rolling strikes by rail workers © AFP

French commuters faced chaos on what is being dubbed “Black Tuesday” as rail workers began a series of rolling strikes aimed at challenging President Emmanuel Macron’s reform agenda.

The four main rail unions are planning to strike on two in every five days for the next three months to protest against an overhaul of SNCF, the heavily indebted state-owned rail operator.

About 48 per cent of essential staff downed tools on Tuesday, 34 per cent of the total rail workforce, according to SNCF, leaving only 12 per cent of high-speed TGV trains and one in five regional services running. Trains to other countries in Europe were also badly hit.

Building on a day of protest last month, the unions are hoping to force the French president to rethink his SNCF overhaul, including the plan to end rail workers’ generous benefits. They argue the reforms will “destroy the public service nature of the railways through pure ideological dogmatism”.

Mr Macron’s efforts are aimed in part at preparing the rail operator for more competition as EU rules open up its home market. His government has said that if necessary, it will enact a rail reform bill through “ordinances”, a process that shortens the time taken to pass legislation.

Riot police hold back demonstrators as striking rail workers and supporters march in Paris on Tuesday © Reuters“

The government will stand firm,” said transport minister Elisabeth Borne in an interview with BFM TV on Tuesday as she urged unions to negotiate.

“Elisabeth Borne is . . . just playing her role, there are no negotiations,” Laurent Brun, a spokesman for the CGT union, responded.

“If the strikers have to be respected, the millions of French people who want to go to work, because they don’t have a choice, because they want to go to work, they must also be respected,” Edouard Philippe, French prime minister, said in parliament on Tuesday.

SNCF has said the strike could cost the company close to €20m a day in lost revenue, although it cautioned that this was only an estimate.

Energy, rubbish collection and Air France employees are also on strike, and rail unions hope stoppages will spread to other parts of the economy, including the private sector. But according to an Ifop poll on Sunday, just over half those surveyed considered the strikes unjustified.

For both sides the stakes are extremely high. Many believe that if Mr Macron stands up to the unions he will be in a position to maintain his reform drive; last year the former investment banker succeeded in loosening France’s rigid jobs market with no significant union opposition.

Train drivers, who are some of the best protected public-sector workers, helped kill off parts of a welfare reform in 1995 and watered down changes to the pension system in 2010. However, with a strong parliamentary majority and weakened opposition, Mr Macron is widely thought to have the political strength to push through further reforms.

Two Perspectives on the Conflict in Afghanistan

By Allison Fedirka


With all the talk of Washington’s expelling Russian diplomats, it’s easy to overlook Afghanistan, an area in which Russia and the United States have butted heads for years. The list of things that confound their cooperation there is long, but perhaps no issue is more important now than the Islamic State.

The United States and Russia have profoundly different views on just how strong, and therefore what kind of threat, the Islamic State in Afghanistan poses. Russia’s foreign minister described it as “rather serious,” noting that the group’s ranks have swelled into the thousands, aided in part by an influx of foreign fighters. The United States disagrees. Washington understands that there is an IS presence in Afghanistan but maintains that most of the fighters were already in the country fighting for groups like the Taliban and the Islamic Movement of Uzbekistan. Washington says they simply fight under a new banner. The distinction may seem trivial, but the way each country frames the IS presence in Afghanistan corresponds with its strategic interests.
An Abiding Peace
Russia has two objectives in Afghanistan. The first is to prevent Islamist extremism from consuming Central Asia. Moscow already fights jihadists in the Caucasus, so the last thing it wants is to open up another and much larger front to the east in a region that is predisposed to extremist activity. For the past 25 years or so, strong central governments have largely kept extremists in check, but there are signs that that may soon change. Kyrgyz media recently noted that the number of extremist and terrorist subjects in Kyrgyzstan has increased literally exponentially in the past eight years. Kazakhstan recently allocated $840 million over the next four years to a state program meant to counter religious extremism and terrorism.

This may not be much, but any counterterrorism assistance is welcome news for Russia, which can do only so much to tackle the Islamic State in Afghanistan head on. The government has no desire to enter yet another military conflict, bogged down as it is in Syria, and it has even less appetite for the domestic blowback such a campaign would incur. And that is to say nothing of how difficult it is to subdue Afghanistan even with a fully supported campaign.

This is partly why Russia advocates the Taliban’s participation in the Afghan peace talks. Supporting the Taliban, even informally, props the group up as it fights the Islamic State itself. The Islamic State is particularly active in the provinces of Jowzjan, Kunduz, Badakhshan and Takhar, all of which are near the border of Tajikistan, where Russia holds military exercises.
The other reason Russia supports the Taliban dovetails nicely into its second objective in Afghanistan: preventing the U.S. departure there for as long as possible. Russian can’t really compete with the U.S. military, so it practices a foreign policy of disruption, inserting itself into areas and conflicts not to win them outright but to preoccupy Washington and gain leverage in areas that are more important to its interest, such as Ukraine. The longer the U.S. remains in Afghanistan, the longer its military resources will be spent in the very area Russia wants extremism to be relegated to. By emphasizing the threat of the Islamic State, Moscow is sounding an alarm that attracts the attention of the rest of the international community and forces the U.S. to address yet another security issue.

It’s a simple but effective ploy. The past few years have demonstrated that where there is the Islamic State, there is cause for international involvement, and international involvement demands that the United States remain in Afghanistan when it would rather leave. The desired outcome for Washington is a negotiated settlement between the Taliban and the Afghan government, one that would enable the U.S. to save face in ways it did not in Iraq, where a power vacuum created a more formidable enemy than the government Washington deposed, and would allow it to keep a limited military presence in the country. Such a presence would give Washington the option of helping to keep jihadists in check and, perhaps as important, give it enhanced strike capability over nearby targets in the future.

The more parties get involved in Afghanistan, the more difficult it will be to reach a peace settlement that everyone can abide. Washington naturally wants what’s best for Washington, so it needs near-unilateral control over Kabul’s military and political operations – hence its version of events in Afghanistan. Saying the Islamic State is just the same old fighters in a new uniform downplays the threat it poses, obviating the need for the involvement that parties hostile to U.S. interests may offer.
Crossing Borders
Waiting in the wings is Iran, which of course has interests of its own. Iran wants to expand throughout the region and needs to protect its eastern border from any threats originating in Afghanistan. It must therefore consider what a settlement in Afghanistan may look like, especially if it entails a U.S. withdrawal, however remote a possibility that may be. Tehran, constituted as it is by Shiites, does not want to see a Sunni government take control in Kabul, let alone one with U.S. ties. Iran cannot prevent that from happening, but it can create a buffer space or a proxy force near the border to secure its territory. In fact, the Islamic Revolutionary Guard Corps already operates in Farrah province alongside the Taliban. Moreover, Tehran has been actively recruiting Afghan fighters for the Fatemiyoun brigades, which fight in Syria. Both of these moves sow the seeds of a future Iranian proxy group to operate in Afghanistan (or in a potential conflict in Pakistan).

Then there is China, which is likewise preparing to capitalize on any potential peace agreement. As with Russia, China’s primary interest in Afghanistan is to make sure extremism stays in Afghanistan. It can ill afford militants crossing the border into Tajikistan, where they could then move into China. The East Turkistan Islamic Movement seeks to establish an Islamic state in the territory of East Turkestan and parts of Xinjiang Uighur Autonomous Region in China. The Chinese government has Xinjiang effectively on lockdown, but it is still keen to prevent local militants from organizing abroad or finding support from beyond Chinese borders. To that end, it signed an agreement with Tajikistan in 2015 for the construction of 10 border posts along the common border with Afghanistan and one training center for Tajik border troops. Some reports also indicate plans to build a Chinese military base in the Afghan province of Badakhshan.

Stability in Central Asia also benefits China commercially. Beijing’s One Belt, One Road initiative and its special economic corridor to Pakistan both run through Afghanistan. Moreover, several of Beijing’s mining operations in Afghanistan have been delayed because of instability, and China, which consumes vast amounts of natural resources, is keen to bring them back online.

With so many countries engaged in Afghanistan, it’s little surprise that the shared desire to start settlement talks is gaining traction. Even the Taliban have openly expressed an interest for the United States to enter into peace talks – even if it was just to get Washington out of the country. The Afghan government, for its part, has expressed its interest in reaching some degree of political solution with the Taliban and has welcomed Russian calls for a trilateral meeting between the Russian, U.S. and Afghan governments. But U.S.-Russia relations could get in the way of a resolution. Partly that is by design. One way or another, their differences will need to be either overlooked or overcome before any settlement can be reached.

The FANG Stocks Bite Back

By Randall W. Forsyth

    Photo: Getty Images 

There are decades where nothing happens; and there are weeks where decades happen,” according to Vladimir Ilyich Lenin. The latter sort of weeks seemed to dominate the quarter just ended, even if the discussion is confined solely to financial markets and economics and ignores the din of the political headlines.

As the year began, the stock market was marching higher in a virtual straight line in a seemingly preordained path to ever-increasing peaks. Sort of like the New England Patriots, who appeared to be moving to yet another Super Bowl victory. Even when trailing late in the AFC championship game, a fourth-quarter Pats rebound against the Jacksonville Jaguars appeared inevitable, and it was. But in the Super Bowl, the Philadelphia Eagles held off another late comeback by Tom Brady & Co., rewriting the well-worn script.

Likewise, three months into a year in which stocks started with such overwhelming confidence, the major market averages broke their nine-quarter winning streak. Ironically, that stumble took place as the bull market celebrated the ninth anniversary of its liftoff from the financial-crisis lows of March 2009.

Emblematic of the atmospheric change was the VIX, formally the Cboe Volatility Index, but known universally by its ticker initials. From the somnolent single digits, which reflected a near-hubristic certainty that nothing could go wrong for a bull market that was rising almost in a straight line, the VIX suddenly jumped in early February on the merest hint of inflation.

Indeed, speculators had made bets on persistently low volatility, or “the latest sure thing,” as this column warned last year (“The Trouble with Those Can’t-Miss Trades,” Oct. 14, 2017). Of course, those bets paid off until they didn’t. The VIX surged as bond yields jumped on signs that at long last, wages might be stirring in a labor market that was at full employment by conventional measures. The unwinding of the “short volatility” trade triggered the sale of stocks, knocking the major averages from their peaks.

After this largely technical episode in February, March’s market rockiness has triggered what might be called a disillusionment with technology, or at least with some of the highflying FANG stocks. Most prominent has been Facebook (ticker: FB), which has shed an astonishing $75 billion in stock-market value since the disclosure of data harvesting by Cambridge Analytica erupted a couple of weeks ago.

Both Facebook and Google parent Alphabet (GOOGL) face regulatory challenges, according to Strategas’ Washington team, led by Dan Clifton. Facebook founder and CEO Mark Zuckerberg is slated for a Capitol Hill inquisition over privacy issues, which could have an uncertain impact on his company’s business model. It’s also telling that a chart of the FANG stocks shows Alphabet and Facebook have trailed Netflix (NFLX)—the top performer in the Nasdaq 100, with a 53.9% surge in the first quarter—and (AMZN) since the turn of the year.

Amazon has been the object of President Donald Trump’s particular ire since the 2016 election campaign. Axios last week reported Trump is “obsessed” with Amazon, after which the president tweeted that the e-tailer doesn’t pay its fair share of taxes and uses the U.S. Postal Service as its “delivery boy” while putting “thousands of retailers out of business!”

“We saw very little attention paid to the one area where Trump could actually hurt Amazon—cloud-computing contracts,” Clifton writes. Amazon Web Services could receive the sole contract, worth billions, for cloud computing for the Department of Defense, and that has attracted criticism from other big tech rivals. Amazon’s shares fell after Trump’s tweet last week, losing some 3.3%. AWS, an integral part of Amazon’s business, effectively subsidizes its retailing operations.

Amazon also unveiled plans during the quarter to coordinate with Berkshire Hathaway (BRK.A) and JPMorgan Chase (JPM) to create an alliance to deliver health care to their employees. On the flip side, The Wall Street Journal reported Thursday that Walmart (WMT) is considering acquiring Humana (HUM) in an attempt to deliver health services more efficiently. That follows CVS Health’s (CVS) proposed buy of Aetna (AET). The aim of all these combinations would be to tackle the one sector that’s proven least tractable to controlling costs with technology: health care.

Perhaps the greatest disillusionment in the tech world has been in the realm of transportation. The death of a pedestrian in an accident involving an Uber Technologies self-driven car has shaken the high hopes about artificial intelligence’s ability to take us wherever we want without hassle—and without the expense of a driver or our own car.

That disappointment also extended to Tesla (TSLA), which has staked much of its future on autonomously driven vehicles. The electric-auto maker’s stock slid 17% in the first quarter (when after-hours trading on Thursday is included), one of the worst performances in the large-cap Nasdaq 100.

In what appeared to be a news dump at the end of the holiday-shortened trading week, Tesla late on Thursday disclosed the recall of 123,000 Model S sedans for a possible power-steering failure, reversing a 3.2% gain in normal trading hours. The stock previously had been hit by news of a fatal crash of a Model X SUV, which may have involved its Autopilot feature.

The real crash hasn’t been in Tesla stock, but its bonds. The equity has been basically a perpetual call option on bullish expectations for Tesla’s business of selling supercool, zero-emissions (ignoring electric plants) automobiles that burns prodigious sums of cash. Bonds, however, provide only the homely promise of semiannual interest coupons and the return of principal—provided all goes well.

Moody’s Investors Service last week rendered its judgment that things weren’t.

The ratings service cut Tesla’s overall rating a notch, to B3 from B2, while the company’s $1.8 billion of senior unsecured notes were trimmed to Caa1, reflecting the company’s “liquidity pressures due to its large negative free cash flow and the pending maturities” of other debt.

The bond market’s dyspeptic reaction was to slash the price of those aforementioned 5.3% senior notes due 2025 to $87.50 from par at their issuance last August, according to Cliff Noreen, deputy chief investment officer at MassMutual, the big mutual life insurance company. Back then, he opined in this space, Tesla got an attractive yield, commensurate with a double-B (top-tier junk) credit, and the notes never traded above par. Meanwhile, the shares have fallen from a peak of $385 in September to under $260 after-hours on Thursday.

Equity analysts remain relatively sanguine that Tesla will be able to step up production of its Model 3 sedan (see page 11), which is crucial for the company’s cash generation—so much so, according to a Bloomberg report, that the auto maker sought volunteers to ramp up output of the sedan to prove wrong the “haters” doubting the company. All of which speaks to the more sober expectations among investors.

As for the VIX, it has remained near 20—nearly twice its previous level of nonchalance—albeit down from 37 while the market was being roiled in February. Tech retains its fans, but some of the irrational exuberance, to coin a phrase, has been tempered. And that’s without even mentioning trade and tariff tensions or the prospect of continued interest-rate increases by the Federal Reserve.

More eventful weeks likely lie ahead. 

After the rough first quarter, it might be comforting to know that April isn’t the cruelest month.

The Dow industrials have averaged a 1.9% gain in it since 1950, the best showing of any month, according to the Stock Trader’s Almanac. During that stretch, there were 46 positive Aprils and 22 negative ones.

The first half of April tends to be positive, perhaps in anticipation of strong first-quarter earnings, the publication speculates, although the Dow is prone to weakness in the second half, following mid-month income-tax payments.

Aprils in midterm-election years tend to be less favorable, however, with an average 0.8% gain in the Dow. More importantly, April ends the strongest six-month span of the year, ahead of the hoary “sell in May” indicator.

Say what you will, the Stock Traders’ Almanac found that the Dow had returned an average 7.6% between Nov. 1 and April 30, going back to 1950, compared with just 0.4% between May 1 and Oct. 31. The tendency for weakness in the middle of midterm election years is even more pronounced. The second and third quarters have been the weakest of the four-year cycle, with an average decline of 1.8% in the Dow industrials.

That historically sets up for the “sweet spot” of the four-year election cycle. From the fourth quarter of the midterms to the second quarter of the “pre-election” year, the Dow has averaged 20.4%.

Whether past will prove to be prologue for this unique political scenario is another question. So many of the fiscal goodies that tend to drive the election cycle have been served up early, which helped the major indexes set records earlier this year.

Then there’s the Fed, which is on track for another two, and maybe three, quarter-point interest-rate increases this year. The Treasury market is reacting anomalously, with longer yields coming down again. The yield curve, expressed in the spread between the two- and 10-year notes, has fallen to less than a half-percentage point. That’s made it the flattest since the financial crisis. The history of the yield curve suggests caution.

Europe Should Not Retaliate Against US Protectionism

Hans-Werner Sinn

 A container ship leaves Hamburg port

MUNICH – US President Donald Trump is making good on his promises to put “American first” through trade protectionism. How should Europe respond?

Trump has temporarily exempted Europe from his newly imposed import duties on steel and aluminum. But his Sword of Damocles – high import tariffs – still hangs over Europe. Indeed, he has already pledged to impose tariffs on European cars – targeting, in particular, BMW and Mercedes – to help US car producers, even though this will also hurt American consumers. As always, consumers are politically less powerful than producers, as their per capita losses are smaller than the producers’ per capita gains, and they face more barriers to collective action.

The European Commission has been considering retaliatory tariffs on a variety of imports from the United States – ranging from Harley Davidson motorcycles to food products like orange juice and peanut butter – in the hope that affected American producers put pressure on the Trump administration. This obviously worked for the moment, but it is ultimately the wrong strategy.

The fact is that retaliatory tariffs are extremely dangerous, as they risk provoking a broader trade war. And, contrary to Trump’s ill-informed claims, trade wars are not good for anyone, as they undermine the division of labor. Nor are they “easy to win.” Quite the opposite: like conventional wars, trade wars are impossible to win.

Beyond this general risk of trade war, there are reasons why the European Commission, in particular, would find that retaliatory tariffs backfire. For starters, they could arouse suspicion that the Commission is motivated at least partly by a desire to reap more customs revenues for itself, as a hedge against a Brexit-triggered financial crisis. Though such revenues would be taken into account in the upcoming budget negotiations with EU countries, questions about the Commission’s motives are the last thing it needs.

In any case, one should not throw stones when one lives in a glass house. And the EU’s house is fragile: it already taxes car imports from the US at 10%, compared to the 2.5% tariff the US has in place for car imports from the EU. While this asymmetry emerged because the US has received greater intellectual-property protections through the so-called TRIPS Agreement, the fact remains that tariffs undermine consumer interests, and are thus unjustifiable.

The EU also collects an import sales tax at the rate of value-added tax for systemic reasons. And it collects extremely high import duties for agricultural products. From the beginning, the European Economic Community was shaped by a bad compromise between Germany and France: French farmers could charge excessive prices, and Germany could sell its industrial goods to France.

The system of agricultural protectionism that this compromise produced survives to this day, exemplified in import duties of 69% on beef and 26% for pork. Because of these high import tariffs, European agricultural prices are, on average, around 20% above world market levels. This burdens consumers across the EU, especially poorer people who have to spend a large share of their income on food.

Europe’s agricultural protectionism also harms developing countries, which are unable to sell their agricultural products – in many cases, the only goods they can export – in European markets. According to an older studyby the Canadian economist John Whalley, the disadvantages of agricultural protectionism for developing countries outweigh the benefits of development aid.

American farmers also lose out, because they are denied access to the huge European market. So, in this respect, Trump is not wrong to criticize the EU’s protectionism. Europe is blocking access to a class of goods – one that is vital to people’s survival – that can be imported much more cheaply than it can be produced at home.

The EU must ensure that it is truly a bastion of free trade, even if America moves to act as a stronghold of protectionism. That means that it must not sacrifice its citizens’ interests to those of the French agricultural lobbies or to the Commission’s financing needs. And it certainly shouldn’t engage in transatlantic saber rattling.

Instead, the European Commission should pursue a de-escalation strategy, offering to reduce tariffs on US imports and to resume negotiations on the Transatlantic Trade and Investment Partnership. This would enable Trump to proclaim victory at home, while raising the European standard of living by freeing Europe’s consumers from the yoke of the EU’s agricultural protectionism.

Hans-Werner Sinn, Professor of Economics and Public Finance at the University of Munich, was President of the ifo Institute and serves on the German economy ministry’s Advisory Council. He is the author, most recently, of The Euro Trap: On Bursting Bubbles, Budgets, and Beliefs.

Globalization’s Backlash Is Here, at Just the Wrong Time

The world economy became more interconnected in the 1990s and 2000s, delivering immediate pain to rich countries, along with benefits that only now are starting to be more apparent.

By Neil Irwin 

At work in the hangar of the Shanghai Aircraft Manufacturing Co.CreditGiulia Marchi for The New York Times

No one should be surprised that there has been a backlash to globalization, given the scale of disruption that has resulted from more interconnected economies. What is surprising is that it has arrived now.

That’s because globalization, at least in the form we have known it, leveled off a decade ago. And that shows a crucial risk of the recent push to re-set the terms of the global economy — including tariffs on steel and aluminum and punitive actions against China that President Trump has introduced.

It is coming after the major costs of globalization have already been borne. And it comes just as billions of people who have become integrated into the global economy over the last three decades are starting to become rich enough to become valuable consumers.

In short, the anti-globalization drive that is spreading across the Western world may be coming at exactly the wrong time — too late to do much to save the working-class jobs that were lost, but early enough to risk damaging the ability of rich nations to sell advanced goods and services to the rapidly expanding global middle class. 
It is tempting to think of globalization as a constant process, but historically that’s not the case. It moves in fits and starts, and occasional reversals. The 1990s and the first years of the 2000s were one of those extraordinary periods in which economies became more interconnected, according to a range of data.

Now, globalization has entered a new phase, in which cross-border trade in goods and services is steady as a share of the economy, and the international flows of capital are lower than they were before the global financial crisis. It is now the spread of information that is rising, with different implications for workers in rich countries than the earlier phase.

Starting in the 1990s, improvements in communications and shipping technology made global outsourcing more feasible. Trade deals reduced tariffs and other barriers to commerce. And many once-poor nations became more integrated into the global economy, especially China.

This adjustment provided a wave of affordable goods and opened up new markets for rich countries, but it also devastated certain sectors and geographical areas, especially those involved in manufacturing low-tech products. Workers in American and Western European factory towns found themselves in competition with Chinese electronics assemblers, Indian call center employees and auto factory workers in Eastern Europe, Mexico and beyond.
The flow of goods and services across national borders as a share of all economic activity hovered near 16 percent through the 1980s and early 1990s, then from 1993 to 2008 shot up to 31 percent. Then it stopped rising, instead bouncing around that level, according to data from the McKinsey Global Institute.
“The interesting thing about tariffs on steel or other goods is that it’s fighting the last battle, not the future one,” said Susan Lund, a partner at McKinsey who has researched these global flows. “Global manufacturing has already reconfigured itself. That change happened, and the horse is out of the barn. We don’t think globalization is over, but it has taken a new form.”

That form consists of greater connectivity and communication, which may not show up in traditional data on trade or capital flows. That includes more people using social media platforms to connect with people in other countries, companies relying on freelance labor located around the globe, and small enterprises doing business with partners around the world through the internet.

In other words, it’s not a form of globalization that endangers factory jobs, but one that could have big consequences in other areas — leading to more competition for technologically advanced white-collar jobs, while also creating enormous new opportunities for American and Western European firms. That, in turn, helps explain why much of the trans-Pacific Partnership, the trade deal that the Trump administration withdrew from, focused on intellectual property rights, data security and privacy.

The M.I.T. economist David Autor and colleagues have done extensive work showing that the “China shock” that ensued with that country’s entry into the World Trade Organization caused lasting pain to communities in the United States that competed with Chinese companies in making a range of manufactured goods.

Even as those effects linger, he sees the risks involved in commerce with China as shifting elsewhere.

“The China shock on large-scale manufacturing and its mass employment effects, that part is largely behind us,” Mr. Autor said. Now, the challenge is Chinese competition on more technologically complex products, like automobiles, airplanes or microprocessors. The manufacturing of more labor-intensive, less technologically complex products
like apparel is migrating to lower-wage countries like Bangladesh and Ethiopia. 
But a shift in where certain products are made is different from a net increase in the level of global connectivity. The level of economic integration is remaining level, even as the details of exactly what is made in which country are changing.

“I don’t think there’s any turning back the clock,” Mr. Autor said, referring to a return to a world where less technologically complex and more labor-intensive products are again made in the United States. “I think we should be girding ourselves for the real challenge, which is struggles over intellectual property and frontier industries.”

The Trump administration’s efforts to pressure China, if they succeed, would do some of that. But those actions have been paired with tariffs on steel and aluminum that appear more aimed at protecting American manufacturing of the metals. The administration’s approach could backfire if it unleashes a series of escalating tit-for-tat tariffs on all sorts of goods, undermining global commerce without fixing the underlying problems in information-intensive industries.

If the latest trade skirmishes do blow up into a trade war, those new barriers to international commerce might also block a long-predicted reward of globalization: a new world of customers. The rise in global economic integration, for all the disruption it has meant for certain workers in the United States and Western Europe, has also been a story of hundreds of millions of people becoming more connected to the worldwide economy, and achieving higher standards of living in the process.

Homi Kharas, a senior fellow at the Brookings Institution, studies the rise of the global middle class — which in his calculations includes people with income of at least $10 per person per day in 2005 dollars. For a family of four, adjusted to 2018 dollars, that works out to around $19,000 a year.

In 1990, only 23 percent of the world’s population fit that category. Today 45 percent do, meaning an additional 2.3 billion humans are now able to afford the luxuries that the global economy provides: abundant food, motorized transportation, mobile phones and the like.

Mr. Kharas argues that it’s wrong to view these billions of people only as competition for good Jobs. 
“What we see is that as the middle class emerges, they have a massive demand for all types of services,” he said. “Whether that is Hollywood movies or Bollywood movies or Hong Kong movies, or the ability to eat out in franchises like KFC or McDonald’s, or using internet applications, or taking out insurance, they’re driving massive changes in the structure of the global economy that include consuming goods that the United States is good at producing.”

In other words, globalization shouldn’t be viewed as a perpetual onslaught in which American workers are facing waves of more and more people willing to do the same job for lower wages — even though it may have seemed that way during the 1990s and early 2000s when trade was soaring faster than the global economy.

Rather, everyone is both a competitor and a customer. With trade battles looming on the near horizon, the open question is whether the United States and Europe, having already borne the costs of competition with the developing world, will stick with open trade long enough to enjoy its benefits.

Neil Irwin is a senior economics correspondent for The Upshot. He previously wrote for The Washington Post and is the author of “The Alchemists: Three Central Bankers and a World on Fire.”

A US-China Trade War? Not So Fast

By Jacob L. Shapiro


The United States and China are not fighting a trade war – yet. This may seem strange to say, considering that the Trump administration announced on March 22 that it would be seeking to place tariffs on $60 billion worth of Chinese imports in the next few weeks. But the measures introduced this week, combined with the steel and aluminum tariffs announced earlier this month, do not amount to a declaration of war. They are a shot across the bow designed to demonstrate U.S. resolve to the Chinese when it comes to trade. The U.S., for all its recent threats, wants to use these tariffs to build additional leverage with China that it can use in negotiations and to score political points at home. China will make token feints at responding for its domestic audience, but the most likely scenario is Chinese capitulation today so it can live to fight tomorrow.
A Lot to Lose
The U.S. has been working up to this moment since Donald Trump’s first day in office. After all, a U.S. president is not endowed with extensive powers over trade relations just by virtue of being elected. A number of legal hurdles must be cleared before the U.S. executive can consider imposing trade restrictions. Such measures may also be subject to judicial review, and there is not much precedence for Trump’s moves in U.S. case law. But nonetheless, Trump has used various laws – section 232 of the U.S. Trade Expansion Act of 1962 for the steel and aluminum tariffs, and section 301 of the U.S. Trade Act of 1974 for the restrictions imposed this week – to claim more power over U.S.-China trade relations than any previous U.S. president.

China would have a lot to lose in a full-fledged trade war with the United States. The U.S. is the largest destination for Chinese exports by far – in 2016, 23 percent of Chinese exports, worth roughly $481 billion, ended up in the United States. China’s other top export destinations were key U.S. allies in the Pacific – Japan and South Korea. Meanwhile, just 8 percent of U.S. exports, worth about $116 billion, went to China. China’s economy also depends more on exports than the U.S. economy does. China has managed to decrease this dependency in recent years, but one-fifth of Chinese gross domestic product still comes from exports; for the U.S., it is more like one-tenth. At the broadest level, China is the weaker party in this fight.

China is not without significant leverage of its own, however. There are certain sectors in the U.S. that are highly dependent on the Chinese market. For example, in 2016, 62 percent of U.S. soybean exports, 77 percent of sorghum exports and 60 percent of animal hide exports were destined for China. China’s Ministry of Commerce has already begun to lay out what retaliatory action would look like, and unsurprisingly it has focused on U.S. agriculture and farm products, such as pork, which would not substantially affect the U.S. economy but could severely hit parts of Trump’s electoral base.

China can also respond with great effect using non-trade-related measures. Beijing could, for example, make it more difficult for U.S. businesses to operate in China. Companies like Apple, Boeing and Starbucks all derive substantial revenue from Chinese operations and have been forecasting increased involvement in China in the years to come. Indeed, China showed just how effective such moves can be when it forced Marriott International, an American hotel chain, and Delta Airlines, the second-largest U.S. airline, to apologize for listing Taiwan and Tibet as separate countries on their websites, threatening to cut their access to the Chinese market if they didn’t. Moreover, China knows that the U.S. economy is consumption based, and tariffs targeted at China will raise the price of consumer goods for average Americans without China having to lift a finger.
The Trouble With War
But what China is capable of and what China will actually do are two different things. And Trump’s anti-China measures, impressive though they may sound, are not so severe that they will lead to a vigorous Chinese response in the areas where Beijing has leverage. The tariffs and penalties the U.S. is proposing apply to only about 10 percent of Chinese exports to the United States and just 2 percent of Chinese exports to the world. That is not exactly a scorched earth policy; in fact, it’s more like a slap on the wrist. But the U.S. is doing this because it has never forcefully pushed back against China, in large part because the U.S. has profited from cheap Chinese goods for the past three decades. In a negotiation, it is not always enough to simply point out your adversary’s vulnerabilities; sometimes, it is necessary to demonstrate how badly those vulnerabilities could hurt when they are exploited.
That is what the U.S. is doing here – it wants to reset the conversation with China on its own terms. And China does not have much choice but to go along. After all, Chinese President Xi Jinping is launching massive structural economic reforms that will necessarily lead to lower GDP growth rates, and that means China can ill afford a trade war that will lower those growth rates even further. If the U.S. were to raise tariffs on all Chinese exports, it could send the Chinese economy into crisis or, at the very least, force China to abandon its attempt to rein in stimulus spending and irresponsible credit growth, which would just delay the inevitable reckoning by a few years. That is why Xi has chosen to make his best two lieutenants – Wang Qishan and Liu He – responsible for China-U.S. relations. By doing so, Xi has revealed that he believes his fate depends more on careful management of Beijing’s relationship with Washington than on the ongoing purges that ensure loyalty at home.

The trouble with war is that once started, it is unpredictable. A shot across the bow can accidentally hit the ship and trigger conflict even if both sides aren’t yet prepared to do battle. This most recent raft of measures is not in danger of hitting China’s bow, but if in negotiations the United States pushes China too far and Beijing feels backed into a corner, China could get more aggressive. China would then have to compensate for the economic backlash that would come from losing access to the U.S. market by rallying the Chinese nation around the flag, and that might lead to anything from boycotts of U.S. products to military engagements designed to unite the Chinese people around their shared identity instead of around shared economic disappointment. This is by far the less likely scenario, but it is possible.

The Trump administration will proudly tout these more recent measures as a major victory against China. China will beat its chest with equal vigor and make harsh statements about defending its rights and interests against irresponsible U.S. overreactions. But unless the Trump administration announces far greater curbs on Chinese access to the U.S. market than it has intimated, the public statements will be little more than posturing. As always, Beijing will be looking for a win-win scenario, where the Trump administration can claim victory at home but no real damage is done to the Chinese economy at this critical juncture. That may not be as sexy as describing the new tariffs as the first salvo of a trade war, but it is the truth.