HOW MUCH DO WE REALLY KNOW ABOUT GLOBAL TRADE'S IMPACTS?
Donald Trump’s campaign has at times resembled a whistle-stop tour of broken-down manufacturing towns. Places like Monessen, Pa., and Hickory, N.C., have come to be seen as central to his rise — and that of Bernie Sanders, before he bowed out — as well as symbols of a national preoccupation during this election season: the downsides of globalization. Earlier this year, research that led to an academic paper from several economists titled “The China Shock” found that between 1999 and 2011, the growth in imports from China killed about 2.4 million American jobs, one million or so of them in manufacturing. That’s a much greater impact than most economists had been assuming, and the 2.4 million figure has come up again and again in debates over global trade.
There’s much less specificity when it comes to the other side of the ledger, however. For all the talk about winners and losers in the global trading game, an actual accounting of what’s happening on the winning side overseas is surprisingly elusive. Even as economists point to cheaper consumer goods and new jobs that trade brings to the United States, they’re unable to say how many jobs are created in, say, Asia. Among friends and in the news coverage I see, the dismissive assumption tends to be that the big winners in the game are the same elites, here and all over, who seem to profit from everything. But the fact is, there’s no deep understanding of what the gains are in other countries. How many and what sorts of jobs are created? To what extent are lives and nations changed?
There are many reasons that the disadvantages have received more attention than the gains. In American political discussions, after all, the focus is understandably on domestic losses rather than foreign benefits. Trade also presents a classic case of concentrated costs and diffuse benefits — the lower prices and higher employment that trade can produce are generally distributed thinly over many beneficiaries, while the loss of jobs falls hard on a smaller number of people. But there is a less-obvious reason as well: Economists haven’t done a particularly good job of pinning down the virtues of trade. In “The China Shock,” the authors David Autor, David Dorn and Gordon Hanson chastise their discipline for its relative silence on this front: “It is incumbent on the literature to more convincingly estimate the gains from trade.”
I have come across one paper, though, that provides a good starting point for thinking about what trade can mean for people overseas. A young Canadian economist at Wilfrid Laurier University, Brian McCaig, studied what happened in Vietnam immediately after the United States slashed tariffs on goods from that country in 2001 — a bilateral trade agreement similar to many others before and since that have opened up the United States to manufactured goods from Asia. He found that over the next three years, as the value of apparel and clothing accessories going to the United States from Vietnam rose by 277 percent, the poverty level in Vietnam fell to 19.5 percent from 28.9 percent, twice as fast as it had fallen in the preceding four years and enough to lift about seven million people out of poverty. This wasn’t American food-stamp poverty those Vietnamese were escaping; it was malnourished, dollar-a-day poverty.
McCaig does not claim that these changes were produced solely by the surge in exports to the United States. By his estimate, only about 250,000 jobs were created in export-based manufacturing in Vietnam during those two years. But those jobs, which were better-paying than almost anything else available before, had an enormous ripple effect: Every new factory position led to several other new jobs nearby. In general, the more specialized a region was in producing exports, the faster poverty declined. In districts with the most exposure to manufacturing, like Tien Giang, near Ho Chi Minh City, the poverty rate fell about twice as fast from 2002 to 2004 as it did in more rural areas like Ha Tinh, in the north. Even in the rural areas, living standards rose as workers in the cities sent money back home. According to McCaig, this came to account for 15 percent of the total income in those regions. Productivity on the farms also improved as landowners adapted to fewer workers.
McCaig says it is hard to do the kind of analysis he did on Vietnam elsewhere — few developing countries keep reliably detailed data on employment and poverty. He also points out that economists in America and Europe tend to be more interested in studying their own economies. But McCaig told me that Vietnam’s transformation resembles what other Asian countries have experienced after gaining access to Western markets in the last few decades. He assumes that other countries would have had similar benefits.
I asked him if there was a way for some back-of-the-envelope math to convey at least a sense of how China benefited from the global trade that led to the loss of 2.4 million jobs in the United States. It is not a straightforward calculation, because the increasing American openness to trade has by no means been the only catalyst behind China’s economic growth; among other factors, its government has also been changing economic policies and making enormous domestic investments. With that caveat, however, McCaig noted that if Chinese exports really did lead to the elimination of one million American jobs in manufacturing, as estimated in David Autor’s work, China would have had to replace them in proportion to how productive Chinese workers were compared with their American counterparts. Given that it took roughly 10 Chinese workers to match the output of one American worker over the last two decades, McCaig said he assumes that China would have needed about 10 million new jobs to replace one million manufacturing jobs in the United States. (It made sense for companies in China to expand on this scale because Chinese workers made less than one-tenth what Americans did.) That accounts for just under half of the new manufacturing jobs that China gained between 2003 and 2011, following China’s entry into the World Trade Organization in 2001, which gave the country’s exporters preferred access to American consumers.
Last year, economists at the University of Groningen, in the Netherlands, said that by their very rough estimates total foreign demand for Chinese goods may have led to the creation of as many as 70 million jobs in China in the five years after China joined the W.T.O. This “export shock” has been described by economists as the most important factor in China’s economic development in the 2000s; foreign consumers were able to support higher wages than Chinese consumers could. The overall growth in the period described by “The China Shock” helped raise 350 million Chinese above the country’s poverty line of $1.90 a day.
Of course, trade liberalization is not always a boon for poorer countries. During an earlier era of American trade agreements, especially in Latin America, countries often agreed to lower tariffs on their own protected industries, like textile manufacturing in Brazil and India. Those changes often ended up hurting poor workers in those industries. But by 2000, McCaig and other economists told me, most countries had lowered their tariffs, and the growth of global trade mostly meant that developing countries got better access to wealthier consumers in the United States and Europe.
Other costs have emerged, however. Urban Chinese are choking on pollution and confronting growing income inequality. In the United States, jobs have disappeared, and there is social unrest. Our exposure to foreign markets is partly to blame, but economists attribute many of the job losses to changes in technology and productivity. (American manufacturing output has grown even as the number of manufacturing workers has shrunk.)
On the other hand, as an article in the current Quarterly Journal of Economics points out, the cheaper products coming into the United States have particularly benefited the poorest Americans, who spend more of their income on imported goods and thus save more when trade makes goods cheaper. But when I spoke with David Autor, he told me that whatever the virtues or costs in the United States, they pale in comparison with the basic humanitarian benefits that people in places like China and Vietnam have experienced as a result of trade with the United States. “The gains to the people who benefited are so enormous — they were destitute, and now they were brought into the global middle class,” Autor says. “The fact that there are adverse consequences in the United States should be taken seriously, but it doesn’t tilt the balance.”
Autor told me that he does not hold out hope that American politicians will bring this sort of calculus to the election debate. But if the rest of us want to consider trade in moral and humanitarian terms, not just as a political and economic matter, it seems important to contemplate how to assign and compare the values of a new job to someone who would otherwise be stuck in dire poverty and a lost job for someone with at least some version of a safety net, which Americans have compared with many of the poor people in the developing world. Undoubtedly there are ways to soothe the hardship on both sides, and we should try to figure them out. But trade inevitably involves some trade-offs. If we want to determine if they are worth it, we can’t just look at one side of the transaction.
EURO ZONE INFLATION AUNCHANGED AT 0.2% IN AUGUST; UNEMPLOYMENT FOR JULY STEADY AT 10.1%
The euro zone remains stuck with a lackluster economy, latest figures show, with stubbornly low inflation and high unemployment levels in some of its member countries.
The news comes in spite of the European Central Bank unleashing a raft of monetary measures to stimulate spending and investment including negative interest rates and a trillion-euro corporate and sovereign bond-buying program.
FED'S ESTHER GEORGE: INTEREST RATES SHOULD GO HIGHER, BUT GRADUALLY
Kansas City Federal Reserve President Esther George, a voting member on the central bank's policymaking panel, told CNBC it's time to increase interest rates.
In the interview that aired on Thursday, George said any tightening should be gradual. "I do think it is time to move that rate. It doesn't mean I favor high rates. It doesn't mean I think it needs to happen rapidly."
The Fed has not acted yet, according to George, because some recent economic data have given policymakers pause.
"But under conditions when we're seeing employment move [higher with] low and stable inflation, I think it's fair to say we could remove some of that accommodation," she said.
Other Fed officials have recently voiced similar positions, raising the possibility of a rate hike at the Fed's Sept. 20-21 meeting. The central bank last increased rates in December, the first such move in more than nine years.
George acknowledged that the economy did slow in the first half of the year. But she believes a stronger second half could still deliver a 2 percent growth rate for 2016. Second-half growth could hit 3 percent, barring unforeseen events, she added.
The recent jobs numbers show Americans are coming back to work, George said. "We're beginning to see wage growth in a way that suggests that the consumer is going to be in a good position to spend," she said.
George said she was concerned about valuations in some markets, including commercial real estate and the oil sector.
As for concerns about the presidential election influencing the Fed, George said policymakers should remain focused on the "real economy,[which] is the job of an independent central bank."
Fed officials were meeting this week at the Jackson Hole Economic Symposium, which is sponsored by the Kansas City Fed.
As Fed Chair Janet Yellen gets ready to address the conference on Friday, former Fed Governor Kevin Warsh is taking the central bank to task, in a Wall Street Journal op-ed.
The Fed needs a new way of thinking, he wrote, arguing its models are unreliable and policies are erratic.
Responding to such criticism, George told CNBC: "It's been a long time since we've used convention monetary policy in a way the public understands.
"Of course, we have a framework focused on the Fed funds rate and the short-end of the [bond yield] curve," she added.
Echoing Warsh, the latest CNBC Fed Survey of economists, fund managers and strategists found 60 percent of respondents feel the central bank lacks a framework for deciding on rate moves, with just 24 percent saying they do and 16 percent unsure.
FED LEAVES RATES UNCHANGED IN JULY MEETING
The Federal Reserve opted Wednesday not to raise interest rates, despite painting a rosier economic picture than it did just a month ago.
As expected, the Federal Open Market Committee kept its overnight interest rate target in the 0.25 percent to 0.5 percent range. However, it noted a labor market that has "strengthened" and said other indicators were pointing to growth.
"Job gains were strong in June following weak growth in May," the FOMC said in its post-meeting statement, referring to nonfarm payrolls that rose from 11,000 to 287,000 over the one-month period. "On balance, payrolls and other labor market indicators point to some increase in labor utilization in recent months."
On the downside, the statement noted that inflation remains mired and is "expected to remain low in the near term" and then rise as the decline in energy prices turns and the labor market continues to strengthen.
"Near-term risks to the economic outlook have diminished," the statement said, expressing a sentiment that had not been in the June missive. At last month's meeting, the committee scaled back its economic projections and slashed its previous forecast of four rate hikes this year to two.
"They clearly have set the stage for a potential rate hike in September, but they didn't want to commit themselves," said Kathy Jones, chief fixed income strategist at Charles Schwab. "You can tell they're feeling a bit more confident."
The statement said "household spending has been growing strongly," an upgrade from language in June, but noted that business investment has been soft, a point underscored by data Wednesday that showed durable goods spending that disappointed again.
In June, the Fed lamented that the jobs market "slowed" and inflation indicators actually had declined. That statement reset market expectations for rate hikes.
"The statement has a bit better tone, reflecting significantly better data relative to expectations over the last six weeks," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank. "However, the Fed has gotten wise to the fragility of markets. They kept in that they're still monitoring financial conditions, so even though many things broke positively for the Fed since their last meeting, they want to be extra cautious."
Financial markets were assigning virtually no chance for a hike at this meeting, and the Fed has been sharply attuned to those expectations. However, a fairly hawkish central bank could increase those expectations for future months.
Heading into the conclusion of the two-day meeting, traders had been giving a September hike just a 20.9 percent chance, with a near-coin flip 49.5 percent probability of one before the end of the year. The Fed last hiked its overnight rate in December after keeping it anchored near zero for seven years. The funds rate most recently was at 0.4 percent.
Fed officials had been expressing angst over geopolitical developments, particularly June's Brexit vote. Concern over global events, however, was absent from the statement.
The committee approved the decision with only one dissent, from Kansas City's Esther George, who continued to push for a quarter-point hike.
The Fed's decision to hold the line comes as concerns increase over global growth. Earlier in the day, Fitch Ratings said it had cut its forecast for Fed rate hikes from two to one this year and from three to two in 2017. The agency also said it expected central banks to be aggressive elsewhere in the world.
This is a breaking news story. Check back here for updates.
AS SUMMER HEATS UP, GAS PRICES STAY COOL
Even with the peak travel season in full swing, gasoline prices are stuck in reverse.
Gas prices have plunged to their lowest July level in 12 years, according to AAA, even as Americans are racking up more miles.
In fact, gas prices have dropped in 39 out of the last 40 days, lopping 20 cents a gallon off in total during that span, according to AAA.
"Gas is getting cheaper as we're moving into the busiest part of summer travel," AAA spokesman Michael Green said. "Those are real savings that add up...And we've seen that cheaper gas prices are motivating people to drive more and to take long trips this summer."
World "petro-politics" is the cause. Leaders in Saudi Arabia, one of the world's top oil producers, have held down prices to dampen production in other nations, including the resurgent oil industry in the U.S.. “It's their goal to maintain their market share and to have the price where it is now so that they can have long term success in the future,” Green said.
In the U.S, the outlook for the rest of 2016 is for even cheaper gas, partly because of the change in seasons. Prices typically fall as the summer wraps up and vacationers head for home.
Amid a global glut of oil inventories that has kept oil prices below $50 per barrel for most of 2016, the national average price of gas dropped to $2.19 on Thursday, marking its lowest average for this time of year since 2004, according to AAA. Making the difference even more profound, the numbers aren't adjusted for inflation. It's the cheapest average since April 28.
U.S. gas prices, which hit an all-time peak of $4.11 a gallon in July, 2008, are now about 57 cents cheaper per gallon than last year and $1.38 per gallon cheaper than in 2014.
That translates into savings of $15 to $35 per fill-up, compared to two years ago. Some 30% of U.S. gas stations are selling gas for less than $2 per gallon, says the AAA.
"It does make a difference," said Chris Carroll, a home remodeler from Lehigh Acres, Fla., when asked about regular unleaded gas prices hovering around $2 a gallon as he filled up. Every bit of savings helps, he says, especially since he uses premium in his big Ram work truck and logs 8,000 miles a month.
Demand for gasoline is among the highest it's been in recent years, said Patrick DeHaan, senior petroleum analyst for GasBuddy, a group that studies retail fuel pricing.
DeHaan projected that about 75% of the nation's 135,000 gas stations would be below $2 per gallon by Thanksgiving, barring any unexpectedly disruptive event.
With the lower prices, U.S. drivers are saving around $239 million per day on gas compared to last year, and $626 million per day compared to 2014, according to GasBuddy.
"Who knows where it's going in the economy, but there's a lot of money that is not being spent at the pump that was two years ago," DeHaan said.
That's in spite of increased gas taxes in the state of Washington and Maryland that took effect earlier this month.
CHINA A POTENTIAL WINNER IN BRITAIN-EUROPEAN UNION BREAKUP
China is a potential winner if Britain and the European Union rework trade deals and look for investors after a British exit.
Beijing faces a blow from weaker European demand for its exports and pressure to hold its yuan steady in turbulent currency markets. But economists and political analysts say if Britain and the EU split, both sides will look to cash-rich Chinese companies that are expanding abroad — with the possible bonus for Beijing of closer political ties.
"One of the benefits China can gain from 'Brexit' is a stronger and closer economic relationship with the U.K. and even with the EU," said Zhang Lihua, director of the Center for China Europe Relations at Tsinghua University in Beijing. "Both the U.K. and the EU need that kind of cooperation with China under the current circumstances."
Chinese leaders urged Britain to stay in the 28-nation EU and have avoided mentioning possible benefits of a split.
On Monday, Premier Li Keqiang, the country's top economic official, said Beijing wants to see a "united and stable" EU and a "stable and prosperous" Britain — a possible reference to concern the vote might inspire separatist sentiment in other EU members or parts of the United Kingdom.
"We are seeing increasing uncertainties in the world economy," Li said in a speech at the World Economic Forum in the eastern city of Tianjin. "We need to jointly handle challenges, strengthen confidence and create a stable international environment."
Europe is China's biggest trading partner, and Chinese investors already see the region as more welcoming than the United States, where some acquisitions have been stymied by security concerns.
Chinese companies own France's Club Med, the makers of Pirelli tires, Volvo cars and Weetabix cereal and football teams Inter Milan of Italy and Aston Villa of Britain. London is the second-biggest center outside mainland China for settling transactions valued in Beijing's yuan.
Britain has technology China needs as the ruling Communist Party tries to evolve beyond low-skilled manufacturing, said Lu Zhengwei, chief economist for Industrial Bank in Shanghai.
"China will benefit from industrial development experience in the U.K.," said Lu. "I do recommend seizing the opportunity to establish China-U.K. free trade to enhance bilateral cooperation between the two countries."
Closer economic ties could lead to warming political relations, Zhang said.
"The U.K. and the EU may become more friendly with China politically, but this is not what China tries to seek," he said.
Dealing separately with the two sides also might allow Beijing to reach agreements that might have been blocked previously by the need for Britain and Europe to agree, said Liu Yuanchun, executive dean of the National Academy of Development and Strategy of Renmin University.
"The political gain for China is bigger than the economic gain," Liu said.
Still, China also faces a risk that Britain's departure might leave other EU members free to take more forceful action on trade disputes including steel.
The EU and the United States accuse China of exporting steel at improperly low prices, hurting foreign competitors and threatening thousands of jobs. Washington imposed anti-dumping duties of up to 522 percent but British resistance blocked the EU from imposing higher tariffs.
In the short run, European uncertainty might depress demand for Chinese goods, but trade matters less to China than it did a decade ago. China is the world's biggest trader but exports as a share of the economy declined last year to 22 percent from 2007's 33 percent.
A more serious problem is downward pressure on China's yuan in currency markets, according to economists.
The British pound and the euro currency used by 17 EU countries have sunk relative to the dollar. As currencies of other developing countries also weaken, the Chinese central bank will be forced to decide whether to let the yuan, also called the renminbi, fall with them or stick closer to the dollar.
Last year, the People's Bank of China spent tens of billions of dollars to prop up the yuan after a change in the mechanism used to set its exchange rate allowed it to fall. That fueled expectations that Beijing was weakening the currency to boost exports and prompted investors to move capital out of China.
If the dollar gains against the yuan, "this could set off a renewed bout of fears over renminbi depreciation and a pick-up in capital outflows," Julian Evans-Pritchard and Mark Williams of Capital Economics said in a report.
LUKOIL OPENS RUSSIA'S LARGEST VACUUM GASOIL PROCESSING COMPLEX
May 31 Lukoil, Russia's No. 2 oil producer, opened the country's largest vacuum gasoil (VGO) hydrocracking facility at its Volgograd refinery on Tuesday, built as part of a sweeping modernisation of the country's refineries.
The $2.2 billion VGO complex, which also includes hydrogen and sulphur production, can process up to 3.5 million tonnes of VGO a year. It will help Lukoil improve overall fuel quality and increase output of ultra-low sulphur diesel by 1.8 million tonnes annually, from nearly 4 million tonnes currently, the company said.
Russian oil companies and the government agreed on plans to modernise refineries in 2011 after gasoline supplies almost ran dry due to a lack of modern refining capacity.
The companies pledged to install 130 new facilities by 2020 that will enable Russia to increase production of higher-margin lighter products.
VGO is mostly used as feedstock to produce diesel and gasoline. Until now, Lukoil exported all the VGO produced at the Volgograd refinery - around 200,000 tonnes a month - via the Black Sea port of Novorossiisk.
Industry sources have said Lukoil will use around 100,000-110,000 tonnes of VGO a month for making refined oil products at the plant, and the rest will be exported from Novorossiisk.
"There won't be a sharp increase in diesel exports, as it had been through before. Maybe an additional couple of 30,000-tonne cargoes a month," a trader said.
"Now, these volumes will be pretty timely in the Mediterranean, taking into account refining throughput cuts in Italy and a strike in France," he said.
France is increasing its imports of refined fuels after a more than week-long strike by oil workers disrupted supply, industry sources said.
Lukoil's Volgograd refinery has an annual capacity of 14.5 million tonnes, or 290,000 barrels a day. (Reporting by Olesya Astakhova; additional reporting by Natalia Chumakova; writing by Vladimir Soldatkin; editing by Susan Fenton)