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The US is a whole lot richer because of trade with Europe, regardless of whether EU is friend or ‘foe’

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Greg Wright, University of California, Merced

President Donald Trump recently questioned the value of the long-standing United States-Europe alliance. When asked to identify his “biggest foe globally,” he declared: “I think the European Union is a foe, what they do to us in trade.”

This view is consistent with his recent turn against trade with Europe but ignores the immense benefits that Americans have reaped due to the strong economic and military alliance between the U.S. and Europe – benefits that include nothing less than unprecedented peace and prosperity.

As such, Trump’s trade war with Europe and his hostility toward broader Western alliances such as NATO portend a future of diminished standards of living – as a direct result of less trade – and greater global conflict – indirectly due to reduced economic integration. In the words of columnist Robert Kagan, “things will not be ok.”

Some of my research focuses on the impact of increased international trade on U.S. standards of living, which I show are causally linked during the late 20th century. Most of the trade in this period occurred among rich nations and was dominated by the U.S.-Europe relationship.

By calling Europe a “foe,” Trump makes clear that he simply doesn’t understand why rich countries trade with one another, which, to be fair, is something that also puzzled economists for many years.

Why rich countries trade

Though in some ways it seems obvious why the U.S. and Europe trade with one another – some might enjoy Parmigiana from Italy, while others prefer Wisconsin cheddar – economists initially had trouble explaining exactly why there was so much trade among rich countries. Surely, they thought, the U.S. can produce good quality cheese at a cost that is similar to producers in Italy, and vice versa, so why would we need to go abroad to satisfy our palettes?

In 1979, economist Paul Krugman provided a clear answer that would eventually win him the Nobel Prize in economics. The first part of his answer was simple but important and boils down to the fact that consumers benefit from having a wide range of product varieties available to them, even if they are only small variations on the same item.

For instance, in 2016 the top U.S. exports to the EU were aircraft (US$38.5 billion), machinery ($29.4 billion) and pharmaceutical products ($26.4 billion). The top imports from the EU seem almost identical: machinery ($64.9 billion), pharmaceutical products ($55.2 billion) and vehicles ($54.6 billion). Although the product categories clearly overlap, there are important differences in the types of pharmaceuticals and machinery that are sold in each market. Consumers benefit from having all these options available to them.

The second part of Krugman’s answer was that, by producing for both markets, companies in Europe and the U.S. could reap greater economies of scale in production and lower their prices as a result. This has been found to indeed be what happens when countries trade. And more recent research has shown that increased foreign competition can also lower domestic prices.

These benefits have been quantified. For instance, the gains to the U.S. from new foreign product varieties and lower prices over the period 1992 to 2005 were equal to about one percent of U.S. GDP – or about $100 billion.

In short, Krugman’s answer emphasized the extent to which international trade between equals increases the overall size of the economic pie. And no pie has ever grown larger than the combined economies of the U.S. and Europe, which now constitute half of global GDP.

Pfizer Inc. is headquartered in New York. Both the U.S. and the EU import and export pharmaceuticals.
AP Photo/Richard Drew

Largest trading partner

The European Union is the largest U.S. trading partner in terms of its total bilateral trade and has been for the past several decades.

Overall, the U.S. imported $592 billion in goods and services from the EU in 2016 and exported $501 billion, which represents about 19 percent of total U.S. trade and also represents about 19 percent of American GDP.

A key feature of this trade is that almost a third of it happens within individual companies. In other words, it reflects multinational companies shipping products to themselves in order to serve their local market, or as inputs into local production. This type of trade is critical as it serves as the backbone of a vast network of business investments on both sides of the Atlantic, supporting hundreds of thousands of jobs.

It is also a network that propels the global economy: the EU or U.S. serves as the primary trading partner for nearly every country on Earth.

A ship to shore crane prepares to load a shipping container onto a container ship in Savannah, Ga.
AP Photo/Stephen B. Morton

Shipping and new institutions

The U.S.-Europe trade relationship also laid the groundwork for the modern system of international trade via two distinct innovations: new shipping technologies and new global institutions.

On the technological front, the introduction of the standard shipping container in the 1960s set off the so-called second wave of globalization. This under-appreciated technology was conceived by the U.S Army during the 1950s and was perfected over Atlantic shipping routes. In short, by simply standardizing the size and shape of shipping containers, and building port infrastructure and ships to move them, massive economies of scale in shipping were realized. As a result, today container ships the size of small cities are routed via sophisticated logistics to huge deepwater ports around the world.

These routes eventually made it profitable for other countries to invest in the large-scale port infrastructure that could handle modern container ships. This laid the groundwork for the eventual growth of massive container terminals throughout Asia, which now serve as the hubs of the modern global supply chain.

At the same time that these new technologies were reducing the physical costs of doing business around the world, the U.S. and Europe were also creating institutions to define new international rules for trade and finance. Perhaps the most important one was the post-war General Agreement on Trade and Tariffs, which eventually became the World Trade Organization, creating the first rules-based multilateral trade regime. A large body of research shows that these agreements have increased trade and, more importantly, raised incomes around the world.

Overall, these advancements contributed to the subsequent enrichment of hundreds of millions of workers in Asia, Latin America and Africa by helping to integrate them into the global economy.

And when the world gets richer, the U.S. also benefits for many of the same reasons noted above: demand for U.S. products increases as incomes rise around the world, as does the variety of products the U.S. can import, and the prices of these goods typically fall.

A cartoon Trump blimp flies as a protesters speak out against Trump’s visit to London.
AP Photo/Matt Dunham

Taking the long view

But it appears that President Trump sees the U.S. on the losing end of a failed relationship.

It is unsurprising that tensions with Europe have come to the forefront over perceived imbalances in trade, particularly for a president who is not afraid to take long-time allies to task.

This is because U.S. trade policy has arguably been overly optimistic in recent years, particularly with respect to China, whose accession to the WTO proved to be much more disruptive to labor markets around the world than was predicted. Previous U.S. administrations preferred patience over confrontation, leading to a perhaps inevitable backlash that has spilled into other relationships, such as the one with Europe.

However, the U.S. relationship with Europe is clearly different, primarily because it is longstanding and has been largely one of equals. But also because their shared values mean that there are many non-economic issues — such as the spread of liberal democracy and the promotion of human rights — that get advanced by the close economic ties.

It’s important to not underestimate what is at stake if the U.S.-Europe alliance is allowed to falter. Americans are likely in the midst of the most peaceful era in world history, and global economic integration, led from the beginning by the U.S. and Europe, has been a key contributing factor. Global extreme poverty is also at its lowest point ever, again in large part due to globalization.

The ConversationThese are the byproducts and legacies of seven decades of expanding international trade and should not be taken for granted.

Greg Wright, Assistant Professor of Economics, University of California, Merced

This article was originally published on The Conversation. Read the original article.

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7.3 Earthquake hits New Britain island in Papua New Guinea

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7.3 Earthquake hits New Britain island in Papua New Guinea.

Preliminary reports warn tsunami waves could hit areas within 300km of the earthquake’s epicentre.

The quake hit off the coast New Britain region of Papua New Guinea earlier today. (Daily Star)

This is a breaking story and will be updated shortly

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NY Man Planned to Blow Himself Up at Washington Mall

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Police and FBI agents searched a Hudson Valley home Wednesday after learning about a man who was allegedly building a bomb in order to blow himself up in Washington D.C., two law enforcement officials told News 4 New York.

Investigators said they were concerned the man, identified as Paul Rosenfeld, at the home on Slocum Avenue in Orangetown was in the process of acquiring bomb parts.

Officials tell News 4 Rosenfeld had no criminal history but had told a reporter in Pennsylvania he planned to blow himself up on the Washington Mall around Election Day because he was angry about the country’s direction. 

He had no plans to hurt anyone else, officials said. He is believed to be a lone actor not affiliated with any international terror group or ideology. 

Full Article at https://nts24.co.uk/2A2oWjM 

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Trump ‘demanding’ answers from Saudis about missing writer

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WASHINGTON (AP) — President Donald Trump said Wednesday the U.S. is “demanding” answers from Saudi Arabia about the disappearance of a well-known Saudi writer and government critic Turkish authorities say was slain inside his country’s diplomatic mission in Istanbul.

Trump said he plans to invite to the White House the fiancée of Jamal Khashoggi, a writer for The Washington Post who has not been seen since he entered the Saudi consulate on Oct. 2 to get paperwork for his marriage.

FILE PHOTO: FILE PHOTO: U.S. President Donald Trump listens to a question during an interview with Reuters in the Oval Office of the White House in Washington, U.S. August 20, 2018. REUTERS/Leah Millis/File Photo

Members of Congress have grown increasingly insistent that the administration find out what happened to Khashoggi. The Saudi government has become a closer ally under Trump and some lawmakers warn that relations could be jeopardized if it turns out the kingdom was involved in his disappearance.

Trump told reporters in the Oval Office that he has a call in to the fiancée, Hatice Cengiz, who had been waiting outside the consulate when Khashoggi went inside and has appealed to the president and first lady Melania Trump for help.

Trump said nobody knows exactly what happened and expressed hope that Khashoggi is not dead. He also said he had spoken with the Saudis about what he called a “bad situation,” but he did not disclose details of his conversations.

Saudi Arabia denies involvement in the disappearance of Khashoggi, a former insider in Saudi government circles who has been living in self-imposed exile in the U.S. for the past year after fleeing a crackdown on intellectuals and activists in the country.

White House press secretary Sarah Huckabee Sanders said White House national security adviser John Bolton and White House senior adviser Jared Kushner spoke on Tuesday to Saudi Arabian Crown Prince Mohammed bin Salman about Khashoggi. Secretary of State Mike Pompeo then had a follow-up call with the crown prince to reiterate the U.S. request for information.

While angry members of Congress likely won’t cause the administration to turn away from Prince Mohammed and end decades of close security ties with Saudi Arabia, they could throw a wrench into arms sales that require their approval and demand the U.S. scale back support for the Saudi military campaign against Iran-backed rebels in Yemen.

Republican Sen. Bob Corker, chairman of the Senate Foreign Relations Committee, said “there will definitely be consequences” if it turns out the Saudis were involved in Khashoggi disappearance. Republican Sen. Lindsey Graham of South Carolina said it would be “devastating” to the U.S.-Saudi relationship.

Sen. Chris Murphy, D-Conn, said if Saudi Arabia had lured a U.S. resident into a consulate and killed him, “it’s time for the United States to rethink our military, political and economic relationship with Saudi Arabia.” But he said it was unclear whether the Trump administration was willing to “go beyond words.”

Sen. Rand Paul, R-Ky., a longtime critic of the Saudi government, said he’ll try to force a vote in the Senate this week blocking U.S. arms sales to Saudi Arabia. He told local radio in his home state Tuesday that he wants to end the arms shipments if there’s “any indication” the Saudis are “implicated in killing this journalist that was critical of them.”

Trump’s comments Wednesday were the toughest yet from his administration on the Khashoggi case. Officials have expressed concern but refused even to entertain questions about what the consequences would be if Turkish allegations turn out to be true. Pompeo has called on the Saudi government to conduct a thorough investigation and to be transparent about its results.

The reaction from European governments has also been cautious. British Foreign Secretary Jeremy Hunt told his Saudi counterpart that if media reports about Khashoggi were correct, it “would be extremely concerning and the U.K. will treat the incident very seriously,” according to the Foreign Office.

The Saudi ambassador to Washington, Prince Khalid bin Salman bin Abdulaziz, has described the allegations as “malicious leaks and grim rumors” and said the kingdom is “gravely concerned” about Khashoggi. Saudi officials maintain he left the consulate shortly after entering, although it has failed to provide evidence.

Washington Post CEO and publisher Fred Ryan said reports suggested the journalist was victim of “state-sponsored, cold-blooded murder.” He demanded answers in a statement Tuesday, saying “Silence, denials and delays are not acceptable.”

Analysts said there were reasons for skepticism about the Turkish account. Ties between Ankara and Riyadh are at a low point over Turkey’s support for Qatar in that country’s yearlong dispute with Saudi Arabia and other Gulf nations. Saudi Arabia, a Sunni Muslim power, is also annoyed by Ankara’s rapprochement with the kingdom’s Shiite archrival, Iran.

Saudi authorities’ failure to provide video footage of Khashoggi’s movements at the consulate to rebut the Turkish allegations have only deepened suspicions.

The Trump administration, from the president on down, is heavily invested in the Saudi relationship. That’s unlikely to change, said Robin Wright, a scholar at the Wilson Center think tank and close friend of the missing writer. The administration’s Middle East agenda heavily depends on the Saudis, including efforts to counter Iranian influence in the region, fight extremism and build support for an expected plan for peace between Israel and the Palestinians.

Indication of those stakes came within four months of Trump taking office, when Saudi Arabia became his first destination on a presidential trip and he announced $110 billion in proposed arms sales.

Prince Mohammed has introduced some economic and social reforms, allowing women to drive and opening movie theaters in the deeply conservative Muslim nation. The flip side, however, is that he’s also squelched dissent and imprisoned activists. He has championed the three-year military campaign against Iranian-backed Houthi rebels in Yemen that has pushed that nation toward famine and caused many civilian deaths.

Still, the Trump administration last month stood behind its support for that campaign with weapons, logistics and intelligence, certifying that the Saudis were taken adequate steps to prevent civilian despite mounting evidence to the contrary.

Karen Elliott House, a veteran writer on Saudi affairs and chair of the board of trustees at RAND Corp., said U.S. support for the Yemen war is likely to be the focus of congressional criticism but won’t endanger a relationship that has endured for decades, underpinned by shared strategic interests. Even under the Obama administration, which had difficult relations with Riyadh compared with Trump, there were some $65 billion in completed arms sales.

“The U.S.-Saudi relationship is certainly not about shared moral values,” House said. “It’s about shared security interests.”

___

Associated Press writers Susannah George, Matthew Lee and Deb Riechmann and video journalist Padmananda Rama contributed to this report.

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