Right in San Francisco

The Negotiation of the Century

   Historians will compare the Trump / Pompeo North Korea negotiation with the Obama / Kerry Iran negotiation - each deals with an intractible enemy, one of George Bush's "Axis of Evil"; each has America playing the  central role on behalf of a broad coalition; each offers global destruction as a potential result of failure. The Obama / Kerry episode looks like of a reprise of Neville Chamberlain's "peace in our time" - good enough to let Kerry bask in the glow of Obama's Nobel Peace Prize (at least among the glitterati Left); but not good enough to include inspection of military facilities, a cessation of missile development, or any restrictions after a decade; and greased by billions of American dollars delivered on pallets in the middle of the night. Whether or not he cancels the Iran agreement, Trump must do quantum better with North Korea.  What is needed:

    1. An experienced, competent, cohesive negotiating team. One of the first rules is to understand who makes decisions. In the Iran negotiations thre was a naive hope that political divisions within Iran would somehow have the "liberals" overrule the ayatollahs. There is no such illusion in Korea - Kim Jong Un and Trump are the decision makers. The North Korean team will have a distorted view of the United States and the broader world; our State Department has been badly diminished, with no ambassador in South Korea.  The replacement of Secretary of State Rex Tillerson with Mike Pompeo, and the replacement of National Security Advisor General HR McMaster with John Bolton aligns a hard-nosed team, but development has skipped over Spring training and the 162 game season to begin in the playoffs. Sustained interest by the captain will be needed.  

    2. Clarity of goals and strategies. Obama had stated goals at the beginning of the Iran negotiations: shutting down Iran's research sites, stopping centrifuges which produce fissile material, eliminating the stockpile of enriched uranium. None were accomplished. Trump's goals will be similar - the verified dismantling of North Korea's nuclear program. Obama backed away from restricting Iran's missile program; Trump will probably include this goal, but it is secondary.   

    3. Profound understanding of the goals and strategies of the opposition. Iran is playing a waiting game with their nuclear program with restrictions expiring after 10 years, while they have been increasing their  influence in Iraq, Syria, and Qatar.  This was the fatal flaw of the Iran negotiations. Kerry and Obama were committed to the crowning achievement of a deal - even if it was weak and had a 10 year sunset. This time our adversary's goal is regime survival, with the possession of nuclear missiles seen as a tool in that direction. Having observed the demise of Muhammar Khadaffi in Libya and Saddam Hussein in Iraq after they gave up their programs, and the dismembering of Ukraine who gave up theirs after the break-up of the Soviet Union, there is much logic for Kim Jong Un's posture. The key element of any agreement is a strong globally-agreed Chinese guarantee of Kim's leadership. 

   There are reasons for optimism: Substantial trade constraints are in place, with Chinese concurrence; Kim understands that he needs to consider the positions of China and South Korea, but the discussion will be directly with Trump; despite Russia's small border with North Korea and their UN Security Council veto, they have been excluded; and Xi Jinping apparently gave Trump a "heads up" on Kim's visit. Perhaps the absence of an ambassador to South Korea means that Team Trump is comfortable with the State Department and CIA professionals. 

    This is hard, but not impossible. South Korea will be willing to pay huge bribes in order to avoid nuclear or conventional decimation. China does not want a rogue nuclear nation on its border - and could use some chips in its trade negotiations with Trump. There is some truth to the premise that Kim craves a "meeting of equals" with Trump - after all, our president is even more important than Dennis Rodman. As Obama proved, the result of a negotiation is a function of not only the hand that you are dealt, but also the skill with which it is played. Trump is no Obama; Kim is no Xi Jinping. Let's be optimists. 

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    This week's video is an interview with Republican John Cox, who is currently polling second in the contest to replace Governor Jerry Brown. The premise - California has veered so far to the anti-Trump left that there is an opening for a successful businessman who offers the voters a  common sense antidote to one party rule with an ultra liberal legislature. If he can get through the "top two" June primary, he may be that person. 

bill bowen - 3/30/18

 

      

    

Trump's China Play: In Search of Allies

   There is no doubt that strong measures must be taken at some point to balance our trade relationship with China. Almost half of our $800 billion annual trade deficit relates to China, and the gap is growing. Despite joining the World Trade Organization in 2001, China has not been playing by the rules, instead requiring that foreign companies doing business in China must form joint ventures with Chinese companies, demanding that they have access to American technology as part of the bargain, and being found guilty by the WTO of periodic "dumping" of products on foreign markets. 

   Donald Trump is the first president in memory to seek concrete actions in the direction of "balanced" trade", and it is a daunting task as President Xi Jinping has become the most powerful Chinese leader since Mao, and Trump faces a Democratic opposition committed to #Resist, Mueller's Russiagate, rising sexual misconduct allegations, and alienated Establishment Republicans. Whether he succeeds or not, at least he promises to frame the issue and engage the necessary American conversation. 

     In one sense, this is a rivalry between America's free market capitalism and China's state-sponsored mercantilism. One can make the case that the Chinese model has many advantages - strategic investment in industries like steel and information technology; direction of low wage and managerial labor to the locations and industries selected by the political leaders; regulations and subsidies to guide development in the favored direction; protection of strategic industries from external competition; expansion of exports through direct subsidization and currency manipulation. The United States or Europe could not do the Three Gorges Dam development of the upriver Yangtze (displacing 1.3 million people and doing extensive ecological harm); we could not align capital and the construction industries to build external transportation infrastructure on the scale of the Belt and Road Initiative (which will provide infrastructure for China-centered trade with over 50 other countries);  we could also probably not raise a third of the population from generations of poverty in two decades. Whether the Chinese can control corruption and avoid the traditional Chinese scourge of a bloated, lethargic bureaucracy remains to be seen, but at the moment they are on a roll. 

    Trump has started with modest proposals - unlike his predecessors who never started: putting tariffs on washing machines and solar panels;  asking the Chinese for a proposal on how we can reduce the trade deficit by $100 billion; instituting tariffs on steel and aluminum, then exempting Canada, Mexico, the European Union, Argentina and Brazil; and instituting some $60 billion in tariffs on Chinese goods entering the United States - an amount calculated to equal the damage done to American companies by intellectual property theft.  

    The reaction - in line with Vladimir Lenin's obseration that the capitalists would sell his communists the rope with which he would hang them: 

        - Concerns from the National Retail Federation retailers like Walmart, Target, and Best Buy that higher prices will hurt working class American families. (No comment from the thousands of retailers and small American manufacturers that Walmart put out of business.)   

        - Howls from the Chamber of Commerce (read General Motors; General Electric; Boeing; etc) that the tariffs could lead to a destructive trade war. Note that many of the larger manufacturers have formed the required joint ventures in China to gain access to a market about the size of the United States. 

        - Articles and editorials in in the mainstream business literature castigating Trump's adventurism - The Wall Street Journal; Bloomberg; the Investor Business Daily.

        - Letters from Democrats and Republicans in Congress advocating for the China lobby.   

        - Substantial stock market unease, reflected in a week of accelerating declines. 

    It will be hard to follow the actions of Trump's team - Commerce Secretary Wilbur Ross, and Trade Negotiator Robert Lighthizer - both because the subject is so extensive, and because they will be criticized by both the normal left wing media, and by the business establishment media. It is also hard to guage the global marketplace where most countries are reluctant to criticize China, but there is enough anti-China sentiment for our jilted TransPacific Partnership colleagues to have gone ahead without us in forming a trading alliance without Beijing. One can only hope that Trump has enough room to run to at least make a real start toward "balanced trade", and that he is able to cultivate allies like Chuck Schumer who seems to get it.  

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  This week's video is a brief exposure of the Facebook hypocracy where the genius of the Obama campaign's use of social media data mining became a hideous perversion when used by the Trump campaign. FWIW, the Trump campaign used the Cambridge Analytica tool in the primaries, but switched to the superior Republican Party data tools for the election. 

bill bowen - 3/23/18

The State of State

    Rex Tillerson arrived as Secretary of State in 2017 with deep experience in the oil politics of the Middle East and Russia and a successful 42 year career at Exxon Mobil. The hope was that the responsible adult would bring gravitas to the cabinet as well as understanding and personal relationships which could help in the post-Iraq, post-Syria, post-Ukraine world of American foreign policy. The generals could handle the military clean-up work; Tillerson would handle the soft side. What went wrong?

    The complexity of foreign policy is reflected in the core membership of the President's National Security Council - the Vice President, the Secretary of State, the Secretary of Defense, the the Secretary of the Treasury, and the President's Assistant for National Security, advised by the Chairman of the Joint Chiefs of Staff and the Director of National Intelligence. The three dimensions of foreign policy - diplomatic, military, and economic - are all represented; each needs a champion who has the confidence of the President and a who can draw upon an experienced and motivated staff which prepares the briefing papers and implements the decisions. This assumes competent staff down several levels, and NSC members who are aligned with the president. Both requirements proved to be missing in the case of Rex Tillerson's State Department. 

    To be fair, the fixation about Russian meddling in the 2016 election has made it very difficult to engage with what Mitt Romney had rightly called our number one national security threat. Tillerson knew Putin, at least peripherally, understood the importance of energy in Russia's economy and foreign policy, and had direct experience dealing with Russian negotiators. Before the Democrats settled on the "Russia cost Hillary the election" meme and Mueller subpoened anyone who had ever talked to a Russian, there was a chance to sort out the interests of Russia and NATO in the former Soviet republics and to agree on a plan to stabilize the Muslim nations lying to Russia's south. Tillerson could have been central, but the Trump administration was denied the opportunity, and Tillerson's resume became less relevant.      

  Tillerson, Trump, and the Senate all deserve blame for the mis-management of the State Department. Trump has had an overall problem nominating people for positions requiring Senate approval, with no nominee yet proposed for one third of the 640 such positions. State, which is facing a 30% budget reduction, is at the forefront with no nominee yet recommended for 54 positions, 61 confirmed and 28 pending before the Senate. As happened to George W Bush, but not Obama, Clinton, or HW Bush, the Senate required resubmission of nominations after the end of the year - a sign that Mitch Mcconnell is as much of a problem as is Chuck Schumer.  At State, a majority of the senior positions remain unfilled, and no ambassadors have been nominated for Saudi Arabia, Jordan, Turkey, Qatar, Yemen, or South Korea - all hot spots requiring expertise and personal contacts.  If Tillerson has been complaining about White House interference, it has not made the media. 

    On broad policy, former Exxon CEO Tillerson would have agreed with the establishment, globalist wing of the Republican party in the Make America Great Again debate about free trade and the ability of American companies to prosper amid global competition. His experienced voice will be missed in the foreign trade debates which will follow the replacement of Gary Cohn by (choke) Larry Kudlow as President Trump's chief economic advisor, and the administration turns away from multinational agreements toward individual country negotiations. Down with the influence of the embassy staffs and the Foggy Bottom experts; up with their counterparts at the Commerce Department and the office of the Trade Representative.  

    The turn from Tillerson to Mike Pompeo - US Military Academy; Harvard Law; House Intelligence Committee; CIA Director - suggests closer alignment than with Tillerson for a hawkish approach to the remaining two members of George W Bush's "Axis of Evil" - North Korea and Iran. Each has a story, but Tillerson was apparently not in the loop with Mike Pence and Ivanka on North Korea, and would have cautioned against scrapping President Obama and John Kerry's Iran nuclear agreement which does not include inspection of Iranian military sites or cover missile development. The first may be an opportunity; the second a risk. 

    Tillerson left Exxon a little better than he found it when he became CEO in 2006 - up about 25%; he won't be able to say that about the State Department, but he will have his XOM stock to cushion the blow, unlike many others who have given up good careers to join the administration and found that they cound not navigate the Senate or the top CEO.  

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      This week's bonus video is for those who couldn't get enough of the curling competition at the recent Olympics. 

  bill bowen - 3/16/2018

Trump: Challenging the Established Order

    Silicon Valley venture capitalists love companies that disrupt industries - Tesla in cars; AirBnB in hotels; Uber in local transportation; Amazon in anything. Information technology is usually a key element, but what they are really looking of is a way of transforming an industry which does not effectively meet customer needs. It is ironic that they hate the great political disrupter, President Donald Trump. Whatever his personal shortcomings and his inability to coalesce a Washington majority around his proposals, he deserves credit for challenging the established order where lesser leaders have lacked vision or feared to tread.  

    The big ones - where he has broken with Republican Party orthodoxy and found a Democratic party thus far totally unwilling to give him the handful of votes which he would need in the Senate to pass common sense legislation favored by a strong majority of Americans. 

        - Immigration. Eleven million illegal immigrants; no effective border control; a predecessor who was clear that he did not have authority to exempt categories of "undocumented immigrants" from enforcement, then did so with millions of children.  Trump had a strategy: apply pressure by terminating President Obama's illegal program with enough lead time to allow Congress to act. He had a balanced proposal which went well beyond the "heels dug in" on either side: a path to citizenship for 1.8 million; enforcement of the border (including a wall); limits on the scope of family members who come as sponsored relatives, and instead focus on immigrants who bring benefit to America; elimination of the lottery designed to allocate immigration slots to people from random countries. We wait for Congress.  

        - Gun control. After years of inaction, we have a president who is willing to take on the NRA and the "Second Amendment" wing of his party. He will eliminate "bump stocks" which make assault rifles out of semi-automatics - by executive order if necessary; he will agree to increasing the purchase age for rifles, expanding background checks, and aggressively using mental health exclusions. We wait for Congress. 

    And the third element of the trifecta which will be a signature success (or failure) of his presidency - foreign trade. The first portion of the problem has been fixed - a disadvantageous tax code which made American companies less competitive and encouraged capital to be kept offshore. As a testament to the #Resist movement, no Democratrs in the House or Senate voted for the tax code changes. On trade, the Democrats in opposition will be joined by most of the Republican establishment which believes in multilateral "free trade" agreements adjudicated by the World Trade Organization, rather than the Trump approach of direct negotiations between the United States and individual other countries. Some themes to watch: 

        - We are losing the current game, have been for decades, and neither party has effectively questioned the status quo since the 1980s when the Japanese car makers were pressured into producing cars in the United States as the price of market access. The 2017 deficit in Goods and Services of $566 billion was up 12% from 2016, and increased from 2.7% to 2.9% of GDP. (The Goods deficit was $810 billion; the Services - travel; education; trade-related; professional and management - surplus was $244 billion.)  Domestically, the winners have been more politically powerful than the losers, particularly as the Democrats have abandoned the white working middle class. 

        -  The primary target is China. China represents almost half of our deficit in goods - $375 billion in 2017. They were invited to join the World Trade Organization in 2001, but have retained their system of state-sponsored industries targeting global markets, demanding transfer of technology in exchange for permission of foreign companies to do business in China, and exclusion of foreign products through tariffs and other barriers. From their perspective the game is working - growth remains above 6%; Xi Jinping is set up as "ruler for life"; basic industries continue to grow (they make half of the world's steel) as they subsidize development in central and southwest Asia. With a detailed Trade Representative  assessment in hand, Trump has asked the Chinese government for a plan to reduce the deficit by $100 billion with the premise that if they do not make real progress, he will find a way. 

        - Trump is playing multi-dimensional chess. He starts with tariffs on steel and aluminum because they are symbolic, but also because a 1972 law and WTO regulations give the President latitude on industries related to national security. This provides leverage for renegotiation of NAFTA, which has primarily benefited Mexico. From there, the theme is that each country is different. He will eventually address the fact that Value Added Taxes - used by most developed countries, but not the United States - are unfavorable to American exports. 

        -   Trump is poor at building coalitions. With former Goldman Sachs president Gary Cohn's exit from the Council of Economic Advisors, Trump loses a strong connection to the top levels of Wall Street as well as to the "free traders" in Congress. Treasury Secretary Steve Mnuchin, Commerce Secretary Wilbur Ross, Trade Representative Robert Lighthizer, and  National Trade Council Director Peter Navarro are capable lieutenants, but a broader coalition is needed to turn policy into effective action. Likewise, there are not a lot of foreign leaders signing up to help restore balance to global trade. 

    Some of this will get done; much won't. The Democratic #Resisters and the Republican NeverTrumpers remain hopeful that the Senate's dilatory confirmation process and Mueller's meandering search for Trump malfeasance will prevail over the President's willingness to challenge the established order on the major issues  confronting the country. This writer hopes not.  

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        This week's bonus is a sample of the five-minute videos developed by Praeger U to articulate conservative positions. This discussion by Dave Rubin, "Why I Left the Left", has received some 17 million views. 

bill bowen - 3/9/18

        

Curbing Public Employee Unions

   Little noticed among the media's Downton Abbey-like coverage of the Trump White House is the pending Supreme Court decision in the case of Janus v the Association of Federal, State, County and Municipal Employees (AFSCME) to overturn a 1977 precedent, by which public employee unions in the 23 states without "Right to Work Laws" can currently force employees to pay union dues - with a carve out" for dues which go to overt political activities. While the case is argued in terms of the constitutional issue of free speech, the real issues are economic and political, with public employee unions - educators; nurses; public safety workers; office workers - being instrumental in electing friendly (Democratic) politicians who then negotiate contracts with their union supporters for wages, benefits, and conditions of employment. The pending Janus decision promises to significantly change state and local politics in Blue and Purple states. 

    The case: 

    The Janus case mimics a case brought by a group of California teachers and heard by the Supreme Court in 2016, shortly before the death of Antonin Scalia. Without Scalia's vote, the Court deadlocked 4 to 4, and the advocates (including the Koch brothers) went looking for another plaintiff. Enter Mark Janus, an Illinois social worker who objects to paying $45 per month to AFSCME, and who objects to contract negotiations which will exceed the nearly-bankruypt state's ability to pay. The case was heard on Monday; there is a strong presumption that Justice Gorsuch will join the conservative block, allowing the millions of  public employees in the 23 non-Right to Work states to opt out of labor unions if they so choose. 

      Union-friendly observers like Dana Milbanks of the Washington Post argue that removal of the 1977 bargain will unleash pubolic employee strikes, expand the scope of bargaining, and expand to include bar association dues, student association dues, continuing education requirements for doctors and all measures of calamity. Others argue that it will energize public employee unions who will now need to demonstrate to their workers that the union adds value.  

    And a broader perspective

    In the Depression era heyday, union organizing was limited to the private sector. In fact, the progressive Franklin Delano Roosevelt recognized that "All Government employees should realize that the process of collective bargaining, as usually understood, cannot be transplanted into the public service. It has its distinct and insurmountable limitations when applied to public personnel management. The very nature and purposes of Government make it impossible for administrative officials to represent fully or to bind the employer in mutual discussions with Government employee organizations." That said, the American labor market has evolved to the point where in 2017 union membership was 34.4% in the public sector compared to 6.5% in the private sector, with the overall 10.7% rate about half of what it had been 30 years earlier. 

    Laws against compulsory union membership align almost completely with the Red State / Blue State division, with Missouri and Kentucky converting in 2017.  In the Right to Work states union membership declined by a net of 293,000 in 2017.

    Overall, the 50 states have a $6 trillion unfunded pension liability, with the blue states such as California, Illinois, and New Jersey generally at the bottom in absolute terms and on a per capita basis. There are some exceptions - Texas stands out - but in general, strong public employee unions help create Democratic majorities and generous pensions. 

    On the other hand, where Republican majorities have recently eliminated mandatory public employee union membership, workers have abandoned the unions in droves. Indiana Governor Mitch Daniels eliminated collective bargaining for government workers when he took office in 2005, and membership plummeted Wisconsin, the first state to negotiate with public employee unions in 1959, eliminated bargaining over pensions, health coverage, safety, hours, sick leave or vacations in 2011; public employee union membership dropped by more than half within a year.  

  While the decision will be popular in places like South Carolina and Kansas, it is really academic. The people who should be the most interested in the success of the case are those deep blue states where public employee unions are strong, pension agreements are generous, and state finances are fragile - Illinois, California, New York, and New Jersey.  

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    This week's video - thanks to an alert reader in Delaware - provides an entertaining insight into the millenial generation. 

bill bowen - 3/2/18