China, the USMCA, the UK, and More

A Macro Musings Transcript

David Beckworth: Our guest today is Christine McDaniel. Christine is my colleague and a senior research fellow at the Mercatus Center where she focuses on trade and intellectual property right issues. Christine previously held several positions in the U.S. government including deputy assistant secretary at the Treasury Department and senior trade economist in the White House. Christine has also worked in the economic offices of the U.S. Department of Commerce, the U.S. Trade Representative, and U.S. International Trade Commission.

While transcripts are lightly edited, they are not rigorously proofed for accuracy. If you notice an error, please reach out to [email protected].

David Beckworth: Christine is a previous guest of the show, and she joins us again today to update us on trade developments since we last talked. Christine, welcome back to the show.

Christine McDaniel: Great to be here.

David Beckworth: Well it's good to have you on, I love chatting with you. We've made it through a tumultuous year, 2018. The world did not end despite the warnings and concerns of some, including myself. I'll confess, among other things I've been critical of Trump's trade policies, and many of the listeners will know I've been critical about him. And I think probably many observers, if not most, would attribute a lot of the market correction in the stock market to the daily whims of trade policy concerns. One day things look good, the stock market goes up, and then Trump puts out a bad tweet and the stock market goes down. The stock market's down like 10 percent I believe from the highs this year.

David Beckworth: Trump has called himself this year The Tariff Man, like a superhero. So there's still a lot of things about him I find troubling, in fact, also the Wall Street Journal today came out with one of the biggest concerns next year, they polled some economists, and the biggest threat that they see next year, a majority of them, was a U.S.-China trade war. So that's the context where I'm coming from, and I've been critical.

David Beckworth: And all the Trump fans out there, you know who you are, don't like me saying this, so I'm gonna acknowledge that there is a growing appreciation I have for a part of Trump, and that is his persistent full court press on China. No other president I've seen to date has done something like that, is that fair, that the relentless push push push ... And even though he's coming, I think, from the wrong understanding, he's unlike any other in pushing intellectual property right issues.

David Beckworth: And we talked about this last time, maybe a better way would have been through TPP or some other mechanism. But given we are here, I just wanna say credit where credit is due to the president, there's still many areas where I'm concerned. And maybe him going to China on trade is like Nixon going to China. Nixon was this hardcore anti-communist who opened up, maybe you need someone like Trump.

David Beckworth: So, with that said, we're taping this right around the holidays, and I have a special holiday gift for Christine. I know you weren't expecting this, but I got a nice picture from the New York Times, Christine, and maybe we could take a picture of this and put this on the webpage. But it's a picture of The Tariff Man from The New York Times, a great picture, it's like Superman if you can imagine, listeners, this guy is opening his shirt and there's a big T. I would have framed this for you, but here it is.

Christine McDaniel: Thank you so much.

David Beckworth: Gift for a trade person.

David Beckworth: Anyhow, we've had a fun, exciting year of trade issues, you've been on, we've had your colleagues on, Don Boudreaux, Dan Griswold. As I mentioned to them, you guys are really busy, Trump has been the Full Employment Act for you. But why don't you walk us through what has happened, what's transpired, what are the latest things, and maybe we should start with China. What's the latest news on China and U.S. in the trade war?

Christine McDaniel: It is all about China right now. It's helpful to get caught up on the state of play, but then it's also really helpful, and now given that it's the end of the year, maybe also a good opportunity, to really get out of the day-to-day and step way back. Because this has been a long time coming, I think to really appreciate some of the things that we're seeing unfold in front of us you do need to step out of that day-to-day.

Christine McDaniel: So, stepping out of that day-to-day, China is fascinating for economists because just think, over the past couple of decades, 800 million people lifted out of poverty. Just think about that.

David Beckworth: It's amazing.

Christine McDaniel: Eight hundred million people. The U.S. population as a whole is, what, only three and a quarter million? We never really thought ... We, the west, never really thought capitalism and authoritarianism could coexist. Look at Russia.

Christine McDaniel: History's not over yet, so we'll see. And you could also argue that perhaps, regardless of any regime that China pursued, communism, authoritarianism, capitalism, socialism, whatever, just given its sheer size and low level of development, and plus the time that it really came online to the global economy, if you will, just the timing was perfect ... Really, given any regime they would have had that amazing growth.

Christine McDaniel: And I think that's the big question that a lot of people around the world, and in government agencies around the world, are asking. What are the different paths for China in terms of their regime, and what will that mean for their growth for the next 25 years? I think that would be a fascinating ... Another topic for another day. Because how far can they really go without democracy? Maybe they can keep going, I don't know, but talk about libertarianism and freedoms, individual freedoms, think about that.

David Beckworth: I suspect at some point this authoritarianism will catch up with them. You think of things like state-owned enterprises ... You mentioned Russia, Russia's got a lot of crony capitalism, and at some point it begins to affect them, right? But you're right, they have made remarkable progress, the joke among economists, what's the best cure for poverty? The answer is China, because China did lift so many people out of poverty.

David Beckworth: But we're engaged with them on these trade issues. And again, going back to Trump, another point I wanted to bring out is that The New York Times, where I got the wonderful picture of Tariff Man, they had a piece in it, this is today's paper, it says, “Weakened China tries new approach on trade, treading lightly.” So there is progress from the U.S. perspective, and maybe we want to be careful, we want all of humanity to get better. But from the U.S. perspective, Trump apparently is making progress, they take him more seriously now.

David Beckworth: But tell us, what are the latest things going on? There's been a lot of G20 meetings, there's a lot of things happening.

Christine McDaniel: Well, I think one thing that ... I'm usually arguing against the Trump trade team's approach, but just to play devil's advocate here, we have seen President Xi come to the table in a very intimate way, and engaging with President Trump on trade. When is the last time we saw a leader of China at that level be so involved in a trade negotiation? You hate to say it, but I've never seen it in my lifetime. Is that because of Trump? It's hard to argue that Trump didn't have anything to do with that, right?

Christine McDaniel: These things don't happen overnight, obviously China's not going to give up state capitalism probably ever, or at least in the near future, and they're certainly not gonna give it up in the next 90 days. So you think of the trade truce that was called last weekend in Buenos Aires, the 90-day trade truce when they take time and figure out a way forward. I think it could be 90 days to figure out a framework moving forward. Trump has said that he does think a deal will be possible, but if not, he is the Tariff Man, so he's still laying down his cards there. He said himself, he loves tariffs, and he is very willing to use them.

Christine McDaniel: You could kind ofsee, maybe over the next 90 days, a framework laid out. Just this week we saw two major concessions, I would argue major, out of the Chinese government, and they were really coming from the top. Number one, financial penalties for those in China that conduct intellectual property theft, and again, that came from the top. Any real change there is gonna have to come from the top, for better or worse, that's just the way that regime is. And then number two, some opening on foreign direct investment.

Christine McDaniel: So those are two announcements, I would say major, both made-

David Beckworth: Yeah, those are major sticking points, right?

Christine McDaniel: Yeah, major sticking points, and the financial penalties, I really like that because that really gets to incentives in China. The tariffs alone are not gonna change China's behavior, you've gotta play to China's incentives. Now, the U.S. can team up with allies and write in stronger rules, rein in China that way, I've argued many times with so many people that that could be very effective.

Christine McDaniel: Obviously, the other way is for President Xi, the Chinese government, to change the incentives. If they buy into these rules changes, and different way of doing things, then of course they themselves ... I mean, that is the best way. So I don't think that was trivial, what we saw this week. Financial penalties imposed by the Chinese government, announced by President Xi's team themselves, I think is quite significant.

Christine McDaniel: And I do keep thinking back to our experience with Japan. You'll recall that we had very similar issues on intellectual property right theft with Japan in the 50s, 60s, 70s, 80s, 90s, and really it was under Reagan that Japan strengthened their intellectual property rights regime and enforcement mechanisms. You could argue that that really came from many, many years of outside pressure, but you could also argue, and I would say that this is the more convincing argument, is that it came just as much, if not more, from internal pressure.

Christine McDaniel: That is, once enough Japanese firms pushed up against the global technology frontier of their industries, they themselves found themselves to be victims of IP theft, and they're the ones that pressured the Japanese government to go for stronger patent rights. And that's what really led to sustainable, long-term reform.

Christine McDaniel: Will that happen in China? There are some signs that that is happening in China, I don't know  where Japan was in the 90s yet or not. China is not Japan. Also, remember, Japan did not have the largely authoritarian state-controlled government that China has today. There were close ties between the Japanese government and Japanese industry, but it wasn't at all to the extent of the control that we see in China.

David Beckworth: That's interesting you mention it's gonna take change on the inside, so getting some kind of political census internally, and hopefully the U.S. and the world's applying just the right touch of external pressure to nudge them in that direction.

David Beckworth: But one of the things I read today along those lines is that the economy is slowing down in China, and that would incentivize firms to be more receptive to change. And then, in addition to that, you see the pressure on Chinese firms themselves, the Huawei executive, the lady who was ... Is she a CEO?

Christine McDaniel: CFO.

David Beckworth: CFO, she was arrested in Canada. So it's getting real. And of course this could come back and bite us in the rear of our executives. I've heard some of our executives don't want to go over there to China as well, they're fearful they might get arrested.

David Beckworth: But my point is, it's getting real for these businesses, the economy's weakening, there's threats of them losing market share in the U.S., threats of arrest, and again, I'm not saying this is the right or most efficient way to do things, but maybe the stars are aligned in just the right way, Trump just happened to be the right person at the right time, China's at a point where it would converge anyways, and maybe everything came together.

David Beckworth: One thing I do worry about, I'd like to hear your thoughts on this, and I've said this before, is that Trump has been able to apply these pressures during a year of great economic growth, right? Over four percent I think second quarter, or third quarter, and now it looks like the growth may be slowing down. The next year most forecasts show a little bit of a slowdown, still positive, but a slowdown in growth.

David Beckworth: And I just worry that, if things begin to get a little bit more messy in the economy, if something breaks out, it's gonna be a lot harder to justify or to get away with tariffs. If people begin to feel the pinch of higher prices at Wal-Mart, if you're shopping for example, it might be harder for Trump to get away with his tariffs, his policies. Is that fair? In other words are these tariffs, will they bite enough that, if there were a slowdown, that there would be some kind of blow back?

Christine McDaniel: Yeah, that's a good question. I think the 10 percent ... So there's two sets of tariffs. There's the section 301 tariffs, which is more IP-related, that's the 10 percent tariff. And then there's the section 232 tariffs, the 25 percent tariffs on steel and aluminum. Now, the section 232 tariffs on steel, there are definitely cases of those biting especially the small and medium-sized manufacturers. But we're talking about the section 301 tariffs.

Christine McDaniel: You look at ... You probably know this better than me, but the Chinese one has depreciated already seven percent since those tariffs went into effect. So you think 10 percent tariff, depreciation seven percent, that three percent-

David Beckworth: Not a big number yet.

Christine McDaniel: Not a lot there. And then I've seen reports where it's the Chinese exporters that are really bearing the burden so far of that. Now, could they do the same for a 25 percent tariff? Then you start to think maybe, maybe not. Then you think ... Then it's gonna start hurting, it's gonna start hurting Chinese companies, companies in China, and then the companies that are in China that can move ... Some of them already starting to, the ones that are easy.

Christine McDaniel: But these bigger plants, like Apple suppliers, it will take them years to move the value chain out of China to another country. And they may wait to see if these tariffs are gonna stay in place, the election results in 2020, may see what happens there.

Christine McDaniel: But the big risk there is for the Chinese people, because there is always this ... I was listening to “The Daily Today”, the New York Times, and one of the speakers reminded us that there's almost this bargain that the Chinese government has made with the people. The party delivers a better life for the people, and the people stay out of politics.

Christine McDaniel: Now, so far the people have been willing to live with that because their lives have been getting better. But what happens when their lives no longer are getting better, or actually get worse? What happens if there is a big catastrophe, an economic catastrophe, and the Chinese government isn't able to keep everyone happy enough? Then you have a different situation.

Christine McDaniel: That said, the U.S. and Chinese economies are largely intertwined. And so our futures are, in a way, bound together. That is very interesting because, in a way ... China has sort of found a way to live with the global economy and harness it for its own purposes, but also in a brilliant way that they have intertwined their fate with the leaders of the world economy as well.

David Beckworth: So instead of having to work with us in the long run-

Christine McDaniel: Yeah, and for us to work with them, we have to.

David Beckworth: That's an interesting point you mentioned, though. The tariffs, and I should have thought of this, what economists call the pass-through rate. How much of the dollar changing, or these higher prices, get passed through to U.S. consumers? And typically it's the case not a whole lot in the U.S., typically the foreign producers bear the brunt of that added cost.

Christine McDaniel: Especially Chinese, yeah.

David Beckworth: The Chinese producers, again this is more pressure on them, the economy's slowing down, they're bearing the loss in the profit margins because of the change in currency. So far, things have worked out for President Trump it sounds like. So as long as there's not too much pressure at home-

Christine McDaniel: And in China things have worked out.

David Beckworth: Yeah, and so things are ... The exchange rate's moving in the right direction for him, all the pressure's being effectively applied back in China, not in the U.S. So he's got his stars aligned, so far so good. Again, the question is, how long will this last and be favorable toward him? This is all very interesting, and again, I mentioned this New York Times piece, the New York Times itself recognized ... I just want to read a quote from this story here.

David Beckworth: “China's tempered approach is born in part out of weakness. The country's economy is in a sharp downturn, putting political pressure on President Xi Jinping to reach a deal to President Trump. American officials recognizing the leverage they now have, wielding tariffs to extract concessions that Beijing has long delayed or rejected altogether.” It's interesting, things have worked out, so far so good.

Christine McDaniel: Yeah ... Right, but on the other side of that, remember, these issues have been a long time coming. I would argue that President Trump just gaslit them.

David Beckworth: Okay.

Christine McDaniel: And remember, each U.S. administration has had its own way of dealing with China. Under President Bush, he largely allowed Secretary of Treasury Paulson to take the helm there, with a strategic economic dialogue, and that was more of an engagement approach. Then President Obama continued with a strategic economic dialogue, albeit I think he transferred that to State, but then also at the same time pursued cooperation among like-minded countries, hence the Trans-Pacific Partnership. Remember, the whole idea behind TPP was to team up with like-minded countries and write in stronger rules on these issues that were not necessarily in the WTO, and rein in China that way.

Christine McDaniel: Of course, then Trump gets in, pulls us out of TPP, now here we are still with all these problems, and then he starts putting tariffs on others. So we don't have a lot of friends, but we still have all the problems. And then he starts to basically put crimps in the whole machine, the WTO is on the verge of ... You could say-

David Beckworth: Collapse?

Christine McDaniel: Well, in about a year or so the dispute settlement mechanism will be in serious crisis because of our lack of willingness to move forward with the appellate body judges there. So yeah, he has ... I don't know if you could say he's exacerbated these problems, but he's definitely brought them to a head.

David Beckworth: Okay, so we've had these problems building up over time, I like the way you frame this that he lit the fire. If you don't cut the brush, the undergrowth, it builds up, and over time becomes more susceptible to whoever lights the match.

Christine McDaniel: Yeah.

David Beckworth: And so President Trump is just maybe lighting the match. In fact, you mentioned Hank Paulson, our Treasury Secretary, who did these strategic engagement talks, and he even came out recently, didn't he, and said, “That was a waste.” Didn't he say something along those lines? He's more skeptical of what they accomplished.

Christine McDaniel: Right, but there's always 20/20 hindsight. Remember, I really believe that we do the best we can at the time with all the information we have at the time, and I think the Bush administration did that at that time. It wasn't at all to the point of urgency as it is now. Remember, after 2008, all bets were off. And remember, up until 2008, the private sector in the Chinese economy was growing as a share of GDP. After 2008, that changed and even reversed course.

David Beckworth: Yeah, okay. So these developments are a long time coming, Trump has just put a match to them, he's put his unique way of solving it into play, so it'll be interesting to see what happens going forward now. So China's probably the big, the most important, issue, the most significant issue, may be his legacy when he's out of office.

David Beckworth: But there's another trade deal that he's worked on, I call it NAFTA 2.0, but it has its own name, USMCA. Tell us about that.

Christine McDaniel: USMCA, the United States - Mexico - Canada Agreement. Somebody asked me what the biggest difference was from NAFTA, and without really thinking I said it's the name. I still, in a way, think that, and I don't think that's a bad thing. The term NAFTA did carry a lot of baggage with it, and the new name kind of gets rid of that.

Christine McDaniel: But more seriously, it has been signed, it's not sealed and delivered yet, will it go past U.S. Congress, Republicans have voiced some concerns on it, Democrats have voiced some concerns on it, but there's really something in there for everyone. And I think at this point everyone's just so exhausted and longing for a certainty at least among our closest neighbors. Why would we go back and dig into all that again?

Christine McDaniel: I think one question is, will Mexico and Canada hold the United States to their promise on lifting those 232 tariffs? I would certainly hope so.

David Beckworth: Explain those, those are the national security tariffs?

Christine McDaniel: Section 232, national security tariffs on steel and aluminum. The U.S. said that they would lift those tariffs off of imports from Canada and Mexico once they reached an agreement on NAFTA 2.0, of USMCA. And now that it has been signed ...

David Beckworth: It should happen.

Christine McDaniel: It should happen. To be fair, Ambassador Lighthizer did say they were working on it, they can only do so many things at once. You saw how he went to the hill recently. So it'd be great if they could get this done before the end of the year, do it with a Republican-led House, at least it'd have support from them. But if you wait-

David Beckworth: You're not sure what will happen next year.

Christine McDaniel: You just don't know, because you've got a lot of steel people in Congress from steel states, and meanwhile the downstream manufacturers are hurting. But they don't always have the same political clout that the steel producers do. So we'll see.

David Beckworth: The hope is that in the next few weeks something happens. And this is where it's hard for me not to get cynical and get critical of Trump, despite all the praise I gave him earlier. But what was the reason for invoking a national security clause on Canada in tariffs, were we afraid they were gonna invade us, or attack us, or ... I know I'm being a little silly here, but explain his justification for using a national security threat or clause-

Christine McDaniel: Well, so the tariffs were on everybody. So you had to ... For other countries, they had to come to the United States and try to get a deal to get out of those tariffs. He kept those tariffs on Canada and Mexico, you could argue, because he wanted to hold leverage over them to get a NAFTA 2.0 deal done. Secretary Ross stated that, when asked about Canada, of all places, he said that they had evidence of circumvention. Chinese and other non-North American steel was entering the United States through Canada illegally.

Christine McDaniel: Now, there is some evidence of that happening. For example, the deal that South Korea got with the United States, that quota deal. If you look at the amount of the quota they got with South Korea, it's about 70 or 80 percent of the steel that has been coming from South Korea over the past three years, and the thinking was that that extra 20 or so percent that was coming from South Korea wasn't really South Korean steel, it was circumvention. So there is something to be said about that.

Christine McDaniel: But I would like to think that the US and Canada could work out a way forward to prevent circumvention. Canada certainly has that in their technical capacity to do so, and then show the United States that they're capable of doing that, that they commit to that, and then the United States honors its promise to lift those tariffs now that USMCA has been signed.

David Beckworth: Now, you recently wrote an article on this new NAFTA plan, and it was controversial, some viewed it as highly controversial. So Christine, what are you doing stirring up trouble?

Christine McDaniel: Well, I wanted to look more closely at that article 3210 in USMCA, which requires members, signatories, of the agreement to alert the others if they are about to engage in a free trade agreement with a non-market economy like China. This clause states that basically US, Mexico, or Canada, if any one of us decides we're gonna do a free trade agreement with China, or a non-market economy, then we've gotta let the others know, we've gotta show them what we're thinking about. And then the others will have a chance to weigh in and possibly, if they don't like it, say, “Well, then we're out of USMCA.”

Christine McDaniel: So I thought, “Oh, that's interesting,” because nothing like that has ever been in there. It was interesting for at least two reasons. One, it used the specific language of “non-market economy”. And then two, it allowed the others to use that as an excuse to abandon NAFTA 2.0.

Christine McDaniel: The thing is, though, if you look at the big picture, and all things considered, here we have the whole world trading regime in disarray, we have the United States, Europe, Canada, Japan, other countries talking on their own, in groups, together, apart, about how to reform the WTO, how we're going to deal with countries that practice non-market economy practices, like China. And we are literally on the verge of reforming WTO rules because of non-market economy practices in China.

Christine McDaniel: If you think of all that, then in a way it makes sense that you would do that. It's the United States, Canada, and Mexico reconfirming their commitment to each other, it's almost like we're roommates or housemates, and we're reconfirming that, yeah, we're gonna stay in this house. But, by the way, a lot is going on out there in the world, and if we wanna bring in somebody else into the house that has very different practices than we do, that might be okay, but you gotta let us know first, you can't just go ahead and do it.

Christine McDaniel: So I think, all things considered, it made sense. Especially, like I said, in a time where the world trading regime is very positively about to be reformed.

David Beckworth: All right, but not everyone thought that was such a great insight apparently. Okay, but your point is well taken that you want those roommates to work together, to coexist, to have a good time, be productive, and you don't wanna disrupt it by bringing in a third party that may not be consistent with what they're doing.

David Beckworth: All right, so any other thoughts on NAFTA 2.0? Are we good?

Christine McDaniel: I think we're good.

David Beckworth: All right, let's move across the Atlantic, then, and talk about some trade issues over there in Europe. Europe, man, they seem to have a lot of problems, both on the continent and the UK, United Kingdom. We have Brexit going on, Brexit started in 2016, it's been a long, drawn-out process, lately the drama has picked up, so kinda summarize for our listeners, what's happened and what can we expect to happen?

Christine McDaniel: I haven't checked my phone in the past 40 minutes, so I don't really know what's happening, but recently the UK and the EU agreed to this political declaration which sets out a framework for the longer term deal, and that longer term deal is basically the UK leaving the EU in March, and then the implementation period will follow.

Christine McDaniel: The declaration was very vague, though. And it was very vague on purpose because there isn't agreement yet on where they will get to, where will they go after that, does the UK remain in the EU single market, in the Customs Union, can it have an FTA with other countries, what about Northern Ireland. There's so many questions that the UK government has not resolved yet, so that declaration was left very vague.

Christine McDaniel: Then, of course, there's the potential no confidence vote for Theresa May-

David Beckworth: The prime minister.

Christine McDaniel: The prime minister. So it's very painful to watch this, but it's also fascinating because think of if a state in the United States wanted to leave the United States. And let's say they could, what if they voted and they decided to do it, and it was so close, and when they voted they didn't really know the ramifications? There's so many close ties there, so it's really fascinating to watch.

Christine McDaniel: That said, the UK's history is much longer on its own than with the EU. But at the end of the day it comes down to, do they want the regulatory regime of the EU or not. And a lot of their trade is with the EU, so it helps to be a part of the Customs Union and part of the single market. But you can't have it both ways.

Christine McDaniel: So, if nothing is done, it looks like there will just be a hard Brexit, and that could also be very painful, but there might be a silver lining on that cloud because, in a way, that just allows the UK to leave and start fresh. But you know, this is-

David Beckworth: Very complicated.

Christine McDaniel: Very complicated, and there's many people that know much more than I.

David Beckworth: Well the thing, to me, it speaks to is the fact that we do live in an increasingly globalized world, and you mentioned before, we have these global supply chains, so everything's interconnected, it's hard to have a clean break. Everything we do is so connected. Like the iPhone, it's produced all throughout the world, in China, parts of the US, other places. And so it's hard just to have a clean break when products are made all around the world, and services, and other things.

David Beckworth: So I can understand why it's complex, and I can also understand why people who voted for Brexit probably did not understand the implications of it. It's like if a state in the US were to leave, they would suddenly, and maybe painfully, realize how many federal dollars they were getting, or what it costs to run their own national defense. It's so much more complicated than just us versus them.

Christine McDaniel: Right. The principle of it, in terms of if they were voting with their heart, the principle of it, that remains the same. It's very complicated. But if you delete the immediate part of the future, of the very painful adjustment process that they'll go through, and then fast forward, that's where they need to think about, where they wanna be. Because otherwise it's nearly impossible to make these difficult, costly decisions.

David Beckworth: Yeah, and it was fun to watch, as you mentioned. The British are very proper, very orderly, and Theresa May trying to defend this to Parliament. She passed her no confidence vote, right? They had a vote where she would have basically lost her office, but she passed it, so she's still in office. She still can bring this proposal to a vote.

David Beckworth: So my understanding is she was going to bring it to Parliament for approval, but she realized she didn't have the votes, so she postponed the vote, and then there was this no confidence vote on her, so she passed that, so in theory she could still bring it before Parliament. Is that right?

Christine McDaniel: I think so.

David Beckworth: Okay, so we're waiting to see what happens over there. But the high drama, which is kind of comic compared to what happens in other places, but the high drama was in Parliament, this mace, this pole that they carry, and someone went in there and tried to take it out, and that's as exciting as it gets. They talk, they yell to each other, and someone tries to take their mace out.

David Beckworth: If we go across onto the European continent, look at France, the drama there is quite a bit more elevated, there's rioting in the streets, there's ... They're different issues, but the president there, Macron, is trying to impose carbon taxes, make some changes. All a part of a bigger picture of being a part of the EU. So this is kind of related, because he has his fiscal budget constraints as being a part of the EU, as well as his goals for a cleaner economy, and they're all coming together. It's interesting to see the different responses.

David Beckworth: In the UK, the craziest thing that happened is someone tried to take the mace, where in France there's rioting on the streets of Paris for weeks.

Christine McDaniel: Right, there's always drama in some country. We just see every single moment of it now because of our communications technology.

David Beckworth: Let's move on to something that will be an issue for the UK, for France, for the US, for the world, and that is data flows. We typically think of trade in terms of goods originally, then we became more aware of services flowing across borders, and now it's data. Tell us why this is and why it's going to be increasingly an important issue.

Christine McDaniel: Data is one of those invisible issues almost. I think it's one of the things that we would be talking about nearly nonstop if it wasn't for the steel tariffs in China. That said, you think about a factory floor eighty years ago compared to today. Eighty years ago, that factory floor was probably in one spot, or maybe you have to go back further than that, awhile ago the factory floor was pretty much in one spot, and definitely pretty much within a certain set of borders.

Christine McDaniel: Today, that factory floor is across so many borders, and you might have a product that goes from a whole production process that's so unbundled, that goes from country one to country two to country four, back to country three, back to country one, country five, six, seven, eight, and then might go back to country one to sell it from country one, do a couple more things at country one, and then export it back across the globe.

Christine McDaniel: But every time it moves between borders, data is moving with that widget, or with that service. That data can sometimes involve private data, or data regarding the particular materials, or can involve intellectual property or trade secrets, a variety of things. So it's an intangible asset that has increasing intermediate input value to the final good.

Christine McDaniel: We don't really have any global rules about how to treat that data, and more and more countries are becoming concerned about individuals' privacy, and sometimes individuals' data is bundled in that data that's moving with the widget across borders. So there's this balancing act that countries do in terms of ...

Christine McDaniel: The firms need to be able to move data across borders to keep their production process viable. Governments need, or at least particular intelligence agencies, may need access to certain data at some points for their security or antiterrorism efforts. And then individuals have a desire for their individual privacy. So this is almost a three-legged stool that is very hard to keep steady. That, I think, is one of the big issues over the next five, 10, 15 years.

David Beckworth: So to make this concrete, if we take the iPhone for example, the iPhone, there's the physical part that's being produced, we produce maybe some of it in the US, we send it overseas, but along with the physical part there's information, there's data that's being sent, and that data is sensitive, it's a commercial secret, a commercial knowhow that we don't wanna share with everybody. Some of it is known, but it's gotta be protected. So it's not just the factory and the goods, but it's the ideas behind that that are increasingly valuable. So that's the concern, that's one example of a concern, right?

Christine McDaniel: That's one example, right, exactly. Another example is insurance companies. Insurance companies are increasingly international. If an insurance company in France is insuring somebody in the UK, and then there's a secondary insurance company out of Brussels that's insuring all those entities plus the US, who owns that data, where can it go? What if it gets in the wrong hands?

David Beckworth: Okay. I have another example, it's a very unorthodox example, but I just wanna bring it up because it came to mind as we're talking here. There was a story of a guy in Austin, I think he's actually arrested now for some other charges, but he came up with a 3D manufactured gun, he made the plans or the patterns to build ... At home, if you have a 3D printer, you make your own gun, not registered. This was controversial, but the thing is he put the plans online, so this data could go anywhere in the world, and the State Department forced him to take it down because he was effectively exporting weapons, that was the clause they used.

David Beckworth: But it speaks to this issue, this knowledge is powerful. You don't have to be exporting a physical weapon, you can just be exporting the knowledge to create one. And this went through court, I think he got the right to put it back online, but he's in trouble for other reasons now. It just speaks to the complexity of the world we live in today.

Christine McDaniel: Yeah, for sure, for sure. And it's always changing, one thing you can always count on in life is change. Just when you think you've got things figured out, you have another issue to deal with. There are really no black and white rules on a lot of these things. The WTO does not necessarily have rules on these things.

Christine McDaniel: Now, in TPP we did have some rules on ecommerce. Those rules basically encouraged the free flow of data more or less, and Japan and the US were the main signatories in TPP who were leading that charge on designing that chapter, and then working with others. Now that the US is not there, it's really just Japan, and now only is the US not at the TPP table, but the US isn't really at the table in a lot of things, including data and data privacy.

Christine McDaniel: So the EU, they're obviously ... They just will fill the vacuum, they're moving forward on their data privacy laws. They've recently instilled new rules on data, a little bit more restrictive than the previous one.

Christine McDaniel: Under Obama we had the Privacy Shield with the EU, and that basically required US firms that wanted to transfer EU personal data to the US or elsewhere had to get this contractual agreement with the US Department of Commerce, because they're the ones, sort of the ombudsmen, in the US for that. So a US firm would have to work with Commerce to basically confirm that they were conforming to the Privacy Shield principles.

Christine McDaniel: And that seemed to strike a pretty good balance between those three legs of that stool I talked about. The Snowden revelations instigated a lot of that, that was a very major ... So fast forward to today, the EU has now a new set of rules, the General Data Protection Regulations, GDPR, and GDPR goes a little bit further than the Privacy Shield. Firms themselves have to comply, but then they also have to show that every single country that they are moving the EU personal data to, that those countries' rules comply also with the EU's rules.

David Beckworth: That's a lot of work.

Christine McDaniel: And guess what, right now the US is not on that list of cleared countries. So there's a lot of work there to be done with the EU. I do think, though, once we have the capacity on the US side to sit down with the Europeans and work this out ... But that's gonna take a lot of time, a lot of people, a lot of brainpower and rolling up the sleeves ... I do think we'll be able to work something out.

Christine McDaniel: Look at Japan, Japan recently did an FTA with the EU, and they were able to come to, I think, a very reasonable agreement. So we'll have to see where this goes. The US Department of Commerce did, in October, appoint an official ombudsman for the United States to deal with GDPR, so it's starting. But again, we can only deal with so many issues at once in the US government, we'll have to see how this moves forward.

David Beckworth: So what are the practical ramifications of this? We're not on the EU's list, the approved list of countries for the GDPR, so what does it mean for Google or Facebook? Does it mean they have to do different procedures in the EU?

Christine McDaniel: Well, it means that any single company that wants to move data on EU citizens out of the EU to the US has to talk to the European Union about making sure that they've complied. This can get very messy very quickly, obviously it would be more efficient for the US to have a system that was in compliance with the EU, so it was just countrywide.

David Beckworth: That seems like it would be hard to enforce, let alone-

Christine McDaniel: Very hard to enforce, in fact Google ... I was at Google recently, there were reports that Google went over and talked to the European Union's person on data privacy about their plan, on how they were going to comply, and apparently they surprised the EU and they were quite clever about it, and they came up with a great plan. In fact, it was so good that it would be very good for Google, but pretty bad for any other companies that might be competing with Google.

Christine McDaniel: We're gonna have to think harder about this, and make sure that the US ... The US itself, we don't really even know how to deal with data privacy yet, I think we'll see that in the new Congress.

David Beckworth: Facebook has been a big part of this conversation, they've gotten in a lot of trouble lately, some of these emails that were disclosed about the executives, what they're thinking about these EU rules. So it will be interesting to see what happens with them.

Christine McDaniel: Yeah, basically if you can get on ... You have to think, where do consumers spend most of their time? In front of a screen. So all companies want to be part of that. Everyone's vying for that. These are hard discussions that we're gonna have to have.

Christine McDaniel: Now remember, there's always a balancing act, with the good comes the bad. This emerging literature on digital platforms and financial technologies show that they are a big boost to small- and medium-sized firms in trying to reach foreign markets.

Christine McDaniel: eBay found that over 90% of their firms on eBay export, that's compared to less than five or 10% what we see in the national statistics, that's huge. PayPal found the same thing, about over 70-80% of firms on PayPal are exporting. And they're not only exporting at a higher rate, but they're reaching many more foreign markets than what we're seeing in the census data. And then Facebook too, we just got a new data set, a survey data set, of firms that use Facebook around the world, and we also find that, for the United States and Australia, those firms on Facebook actually do have a higher propensity to export than their national counterparts.

Christine McDaniel: So we don't wanna throw the baby out with the bathwater, there's a lot of potential there, potential to be an amazing tool for trade facilitation, especially for the smaller firms. On the other hand, there are some real legitimate privacy concerns there that the country itself has to discuss and see where the public wants to end up, and then for the Congress to recognize that.

David Beckworth: We recently had a guest on that talked about automation and AI and all the smart technologies, and would they be displacing jobs or creating jobs. This conversation that we're having right now would have been unimaginable probably 20, 30 years ago, this whole data flow across borders, creating new jobs that weren't there before, both the firms themselves but even the regulatory authorities. There's a whole new emerging field of regulatory studies that's gonna be based around how do we deal with these privacy issues.

David Beckworth: So it's neat to see this, stepping back, from a broader perspective, there's new dynamism, new ideas, new challenges, new opportunities that arise, and I think it's just another example that there's always gonna be new jobs created that we never would have imagined in the past.

Christine McDaniel: So true, that is so true. I remember looking at the BLS data a couple years ago, occupation level data, I went back ... I think I could go back to the 60s or 70s, and it was just amazing the top 20 jobs by sector, compared to what they are today by sector. Many disappeared, new ones have emerged that we didn't even know about.

Christine McDaniel: But I think on the privacy thing, again, it's easy to get so caught up with everything that's in front of us right now, and hopefully the policymakers will be able to do this, but we have to step back and really think about what do we want as individuals and as a society. And then remember, each country has different preferences. The EU, they have a very different history than the US with the Stasi and the surveillance. And that didn't happen that long ago for them. To them, personal privacy, that's the holy cow, as my European friends tell me.

David Beckworth: For them, Facebook is a very important issue because they do have these images of secret police and the communists still on their minds, and they don't want to have their privacy taken.

Christine McDaniel: Yeah, I think maybe the younger generation are less concerned about it, but still it's much more personal and a higher priority to them that their personal privacy is not transparent to the government, because of that history. Now, in the United States, I guess you could argue McCarthyism, we had that here, but I don't think ... At least me as an individual, I'm not that concerned. I'm not committing any crimes, so I'm not that concerned if the government knows where I went shopping last night, or whatever. I just don't think ... As a general rule of thumb, we're less concerned about this in a way.

Christine McDaniel: Now, that said, once insurance companies can use its particular information about you, or-

David Beckworth: Once we get burned like the Europeans, we'll be more sensitive.

Christine McDaniel: Possibly. Different countries just have different outlooks on this. But the US and EU, for all of our differences, we are much more similar in the big picture, because China is really on the other spectrum of this, and they have a much tighter control of what goes in, what comes out. They also have much more control in surveillance over everything that goes on inside those borders.

David Beckworth: Yeah, we could have a whole episode on China's social credit system, where they monitor and give scores to people based on a whole range of things, which is very alarming. But I think our time is up, so we'll end on that note. Our guest today has been Christine McDaniel. Christine, thank you for coming on the show.

Christine McDaniel: You bet.

David Beckworth: Macro Musings is produced by the Mercatus Center at George Mason University. If you haven't already, please subscribe via iTunes or your favorite podcast app, and while you're there please consider rating us and leaving a review. This helps other thoughtful people like you find the podcast. Thanks for listening.

About Macro Musings

Hosted by Senior Research Fellow David Beckworth, the Macro Musings podcast pulls back the curtain on the important macroeconomic issues of the past, present, and future.