Policy Brief #179

During an "exit interview" with the Wall Street Journal, departing National Economic Council Director Lawrence Summers argued that history would judge the United States based on how well we adjust to China’s emergence as a great power, economically and politically. In the face of China’s progress, America’s manufacturing sector faces major challenges in becoming and remaining competitive and our choice of national economic policies will affect how well we meet those challenges. It is essential that the U.S. trade deficit not balloon as the economy recovers. There is scope to expand our exports in services and agriculture, but improving the competitiveness of U.S. manufacturing is vital.

The U.S. Trade Deficit: Background

Components of the Trade Deficit. The U.S. trade deficit in goods and services was just under $700 billion in 2008—4.9 percent of Gross Domestic Product (GDP). However, the deficit in goods trade was nearly $835 billion, which was partially offset by a $136 billion surplus in services trade. The latter surplus has grown consistently over a range of service types and has important potential to expand. Going forward, we can assume this surplus will remain around one percent of GDP. But services trade surpluses alone cannot solve the U.S. trade deficit problem, because of persistent large deficits in goods trade.

Very important are deficits in the energy sector. In 2008, petroleum products accounted for $386 billion of the total trade deficit (2.7 percent of GDP). reducing energy imports (and consumption) is a significant challenge for the U.S. economy, and with global energy demand continuing to rise and supply constrained, oil prices are more likely to rise than fall. The U.S. bill for imported oil is unlikely to fall below 2.7 percent of GDP for years to come.

In future, for overall U.S. trade in goods and services to be balanced, non-energy products (that is, manufactured and agricultural products) would have to achieve a surplus of around 1.7 percent of GDP. Added to the one percent services surplus, the two would balance out the almost unavoidable petroleum deficit.

Obviously, elements in this rough calculation could shift, for better or worse, but if the U.S. economy is to achieve a more balanced growth path, the competitive position of U.S. manufacturing must improve sharply.

Growth of the U.S. Trade Deficit. In 1999, the U.S. economy was experiencing strong growth and low inflation, but the trade deficit in manufactured and agricultural products was high—$262.5 billion—and concentrated in four broad industry categories. The largest deficit was in plastic, wood and paper products ($62 billion). Transportation equipment—from autos to aerospace—was close behind ($61 billion), followed by textiles and apparel ($52 billion) and computers and electronics ($44 billion). Only two categories had trade surpluses: chemicals at more than $9 billion and agriculture at $4 billion.

By 2008, the trade deficit had risen to $400 billion, an increase of $138 billion or nearly 52 percent in nominal terms. The deficit in computers and electronics accounted for nearly half of the overall increase in the trade deficit (48 percent, a $66 billion increase). Two other industries had large deficit increases: plastic, wood and paper products; and textiles and apparel. By contrast, agricultural products contributed an additional $27 billion to a small 1999 surplus. And transportation equipment reduced its trade deficit by nearly $12 billion. Chart 1 illustrates how the increase in the U.S. goods trade deficit (excluding oil) was distributed by segment between 1999 and 2008.

Rising Imports from China

Simply put, the United States runs chronic trade deficits and China runs trade surpluses because we spend more than we produce, and they do the opposite. The U.S. trade deficit with China in manufactured and agricultural products was already large in 1999—$68.6 billion or 26 percent of the nation’s total trade deficit. By 2008, it had increased to nearly $268 billion. The story of the increasing U.S. trade deficit from 1999-2008—apart from oil—is the explosion in the deficit with China.

Computers and electronic products account for much of the increase in U.S. imports from China. In 2008, China exported $108 billion in these products to the United States, up from less than $19 billion in 1999. Beyond this sector, Chinese exports to the United States have grown strongly pretty much across the board. Although the United States exports agricultural products to China, there is a large return flow of processed and labor-intensive food products. And, while Chinese textile and apparel imports have risen, U.S. demand for Chinese goods in this category has grown only modestly as other emerging economies have become major clothing exporters.

The Nature of Chinese Exports. On a visit to China early in 2010, I heard a memorable speech declaring that the United States is exploiting China. The Chinese perception is based on where profits land. For example, a 2009 survey by Greg Linden, Kenneth Kraemer and Jason Dedrick of the University of California suggests that Apple, Inc. sells iPhones or iPods for several hundred dollars, most of them “made in China,” but the Chinese producer and Chinese workers receive just under four dollars apiece. The retail price of the 2005 video iPod was $299, the wholesale price $224 and the factory price $144.56. The largest part of the factory price ($101.40) came from Japanese components, with U.S. companies other than Apple supplying $14.14 in components and many different suppliers providing other small components. The final assembly and checking is done in China for $3.86, while Apple’s estimated gross margin is $80 per unit sold at wholesale, plus a portion of the retail margin through its Apple online and retail stores.

These same researchers deconstructed the value of a 2005 Hewlett-Packard Notebook PC, which sold at retail for $1,399 and had a factory cost of $856.33. Intel and Microsoft received a total of $305.43 for each computer sold, while the assembly and checking done in China netted $23.76— only 1.7 percent of the retail price. China’s massive export boom in computers and electronics derives from the fact that it is a very good place to assemble electronic products that clearly benefit U.S. companies’ profits. However, China’s policymakers want change; they are determined to attempt to obtain more of the value added of the goods their citizens assemble.

The place of China as a supplier to the United States is further illuminated in the forthcoming book Rising Tide: Is Growth in Emerging Economies Good for the United States? by Lawrence Edwards and Robert Lawrence, who have taken a detailed look at the “unit values” of traded products, particularly U.S. exports and imports. Detailed trade data identify specific classes of products and provide total dollar value and number of physical items sold in each class. For example, the data report the value of electric motors exported by China to the United States, along with the number of motors, which allows a calculation of the price per motor. If a country is selling motors for electric shavers or toys, the unit value will be small; if the motors are for large capital goods, the unit value will be high.

Edwards and Lawrence find a striking result for China, one that also applies to other emerging economies. It turns out that unit values in the same product categories are hugely different. China sells low unit value products to the United States, and the United States sells high unit value products around the world. These price differentials are so great, in fact, they suggest the United States and China are not really competing. They are making completely different things. Perhaps even more surprising, over the past several years, there appears to be no tendency for the unit values to converge. This contradicts the hypothesis that China is successfully moving up the technology or “value ladder.” Instead, U.S. competitors are Europe and Japan.

Although the volume of Chinese exports to the United States has soared, in high-tech, as we saw, it is assembling components originating elsewhere and, in other industries, it is making primarily low value products, such as toys and children’s clothing— market niches where the U.S. would not be expected to be competitive.

China and Multinational Companies

When China emerged from the Cultural Revolution and started on a path to become a productive and market-oriented economy, it faced massive educational, technological and business hurdles. Competent scientists, engineers and managers had been exiled and “re-educated.” Heroic efforts were needed to catch up to developed nations’ economies. Asian precursors such as Japan and Korea had faced their own catch-up challenges, taking advantage of the global market in capital goods to help them, and China followed their lead. Unlike the others, China encouraged direct foreign investments and required partnerships with domestic businesses. These relationships provided not only financing, but also the business and technology skills of global corporations and sped development of Chinese companies.

Germany provides a fascinating case study of the benefits and perils of a strong relationship with China. Spiegel Online notes that the most important driving force behind the current German economic upswing is its exports of sophisticated capital goods to China. German companies find, however, that the Chinese demand access to their industrial know-how. German businesses are reluctant to offend their Chinese customers, but deeply concerned about the loss of intellectual property. Beijing does not want merely to catch up to German companies—its goal is to surpass them. It has already done so in the manufacture of solar panels, by subsidizing research into solar technology. China exports perhaps 70 percent of its output of solar panels, about half of which goes to Germany, where demand is heavily subsidized by the German government. In electricity generation, Beijing invited Western companies to build power plants jointly with domestic Chinese partners. Now the Chinese are upgrading the plants with their own technology, based on what they learned through the German company Siemens and the French company Alstom.

A 2010 study by James McGregor of APCO sharply criticizing Chinese industrial and technology policies provides additional examples of China’s determination to leverage Western technology. Notably, China is expected to spend $730 billion on its rail network by 2020, with about half being used to expand high-speed passenger lines. This level of capital spending is irresistible for European producers. The China National Railway Corporation (CNR) invited Siemens to bid on a $919 million contract to build 60 passenger trains for service between Beijing and Tianjin. Siemens built the first three, but the remaining 57 were built in China by CNR, using 1,000 Chinese technicians Siemens had trained. In March 2009, Siemens announced an agreement for it to build 100 additional high-speed trains to serve Beijing-Shanghai, but China denied such an agreement ever existed. Siemens ultimately received a contract for $1 billion in components, but $5.7 billion went to CNR, which built the trains.

In the long run, China favors its own producers. It brings in foreign companies at the launching of an industry, then uses government procurement to advance the market share of Chinese companies and, eventually, to shut out competition. This strategy has allowed it to build on foreign companies’ expertise, develop domestic champions and raise the technological level of its economy and exports. Because of its large and rapidly growing market, China can pressure foreign companies to partner with Chinese companies, allowing their employees to learn managerial and technical skills. Over time, China has somewhat loosened formal requirements for foreign companies to accept partners, but the strategy of technology and skills transfer remains very much in force.

Developing countries naturally learn from best practices world-wide; indeed the 19th century economic history of the United States includes considerable technology transfer from Britain and the rest of Europe. Nevertheless, companies that have invested heavily to develop new technologies and efficient processes cannot afford to simply allow China to free-ride on their efforts. Yet many Chinese leaders make it clear they are on a mission to acquire the best technology, using their size and growth as a way to obtain it.

A December 23, 2010 New York Times editorial noted this strategy, saying, “[I]ntellectual property misappropriation cannot be a government policy goal, especially in a country the size of China, which can flood world markets with ill-begotten high tech products.” The editorial acknowledged some U.S. progress at the World Trade Organization, but urged our government to be “more vigilant and aggressive” against intellectual property losses.

Helping U.S. Manufacturers Adjust to China

U.S. exports of manufactured goods reached $952 billion in 2009 and grew strongly in 2010. The goal of increasing exports substantially is feasible, given favorable economic conditions and policies. It may even be possible to bring some off-shored production back to the United States, a possibility some manufacturers have been exploring, in order to remediate cost, quality and delivery problems. But first, policymakers must recognize that:

1. Today’s trade deficit is not a technology problem. The U.S. economy simply must become a more attractive place to develop and manufacture new products. The best ways to do this are to balance the budget and lower the marginal tax rate on corporations. Our trade problem is that U.S. companies develop innovative products but choose not to manufacture much of their value here. One chronic reason is that the value of a dollar has been too high, making U.S. production too expensive. If the U.S. saved more and balanced the federal budget, that problem would take care of itself. This would require global exchange rate adjustments including an increase in the real exchange rate of the renminbi, although economic forces will force this to happen without the need for U.S. political action. In addition, the U.S. corporate tax rate is higher than that of other countries, encouraging overseas investments. Both of the recently announced deficit reduction plans provide blueprints for balancing the budget and lowering corporate tax rates.
    
2. Technology may become a problem in the future. The United States should work with the European Union, Japan and multinational companies to develop a uniform code of conduct to protect technology and patents when emerging market companies work with multinationals. Government sanctions that would draw the United States into direct conflict with China are inadvisable, and the World Trade Organization (WTO) has limited effectiveness. Thus, multinational corporations should take the lead and refuse to work with foreign entities that demand access to and misuse proprietary technology. They should be fully informed of past unacceptable practices and the policies and behavior they should expect before entering new markets. If companies nevertheless reveal their technology as the price of market access, that is their choice.
    
3. Policymakers must work with the private sector to identify and reduce barriers to U.S. exports. The expansion of U.S. exports will be in industries such as advanced manufacturing, electronics, aerospace and medical devices. These industries will require new technologies, capital, R&D and skilled labor. There is a strong case for support of technology development through direct funding, improved tax treatment of R&D, increased access to capital and a reduced marginal corporate tax rate. Skill shortages appear to be another important barrier to expansion. Improving the U.S. education and training system in science, math, engineering and technology is a long-term national priority. Furthermore, as recommended by Brookings vice president Darrell West, easing restrictions on H-1B visas to prioritize high-value immigrants with technology expertise is an obvious policy fix with immediate benefits.
    
4. The policy debate must focus on the right issue, and not be drawn down blind alleys. Indicators that the U.S. economy is falling behind must be evaluated carefully. For example, A 2007 National Academy of Sciences study, Rising Above the Gathering Storm, reviewed a range of such indicators. It noted that China is building 50 chemical plants, whereas the United States is building one; and computer chip fabrication plants are being built in China (and elsewhere in Asia), but not in the United States. However, the lack of U.S. investment in these sectors may not be a reason for concern. It can be difficult to operate either bulk petrochemical or chip fabrication plants profitably over the long run, and they create few jobs.
    
5. Companies should focus on innovation and cost reduction and avoid dragging policymakers and themselves along time-wasting tangents. Endless discussions took place during the Clinton administration about how Fuji was competing unfairly with Kodak, whereas the real challenge to Kodak was not Fuji but digital technology. Currently, the World Trade Organization is assessing appeals from the European Union (EU) and the United States regarding its decision that the EU unfairly subsidized Airbus to the detriment of Boeing. Whatever the merits of the arguments in the parties’ six years of legal wrangling over this issue, Boeing’s future success may depend more on how well it solves problems with the new 787, now several years behind schedule, and whether it can make its factories leaner and more productive.

Conclusion

Expanding manufactured exports is a key to our nation’s global competitiveness and reduced trade deficits. Recovery in manufacturing will help employment and the revival of local economies. Competition from emerging economies, especially China, means that innovation in products and processes will be essential to maintaining U.S. leadership. While emerging economies are important markets for U.S. manufacturers, these exchanges should not become opportunities to misappropriate U.S. companies’ intellectual property. U.S. policymakers must create a climate that fosters growth in manufacturing while protecting U.S. innovation and technology.

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Justin Wolfers, professor of Economics and Public Policy at the University of Michigan, re-joins Brookings, Vice President and Economic Studies Co-Director Karen Dynan announced today.  Wolfers was a visiting fellow from 2010-2011.

A world-renowned empirical economist, Wolfers will continue in his role as co-editor, along with David Romer of the University of California, of the Brookings Papers on Economic Activity (BPEA), the flagship economic journal of the Institution.  He will continue his focus on labor economics, macroeconomics, political economy, economics of the family, social policy, law and economics, public economics, and behavioral economics. His appointment as senior fellow will last 13 months.

Wolfers is also a research associate with the National Bureau for Economic Research, a research affiliate of the Centre for Economic Policy Research in London, a research fellow of the German Institute for the Study of Labor, and a senior scientist for Gallup, among other affiliations. He is a contributor for Bloomberg View, NPR Marketplace, and the Freakonomics website and was named one of the 13 top young economists to watch by the New York Times.  Wolfers did his undergraduate work at the University of Sydney, Australia and received his Master’s and Ph.D. in Economics from Harvard University.  He is a dual Australian-U.S. national and was once an apprentice to a bookie which led to his interest in prediction markets. 

“We are pleased to re-welcome Justin back to Economic Studies,” said Dynan. “His work continues to challenge the conventional wisdom, and we look forward to collaborating with him once again.” 

“Justin is outstanding at communicating economic ideas to a wide audience, as evidenced by his regular writings for media as well as his large social media presence,” added Ted Gayer, co-director of Economic Studies.

“I have enormous affection for the Brookings Institution, which provides not only a home for deep scholarly research, but also an unmatched platform for engaging the policy debate,” said Wolfers.  “The Economic Studies program has a rich history of being the go-to place for policymakers, and I look forward to coming back and engaging in debate with my colleagues there.”

       

Employers continued to boost payrolls in 2015, capping six straight years of job gains. It was the third year in a row in which employment gains topped 210,000 a month. In the 12 months ending in November, public and private payrolls increased 220,000 a month, or about 1.9 percent over the year. Virtually all the growth in payrolls was in the private sector, which added 212,000 jobs a month. The public sector added modestly to its payrolls last year, but the number of government employees remains more than one million (4.4 percent) below the peak level attained in 2010. 

Nearly all major industries except mining contributed to job gains in the past 12 months, though gains in manufacturing were weaker than in any year since the expansion began in 2010.  Payrolls in the mining industry tumbled more than 10 percent, hurt by a steep fall in oil and gas prices and the decline in exploration for new energy reserves. The construction industry continued to add to payrolls last year at about the same pace as in the previous two years, although the level of employment is still about 1.2 million (15 percent) below the peak level achieved in 2006.

Based on the age composition of the U.S. population, between 65,000-80,000 new jobs are needed every month to keep the unemployment rate from rising. Since late 2010, monthly payroll gains have comfortably exceeded this threshold. As a result, the jobless rate has declined steadily. In the 12 months through November 2015, the unemployment rate dropped another 0.8 percentage point, falling to 5.0 percent. The jobless rate is now within a half percentage point of its level immediately before the Great Recession. Since reaching a peak in the autumn of 2009, the unemployment rate has been cut in half.

We’ve also seen improvement in other indicators of job market distress in the past year. The number of Americans who want full-time jobs but have been forced to take part-time positions fell more than 11 percent in the 12 months through November 2015. About 9 million workers who wanted a full-time job were employed part-time in the middle of 2010. That number has fallen to about 6 million in recent months.  Similarly, the number of Americans in long spells of unemployment continues to shrink. Workers reporting they were unemployed 6 months or longer fell to 2.05 million in November, representing a considerable improvement since 2010. In that year, more than 6 million jobless workers reported they had been looking for work for at least a half a year.

The most welcome news for Americans who hold jobs is that inflation-adjusted wage levels improved last year.  Real average hourly earnings increased 1.8 percent between November 2014 and November 2015, and real weekly earnings climbed 1.6 percent.  These gains represent a considerable improvement compared with earlier years in the recovery, when real wage gains were negligible.  Nonetheless, nominal wage gains in 2015 were only slightly faster than they were in earlier years of the recovery. The reason for the startling turnaround in real wage growth is that consumer prices increased very little over the past year.  In the 12 months ending in November, the CPI edged up just 0.5 percent, almost a full percentage point more slowly than the average rate of consumer inflation in the previous three years.  The slowdown was driven by lower prices for energy and other key commodities.  (The “core” consumer inflation rate, which strips out the effects of price changes in energy and food, was 2.0 percent last year, a bit higher than the rate in the previous year.) 

Back when politicians and voters cared more about inflation than they currently do, Brookings economist Arthur Okun proposed an economic indicator called the “misery index” to summarize the dual hardships of inflation and unemployment. To measure economic misery Okun suggested adding the current unemployment rate and a measure of consumer price inflation.  In Chart 1 below I have added the civilian unemployment rate and the trailing 12-month percentage change in the CPI.  In the 11 months of 2012 through November, the misery index averaged just 5.4, its lowest level since the 1950s and well below its average levels in the 1990s (8.8) and in the period from 2000 to 2007 (7.8). When inflation is benign and has remained subdued for a long time, Americans may forget the pain they feel when price increases are frequent and large. Okun’s misery index fell to an exceptionally low level in 2015, even if a small majority of Americans continues to believe the economy is getting worse.

The good news in 2015 is that unemployment continued to fall and real wages began to rise.  The less welcome news is that key measures of labor force participation failed to improve.  For example, the labor force participation rate of Americans between 25 and 54 was the same in November 2015 as it was in November 2014. More worryingly, it was 2.1 percentage points below its level in November 2007, just before the Great Recession.  So far we have seen no rebound in participation among people in prime working ages, despite abundant signs that it’s easier to land a job. 

Low participation is the main explanation for depressed employment rates among prime-age Americans.  Participation rates are not only low in comparison to levels seen before the Great Recession, they are also now below those in other rich countries.  Charts 2 and 3 compare employment-to-population rates among 25-54 year-olds in seven OECD member countries (Canada, France, Germany, Japan, Sweden, the United Kingdom, and the United States).  The charts show employment rates separately for men and women in two different years, 2000 and 2014.  The countries are ranked, from left to right, by their employment rates in 2014. In 2000 the U.S. had the second highest male employment rate (Chart 2) and the second highest female employment rate (Chart 3) of the seven countries listed.  By 2014, the U.S. had the lowest male and female employment rates among the countries compared.  Although several nations saw declines in their prime-age male employment rate, only the U.S. also experienced a decline in its prime-age female employment rate.  The other six countries all saw increases in female employment.

The main reason for the drop in prime-age U.S. employment was the decline in prime-age participation. An enduring puzzle of the current recovery is the failure of participation rates to rebound, even in the face of steady improvement in the job market.

      

       

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The financial crisis is now eight years behind us, but its legacy lingers on. Many Americans are concerned about their financial security and are particularly worried about whether they will have enough for retirement. Guaranteed benefit pensions are gradually disappearing, leaving households to save and invest for themselves. What role could equities play for retail investors?

Another concern about the lingering impact of the crisis is that business investment and overall economic growth remains weak compared to expectations. Large companies are able to borrow at low interest rates, yet many of them have large cash holdings. However, many small and medium sized enterprises face difficulty funding their growth, paying high risk premiums on their borrowing and, in some cases, being unable to fund investments they would like to make. Equity funding can be an important source of growth financing.

On Friday, April 15, the Initiative on Business and Public Policy at Brookings examined what role equity markets can play for individual retirement security, small business investment and whether they can help jumpstart American innovation culture by fostering the transition from startups to billion dollar companies.

You can join the conversation and tweet questions for the panelists at #EquityMarkets.

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• Keynote address by Richard G. Ketchum
• Panel Discussion
• Keynote address by Roger Ferguson

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• Not just for the professionals? Understanding equity markets for retail and small business investors

Transcript

• Uncorrected Transcript (.pdf)

Event Materials

• Equity Markets Retirement Security 2016 Apr 15 (2)
• 20160415_equity_markets_transcript

       

       

       

       

       

This weekend’s election results in Turkey were a surprise to the vast majority of Turkish pollsters and pundits, myself included. The ruling Justice and Development Party (AKP) won nearly 50 percent of the popular vote. The party can now form a single-party government, even if it doesn’t have the supermajority necessary to remake the Turkish constitution. What happened?

Now I see clearly

As with much in life, the result does make sense in hindsight. Prior to the June 7 election, President Recep Tayyip Erdoğan and the AKP leadership had supported a Kurdish peace process, in part in the hope of gaining Kurdish votes. In that election, however, not only did the AKP fail to win new Kurdish votes, but support for the Nationalist Action Party (MHP)—a far-right Turkish nationalist party—swelled, apparently out of frustration among nationalist Turks with the AKP-led peace process with the Kurds. In other words, the AKP had the worst of both worlds.

Erdoğan and the AKP leadership, recognizing the political problem this posed for them, allowed the peace process to collapse amid mounting instability driven by the Syrian civil war. This, combined with disillusionment with the MHP leadership due to their perceived unwillingness to form a coalition government, drove about two million MHP voters to the AKP this weekend. The exodus shows, in a sense, what close substitutes the two parties can be among a more nationalist voting bloc.

The controlled chaos that resulted from the collapse of the peace process—combined with the escalating refugee crisis, the fear of ISIS attacks, and the struggling economy—helped the government politically. Voters evidently recalled that it had been the AKP that brought the country out of the very tough times of the 1990s.  

In contrast, the opposition parties seem to lack leadership and appear to promise only internal squabbles and indecisiveness. Craving security and stability, voters have now turned to the one party that appears to have the strength to provide it. In that sense, Erdoğan’s nationalist gambit—which was actually a well-conceived series of political maneuvers—worked. Even some one million conservative Kurdish voters returned to the AKP.

These voters perhaps did not notice the irony that the government had also engineered the instability they feared. In part, this success derives from government’s control over the media. These elections may have been free, in the sense that Turkish voters can cast a ballot for the candidates they want. But they were not fair. The state maintained tight control over traditional and social media alike. Freedom House and the Committee to Protect Journalists, among others, have cast doubt on Turkey’s press freedom credentials. Real opposition voices are difficult for media publish or voters to see on television. Thus, for example, Selahattin Demirtaş, the leader of the pro-Kurdish Peoples' Democratic Party (HDP) and the most charismatic opposition politician in Turkey, had essentially no air time during the campaign.

Not all bad news

There are some important upsides to the election results. For one, HDP again passed the 10 percent threshold to remain in parliament. That will help mitigate—though hardly erase—the polarization that grips the country, and will hopefully make government reconsider its abandonment of the Kurdish peace process.

More significantly, the AKP does not have what it needs to convert Turkey’s government structure into a presidential system, which would be a bad move for the country. The election results will undoubtedly revitalize Erdoğan’s push for a presidential regime in Turkey. But that requires changing the constitution, and the AKP did not achieve the supermajority that it would need to do that on its own.

Critically, changing to a presidential system will require some support from the opposition and even more importantly popular support via a referendum. As political strategists around the world have learned, people tend not to vote on the actual referendum item, per se, but based on more general opinions of their leadership. So to win a referendum on the presidential system, Erdoğan and his AKP colleagues would need to show improvements in the economy, in the security situation, on the Kurdish issue, on Syrian refugees, and on national stability more generally. Instability in Turkey, particularly the renewal of violence in the Kurdish region, will deter investment and deepen the economic slump throughout the country.

With its new majority, AKP leaders are now in a position of strength to negotiate with the HDP over Kurdish issues. The refugee crisis also means the government also has more leverage with the EU. If it chooses to use its strength to reach positive agreements on those fronts, the outcomes could be very good for the Turkish people.

To actually win a referendum on the presidential system, Erdoğan would have to work to depolarize his country. While the presidential system itself would not be good for Turkey, the process of getting there might be.

       

Editors’ Note: Since President François Hollande’s 2012 election, France has launched an Asia-wide initiative in an attempt to halt declining trade figures and improve its overall leverage with the region, write Philippe Le Corre and Michael O’Hanlon. This piece originally appeared on The National Interest.

On April 26, France’s defense shipbuilding company DCNS secured a victory in winning, against Japan and Germany, a long-awaited $40 billion Australian submarine deal. It may not come as a surprise to anyone who has been following France’s growing interest in the Asia-Pacific for the past five years. Since President François Hollande’s 2012 election, the country has launched an Asia-wide initiative in an attempt to halt declining trade figures and improve its overall leverage with the region.

Visiting New Caledonia last weekend, Prime Minister Manuel Valls immediately decided on the spot to fly to Australia to celebrate the submarine news. Having been at odds in the 1990s over France’s decision to test its nuclear weapon capacities on an isolated Pacific island, Paris and Canberra have begun a close partnership over the last decade, culminating in the decision by Australia’s Prime Minister Malcolm Turnbull, in power since September 2015.

Unlike its Japanese competitor Mitsubishi Heavy Industries (MHI), DCNS promised to build the submarine main parts on Australian soil, creating 2,900 jobs in the Adelaide area. The French also secured support from U.S. defense contractors Lockheed Martin and Raytheon, one of which will eventually build the twelve shortfin Barracuda submarines’ combat systems. Meanwhile, this unexpected victory, in light of the close strategic relationship between Australia and Japan, has shed light on France’s sustained ambitions in the Asia-Pacific region. Thanks to its overseas territories of New Caledonia, Wallis and Futuna, French Polynesia and Clipperton Island, France has the world’s second-largest maritime domain. It is also part of QUAD, the Quadrilateral Defence Coordination Group that also includes the United States, Australia and New Zealand, and which coordinates security efforts in the Pacific, particularly in the maritime domain, by supporting island states to robustly and sustainably manage their natural resources, including fisheries.

France is also attempting to correct an excessive focus on China by developing new ties with India, Japan, South Korea and Southeast Asian countries, which have all received a number of French ministerial visits. France’s overseas territories also include a presence in the southern part of the Indian Ocean, with the islands of Mayotte, Réunion and the Scattered Islands, and French Southern and Antarctic Territories, as well as the northwest region of the Indian Ocean through its permanent military presence in the United Arab Emirates and Djibouti. Altogether these presences encompass one million French citizens. This sets France apart from its fellow EU member states regarding defense and security in the Asia-Pacific, particularly as France is a top supplier of military equipment to several Asian countries including Singapore, Malaysia, India and Australia. Between 2008 and 2012, Asian nations accounted for 28 percent of French defense equipment sales, versus 12 percent during 1998–2002. (More broadly, 70 percent of European containerized merchandise trade transits through the Indian Ocean.)

Despite its unique position, France is also supportive of a joint European Union policy toward the region, especially when it comes to developments in the South China Sea. Last March, with support from Paris, Berlin, London and other members, Federica Mogherini, the EU’s High representative for Foreign Affairs and Security Policy, issued a statement criticizing China’s actions:

“The EU is committed to maintaining a legal order for the seas and oceans based upon the principles of international law, as reflected notably in the United Nations Convention on the Law of the Sea (UNCLOS). This includes the maintenance of maritime safety, security, and cooperation, freedom of navigation and overflight. While not taking a position on claims to land territory and maritime space in the South China Sea, the EU urges all claimants to resolve disputes through peaceful means, to clarify the basis of their claims, and to pursue them in accordance with international law including UNCLOS and its arbitration procedures.”

This does not mean that France is neglecting its “global partnership” with China. In 2014, the two countries celebrated fifty years of diplomatic relations; both governments conduct annual bilateral dialogues on international and security issues. But as a key EU state, a permanent member of the UN Security Council and a significant contributor to the Asia-Pacific’s security, France has launched a multidimensional Asia policy.

All of this should be seen as welcome news by Washington. While there would have been advantages to any of the three worthy bids, a greater French role in the Asia-Pacific should be beneficial. At this crucial historical moment in China's rise and the region's broader blossoming, the United States needs a strong and engaged European partnership to encourage Beijing in the right direction and push back together when that does not occur. Acting in concert with some of the world's other major democracies can add further legitimacy to America's actions to uphold the international order in the Asia-Pacific. To be sure, Japan, South Korea and Australia are key U.S. partners here and will remain so. But each also has its own limitations (and in Japan's case, a great deal of historical baggage in dealing with China).

European states are already heavily involved in economic interactions with China. The submarine decision will help ensure a broader European role that includes a hard-headed perspective on security trends as well.

      

       

       

       

       

In their recent blog for Social Mobility Memos, Brad Wilcox, Robert Lerman, and Joseph Price make a convincing case that a stable family structure is an important factor in increased social mobility, higher economic growth, and less poverty over time.

Why is marriage so closely tied to family income?

The interesting question is: what lies behind this relationship? Why is a rise (or a smaller decline) in the proportion of married families associated, for example, with higher growth in average family incomes or a decline in poverty? The authors suggest a number of reasons, including the positive effects of marriage for children, less crime, men’s engagement in work, and income pooling. Of these, however, income pooling is by far the most important. Individual earnings have increased very little, if at all, over the past three or four decades, so the only way for families to get ahead was to add a second earner to the household. This is only possible within marriage or some other type of income pooling arrangement like cohabitation. Marriage here is the means: income pooling is the end.

Is marriage the best route to income pooling?

How do we encourage more people to share incomes and expenses? There are no easy answers. Wilcox and his co-authors favor reducing marriage penalties in tax and benefit programs, expanding training and apprenticeship programs, limiting divorces in cases where reconciliation is still possible, and civic efforts to convince young people to follow what I and others have called the “success sequence.” All of these ideas are fine in principle. The question is how much difference they can make in practice. Previous efforts have had at best modest results, as a number of articles in the recent issue of the Brookings-Princeton journal The Future of Children point out.      

Start the success sequence with a planned pregnancy

Our success sequence, which Wilcox wants to use as the basis for a pro-marriage civic campaign, requires teens and young adults to complete their education, get established in a job, and to delay childbearing until after they are married. The message is the right one.

The problem is that many young adults are having children before marriage. Why? Early marriage is not compatible, in their view, with the need for extended education and training. They also want to spend longer finding the best life partner. These are good reasons to delay marriage. But pregnancies and births still occur, with or without marriage. For better or worse, our culture now tolerates, and often glamorizes, multiple relationships, including premarital sex and unwed parenting. This makes bringing back the success sequence difficult.

Our best bet is to help teens and young adults avoid having a child until they have completed their education, found a steady job, and most importantly, a stable partner with whom they want to raise children, and with whom they can pool their income. In many cases this means marriage; but not in all. The bottom line: teens and young adults need more access and better education and counselling on birth control, especially little-used but highly effective forms as the IUD and the implant. Contraception, not marriage, is where we should be focusing our attention.