In his speech to the European Parliament yesterday, the Canadian prime minister acknowledged that “sovereignty and openness are now difficult to reconcile,” but also argued that “deepening and widening our relationship will strengthen our sovereignty.” This seems… undertheorized. The Wall Street Journal’s overview of the bizarre gambit captures its incoherence well:

“Wouldn’t it be lovely if Canada was the 28th state of the European Union rather than the 51st state of the United States?” asked Finnish President Alexander Stubb, who speaks regularly with Carney.

I have been sympathetic to Canadian complaints that President Trump’s constant efforts to insult their country are inappropriate and unhelpful. At the same time, Carney’s determination to elevate himself to some anti-Trump hero of the globalist pearl-clutchers is at this point obviously causing far more harm to our northern friends.

• As the Financial Times, which rather better understands the EU, reports on consecutive days: EU capitals rebuff Mark Carney’s ‘unique alliance’ with Canada and Why Mark Carney’s romance with Europe can only go so far.

• Canada also faces the awkward problem that 70% of its exports go to the United States and only 6% go to the EU, notes Peter Harrell. And it’s unclear what Canada could hope to gain anyway, notes Nicholas Phillips. For instance, “there’s nothing to gain on competitiveness: regulatory alignment can only go in one direction, toward the EU, which is a proven formula for economic stagnation.”

• And then there’s the question of who would ever look to the EU as a functional example of strengthened sovereignty through deeper and wider relationships. Its inability to address the China wave now crushing its own industrial base is a glaring weakness (and contrasts helpfully with the sort of robust confrontation the Trump administration is insisting on for USMCA).

Speaking of which: Imports of Chinese autos into Europe continue to skyrocket. The latest plan? EU asks China to voluntarily limit car exports (Financial Times). “Brussels is seeking a commitment from Beijing to restrict sales of China-made hybrid vehicles to about 15 per cent of the EU market compared with more than a third today.” Good luck. Meanwhile, in the real world, “President Xi has called for China to make its advanced manufacturing sector ‘bigger and stronger’ and strengthen control over ‌key industrial supply chains, official news agency Xinhua said Thursday” (Reuters). Oh, and Michael Pettis points out that “China has unveiled a sweeping five-year plan for its electronic information manufacturing sector, aiming to boost the industry’s annual revenue beyond 30 trillion yuan ($4.5 trillion) by 2030.” (For reference, the combined value of the entire global consumer electronics and semiconductor markets is today around $3 trillion.)

There is no economic future for Canada in a free-trade zone unable to protect itself from China, which will in turn mean its own goods will face increasingly robust exclusion from the American market. The longer it pretends otherwise, the less leverage it will have when it comes back to the USMCA table, and the funnier President Trump’s jokes will become.

In other USMCA news, U.S. Pressures Mexico to Box Out China’s AI Hardware Exports (Wall Street Journal). “Mexico and the U.S. are discussing the so-called rules of origin proposal as part of negotiations around revising the U.S.-Mexico-Canada Agreement… In addition to AI equipment, the U.S. could also propose rules to lower Chinese content and increase North American components for a litany of consumer products, such as medical equipment. While cars, auto parts and high-end computer chips are subject to tariffs from the Trump administration, more commonplace semiconductors used in the AI buildout can enter the U.S. largely tariff-free.”

Keeping Chinese supply chains out of North America is the core of the USMCA renegotiation and, further underscoring Canada’s strangely unreasonable position, Mexico seems perfectly comfortable going along with it. Peter Harrell has more on the importance of reworking rules of origin. I also wrote about this in the Financial Times last year: “A USMCA premised on balanced trade and the exclusion of non-market economies would represent a revolution in trade law and international relations”

GOOD, BAD, and UGLY READS FOR YOUR WEEKEND

Good: The Federal Government Subsidizes Professional Daycare. It’s Time To Fund The Family. (Leah Sargeant in The Daily Wire.)

Following nicely on last week’s discussion in TRE about the Day Care Dustup, Sargeant writes: “In 2022, Governor Spencer Cox of Utah petitioned the Biden administration for exactly this kind of flexibility. Cox cited surveys of Utah residents that found 81% of them preferred to have a child too young for school watched by a parent or guardian. Cox was frustrated that a program intended to help poor families rise made that help contingent on overriding their better judgment about their children’s needs.”

Bad: Republicans’ Familiar Fight Over Big Government (Matthew Continetti in the Wall Street Journal.)

Continetti’s framing of the day care debate is another reminder of why the Wall Street Journal’s editorial page has ceased to be a serious source of policy commentary: “Limited-government conservatives point out the potential cost of the program, its perverse incentives (that $9,000 vanishes as soon as dad gets a raise) and its reliance on social engineering.”

The potential cost of the program is… $0. There is no proposal to appropriate any additional funding.

The perverse incentives… already exist in the program, which, again, is not being expanded. The description of the perverse incentives is also incorrect. The $9,000 does not vanish as soon as dad gets a raise.

The social engineering is… reduced if the program becomes more neutral in its treatment of different family arrangements. Just imagine the counterfactual. If existing law made both family structures eligible and someone came along and said “we should provide subsidies only to people who put their children in paid day care,” would that be less social engineering?

Continetti quotes Doug Holtz-Eakin making the same mistake: “Who works or does not work; who takes care of a child; or who takes a child to childcare is the family’s business. It is certainly not the place of the federal government to put its thumb on the scale using taxpayer dollars.” Which policy puts a thumb on the scale—the one that makes eligibility dependent on who works or does not work and who takes care of a child, or the one that does not?

(And of course, note that these same conservatives are fine with “social engineering” and “who works or does not work” when the subject is work requirements. It’s hard to make sense of these objections, except as opposition to the idea of providing support to families raising kids. That’s an objection they’re entitled to have… but perhaps not an effective one. They seem awfully determined not to focus on it.)

Ugly: Worried About Your College Kid? Now You Can Hire a Local Mom. (New York Times). Submitted without comment:

“Sometimes people think that we’re coddling students,” Horwitz said, “and I just don’t think that anything could be further from the truth. … Horwitz, for her part, brings students balloons on their birthdays and chicken soup when they’re sick, sits with them in the emergency room and picks up their prescriptions if they’re busy. She bakes homemade challah, coordinates with the bedbug exterminator, texts photos and updates to faraway parents and doles out recommendations on the best local doctors and landlords.

HERE COMES XI

President Xi Jinping arrives in Washington next week for yet another summit with President Trump. On the agenda? Who knows. Will anything be accomplished? Probably not. And here’s hoping not. To quote the conclusion of my Financial Times column on the May summit: “The best plausible result is simply no deal, beyond efforts to smooth any decoupling that might proceed, giving the US time to come to its own terms with the irreconcilable differences of its great-power competitor. Only then can we hope to succeed in one of the decoupled spheres towards which the world now hurtles, whether we like it or not.”

Perhaps the biggest question on the table is how long the two sides will extend their “truth,” with the U.S. postponing its blacklisting of Chinese firms and China promising to keep supplying critical minerals (a promise it’s already not keeping). The shorter the truce the better, lest U.S. firms relax on getting alternative sources of critical minerals online as quickly as possible.

Discouragingly, President Trump continues to insist on floating the idea of having Chinese automakers set up plants in the United States. This week he told Fox News, “if China wanted to come in, and open a plant to build their cars here, I’d be okay with it — Japan does it — but they hire our people. The big thing is they hire our people, they use our people.” Encouragingly, his cabinet sees things differently.

• As noted last week, Transportation Secretary Sean Duffy has just sent an angry letter to Ford, warning it against “intertwining its future with Chinese state-backed enterprises” and choosing “to deepen operational dependencies on strategic competitors.” Those warnings would apply to welcoming Chinese manufacturers into the U.S. market.

• Earlier this year, Treasury Secretary Scott Bessent discussed the issue at a Semafor event:

Ben Smith: “There are people in China who would like to have one of the outcomes of these talks be some form of joint-venture, BYD factory setting up in the United States. Is that on the table?”

Scott Bessent: “I think we’re going to maybe end up with two boards, a board of trade and maybe a board of investment. I’m not sure — we have a 100% tariff on Chinese EVs, and there is a rule to do with autonomous-driving cars that they cannot have foreign components or Chinese components.”

Ben Smith: “Just to be clear, you don’t like the idea of a BYD factory in the US: American workers, Chinese investment?”

Scott Bessent: “There are things; I would think maybe the auto-industry isn’t one of them…”

While Ford pursues its China partnership, General Motors is working on developing its own batteries and supply chains:

“We’re developing a supply chain such that, two years from now, three years from now, it will be domestic,” Kurt Kelty, GM vice president of battery and sustainability, told CNBC during an exclusive interview. “That’s what we’re aiming for — when we get into market, we’ve got a domestic source for that.”

And blueberry grower Driscoll’s is getting its own lesson in what happens when you go to China. The Wall Street Journal tells the all-too-familiar tale:

About 15 years ago, executives from U.S. fruit grower Driscoll’s went to China with a goal of turning blueberries into that country’s next big food trend. The California company dispatched one of its experts to scout farmland in southwestern China’s Yunnan province, contracted with global blueberry-genetics firms to lock up the best varieties and brought in high-tech growing technologies to mass produce a fruit few Chinese people then ate. By 2020, it was cranking out thousands of tons of blueberries for Chinese supermarkets. Then it became the latest U.S. company to encounter the buzzsaw of Chinese competition.

As tales of blueberry fortunes spread, Chinese entrepreneurs rapidly built farms of their own. They adopted high-tech growing techniques similar to Driscoll’s, even allegedly copying greenhouse designs used by farmers growing for Driscoll’s. They also swiped the company’s patent-protected varieties, a Chinese court has ruled. State banks fed the rush, offering a special category of loans for blueberry growers.

Production in China has shot up 25-fold since 2010. In 2021, China overtook the U.S. as the world’s top blueberry grower, and by 2025 its annual production was double what it was in the U.S. For Chinese consumers, it was a blueberry bonanza. Prices dropped so low—often $3 or less for a 9-ounce container—that state media trumpeted an era of “blueberry freedom,” in which even ordinary people can gorge on a once-exotic fruit. For just about everyone in the blueberry business, though, it has been a knife fight, plagued by intellectual-property theft and tanking profits.

It’s OK, though. China may do that on a truly critical product like blueberries, but I’m sure they want Jensen Huang to succeed with advanced AI chips in their market for as long as possible.

But making Jensen look serious by comparison, China’s trade diplomats are complaining at the WTO that departing from its most-favored nation principles would lead to “power-based trade relations” and protectionism.

And a final item: Congress just passed the first new tariff authority since the 1970s, giving the president authority to level tariffs on importers of Russian oil and gas (Wall Street Journal). Guess who, per PunchBowl’s Andrew Desiderio, is the number one target? China.

Share

REPLACING CHINA

New data from the JPMorganChase Institute shows that small- and mid-sized firms have shifted their mix of spend from international to domestic payments since imposition of tariffs last year. One interesting question: to what extent does declining international spend reflect a tariff-induced shift toward domestic sources of supply, and to what extent does it reflect declining prices on imports as foreign sellers absorb part of the tariff cost? Presumably, the answer to some extent is “both.”

The industrial policy drumbeat proceeds apace.

Former Australian Prime Minister Scott Morrison writes in the Wall Street Journal that China Overplayed Its Hand on Critical Minerals:

The virtue of the Trump administration’s measures is that they can’t be easily reversed by China’s market manipulation. Floor price and durable offtake agreements boost resilience and provide guardrails for Western participants and tie in end users. These measures change the economics, enabling Western competitors to challenge China’s dominance. Counterintuitively, we have China to thank for it.

• Progress: Elmet Group wins $2 billion US tungsten stockpile contract (Reuters). The U.S. takes a particularly large equity stake of nearly 20%.

• Progress: US aims to issue deep-sea mining permits within months, Interior Secretary Burgum says (Reuters).

Though not progress everywhere. On the defense front, Pentagon Sees Strategic Inventory Munitions Shortfalls, IG Says (Bloomberg). And, the Iran war is raising doubts over Trump’s “America First” foreign investment goal (Peterson Institute). Pledges from Gulf states represented the majority of the investment commitments secured by the Trump administration in its first year. Enthusiasm and capacity for following through is, er, waning.

AI AND THE LABOR MARKET

Who wants to see a robot pick cherry tomatoes? That would replace “jobs Americans won’t do,” of course. Nonetheless, More U.S. Workers Fear Losing Their Jobs to Technology according to Gallup. The share has has risen substantially, to more than 25%, in the past year.

This is presumably about AI, and there the Center for State Labor Innovation had a very good piece by MIT’s Thomas Kochan on potential avenues for worker influence on AI deployment. This is a theme I emphasized in my recent New York Times essay, arguing:

As for the threat these models pose to the job market, greater worker power is the strongest defense. So long as management alone gets to choose the tools it deploys, it will always prefer those that decrease or eliminate the need for actual human employees, with all their tiresome expectations of living wages and basic respect and so on, or that at least minimize their autonomy and keep them closely monitored. But if workers must also approve the use of these models, that equation would flip on its head. Management would have to find approaches that make workers’ jobs better; A.I. companies would have to develop tools that they could expect workers to approve.

That essay also discussed legal liability for A.I. labs, which is now squarely on the front burner. I wrote:

Lawmakers at both the state and federal levels should make the developers and deployers of A.I. strictly liable for harms that they cause. Where so-called agentic A.I. is acting autonomously, it should be treated as an agent of whoever provides and whoever controls it, leaving them liable just as employers are for their employees, including criminally liable if the agents commit crimes. The concept of an “attractive nuisance” should also apply.

Andrew Ross Sorkin headlines today’s DealBook, The A.I. Industry’s New Worry: ‘Liability Exposure’. Yeah, no kidding. Sorkin focuses on tort liability if models run amok. That’s an obvious worry.

But the labs may already be on the hook for potentially trillions of dollars of liability, it seems to me, given the harm they are already causing. One good example is the damage to public education, where effects of the rampant cheating and cognitive offloading are undermining schools in ways that may make COVID look like child’s play. Look at what’s happening even at an elite and tech-capable university like MIT, which just published an in-depth report that Alex Veremeyenko summarizes:

Study groups are disappearing. Office hours are emptying out. Problem sets and take-home exams no longer prove anything, because AI can produce credible solutions to almost any written assignment in the undergraduate curriculum. Students who lean on chatbots lose mastery and confidence, and some slip into what the report calls cognitive surrender, reaching for AI at the first hint of struggle.

Meanwhile, the hacking capabilities of the models now being released are imposing enormous costs on all of the institutions across society that must upgrade their own tools and revise their own processes in response. Who should pay for that? So far, the labs are imposing far more cost on society than they are providing benefit. Future uses of the technology will hopefully provide benefits far in excess of costs, but that is no defense against the costs in the meantime. The labs need to proceed in a way that avoids those costs, or else expect that the first claim on that future wealth will go to those who are bearing them.

YOUR BAD TWEET OF THE WEEK

It would be too easy to just pick a David Sacks tweet every week, or a Jensen Huang quote every week, but seeing as we’re already talking about AI liability, and we have David Sacks quoting Jensen Huang, let’s take a moment to appreciate:

It’s not clear if Jensen and David are saying that robust tort liability solves for the market failure, or that there is no market failure and the profit-maximizing strategy is always to prioritize safety. The latter would be… untrue. The former might be true in theory, but it’s safe to assume that if anyone ever tries to hold these companies liable, the same tech leaders will be arguing that’s unfair. Tech leaders like David Sacks. Who rejects tort liability for Meta: “I think in the case of social networking, it’s much more unclear what the harms are and what the benefits are. And I think it’s much more subjective and it’s much more of a personal choice for adults and also for parents. … You said, the harms of this are immense and well known and understood. If that’s the case, then let’s just ban it for under 13 or under 16 or whatever it is.” So no tort liability, or if there would be tort liability then we need new laws and regulations.

It’s quite the shell game: oppose regulation because the market will fix it, or count on liability to fix the market; then when that doesn’t work, oppose the liability and say we should have regulated.

Enjoy the weekend!

Leave a comment

Davenport characterizes the policy change as one that “would effectively create a government incentive for parents to stay home with their children,” which is “effectively” true only in the sense that it would negate the overwhelming incentive that current policy creates to use paid child care. The policy would offer a family nothing for having a stay-at-home parent that it could not also receive without one, so it creates no “incentive” in that respect. Rather, it would end the policy of telling parents they can receive the subsidy only if they make the latter choice.

Critics were also quick to complain that the policy change would take funding away from one set of parents and give it to another, but that dynamic is also misstated. Davenport warns at one point, “the move could end up redirecting money away from working parents and their child care providers, causing some to raise their rates or even close, critics said, potentially worsening what many experts say is a child care crisis in the country.” But then she provides this example:

Krystal Gastineau, the owner of Cribs 2 Crayons, a child-care center in Aurora, Colo., said that about half the children she cares for receive the subsidies, which are paid directly to Ms. Gastineau’s business via direct deposit. “If they could, I think parents would choose to take the money and stay home,” she said. “That would take away a major source of income.”

That quote speaks volumes. “I think parents would choose to take the money and stay home.” In other words, the day care center operates on federal funds provided to serve parents who would prefer a different arrangement. Altering the policy would allow parents (married, with one working) to make the choice they prefer. So who is incentivizing what on whose behalf here?

The Japanese soldiers of the Old Right, unaware they are still fighting a war that ended 30 years ago, came charging out of their caves with some genuinely bizarre arguments.

Jonah Goldberg: “Any evidence it works? Got some studies? Data? Examples of any kind? Or are you just going along because it sounds good or polls well or keeps you in good graces with Vance and Heritage Foundation and (wink wink) Heritage Americans and small donors? Maybe you just like expanding entitlements so long as you think it’ll benefit your coalition? Prove you have anything like republican virtue or intellectual seriousness.”

It’s not clear what Goldberg means when he asks if this “works.” Like, does making families with a stay-at-home parent eligible to receive support “work” in making those families eligible for that support? Unclear what data is needed. Is reallocating funds without increasing spending really a form of “expanding entitlements”? Is Jonah Goldberg someone who comes to mind when you think about “republican virtue” and “intellectual seriousness”?

Dana Loesch: “No. Incentivizing government dependency isn’t ‘great’ for families. Dependency is one of the tools the left has used for the past 100 years to destroy the family. This proposal will also include illegal aliens, as currently law determines status by the child not the adults so anchor babies are eligible for this fund, which isn’t ‘great’ for American families…”

Does providing support only to households that earn income “incentivize government dependency”? Does offering the expansion only to married couples “destroy the family”? Should conservatives leave untouched any program that serves illegal aliens, lest improving the program incidentally improve services for illegal aliens as well? (And does this argument apply to public education, highways, and the police?)

EPPC’s Patrick Brown offered the far more thoughtful critique that “the broadening of eligibility comes with real trade-offs … a conservative estimate is that the population of eligible children might double after the new rules. As a result, the odds of being a CCDBG-eligible child who actually received the assistance would go from 1 in 7 to 1 in 14.”

But the problem with this objection is two-fold. First, as noted by Ms. Gastineau above, in many cases we could be talking about the same households still benefiting from a subsidy but now having more options in how to arrange their lives. Second, even insofar as there is a direct tradeoff, that tradeoff already exists. Those families with a stay-at-home parent are there, and the policy choice is to give 0% of the subsidy to them. Is 0% for households with a stay-at-home parent and 100% for households where all parents work the correct split? You could make that argument, but it would be difficult, and Patrick doesn’t try.

Especially seeing as the Trump administration proposal would merely give states the option to open eligibility (where, presumably, those states believe that doing so would benefit their populations), the starting assumption should be that greater flexibility and the option of a refined allocation would produce a net benefit. “No reallocating existing funds, you can only add new ones” is the standard left-of-center approach to the safety net, neither conservative nor wise. (Patrick responds to the response here, in his always-excellent Family Matters newsletter.)

Most worthy of critique, on the other hand, is President Trump’s promise to give everyone $5,000 if Republicans win the midterms. Without spending too much time on it: (1) terrible way to run a campaign, (2) we cannot afford it, (3) it’s inflationary, (4) only mail universal checks as stimulus in a crisis.

The better idea would be a deficit reduction plan that both raises taxes and cuts spending. Encouragingly, that continues to gain traction with Republicans. As Social Security fund runs dry, some Republicans say it’s time to raise taxes (Washington Post). Congressman Tom Cole (R-OK), chairman of the House Appropriations Committee, says: “We’ve got too many people who say, ‘Well, we have to stay within the current income level or stay at the current tax rate.’ I’m willing to look at the tax rate. I am willing to raise the amount of income through tax.”

YOUR ONE WEEKEND READ on this 25th anniversary of 9/11 is The Man Who Refused to Sit on the Sidelines, from The Atlantic. “The FDNY lost 343 men on September 11; 65 of their sons and daughters now serve in the department.”

If you’ve never read Esquire’s story on The Falling Man, that would be very much worth your time as well.

BLUE-COLLAR BOOM

The Wall Street Journal reports, Americans Without College Degrees Are Having One of the Best Job Markets in Years. “Unemployment among younger workers who didn’t go to college has rarely been lower in recent decades. It is the opposite story for college grads.” Important to note, though, that this is still relative to these cohorts’ own experience in the past. In absolute terms, college grads still have a lower unemployment rate.

But something is clearly happening to the college degree. The Financial Times: The University Degree Is Losing Its Lustre. Both the Journal and FT point the finger at technology and economic trends, and surely those play a role, but it’s also worth bearing in mind the extent to which universities are doing this to themselves, both with lousy programs that produce graduates lacking both hard and soft skills, and with overproduction of graduates in the first place that floods the market with low-value diplomas. In a recent Commonplace piece, Perverse Incentives Handed Higher Ed to AI, Dalton Haydel explores this further.

ARTIFICIAL INTELLIGENCE

What is the economic effect of A.I. going to be? Anthropic has released a really nice modeling tool that lets you put in your own assumptions about likely labor-market effects. It’s simplistic in all sorts of ways, but does well what a model is supposed to do, which is test your intuitions about reasonable assumptions, how they relate to each other, and how they would affect outcomes.

Here’s my own run through it:

By 2030, AI will be capable of doing 85 out of 100 knowledge-work tasks. (We did it! “AGI”!)

Out of every 100 instances of a task AI can do by 2030, AI will be doing 50.

For those 50 tasks, some of them will be fully automated, meaning a human is not involved at all.

Tasks where AI is involved will get done twice as fast as today.

When someone is displaced entirely from their occupation, it will take them six months on average to find a new job.

Results! GDP up 14%. Unemployment rate just below 5%. Wages up for all types of workers, by 11% on average. Labor share of income at 58% (similar to today).

Frankly, those are some pretty aggressive assumptions and some pretty pleasant outcomes, at least economically speaking. Try it for yourself.

When is AGI not AGI? When it’s OpenAI talking about AGI! Pitchman Sam Altman has always played a shell game with his definition, but I especially enjoyed this comment from OpenAI president Greg Brockman promoting the new Astra model. “Everyone has a different definition of AGI . . . it’s a grey, fuzzy thing. But I think when we look back people will think it’s about this time and about this model.” We don’t know what AGI is, but this is it. OK, then.

Anyway, per Brockman, it’s now more of a “spiritual concept.”

And in Dallas, at the Republican Convention: AI Loses Debate (Semafor). Ben Smith has a great writeup of the faceoff between Joe Lonsdale and Joe Allen, which he reports the latter Joe won convincingly. Apparently Lonsdale was surprised that arguments like “we have Kitty Hawk, we have 747s, we built the railroads” didn’t land, nor did comparing AI complaints to “Black Lives Matter hysteria” or saying they’re “psyops from China.” As Allen put it, data centers are “a constant humming reminder of a future they don’t believe in.”

Speaking of which, read my New York Times essay on why Americans don’t believe in the AI future! Big Tech Fooled America Once. The Second Time’s Not Going So Well.

IN MORE PROMISING CORNERS OF AMERICAN INDUSTRY

Japan, U.S. advance $550 billion investment pact with AI, chips in focus (Investing.com): “Japan is making progress on a $550 billion investment initiative with the United States, with artificial intelligence and semiconductor projects expected to play a central role in the next phase of the agreement, Bloomberg reported on Friday.” And, South Korea Nears Agreement on Billions in U.S. Investments, a Win for Trump (Wall Street Journal): “The deal, potentially worth more than $100 billion, envisions South Korea financing the construction of up to eight nuclear power plants and a natural-gas project, according to people familiar with the matter.”

The Department of Energy announces a new critical minerals investment. Ex-Im Bank announces a new manufacturing investment for advanced satellite communications systems. And, USA Rare Earth breaks ground on its South Carolina facility—the first new rare earth magnet factory in America in 40 years.

While Ron Paul himself would probably not be excited by such aggressive industrial policy, allow us to say: It’s Happening.

But wait, don’t be fooled so easily by all of the great data coming out of the industry, the increases in output and now employment, the investments coming online. Richard Stern, working always at Advancing American Freedom, has some bad news: “the tariffs have limited what could have been a far larger manufacturing surge” and “threats of more government involvement in industry are holding back growth and delaying investments.”

What’s worse, “this bounce in manufacturing output is largely explained by a rise in industrial capacity utilization rather than by an expansion in manufacturing capacity.” Instead of instantly making new factories appear, the economy appears to be boosting production in existing factories while working to bring new ones online. Suspicious.

Fortunately, while fundamentalists confused by a world not aligning with their dogma might attempt to reverse engineer an incoherent story that validates their one truth, we have analysts like Richard and organizations like AAF doing the hard work of explaining how the novel set of policies designed to boost manufacturing have nothing to do with the boost in manufacturing, while the set of policies pursued for decades as manufacturing collapsed are responsible for the progress.

Share

MEANWHILE, IN CHINA NEWS

A broad-based coalition of unions and industry groups have just written to Senate leaders John Thune and Chuck Schumer in support of the Connected Vehicle Security Act that would exclude Chinese vehicles from the U.S. market. This is important legislation with growing bipartisan support that the Trump administration should get behind as well. Transportation Secretary Sean Duffy has just written to Ford, blasting its continued pursuit of partnerships with Chinese companies, but, like, you don’t have to use the Article II angry-letter power. The Constitution afford our nation stronger tools.

Polestar, seen last week complaining about its poor treatment by U.S. regulators, “cut its full-year delivery forecast, hurt by Washington’s crackdown on Chinese-linked vehicles that forced it out of the United States.” One correction, though. Reuters describes Polestar as a “Swedish company, which is majority-owned by China’s Geely Holding.” If you’re majority owned by a Chinese company, sorry, you’re not Swedish any more.

Good story in the New York Times on dynamics in Latin America, where Peru Shows the Limits of Washington’s Anti-China Push. It does seem a bit incongruous, though, to report “Senior administration officials have warned, while offering no evidence, that Chinese-financed projects threaten Peru’s sovereignty and, in the case of the port, could give Beijing a military foothold” and then “today, Chinese companies control Lima’s electricity distribution system and play a role in transportation, banking and telecommunications.” What evidence are we looking for here?

Georgetown’s Peter Harrell highlights a potential decision by Malaysia to use Huawei chips in a major “sovereign data initiative,” an early test of provisions in bilateral trade agreements secured by the Trump administration that would seem to preclude such moves. Decisions like these, and the U.S. choice to respond or not, will determine whether we can successfully establish a “China or the U.S., pick one” framework for potential trading partners.

And per the Brookings Institution’s Kyle Chan, looking at the upcoming Trump-Xi summit, “sounds like Board of Trade / Investment talks are stalled—by Washington.” That’s something we’ve been pushing on since the spring, and would be good news indeed.

(For an appallingly weak counterpoint, see the new Foreign Affairs essay by former Biden adviser Brian Deese: The Case for Letting China In. The case, apparently, is that China has things we need, and if we structure our investment deals right we can get it to hand leadership back to us. Good plan.)

Maybe Mr. Deese would prefer to be in…

EUROPE

Oh, Europe. Still can’t decide what to do. Now, EU faces 300,000 factory job cuts as China ‘colonises’ supply chains, industry warns (The Guardian). In a Brookings symposium on the issue, Ryan Hass, director of the Institution’s China Center, hits the nail on the head:

The current EU-China trade trajectory serves China’s interests. Beijing will use carrots and sticks to sustain its open access to the EU common market, which is the only major market in the world with high purchasing power that remains open to China’s surging exports. China may pay lip service to European concerns, but it will not offer any concessions or meaningful voluntary restraints on its exports. If there is going to be any rebalancing of EU-China trade relations, Europe will need to instigate it.

Whether justified or not, China’s confidence in its capacity to sustain the current trade trajectory is borne of three factors. First, Beijing judges Europe’s leaders as politically weak, divided on China, and lacking a mandate to launch a trade war against China amidst an actual war in Ukraine and a widening transatlantic rift with U.S. President Donald Trump. Second, Beijing is confident it can build an image of its market as a key driver of future demand for European products, and thus a key opportunity that European industrial giants cannot afford to squander. And third, China is confident it has punitive tools at its disposal to prevail in any trade war with Europe, should it become necessary to use them.

On its current trajectory, China’s surging export wave will decimate key European sectors, including autos, chemicals, green energy, machinery, and industrial tools. This, in turn, will alter Europe’s political center of gravity. The only question is whether Europe will be compelled to push back now or later on China’s unfair trade practices, including China’s suppressed domestic demand, its subsidies, and its undervalued currency.

AND FINALLY, IN H-1B NEWS

The Department of Labor is investigating Cognizant. This has received extraordinarily little coverage, but Newsweek has a good rundown. Republicans on the Senate Judiciary Committee are pleased. One wonders what a large-scale investigation into the visa practices of a major Indian outsourcer might turn up, and how that might be applicable to the sector more broadly. Stay tuned.

In less helpful reform, IFP’s Connor O’Brien highlights a move by DHS that’s likely to backfire. The proposed policy change would force temporary visa holders to leave the United States immediately if they lose the job attached to the visa (whereas currently they have 60 days to find a new job). At first glance, this seems like a “tough on immigration” approach. But the reality is that employers already have far too much control over workers using these kinds of visas… that’s partly why employers love them! Essentially giving employers the power to deport a worker they’re unhappy with will only invite further abuse in the program. The answer is fewer temporary visas, not more exploitative relationships.

YOUR BAD TWEET OF THE WEEK

This week we salute the Tax Foundation’s Erica York for pushing back against the subversive narrative that the labor share of income is falling with better data showing that… the labor share of income is falling. Good catch.

There were indeed a couple of years in the late-1940s when labor share was lower than today, so… well, I guess that’s the question. So what? If the Old Right put half the effort into thinking about and addressing economic problems that it puts into trying to argue they just don’t exist, maybe it would be in better shape.

Enjoy the weekend!

Leave a comment

The Federal Reserve’s latest Beige Book reports: “Healthy labor demand was seen most frequently in manufacturing, construction, and some service sectors... Significant wage increases were most often connected to demand for skilled workers in construction and manufacturing.” Also encouraging.

And the Purchasing Managers’ Indices continue to report strong growth this month.

• From S&P: “The headline seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index™ (PMI®) was unchanged at 53.9 in August, signaling a solid expansion in the manufacturing economy. Output volumes rose for the fifteenth consecutive month…”

• From ISM: “New Orders Growing; Production Growing; Employment Growing… Economic activity in the manufacturing sector expanded in August for the eighth consecutive month…”

And from the Dallas Federal Reserve, Texas Manufacturing Activity Accelerates as Outlooks Improve Further.

Caveat: There may be something wrong with these numbers. The true experts in the free trade gang were so reliable about posting data from these sources in the months after Liberation Day, when it didn’t immediately turn positive. But now they’ve gone quiet. They may know something we don’t. We are monitoring the situation.

YOUR ONE WEEKEND READ is Why the World Needs to Force China’s Yuan to Revalue: A currency accord, enforced with tariffs, might be the only way to get China to act, from Greg Ip in the Wall Street Journal:

China’s massive and growing trade surplus threatens to hollow out its trading partners’ industrial bases. For years, the rest of the world has pleaded with China to change its economic model to rely more on domestic demand, and less on exports, to no avail.

A currency accord, enforced with tariffs, might be the only way to get China to act. The time may be ripe. Frustration with China is boiling over, especially in Europe. “This Chinese surge now threatens…the very core of Europe’s productive system,” a French government report said in February. In June, German Chancellor Friedrich Merz called for a new Plaza Accord aimed at China.

A meeting by central bank governors and finance ministers from the top 20 economies starting this weekend in Asheville, N.C., would be a good place to start the conversation.

Read the whole thing and, while you do, imagine former Trump CEA Chair Steven Miran bursting through the wall like the Kool-Aid Man. Did someone say a currency accord backed by tariffs?

Seriously, though, it’s good to see the international economic framework that has guided the Trump administration get the credit it deserves in the Journal…

…and with our trading partners! On Sunday, reported Reuters, G20 countries should consider more trade barriers on China to cut imbalances, Bessent says. “U.S. Treasury Secretary Scott Bessent said on Sunday he will encourage G20 members to re-examine terms of trade with China to shrink global imbalances and press Beijing to rebalance its economy away from exports and toward domestic consumption.”

On Tuesday, the U.S. released a “chair statement” from the summit with support from 19 of 20 countries. Any guess on who the one is? (The Financial Times provides a hint: China derails consensus after US-hosted G20.) As Bloomberg’s chief U.S. economist Anna Wong notes, “The 19-1 vote is really telling. Now that Europe is experiencing what the U.S. had experienced in the 2000s, there is finally something approaching moving toward a global consensus on global imbalances.”

Strange, that. We were warned by the very best experts that aggressive U.S. action on trade was going to alienate allies and drive them toward China. But it seems to have had the opposite effect, and now everyone is coming together to confront and isolate China.

From the Wall Street Journal: U.S. Says It’s Fed Up With China’s Overcapacity—and More Countries Agree. For instance, “When it comes to China, ‘everyone’s feelings have crossed a threshold,” said Japanese Finance Minister Satsuki Katayama.’” And, “a February report by the French government titled ‘The Chinese Steamroller’ said China’s export surge threatened the ‘very core of Europe’s productive system.’ In Indonesia, one of the poorest G-20 members, government officials have said that a flood of Chinese imports is hurting domestic industry.”

Indeed, it appears that by refusing to continue absorbing the brunt of the global imbalances itself, the U.S. has forced its partners to acknowledge and address the problem alongside it.

In his latest at Foreign Affairs, A Great Rebalancing Is Coming: Who Will Bear the Costs of a Global Trade Adjustment?, Michael Pettis looks at how all this might play out:

Beijing seems set on trying to preserve its surpluses for as long as possible. Washington is just as intent on reducing its deficits. If Europe can develop the political capacity to do the same, the burden of adjustment will increasingly fall onto the surplus economies, which would have to rely more on domestic demand and less on exports. If it cannot, Europe will absorb more and more of the global surpluses, and what appears today to be a trade conflict mainly between China and the United States may become a conflict between China and Europe—and a struggle between the two of them to avoid bearing steeper costs down the road.

If I were Canada, I’d work on teaming up with the United States against China on this one, rather than cozying up to China or thinking about joining the EU. I would not recommend the current strategy. As Secretary Bessent suggests, “I don’t think you can be in a tit-for-tat with someone who’s 13 times larger than you are.”

MORE GOOD READS FROM THE WEEK

I still don’t have the greenlight to emulate Matt Walsh’s “What Is a Woman?” documentary, sporting a man-bun wig while wandering around conferences to ask pretentious and underachieving economists “what is an economist?” So you’ll have to make do with this not-a-parody column from Soumaya Keynes in the Financial Times: When Is an Economist Not an Economist?

Think of economists as a guild whose members police who is allowed to join and what counts as true economics. By guarding the definition of economic expertise, they preserve their influence over the public and public policy.

This seems mostly right, with the caveat that their definition of “true economics” has fallen so flat on its face that defining their profession by its terms is at this point reducing their influence rather than preserving it. (Also, fun fact: Yes, Ms. Keynes is related to that Keynes! She is his great-great-niece.)

Forthcoming in the American Economic Review, from Daron Acemoglu et al: Eclipse of Rent-Sharing: The Effects of Managers’ Business Education on Wages and the Labor Share in the US and Denmark. Apparently, CEOs with business degrees don’t just wear snazzier quarter-zip fleeces, they also reduce wages by placing higher priority on shareholder value. They do not, on the other hand, increase output, investment, or employment growth.

And, from the New York Times, Wispr Flow is supposed to make writing effortless and magical. So I “wrote” this column with it. Amy X. Wang observes:

To tell you the truth, I hate this. I hate Wispr Flow so much. I hate that so many people in the world are lauding this like it’s the greatest invention, when actually I think it’s making everyone sound a little like an idiot, and now everybody has to read everyone else’s idiot words. I wish I could describe elegantly how much I hate it with some kind of handy, clever metaphor, but that kind of creativity comes to me through writing with my hands.

Speaking of things AI is ruining…

EDUCATION

NYC school system to ban AI for elementary, middle school students (Politico). Good for them. EPPC’s Patrick Brown makes the salient political point: “One political side has its leaders pushing robots as tutors and ‘A1 in every classroom.’ The other side has a major city administration keeping generative AI out of elementary and middle school classrooms. One of those paths is more family- and human-friendly than the other.”

• This misstep by at least one faction of the right-of-center parallels the one I wrote about in Vice President Donald Trump: “If Trump brands Republicans as the party of liberty-means-license and ‘kids want to spend their time gambling with borrowed money because that’s their welfare-maximizing revealed preference,’ while Democrats become the party that speaks in moral terms and works to ensure young men build decent lives, the electoral consequences will be steep.”

In better news, from the State Department, “Vice President J.D. Vance and Secretary Marco Rubio announced today the launch of Foundry School, a training program for entrepreneurs, engineers, technicians, and industrial leaders to rebuild American manufacturing.” Cutting the enormous and counterproductive subsidies to traditional higher education is important, having new models like this toward which funding can be directed is equally important.

And back to worse news, from the Department of Justice, Ohio State University Agrees to $2.1M Settlement to Resolve Allegations that it Failed to Disclose Employees’ Ties to the People’s Republic of China in Applications for Federal Research Funding. Well the fine is good news, but as FDD’s Craig Singleton goes deeper on the problem in Higher Ed’s Secret Foreign Funding:

Washington has a list of names. What’s delaying disclosure? (Wall Street Journal).

China, China, China. It’s enough to make you think entangling our economy and society with a communist, authoritarian one might not be a good idea! Which brings us too…

Share

CHINA

A few decoupling items to keep an eye on, all from Bloomberg:

Top Automakers Urge Congress to Permanently Ban Chinese Cars: “The call by the US auto industry’s biggest trade association — echoing a similar plea made by the alliance and other auto groups in March — underscores mounting concerns in the domestic industry about the threat posed by China’s automobile makers. The alliance represents domestic carmakers including General Motors Co. as well as overseas giants Toyota Motor Corp. and Volkswagen AG.”

• A wild, related statistic from BYD’s latest financial report: “First-half sales from overseas rose 34% to 181.3 billion yuan ($27 billion), accounting for 53% of the total, while they shrank 31% in Greater China.” That’s, um, not normal. “The results show how the vast Chinese market, where annual vehicle sales outnumber those of the US by nearly two-to-one, has become so brutal that not even its national champion can count on making money there. That’s why Chinese carmakers have increasingly turned abroad…”

Why the FCC Is Becoming America’s China Uber-Hawk: “Perhaps less-well recognized is that the regulator is emerging as a key instrument in Washington’s efforts to ‘de-risk,’ or in some cases outright decouple, US supply chains from China. This shouldn’t come as a surprise: Since before the FCC’s creation, the US national security apparatus (and especially the Navy) was paying close attention to devices that transmit and receive signals over the air.”

LABOR x IMMIGRATION

Don’t look now, but: Record-High 47% Want Unions to Have More Influence (Gallup). Of particular note, “partisans differ on whether unions should gain influence, but majorities in all three groups approve of unions overall: 89% of Democrats, 70% of independents and 52% of Republicans. Broad Democratic approval is typical, but this is only the second time in the past quarter century — the first being in 2022 — that a majority of Republicans have approved of unions.”

Perhaps not unrelatedly, the quiet withdrawal of the case for mass immigration continues apace, even on the Wall Street Journal opinion page. In Immigration Becomes a Global Powder Keg, Walter Russell Mead makes the obvious yet not so frequently made point: “In recent years, American immigration advocates have argued that falling birthrates create a need for more immigrant labor. Those arguments are less convincing in the face of the accelerated automation that artificial intelligence appears ready to unleash.”

Example? Watch this “AgTech moon landing moment.” The first robotically harvested head of lettuce!

Perhaps not unrelatedly, the Center for Immigration Studies has released its latest analysis on the foreign-born population in the United States, finding that since January 2025, “The total foreign-born population declined 2.9m; Illegal immigrant population may have declined 2.3m.”

Either “root causes” like climate change suddenly reversed their effect, or enforcing the law works. You be the judge.

One place that enforcing the law seems to work is trucking. The U.S. Department of Transportation announced that it has shut down more than 100 commercial driver’s license (CDL) schools that were granting licenses to drivers who failed English proficiency tests, among a variety of actions. Vice President JD Vance on the problem: “We know that trucking is one of the best sources of employment for non-college-educated men. It was bad for people’s jobs, but it also made our streets and our highways a lot less safe.”

OPT, Yeah You Know Me (you’re welcome, Gen X). Here’s a problem that deserves more attention and seems easy enough to solve: alongside the H-1B mess, people are catching on to the absurdities of Optional Practical Training program (OPT), which was intended to allow foreign college students to work temporarily, but has been expanded by corporations and allied regulators into yet another boondoggle. Bloomberg actually had one of the best rundowns on this a number of years ago in The STEM Graduate System Is Broken. Here’s How to Fix It:

OPT has also opened a side door into the U.S. job market with minimal labor protections and oversight. It is increasingly funneling cheaper and more pliable, visa-dependent foreign candidates into fields such as software engineering and development, depressing wages and making a once-attractive career path less desirable. Moreover, even as OPT benefits U.S. schools eager to attract foreign students, it can undercut American students looking for work. And there have been too many instances of exploitation and outright fraud.

Fair warning, though, from the Cato Institute, which is proudly promoting testimony from its director of immigration studies, David Bier: “If you make legal immigration impossible, don’t complain about illegal immigration. You created it. You made it illegal.” That’s one way of looking at it! Fortunately, not one that conservatives have to put up with any longer.

And finally, speaking of things conservatives don’t have to put up with any longer…

YOUR BAD TWEET OF THE WEEK

Likely a regular feature, given the volume of foolishness out there (nominations welcome). Our inaugural edition comes to us from Grover Norquist’s former tax policy director, Ryan Ellis:

Enjoy the weekend!

Leave a comment

So now we have a split. Understanding America will be returning to your inbox in early September as a bi-weekly digest from the whole American Compass team focused on the challenges of reclaiming American citizenship. Weekly on Fridays, you’ll receive this fine product, The Real Economy, covering the stories that matter in, well, the real economy.

YOUR ONE WEEKEND READ is Reforging American Industrial Deterrence and Reclaiming the Common Good, a fantastic new essay from Congressman Riley Moore in the latest issue of American Affairs. He dives deep into the steel industry as a case study in America’s willful abandonment of its own industrial base and the necessity of reindustrialization:

We must implement policies that align commercial incentives with our strategic interests, so that it once again becomes profitable for private firms to build and sustain the capacity our deterrence depends on. And, ultimately, we must reintegrate our national security infrastructure with a strong and independent commercial industrial base.

It won’t be easy. Wall Street’s profit-maximizing logic is opposed to even modest tariffs to protect American industry, and it will fight even harder against the much higher tariffs and direct federal investment required to rebuild once great mills like Weirton. But doing so is necessary, not only for our national security but for our identity as a country that is independent, self-sufficient, and capable of standing on its own two feet.

Moore’s concept of “industrial deterrence” mirrors closely the “industrial depth” that Assistant USTR Mark DiPlacido and I described a couple of years ago in Big Stick Economics:

The big stick of President Theodore Roosevelt’s dictum is not an exorbitantly expensive fighter jet that takes 40 years to develop, is impossibly difficult to maintain, and depletes the munitions stockpile after a few sorties. Security at home, functional alliances, and deterrence all require industrial depth: a diversified resource base capable of meeting the demands of wartime production, flexible supply chains in competitive markets without single points of failure, a skilled workforce with a strong talent pipeline, and an industrial commons that fosters the interaction and investment necessary for constant innovation. The measure of the conservative commitment to a strong defense is not the size of the Pentagon’s budget or the number of invasions launched, but the willingness to adopt economic policy that ensures market forces strengthen rather than erode the foundations of national power.

Read that one too!

MORE GOOD READS FROM THE WEEK

Wall Street Journal: Europe Chastised Trump’s Climate Rollback. Now It’s Delaying Its Own Green Goals. Developed nations are increasingly balking at the cost of measures to cut down on fossil fuels. In a surprise to no one capable of doing math, the grandiose climate commitments that began a decade ago with the Paris Climate Accord now lie in shambles as the “ambition” of statement-issuing diplomats gives way to the reality of the energy needs of an industrial economy.

New York Times: Private Equity Is Stuck With 33,575 Unsold Businesses. Even amid a booming deal-making environment, private equity firms are unable to exit a growing number of investments at values their investors require. In the past four years, private equity returned 6% annually, trailing the S&P 500 by almost 10 percentage points. This is impossibly bad. The unluckiest monkey throwing darts at a list of stocks would perform far better. At least they’ve ruined companies and degraded services in the process… Great story in today’s Times about the degradation of a once great residential community when the local ownership sold to a private equity firm on the other coast.

One industry they’ve worked hard to ruin is youth sports. You can read more about that in New York Magazine: The Pay-to-Play Childhood. Private leagues have made youth sports expensive, hypercompetitive, and all-consuming. Investors are making a killing. For more on the theme, check out these two Commonplace classics:

• Michael Brendan Dougherty, In Defense of Travel Teams. Travel baseball and the dance mom circuit drain the wallets and time of suburban families. But I’m not going to stop taking part.

• Yours truly, The Moral Arbitrage Driving Wall Street Profits. Squeezing ‘inefficient’ businesses run for greater purpose will generate cash, but not value.

IMMIGRATION x LABOR

Fresno Bee: Federal judge finds Department of Labor’s effort to cut farmworker wages is unlawful. Sorry farmers, but if so few Americans are willing to work for you at a reasonable wage, leaving you desperately reliant on temporary foreign workers, you can at least pay those workers the going rate.

Politico: Unions sound alarm on last-minute push for robot farm equipment. A draft trailer bill would let unpiloted machines work alongside farmworkers, angering labor groups worried about job loss and safety. Bizarre move by organized labor, but no more bizarre than its general opposition to immigration enforcement or restriction. A union representing the interests of legal American workers would be falling over itself to support investment in farm automation, which would address “labor shortages” not by bringing in temporary foreign labor at low wages but instead by mechanizing processes and rapidly boosting productivity, which would improve job quality and wages. Another term for “job loss” of “jobs Americans won’t do” is “progress for workers.” Help us help you, labor organizers.

OH, CANADA!

Shortly after Liberation Day, the commentariat made copious amounts of hay about how the United States was no longer a trustworthy trade partner, its demands were unreasonable, allies would retaliate… and then the opposite happened. Virtually every American ally came to the table and reached a reasonable agreement.

This left Canada in a rather awkward position. Hard to complain the United States is being unreasonable when everyone else managed to get along just fine. And sure enough, the sticking point in the latest Mountie Meltdown appears to be the entirely reasonable and necessary American demand that Canada hold hands with the U.S. and Mexico in keeping Chinese distortions out of the North American market.

As Michael Froman, president of the Council on Foreign Relations and U.S. Trade Representative in during the Obama administration, explained on CNN:

I think the new issue is that the Trump administration is pressing Canada, as well as other countries, to adopt a common approach vis a vis China, whether it’s a common external tariff or export controls, or ensuring that Chinese products, inputs don’t get inserted into products in Canada, that will then be imported into the United States. And that’s a new set of trade issues and Prime Minister Carney has noted that that goes against their sovereign right to establish relationships with other countries. So that’s going to be an issue of contention that the administration is going to continue to have to have dialogue with Canada and with other countries over time.

Prime Minister Mark Carney has acknowledged the same, saying, “the U.S. introduced in the last hours, efforts to restrict our ability to have other trade deals. We’re the partner of choice in many respects for countries around the world, and the Americans wanted to restrict that. Unacceptable.”

But with due respect to Carney, this is not something the U.S. introduced in the last hours. It has been the core issue for more than a year. I wrote this in March 2025: “The third requirement of participation in a U.S.-led economic and security alliance should be the maintenance of a collective perimeter that excludes China. Partners should agree on common tariff barriers, investment restrictions, export controls, and immigration policies.” You should try reading Understanding America, Mr. Prime Minister, if you need help understanding America.

With somewhat less respect, Canada is “the partner of choice”? No, you’re not. The U.S. is the partner of choice. And that’s why Canada has none of the cards, and will inevitably have to make the sorts of commitments on China that the U.S. is reasonably seeking and most other trading partners have already made. While the roughly $900 billion in bilateral trade between the U.S. and Canada represents less than 3% of U.S. GDP, it represents about 40% of Canadian GDP. How much pain Canadians wish to suffer to prove their toughness, before reaching a trade deal on the access they need to our market, is their decision to make.

Last but not least, watch U.S. Trade Representative Jamieson Greer’s interview on the CBC.

Share

THAT’S FINE IN PRACTICE, BUT WHAT DOES THE THEORY SAY?

A couple of interesting papers from highly credentialed academic economists are worth a look:

Caroline Freund, former global director of Trade, Investment and Competitiveness at the World Bank, finds that Foreign Exporters Absorbed Nearly Half of the 2025 US Tariff Shock. Huh. Say more. “Most economic forecasters predicted a sharp rise in consumer prices and significant import disruption.” Yes, that’s true. “Instead, retail prices rose modestly and import-dependent sectors held up. This column uses data for the 50 largest US trading partners to show that foreign exporters absorbed roughly 40–50% of the 2025 US tariff increases through lower export prices–much more than earlier studies suggested.” Interesting.

This is my favorite part: “The aggregate result vindicates optimal tariff theory. It does not mean the tariffs made America better off.” If an economist could cross her arms and stomp her foot in prose, that’s how it would sound. For more on the vindication of optimal tariff theory, be sure to check out today’s American Compass Podcast discussion with Stephen Miran, who chaired the White House Council of Economic Advisers last year.

And at the Federal Reserve Bank of Boston, How Much Did Labor Productivity Gains Offset the Inflationary Impact of the 2025 Tariffs? “We provide evidence that industries in which tariffs induced higher costs in 2025 also experienced greater labor productivity growth, which helped them mitigate those higher costs.” That wasn’t in the models. Strange.

WE CAN JUST BUILD THINGS

Speaking of manufacturing data, The Kobeissi Letter highlights:

US manufacturing activity is rapidly expanding: The Philadelphia Fed Manufacturing Index of current business conditions rose +6.0 points in August, to 47.4, its highest since April 2021.

At the same time, the index of future business conditions jumped +39.2 points, to 73.6, its highest level since the 1980s and its largest monthly increase on record.

Meanwhile, the index of future new orders soared +30.9 points, to 66.0, its highest since June 2021.

All while the 6-month forecast for capital expenditures surged +18.1 points, to 48.2, its highest since the 1970s.

The US manufacturing sector is gaining momentum.

One place momentum is growing? The Hyundai plant in Georgia that faced a massive immigration enforcement raid last year. Now, “the South Korean automaker could increase the planned production capacity of its Hyundai Motor Group Metaplant America from 500,000 units to between 700,000 and 800,000 units by 2028. … The potential capacity increase would be part of Hyundai’s plan to invest $26 billion in the U.S. through 2028, he said. The company aims to launch dozens of new products and has a goal to produce at least 80% of the vehicles it sells in the U.S. domestically by the end of this decade, up from roughly 40% in 2024.”

“For us, the USA is the most important market in the world besides Korea, which is our headquarters,” Hyundai’s CEO told CNBC. Maybe Canada just slipped his mind?

WOMP WOMP

Sad trumpet for Chinese firms, though, whose momentum isn’t growing so well.

Financial Times: How Shein’s IPO lost its shine. Once high-flying fast-fashion retailer is listing in Hong Kong at quarter of peak value after years of false starts.

Wall Street Journal: EV-Maker Polestar Says Trump Administration Strung It Along Before U.S. Ban. The Chinese-owned automaker told dealers it is still trying to understand why it is being barred from the U.S. market. Looks like they, too, could benefit from an Understanding America subscription. Maybe they can commiserate with the Canadians at their next strategic summit.

TURNING TO TECH

New York Times: Meta to Pay Up to $17.1 Billion in Landmark Settlement Over Social Media Addiction Claims. The social media giant settled with 47 states, the District of Columbia and U.S. territories, and agreed to make major changes to its products over claims its platforms endangered children. Stay tuned for more on this at Commonplace shortly.

New York Times: How Big Tech Captured American Schools. Companies like Google and Microsoft have used their money, their might and their massive reach to influence nearly every step of the education supply chain. The atrocious conduct by purveyors of social media has become common knowledge. The parallel playbook run by many of these same companies to cash in on public education and corrupt it in the process is only beginning to come into public view. The fallout is going to be similarly severe.

AND ARTIFICIAL INTELLIGENCE IN PARTICULAR

Quite the comment from Sam Altman:

I thought when we got to GPT-4, which was back in 2023, that very quickly after that there was going to be much more disruption, software businesses up for grabs right away, than it turned out to be. I think I was wrong about a few things, but one in terms of the speed: the economy just has so much inertia. People keep doing the same things, buying from the same company, wanting to use their tools the same way. I think this is actually a positive in many ways, and it’s going to make this big transition go smoother and slower. I’m grateful for it. But it means we’ve all been too ambitious on timelines. Even with this incredible technology, society and the economy will adapt more slowly.

Sounds like maybe his choice between curing cancer and educating the world for free is getting pushed out a few years? Of course, we haven’t all been too ambitious on timelines. Some people with experience in the real world and a preference for analysis over carnival-barking have been making these points for years. But we welcome Sam aboard.

Wall Street Journal: What Problems Should AI Be Solving? Some of the biggest fortunes may be hiding in markets and solutions that Silicon Valley is ignoring.

New York Times: Sick of A.I. Slop? So Are Tech Giants. Spotify, LinkedIn and others are trying to dig out of a digital sewage heap full of low-quality content made with artificial intelligence.

FINALLY, ON THE LIGHTER SIDE

Wall Street Journal: The New Cure for Career Burnout: Clown School. For actors and others worn down by rejection and the pressure to get everything right, clowning offers an unusual prescription: embrace failure.

Enjoy the weekend!

Leave a comment