Op-Ed Analysis


President Trump’s Trade Deal with the EU Is Hardly a Breakthrough


Juncker Can’t Arm Twist Europeans to Make Bad Commercial Decisions

By Peter Morici

Aug. 13, 2018-

President Donald Trump is out on the hustings telling voters he is accomplishing great things. The economy is growing faster and creating more jobs but the deals with North Korea and the European Union he touts don’t ring true.

The Chinese and Russians are apparently helping North Korea evade sanctions and it has not slowed its missile program. U.S.-EU trade relations dodged a full blown trade war with the recent agreement to negotiate lower barriers to commerce on many industrial, agricultural and energy products but it is doubtful those talks will radically reduce the overall U.S. trade deficit.

European Commission President Jean-Claude Juncker did promise to take more natural gas and soybeans but Russian piped natural gas is simply a lot cheaper in Europe than U.S. LNG. Juncker can’t arm-twist his members to make bad commercial decisions.

Soybeans are a fungible commodity on global markets. With China shifting purchases toward Brazil in the wake of U.S. tariffs on metals and other products, the Europeans, who don’t grow a lot of soybeans and are looking for the best price, will naturally source more from the U.S. farmers no matter what Juncker and Trump decide.

Modern trade agreements are the product of sound economics and a sensible reflection of political realities. Governments lower tariffs and accept disciplines on subsidies, product standards, foreign investment rules and similar practices that can favor domestic suppliers over imports to create a broader international market where businesses can compete, specialize and accomplish scale efficiencies in production and R&D.

Voila, the iPhone designed in America but assembled in China from components and software from across Asia, America and elsewhere. The internet and Windows platform provide a global framework for the inexpensive exchange of ideas and deal making.

Jobs get rearranged, and jobs are votes. Consequently, the multitude of World Trade Organization, EU, North American Free Trade Agreement, and other trade and investment agreements were crafted with the express intent of creating a balance of benefits. American frustration stems from the increased trade deficits that came after China was admitted into the WTO and with Mexico after NAFTA.

China has not become more open and instead imposes egregious conditions on foreign firms seeking to enter its markets, strong arms or outright steals technology. Instead of being illegal, industrial espionage is virtually a state-sponsored industry.

But the specific problem with U.S.-EU relations is that mercantilism is not an Asian specialty. Germany and several other Northern European nations have purposefully engineered huge trade surpluses inside the EU and with the rest of the world.

Germany has a current-account surplus (the broadest measure of a nation’s trade account) exceeding 8% of gross domestic product. That drives huge imbalances with Italy and other Southern European nations, and it significantly instigated the dissatisfaction that elected a euroskeptic populist government in Italy and begot Brexit.

Long ago, the EU ceased to be about building an open internal market. The common currency has become a mechanism for German domination through trade with its southern neighbors.

The Brussels rule-making bureaucracy has become a French Frankenstein that seeks to regulate every business decision. It imposes huge fines on American companies for business practices considered benign elsewhere-witness the $5 billion penalty assessed on Google GOOG, -0.92%  for providing the Android operating system based on an advertising business model.

U.S. negotiators are naïve to expect that a deal with the EU to further reduce tariff and nontariff barriers would radically redress the $150 billion trade deficit with Europe.

Without breaking up the euro and German economic policies that require the common currency to be weak against the dollar to prop up troubled southern EU economies, and without curbing the regulatory terrorism of the politically unaccountable Brussels bureaucracy, no deal with the EU will be worth much more than the 2001 WTO accession agreement with China.

What the EU is offering is disingenuous. It’s too limited and merely an obfuscation engineered by the Brussels bureaucracy to boot trans-Atlantic trade problems to the next U.S. administration.

U.S.-EU trade relations may have been saved from the calamity of a trade war but they are hardly headed for better days – unless you speak German.


Peter Morici is a professor emeritus at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and six-time winner of the MarketWatch best forecaster award. (See his economic forecasts here.)



A Reasonable Man under Siege


Why Democrats Are Foolish to Oppose the Kavanaugh Nomination

By Peter Morici

Aug. 9, 2018-

Democrats are foolish to oppose Judge Brett Kavanaugh’s nomination to the U.S. Supreme Court. By miscasting him as a foe of Roe v. Wade (1973), consumer rights and a healthy environment, they do the truth a disservice and will hurt themselves in November.

Currently, the court may be divided into three groups – Justices Clarence Thomas, Samuel Alito and Neil Gorsuch on the right, Justices Ruth Bader Ginsburg, Sonia Sotomayor, Stephen Breyer and Elena Kagan on the left, and Chief Justice John Roberts and Anthony Kennedy, who often decide close cases and sometimes reach common ground with Justices Kagan or Breyer.

Democrats can’t get another liberal justice with President Trump in the White House. Although more conservative than Justice Kennedy, Mr. Kavanaugh is more likely to become an occasional swing voter than anyone the Democrats could get if they derail him.

During his service to the campaigns and administration of President Bush, Judge Kavanaugh established a persona as a tough conservative. However, since joining the Court of Appeals of the D.C. Circuit, he has demonstrated a remarkable openness to legal reasoning across the ideological spectrum.

He has ruled against issues liberals hold dear but based on constitutional principles. For example, overruled on appeal, he argued the U.S. Consumer Financial Protection Bureau was unconstitutionally structured, because its director is excessively insulated from accountability to the political branches of government. He argued in a dissenting opinion the Federal Communications Commission (FCC) could not impose net neutrality, because it lacked explicit statutory authority. However, he sided with environmentalists in a greenhouse gas case over regulation of “biogenic” emissions and argued the Anti-Injunction Act denied courts jurisdiction to block penalties assessed by the Affordable Care Act.

He has lavished praise on the scholarship of liberal New York Judge Robert Katzmann, his clerks have been hired by Justices Roberts, Kennedy, Kagan, Breyer and other justices, and as dean of the Harvard Law School, Justice Kagan hired him to teach.

Democrats on the Senate Judiciary Committee are demanding Judge Kavanaugh’s correspondence going back to his work for President Bush, but that could drag the hearings into late October and energize Mr. Trump’s conservative base.

The Democrats are defending some 26 of the 35 Senate seats up in November – including Sens. Joe Manchin of West Virginia and Heidi Heitkamp of North Dakota, who are particularly vulnerable – making this strategy especially risky.

The questioning of Judge Kavanaugh will reveal a thoughtful legal scholar who those among us with an open mind would be welcome to Sunday dinner. Then the theatrics will turn to abortion – an issue where Democrats and media liberals woefully misread the pulse of the electorate.

A growing and unsalable majority of Americans want abortions to remain legal – but with conditions. That is the direction the court and legislatures have been taking the practical application of the law. And the hearings will reveal that GOP senators are mostly in line or defer to that thinking.

Roe v. Wade established that abortions should be legal until the fetus is viable outside womb – at that time, the end of the second trimester of pregnancy – but since medical technology has moved up the point of viability.

In Planned Parenthood v. Casey (1992), the Supreme Court effectively permitted Congress and the states to regulate abortions if those requirements did not place an undue burden on a woman’s right to abortion. In Gonzales v. Carhart (2007), the Supreme Court upheld some limit on late-term, partial-birth abortions – and those compromises appear to enjoy wide public approval.

The Democrats will focus on Judge Kavanaugh’s dissenting opinion in Garza v. Hargan (2017), where he argued that the government is not required to provide a pregnant teen in immigration custody an abortion on demand but rather that the decision should wait until she is expeditiously transferred to her adult sponsors. He viewed imposing such a requirement before such a momentous life decision did not impose an undue burden.

That does not sound like a guy looking to go against the moral judgment of the preponderance of the nation and throw out Roe v. Wade. And when questioned about Garza v. Hargan, Judge Kavanaugh will look evil only to abortion-rights zealots.

To the rest of us he will look like a reasonable man listening to a nation wrestling with a tough moral issue. And Democratic senators driving the abortion issue will look silly and out of step with voters just as they are going to the polls.

Peter Morici is a professor at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and six-time winner of the MarketWatch best forecaster award. (See his economic forecasts here.)



Reading the Fed Tea Leaves Is Futile


Powell’s guess about inflation and unemployment is as good as anyone’s

By Peter Morici

July 30, 2018-

Reading the tea leaves is getting tougher under Federal Reserve Chairman Jerome Powell. Its assessment of the balance of risks between unemployment and inflation offer little guidance about the forces that will be acting on policy makers this fall and beyond.

The impulse from lower taxes on consumer spending and gross domestic product growth could peter out next year. Or as supply siders in the White House predict, a lower cost of capital could set off a permanently accelerated pace of capital formation and GDP growth.

The outlook for inflation has never been more uncertain. And we have a chairman who is a lawyer with little rigorous training in economics-a tinker in a land of physicists.

The unemployment-inflation tradeoff has become unglued from the Phillips curve, and it’s important to bear in mind what this means. To dilettantes, the hypothesized inverse association between rates of inflation and unemployment is an empirical relationship that tells us too much economic activity causes prices to rise.

More fundamentally, it’s about the elasticity of the supply of labor, and the latter appears to be very close to zero these days. As headline unemployment falls, the pace of real wage gains hardly seems to budge, because the adult labor-force participation rate remains woefully low.

Hence the headline unemployment rate (the U3) is not the relevant measure of slack in the labor market. The appropriate metric would include the “unemployed” counted in U3 plus those adults on the sidelines not currently looking for work but who could be inspired by higher wages to give up welfare benefits – a very difficult number to estimate.

Also, overseas workers and international labor arbitrage are increasingly important, and a stronger dollar could easily erase the effects of many Trump tariffs.

For other reasons, the ultimate effects of tariffs on prices of many goods may not sort as initially anticipated. For example, the management at Whirlpool WHR, +0.20%   is blaming the steel tariffs for declining profits – even with a recently imposed protective tariff on washing machines-but LG is expanding capacity.

The Korean company appears to understand the lesson of Bush-era steel tariffs – the initial steel price spike should subside to about half as mothballed and new capacity come on line. Then LG, with a superior product, can undercut Whirlpool by producing here and prices should fall.

When asked about the juxtaposition of the 4.5% Fed estimate of the non-inflationary rate of unemployment and the observed U3 at about 4%, Powell attributed the absence of an inflationary surge mostly to market expectations.

Geez that sounds like the stuff we got on Louis Rukeyser’s “Wall Street Week.”

Over the next several months, the financial editors will continue to give space to stories making alarmist comparisons between monthly consumer prices this year and last. However, remember oil and gas prices fluctuate a lot, and those were depressed last year. The fact is core CPI inflation is very tame-over the last three months the annualized monthly change averaged just 1.8%.

Sorting all the competing forces on inflation-in the oil market, sanctions on Iran and state entropy in Venezuela vs. booming Saudi Arabian and U.S shale production, and the supply-chain consequences of tariffs vs. a stronger dollar – it’s very tough for the trained macroeconomists who advise Chairman Powell to tell him what he should tell us about the outlook.

Those macroeconomists tend to view folks who specialize in industry economics as the intellectually less fortunate who should to be banished from prestige positions at the Fed to the bowels of the Commerce Department. And Powell, unlike his predecessors, spends a lot of his energy on Capitol Hill massaging the expectations of politicians who could become his critics if he stumbles.

The chairman is like the history professor pressed into service to teach a 20th century American novel class by an unforeseen absence in the English Department. He may remember Booth Tarkington wrote “The Magnificent Ambersons” – I bet Powell even has his very own copy of Keynes’s “General Theory” -but he relies on Masterplots or the yellowed lecture notes of an overworked colleague to get through the semester.

With all this going on, looking to Fed statements for the outlook about inflation and interest rates six months from now is like reading the Las Vegas betting line for the 2019 Super Bowl Champion in January.

It may be the Patriots or it may not.


Peter Morici is a professor at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and six-time winner of the MarketWatch best forecaster award. (See his economic forecasts here.)



Reversing the Damage of Previous Administrations


How Judge Kavanaugh Will Help Secure Trump’s Economic Legacy

By Peter Morici

July 26, 2018-

Placing Judge Kavanaugh on the Supreme Court would be good for personal liberty and the economy. He demonstrates great skepticism of the “administrative state” and the penchant in recent decades for presidents and federal agencies to impose regulations on issues where Congress has been silent or simply disagrees with the president.

President Obama acted without legislative direction to create a whole class of legal rights – pertaining to residency, higher education and employment – for adults brought illegally into the United States as children- “Dreamers.”

Mr. Obama’s EPA unilaterally set limits on greenhouse gas emissions – something he could not persuade Congress to authorize. And Mr. Obama went far beyond the authority in federal statutes and judicial precedents by imposing racial preferences in college admissions, and mocked the constitutional rights by encouraging limits on free speech and imposing rape tribunals at universities that violate established rules of evidence and protections for the accused.

Often, federal administrative law and liberal judges require a subsequent president to go through elaborate public hearings and court challenges that make it difficult for sitting presidents to reverse the unilateral edicts of prior presidents and regulatory agencies – consider the courtroom obstacles President Trump faces ending the DACA program.

Two sets of issues – one legal and another economic – are at play. Together they will determine how free and prosperous America will be in the coming decades.

Often, Congress cannot write precise rules into statutes – issues are too complex and good policy choices change as market structures and scientific knowledge evolve. For example, the FDA, subject to goals set out in law, determines which drugs are legal for sale and how tightly some medications, such as opioids, are controlled.

That is quite another thing from the legislative authority presidents and bureaucrats have arrogated as a consequence of a 1984 Supreme Court decision involving the EPA and Chevron U.S.A. It states that when a law is unclear the court should defer to a reasonable interpretation by the federal agency applying the law.

Mr. Obama, reflecting the interests of anti-free market, increasingly socialist elements of the emerging Democratic Party, appointed left leaning judges to help impose a European-style regulatory order and constraints on civil liberties – consider the strict controls on academic freedom now imposed at many universities and what is acceptable speech among employees of businesses.

Practically speaking, most new EU laws require consensus among its 28 member governments – a cumbersome and inadequate process. What has evolved is an administrative state that imposes rules – for example, proclaims all manner of business standards, antitrust policy rules and limits on individual states’ tax policies-all with limited judicial oversight and often with a bias against non-European interests. Ask Amazon and Apple about the treatment they received on tax disputes or the terribly large fines Google must pay on accusations of monopolization.

The reams of regulations imposed on member states are costly and often primarily serve the purpose of expanding the reach of the Brussels bureaucracy and its statist impulses. Ultimately, that burden and bias instigated support for Brexit among some Conservative MPs.

Judge Kavanaugh’s record reveals a deep suspicion of presidential and government agency overreach. Last year he reviewed FCC net neutrality rules based on the reasoning that internet service providers are public utilities and could not split the internet service into fast and slow lanes.

Though the DC Circuit sided with the FCC, Judge Kavanaugh dissented “Congress never enacted net-neutrality legislation or clearly authorized the FCC to impose common-carrier obligations on Internet service providers.”

In a Harvard Law Review article he wrote “Chevron is nothing more than a judicially orchestrated shift of power from Congress to the Executive Branch,” and he has written some 40 opinions finding federal agencies actions to be unlawful or cursory in its actions.

Historically, Americans enjoyed greater protection of their civil liberties from an aggressive state and more robust economic growth than heavily regulated continental Europeans. Mr. Obama and the ascendant socialist wing of the Democratic Party sought to narrow those differences and no surprise, our society has grown more restive, divided and less tolerant of individual liberty.

The true legacy of President Trump will be in the appointment of justices – like Judge Kavanaugh – who reverse the damage, preserve freedom and enable the civic and economic benefits that follow.

Peter Morici is a professor at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and six-time winner of the MarketWatch best forecaster award. (See his economic forecasts here.)



Four Reasons Detroit Should Keep Making Sedans


Automakers Are Crazy to Bet Everything on the Price of Oil

By Peter Morici

July 23, 2018-

The Detroit Three have always had a tough time competing with Asian auto makers in the markets for mid-sized and compact sedans. Often superior Japanese product designs and a field crowded by smaller rivals too, make sedans the toughest competitive arena in the industry. Margins are thin too.

Compounding these issues, improvements in vehicle design, which reduced the gas-cost penalty of driving a car-based sport utility vehicle relative to a sedan, and lower gas prices – the national average price fell from $3.30 in 2008 to $2.25 in 2017 – caused sedans’ share of overall vehicle sales to fall to 37% in 2017 from 47% a decade earlier. In June, sedans accounted for just 31% of total vehicle sales.

In 2011, auto makers got a break on mileage standards – although miles-per-gallon requirements are rising, the Obama administration permitted auto makers to meet separate standards on a size of platform basis-the bigger the perimeter of the four wheels the lower the MPG target.

Consequently, the Detroit Three no longer need to sell sedans to hit EPA targets for fleet averages, and early in May, CEO Jim Hackett announced Ford F, -1.03%  will phase out virtually all sedans in favor of SUVs and pickups-Chrysler and GM soon to follow.

This decision may prove shortsighted for four reasons.

Affordability and market share

The average price of a vehicle is about $36,000, and above $40,000 for Ford even though it sells, for now, a lineup of lower-priced sedans. With the median household income around $60,000 a year, that is simply too expensive for at least one-quarter of families, and they will have to continue buying sedans or older used SUVs and trucks.

Though facing tough times selling sedans too, foreign competitors continue to invest in those less expensive vehicles, and not all of the domestically branded sedans canceled will be replaced by new sales of Detroit’s SUVs and light trucks. If Detroit stays on course, it will lose considerable market share to Japanese, Korean and German manufacturers and eventually the Chinese as folks on limited budgets seek their sedans.

First buyer advantage

Lots of young people enter the market buying a sedan and if their experience is favorable, they buy up to SUVs and light trucks within that brand as their incomes and families grow. Ceding the Dodge Dart, Chevy Malibu and Ford Focus market to Toyota and Honda just about guarantees fewer customers 10 years from now for Ford and GM SUVs.

Look for the Asians to beef up SUV and crossover offerings too and to gain some market share even as they boost their sales more immediately through the sedan market.

Shale boom isn’t everything it’s cracked up to be

Investors are placing tougher demands these days on shale producers and although they responded to OPEC and Russia cutting production, America remains a net petroleum importer and U.S. gasoline consumption is rising again. Add in the state entropy in Venezuela and U.S. sanctions limiting Iranian exports when those become fully effective later this year, and gas prices could rocket to $3.50 a gallon.

That’s good news for the much-awaited plug-in hybrid and all electric revolution, but even those technologies are more workable in lighter sedans than heavier SUVs and pickups.

Gas, hybrid or electric, sedans have lower oil price tags, and should oil prices jump, an auto maker without sedans could be as out of place as football equipment at the World Cup.

Supply chain flexibility

These days more moderate-sized SUVs and crossovers may be made on the same platforms as cars but despite what you may have read about flexible manufacturing, rolling out new sedans would take years once those are gone from Detroit’s lineup.

Shifting regulatory requirements and competition to incorporate newer technology precludes simply taking old vehicle designs off the shelf. It could take many years to get back into the sedan market with a competitive product.

Essentially, Jim Hackett and his colleagues at GM and Chrysler are betting the price of gasoline will permanently ease from recent highs of about $3.00 a gallon. To be less polite, they are gambling the stockholders’ money on the price of oil.

That’s an odd preoccupation for folks paid to make cars, not speculate.

Peter Morici is a professor at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and six-time winner of the MarketWatch best forecaster award. (See his economic forecasts here.)




Maybe It’s Time to Stop Negotiating with China

By Peter Morici


May 7, 2018 –

The battle lines are drawn in the trade war with China, and President Donald Trump can expect little support from the high tech and financial sectors or the economics profession. They argue the U.S. is doing quite well.

Donald Trump has lifted growth to 2.9% a year but that compares poorly with China, whose superior performance can no longer be written off as that of a developing country playing catch up.

Beneath the modern theory of free trade lurks an assumption that economists are disinclined to discuss – the textbook theorem assumes balanced trade accomplished through a reciprocal reduction of trade barriers and market-determined exchange rates. We haven’t had an overabundance of those with our three biggest competitors – Japan, Germany and most of all China.

Consequently, America’s trade deficit will exceed $675 billion in 2018, and about 60% is with China. This situation creates winners and some big losers-mostly, Middle Americans whose jobs are displaced by imports but are not re-employed to make exports.

West Coast high-tech executives who get rich shipping manufacturing jobs and technology to China, New York bankers who cut the deals to finance the process, and academic economists tell us lower-priced Chinese goods help us live better by consuming more. They soft peddle the massive foreign borrowing necessary to finance the deficit that will soon leave the country vulnerable to a financial meltdown similar to those that crippled Greece, Spain and many others.

China’s mercantilist tactics

China’s mercantilist tactics are well documented: high tariffs, subsidies and various restrictions on foreign investment including mandatory joint-venture requirements. Those encourage U.S. companies to move factories and transfer technology. Beijing has targeted a succession of U.S. industries – for example, aluminum, autos and solar panels.

Trump plans to levy tariffs on $50 to $150 billion on goods from China. However, China sends the United States more than $500 billion in goods but the United States ships less $150 billion the other way. In a tit-for-tat faceoff, China could virtually wipe out all of U.S. exports while maintaining access for most of its shipments to the United States.

The Chinese have indicated no appetite for real negotiations on U.S. grievances. They are strenuously resisting negotiations to draft a plan to reduce the bilateral imbalance by $200 billion as requested by the Trump administration or to curtail a planned $300 billion in new subsidies to upgrade advanced technology industries.

Now China is setting its sights on displacing American leadership in the industries that will drive global growth and define advantages in national security over the next quarter century – artificial intelligence, advanced microprocessors and the internet.

President Xi Jinping has floated speeding reforms in the insurance and financial sectors and lifting joint- venture requirements in the auto sector. Regarding the former, we have heard those promises before only to be disappointed by Beijing’s backsliding after the crisis has passed.

U.S. auto companies would face considerable difficulties extricating themselves from established joint ventures. And the Chinese have likely already obtained what they need – they appear to be leading in the race to develop affordable electric vehicles and critical battery technologies.

Displacing American leadership

Now China is setting its sights on displacing American leadership in the industries that will drive global growth and define advantages in national security over the next quarter century – artificial intelligence, advanced microprocessors and the internet.

State guidance, support, and preferences for domestic firms are deeply imbedded in the culture of China’s ruling oligarchy and concessions made in one area – for example, compulsory joint ventures – can easily be replaced by providing subsidies and exerting other levers on foreign firms – for example, extracting concessions through antitrust reviews during the endless rounds of merger and acquisitions that characterize the high-tech industry.

As China has no interest in reforming its mercantilist policies, the United States should require licenses for Americans to import Chinese goods. Exporters could be issued resalable import permits equal to the value of their sales in the Middle Kingdom. Those wishing to purchase items from China would then bid for those.

Any Chinese retaliation against U.S. exports would only reduce licenses for Americans to purchase Chinese products. Unlike a tariff, the revenue generated, by going to U.S. exporters, would serve to promote sales of U.S. products abroad.

This could be phased in by at first issuing import licenses of somewhat greater value than exports and gradually reducing those to parity over three to five years. And, it would challenge the Europeans, NAFTA allies and others to do the same.


Peter Morici is a professor at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and six-time winner of the MarketWatch best forecaster award. (See his economic forecasts here.)




How China Has Targeted U.S. Industries – What to Do About It

By Peter Morici


May 4, 2018 –

China has long prosecuted a trade war against American industries and workers. Finally, we have a president willing to take up arms but he is widely disparaged by academic economists – who are generally sympathetic to the resist Trump movement and prescribe more Obama-era appeasement.

Supported, for example by New York Fed President William Dudley, they argue the economy is doing well and a trade war is not winnable – those are false and Beijing has left Washington little choice but to defend America or abandon our children’s future.

The 2.9 percent economic growth accomplished so far by President Trump compares poorly to the better than 6.5 percent China has posted in recent years. Beijing is using the dividends from unchallenged mercantilism to finance instruments of soft power – foreign aid and state directed overseas investment – and build an impressive navy to subvert U.S. security arrangements in the Pacific.

The U.S. trade deficit with China accounts for about 60 percent of our massive global trade deficit. Those impose a huge drag on the demand for U.S. goods and services and require a massive federal budget deficit to avoid permanent recession and Italian-style unemployment.
Those deficits must be financed by foreign borrowing. Even free trade economists acknowledge the accumulated foreign debt will soon breach levels that instigated financial meltdowns in countries like Spain and Greece.

How China targets U.S. industries

China has targeted a succession of U.S. industries – for example, aluminum, industrial machinery and solar panels – with massive subsidies, high tariffs and administrative barriers to competitive imports and forced joint ventures to gain market access that give away U.S. technology to fledging Chinese competitors.

Now Beijing is going in for the kill – targeting America’s internet giants, artificial intelligence and advanced microprocessors.

Mr. Trump has threatened tariffs on $50 billion to $150 billion of imports across a broad range of industrial machinery and household products to compensate for lost intellectual property exports. China promises retaliation but appears to be offering to phase out joint venture requirements in the auto sector and speed reforms in insurance and other financial services.

The process is degrading down to just another chapter in a long history of U.S.-Chinese bilateral negotiations, which likely will end with a list of promised reforms that may never materialize and won’t resolve broader systemic problems bedeviling bilateral commerce.

U.S. auto companies will face considerable difficulties extricating themselves from established joint ventures, and the Chinese likely have obtained what they need in that sector. They appear to be leading in the race to develop affordable electric vehicles and critical battery technology.

China’s culture

State guidance, support and preferences for domestic firms are deeply imbedded in the culture of China’s ruling oligarchy and any commitments made in a new trade deal could be circumvented with other policies.

For example, Qualcomm’s purchase of Dutch chipmaker NXP has been approved by antitrust regulators in the U.S., Europe and elsewhere but those companies have significant sales in China. Beijing’s regulator has put the deal on hold apparently pending the resolution of U.S.-Chinese trade tensions.

China aims to build a significant indigenous microprocessor industry and with joint ventures off the table, it could require intellectual property transfers through antitrust reviews – much the way European regulators target big American technology companies to pursue industrial policy objectives.

We can’t retreat into absolute protectionism – the supply chains of the two economies are too intertwined to start over – but we can acknowledge what experience has taught us.

The Chinese Communist Party is hell bent on maintaining control over the broad focus and priorities of private sector investment and establishing dominance in high tech – unless America makes it too costly.

President Xi thumbs nose

Shortly after offering the above-mentioned concessions on autos, President Xi pledged massive new subsidies for Chinese technology companies – essentially thumbing his nose at Mr. Trump.
No promised reforms – honored or abandoned – can mitigate that malignancy and negotiations with Beijing have repeatedly proven a fool’s journey.

In 2017, China sent the United States $525 billion in goods and services but Americans only sold $187 billion there. We should impose a system of marketable import licenses that reduce the trade gap by $50 billion to 100 billion each year until it is eliminated.

It’s not pretty or something as an economist I would prescribe in a perfect world, but in a perfect world we won’t need armies.


Peter Morici is a professor at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and six-time winner of the MarketWatch best forecaster award. (See his economic forecasts here.)



5 Things that Could Derail the Economic Expansion

Economy has weaknesses, but giving innovation freer hand would set off more growth


By Peter Morici


April 30, 2018 –

Despite trade tensions and the Federal Reserve and European Central Bank gradually tightening monetary policy, the International Monetary Fund sees the global economy advancing 3.9% in 2018 – the best year since 2011. This provides a powerful backdrop for a U.S. economy soon to enter its ninth year of recovery.

Yet, even with the economy adding 202,000 jobs monthly in the traditionally soft first-quarter and publicly traded companies posting huge profits, we should not be lured into complacency.

Here are five things that could derail the expansion.

  1. Auto Sales and Emission Standards

In recent years, improvements in fuel efficiency and longer expected vehicle lives helped auto makers sell more high-priced and profitable SUVs and pickups. However, drivers are now saddled with longer loans and gas prices are rising, sales have leveled off and lower priced, thin-margin sedans could become more attractive.

Auto makers are struggling to accommodate higher EPA fuel economy standards and are asking for a reprieve. However, Detroit has been investing big in electric vehicles and bending mileage standards would undermine transition from gasoline and diesel. The Trump administration should back off plans to accommodate manufacturers and let the required fleet average rise to 50 mpg by 2025 as planned – a stampede into electric vehicles could set off another round of robust growth.

  1. Housing and Student Debt

Economists have been counting on a pickup in new home sales to compensate for slower growth in the auto patch but new home construction has not recovered to pre-recession levels.

Millennials should be in their prime years for buying first homes but are saddled with massive student debt. On the supply side, local governments have laid on onerous building codes, zoning laws and compliance costs that make single home and apartment building more costly.

Real debt relief – beyond programs that push college graduates into low paying public-service jobs to obtain write downs – and Trump working with the state governors to release builders from onerous municipal bureaucracies are needed to increase demand and keep home ownership affordable and contributing to growth.

  1. Worker Shortages and Immigration Dysfunction

In many places, jobs go begging for skilled applicants, and state-supported job-training programs have plenty of vacancies. At the same time, the labor-force participation for prime working-age adults remains depressed below pre-financial crisis levels.

Entitlements reform is sorely needed to get more Americans working-for example, one-in-20 prime working-age adults is on Social Security disability. And immigration reform that replaced the diversity lottery with a system favoring labor-force needs would help a lot.

Czech Republic and other Eastern European countries with rapidly growing manufacturing sectors and labor shortages are turning quickly to robots and the artificial intelligence that runs them. Overcoming resistance here will be key to keeping growth going.

  1. Trade and Budget Deficits

The growing trade deficit – especially with China – is a huge drain on aggregate demand, and a large federal budget deficit is required to hoist domestic demand to compensate. The twin deficits must really be fixed simultaneously.

That will require brinksmanship far beyond the targeted tariffs and entitlement reform. If not, too much foreign borrowing could ultimately send interest rates up and out of control-no matter how much money the Fed prints.

  1. Political Demagoguery and Scapegoating

Both political parties are guilty of holding up progress. For the Democrats, it’s resistance to reforming what are plain abuses of the social safety net and insistence that the diversity lottery give low-skilled immigrants continued preferences over new entrants with abilities in short supply. For Republicans, it’s insisting that too many Obama-era regulations, such as automobile mileage standards that will help free us of dependence on imported oil, don’t make economic sense.

Of all the political foolishness, the worst is the recent railing by both Bernie Sanders and Donald Trump that Amazon is too big – throwing cold water on the tech-sector stocks. Any company that can outwit Google, IBM  and Microsoft to accomplish dominance in cloud computing and take on the FedEx and UPS duopoly in express delivery-not to mention stake out major roles in drones, autonomous drive cars and artificial intelligence to compete with industry giants in aerospace and autos-is one we want to feed, not break up.


Peter Morici is a professor at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and six-time winner of the MarketWatch best forecaster award. (See his economic forecasts here.)




Planning for Retirement in Turbulent Times


By Peter Morici


April 27, 2018 –

If you don’t want to be broke, bored or just not able to retire, it’s best to start planning right now. For most folks that begins with establishing an IRA or similar account where they work, because benefits defined pensions are disappearing and social security won’t be enough.

Most folks don’t have access to private equity deals or exotic real estate plays, and a diversified portfolio of stocks has proven best for the long haul. Over the last 50 years, the S&P 500 has outperformed 10-year Treasuries 2 to 1.

Recent market turbulence has created a lot of anxiety, but the steady gains from the election of Donald Trump through late January were exceptional – big swings are the norm even in a growing economy and long bull market.

Those within 10 years of retirement should gradually adjust their portfolio from mostly stocks to half fixed income – the exact mix at retirement depends on factors, for example like money that may be needed for a child’s wedding.

Most folks often underestimate what they will need in retirement. Mortgages may be paid and children grown, but we tend to spend more on ourselves. For one thing, annual health care expenses can range up to $24,000 per couple, or even more, because Medicare premiums are graded to income and many older folks elect some kind of concierge service like MDVIP. Those provide quick access to a general practitioner and other personalized services, and other doctors who accept Medicare have crowded calendars and waiting rooms.

Most folks underestimate non-medical expenses because regular avocations cultivated during working lives – assuming their kids gave them some time away from soccer, dance lessons, college admissions and the crises adolescent children create – don’t take up nearly all the leisure time available in retirement.

Folks don’t garden or golf much in the winter and even the most avid reader or knitter wants to get out the house more. Hence, retired folks spend more on travel and entertainment and many take up an additional hobby – I started biking at 65 and was shocked at how much it cost to keep my carbon fiber speedster on the road logging 7,000 miles a year.

Even well-established millennials sometimes need help from parents to get through rough patches or purchase a home – don’t judge them harshly, many baby boomers borrowed down payments from their parents. Provisions are needed for the final decade of life when long-term care is often required, and one-time needs like a new furnace, roof or car still can cost more and come up sooner than anticipated.

After auditing all that, estimating annual needs and subtracting Social Security benefits from the total, it is important to recognize we are living a lot longer these days. Couples who reach 65 in reasonably good health, embrace activities that keep minds active and exercise regularly should count on one partner living to 100.

The minimum annual distribution requirements for tax-sheltered retirement accounts imposed by the IRS at age 70 essentially assume longevity in that range. Simple prudence requires planning for retirement assets to last at least 35 years.

At retirement, if funds are allocated one-half in an S&P 500 index fund and one-half in fixed income – for example a ladder of CDs ranging from one to five or seven years, retirees can conservatively assume a 4 percent annual rate of return. Assuming overall inflation at 2.7 percent – 2.25 for general living expenses and 4.25 for health care – and running down savings at a rate of 3.5 percent, the money should last 35 years.

As a 4 percent rate of return is conservative, the money should last longer and some likely will be left for heirs.

If your savings won’t support your anticipated spending at a 3.5 percent draw down rate, then you should plan to work longer or continue earning some money after leaving full-time employment.

Most folks find complete retirement boring and even stressful. Although it may not be possible to work part-time in your old line, cultivating some independent consulting work, turning a hobby into as sideline that pays or just a part-time gig in a flower shop or as a limo driver – depending on your education, skills and desire for continued responsibilities to others – can be as important as stashing enough cash in an IRA.

Peter Morici is a professor at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and six-time winner of the MarketWatch best forecaster award. (See his economic forecasts here.)




Over Investing in Higher Education

Trump’s Spot- on Apprenticeships Offer an Alternative to College


By Peter Morici


April 24, 2018 –

After decades worrying about a shortage of good-paying jobs, America has too many – manufacturing, construction and increasingly service businesses can’t find the qualified workers needed to expand. This is a significant barrier to permanently restoring 3 percent to 4 percent growth so that the nation can meet the needs of an aging population, finance its commitments to defend freedom – through our military and costly instruments of soft power – and invest in infrastructure and R&D without becoming dangerously indebted.

America is overinvesting in traditional higher education – it spends a much higher share of GDP than do other countries but gets too little return on these resources. Employers report that 4 in 10 graduates lack the critical thinking skills necessary for entry-level professional work, and too often four years of college adds little to students’ analytical abilities.

No one should be surprised. Universities are pouring millions in attractive amenities and big time sports. Students spend about one-third less time in class and studying than in the 1960s but have plenty of leisure to demonstrate against alleged micro aggression, sexism and racism of conservative professors and engage in social activism enabled by university presidents bent on molding intolerant liberals.

With nearly 70 percent of high school graduates enrolling in two- or four-year colleges, too many lack the academic abilities and interest for the abstract study that goes into calculus, literary criticism or economics. Many would profit more from a skills-based apprenticeship or a year or two of hands-on, focused training.

Parents and students shouldn’t be blamed, because employers give preference to college graduates in hiring for many jobs that hardly require the esoteric stuff we do at universities – for example, insurance adjusters, cellphone sales, makeup artists and the like. Diplomas are used as evidence applicants can follow instructions, navigate a bureaucracy and show up every day – the only real requirements other than a big loan or rich parents for obtaining a B.A. these days.

Finishing college pays 73 percent more than going to work after high school but that’s an average, which includes engineers, accountants and the like. Many land in low-paying dead-end jobs and saddled with a lifetime of debt when more practical alternatives are available.

The Department of Labor certifies apprenticeship programs. Usually completed in well less than four years, those generally offer about $15 an hour while students take courses and get hands-on experience. On completion, 87 percent of students are in positions that pay an average of $60,000 a year – for college graduates the average is about $50,000 and subtracting the above-mentioned skills-based majors, the college average is a lot less.

About two-thirds of apprenticeships are in construction and manufacturing, but President Trump sees great opportunity in the service sector and has doubled the DOL budget for cultivating apprenticeships. Private actors like Wells Fargo, professional services firm Aon PLC and the National Restaurant Association are building out programs.

In the tech sector, Course Report connects students to some 95 coding schools – those annually matriculate about 23,000 graduates through programs that last about 14 weeks, cost about $11,000 and place graduates in jobs with starting salaries averaging nearly $71,000.

Through the online portal Coursera, Google offers an 8-to-12 month IT Support Professional Certificate program that connects graduates with employers like Bank of America, Walmart and GE Digital.

More formalized schools are emerging like Holberton School in San Francisco, which trains software and operations engineers in two years and the fees are 17 percent of students’ internship and first three years post-graduation earnings.

These less-expensive alternatives are not available in enough industries and enough places, making the vast network of community colleges and state four-year colleges the default option for most high school counselors and parents. Many are too often located far from potential students in economic depressed areas hard hit by globalization.

The available seats in many programs fill up too quickly – often the one-to-two-year programs noted above have acceptance rates that rival Ivy League institutions.

Redirecting federal and state funding from higher education is sorely needed to encourage more of these innovative programs – fewer students in college and more in skills-based training would make young workers more productive and prosperous, less indebted and better enabled to embark on independent adult lives.

Peter Morici is a professor at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and six-time winner of the MarketWatch best forecaster award. (See his economic forecasts here.)




America’s Youth Losing Confidence in Democracy and Capitalism

Neither Political Party Is Offering What Young People Want


By Peter Morici


April 23, 2018 –

As the United States and China face over trade – and more systemically about the extent and practicality of pro-market reforms in the Middle Kingdom – the commitment of President Xi Jinping and his government’s commitment to Communist Party rule and a socialist-market economy has emerged as a significant challenge to the viability of the World Trade Organization.

At home, however, the success of the Chinese system – posting consistently strong growth – challenges the legitimacy of our own democratic and free-market institutions among our youth.

An October 2017 study found 46% of Americans between 18 and 29 indicated they believe states are more effectively governed by experts than elected officials – among those over 50, the figure was only 36%. Similar polls demonstrate wide youth dissatisfaction with capitalism.

Youth behavior on college campuses-demands for strict adherence to leftist orthodoxy from faculty, fellow students and visiting intellectuals, and reflexive dismissal of anything advocated by President Donald Trump-displays an alarming contempt for the essential building blocks of any democracy.

Those are free speech, respect for disagreeing opinions and the absolute obligation of the losing side in an election to accept the outcome, honor the winner and work with the new government until the next round of voting.

Young people have terrible examples to guide them. Academic administrators systematically punish faculty who fail to sanitize syllabi and classroom dialogue to the tyranny of political correctness and purge conservatives who challenge theology of identity politics.

Politicians like Charles Schumer, who obstructs Senate votes on nominations to staff the Trump administration, and Nancy Pelosi, who never admits value in anything the GOP proposes, refuses to collaborate on most legislation and disrespectfully protests during the State of the Union address. And Republicans were hardly wholesome in their conduct toward President Barack Obama when they were in the opposition-stonewalling Obama’s final Supreme Court nomination and Rep. Joe Wilson shouting “liar” during Obama’s 2009 State of the Union address.

For generations, universities have been run by pious ideologies and political parties populated by vainglorious sore losers. Nowadays, however, young people are quitting the faith for the same reasons so many rural and smaller city Americans rejected the establishment Republican Party of Jeb Bush during the primaries and Hillary Clinton in the general election to put Donald Trump in the White House. America has failed many of them, and the leadership of the major political parties is callous to their pain.

From the 1930s to 1960, most workers had less than a high-school education, and many more were on farms, in factories, unionized and identified with the Democratic Party, which won most elections. Republicans represented the merchant class, financiers and industrialists, who were generally better educated and resisted New Deal redistributionist policies and encroachments on free markets.

Since then, freer trade, more open immigration, the digital revolution in production and communications, and the civil rights and women’s movements have greatly changed the economy and realigned political parties-omitting the genuine interests of many millennials and blue-collar workers.

These days both political parties reflect the values of highly educated elites. Democrats champion the mind set of liberal academics, successful professionals on the two coasts who profit from globalization and the digital economy, and professional advocates of race and gender issues.

Republicans still hue to an agenda advocated by high-income, high-wealth individuals who also have benefited grandly from changes in our economy. One need only point to their success cutting corporate taxes and failures on health care to see the ties that bind.

The typical 26-year old is not a Harvard or University of Michigan graduate with a promising career at a software startup, law firm or investment house, but rather a second-tier, private or public college graduate-or less-often stuck in a dead end, low-paying job and burdened with huge student debt he may well take to the grave.

Millions of young adults bought into a capitalist promise – borrow thousands of dollars for college to get a good job – and got stiffed.

Ultimately, young people will assess the efficacy of our political and economic systems-and assign their loyalties-by how well those address their basic needs.

American democracy and capitalism are not doing well in the eyes of young people and the marginalized.


Peter Morici is a professor at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and six-time winner of the MarketWatch best forecaster award. (See his economic forecasts here.)





The Optimists May Be Right (about Productivity and Economy)


By Peter Morici


April 19, 2018-

In January, Wall Street investors were optimistic tax cuts would sustain economic growth and the Trump bull market. As spring arrives, the world has proven decidedly more uncertain.

The administration has not articulated end game goals for the trade standoff with China. President Xi Jinping is offering some concessions but his commitment to industrial policies that target vital American industries remains clear and menacing. An all-out trade war could disrupt global supply chains, nix planned investment spending, stall both economies and tank stocks.

The Facebook imbroglio raises prospects of tighter regulations on the tech sector, and the kind of Washington overreach that gave us Dodd-Frank, which crippled regional bank lending and substantially slowed the Obama recovery.

Along with President Trump’s vitriolic remarks about Amazon, those combined to take the stock market well off its January highs. And now Federal Reserve Chairman Jerome Powell could face the tough choice of easing back on planned interest rate hikes to keep the economy growing or accelerating those to keep inflation from flying out of control but pushing America into a recession.

The March jobs report indicates businesses continue to hire at a nice clip – the three-month average is 202,000 and wages were up only 2.7 percent on a year over year basis. Along with productivity growth at its recent pace of about 1 percent a year, that should keep inflation right in line with the Fed’s 2 percent target.

Indeed, core inflation – prices less the volatile food and energy sectors – has been hovering at just about that pace.

This wage and price performance puzzles economists. Unemployment at 4.1 percent is quite low, and even in the interior in places hard hit by globalization – for example, Indiana, Iowa and Nebraska – economic development officials report businesses scurrying to find workers.

This is hardly new – we have heard reports of worker and skill shortages for many months – but those hardly seem to show up in the wage or consumer price inflation statistics.

During the recent recovery, four factors have kept inflation in check – the revolutions in shale oil and advanced recovery technics, non-oil commodity prices depressed by excess capacity from the overhang of the Great Recession, expanded competition from inexpensive imported manufactures and increased retail competition enabled by Internet commerce – but those mostly have run their course.

Investors are pushing smaller U.S. oil producers to finally turn profits and domestic oil prices are up, broader import prices are now rising at a 3.6 percent annual clip and stronger global growth has pushed up costs for critical items like building materials.

The housing sector is particularly squeezed. The combination of tighter building codes, higher material prices and shortages of essential skilled workers keep new home construction below pre-recession levels and are boosting new home and resale prices.

Amazon and other Internet retailers have eliminated many of the weaker brick and mortar competitors, and now must squeeze better margins out of their supply chains or expand into other activities to grow. For example, Amazon is both raising prices and expanding into package delivery, drones, ocean freight and a host of other activities.

Stronger productivity growth could mitigate all these pressures on inflation.

White House economists are confident that deregulation, business investment prodded by tax cuts and deregulation will restore the lost era of strong productivity gains – those averaged 2.3 percent a year from 1947 to 2009.

Economists mostly sort into two camps – those who believe the post-World War II period was exceptional and those at the White House and a few others (count me in) who believe the best is yet to come – that artificial intelligence and robotics is about to break loose progress on the scale of the Industrial Revolution.

That’s why the former see tax cuts as primarily demand stimulus and after a brief period of stronger growth, the economy slowing to a pace in line with the Obama recovery. In contrast, the White House and a few others see growth speeding up to about 3 percent longer term.

We can’t wholly relive the Reagan-Clinton decades, because of slower adult population growth and the effects of expanded entitlements on labor-force participation among prime-working-age adults.

However, if the optimists are right about productivity, the Trump economy will be saved and the Fed will have a lot easier time than many expect.


Peter Morici is a professor at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and six-time winner of the MarketWatch best forecaster award.




Here’s Why Trump Needs a More Realistic Approach to Trade with China

By Peter Morici


April 16, 2018-

President Trump does not take on small tasks – confronting North Korea after predecessors kicked the can, reforming taxes and business regulations and now America’s corrosive trade deficit.

Nothing he does is without drama – repeatedly shaking up the White House staff, personal legal troubles, and tariffs that aggravate allies and the moribund WTO.  Yet, the economy has proven resilient – stocks notwithstanding,  consumer confidence and business activity are strong, and forecasts for economic growth in 2018 are close to 3 percent.

To keep his promise to resurrect communities decimated by globalization, he has to do a lot more to address America’s flood of imports than slap tariffs on aluminum and steel.

Reawakening shuttered factories in the vast expanse between Manhattan and the Silicon Valley requires halving the $650 billion trade gap. That’s what it will take to sustain growth in excess of 3 percent, bring in tax revenues to tame budget deficits and rein in foreign borrowing that threatens another financial meltdown.

Otherwise, the Democrats will take back control, and we know what their brand of economics does to working class Americans-diminished lives, opioid addiction and the indignity of government charity.

China accounts for more than 60 percent of the trade gap, and it’s not cheap labor that’s harpooning American industry.  Beijing has been carefully guiding investment toward mid-technology activities like auto parts and targeting high tech industries like microprocessors and artificial intelligence-the latter is increasingly abundant in new products across a broad span of new products.

For those, Beijing’s mercantilism is key-vast subsidies, high tariffs and a myriad of administrative barriers to imports that compel U.S. firms to invest in China to sell there, forced joint ventures on U.S. firms establishing facilities in China that virtually guarantee technology theft and state-directed industrial espionage.

Competing with China is like playing football against a team outfitted with guns and knives.

Enforcing U.S. trade laws and relying on the WTO is hardly an answer. The U.S. has imposed more than 150 antidumping and subsidy duties, but WTO rules require riffle shots-narrowly focused measures that hardly match the breath and systemic scope of Chinese commercial aggression.

WTO rules were written to police the protectionism of governments overseeing market economies and are not well applied to a central authority puppeteering state owned enterprise and private firms with substantial communist party participation in their management.

Once again, China and the United States are engaged in discussions to permit more U.S. exports and stop the abuse of American MNCs investing there. And once again Beijing is floating limited, as opposed to comprehensive reforms-and without credible enforcement.

If China is not more forthcoming, the Trump administration is readying another set of unilateral measures. Some make sense-for example, imposing restrictions on Chinese investments in American technology sectors that mirror those imposed on U.S. firms in China-but others don’t.

The administration is threatening tariffs on $150 billion in Chinese exports to offset U.S. losses from intellectual property piracy-against a $335 bilateral deficit, that’s chump change.

We have learned that targeted trade actions don’t change Beijing’s behavior. Chinese exporters find ways around those-for example, by routing goods through third counties, either cleverly disguised or incorporated into other products.

And Beijing can easily retaliate against Mr. Trump’s targeted tariffs by levying duties on U.S. agricultural products like pork, sorghum and soybeans from states that went for Mr. Trump in 2016. Causing discomfort for China’s unelected President Xi is more difficult.

It would be better to prepare broad measures aimed at rebalancing trade if China will not provide a specific timetable and credible measures to eliminate the trade deficit.

The United States could require licenses to import Chinese goods. Exporters could be issued resalable import permits equal to the value of their sales in the Middle Kingdom. Those wishing to purchase items from China would then bid for these through an online marketplace-similar to eBay. Those would be purchased by those businesses and consumers placing the highest value of products from China.

Phasing in this regime over three years would give businesses time to adjust but still create crises for Beijing policymakers and the WTO. That’s what it’s going to take to reorder our relationship with China and reform the WTO.

Peter Morici is a professor at the University of Maryland Smith School of Business, former Chief Economist at the U.S. International Trade Commission, and six-time winner of the MarketWatch best forecaster award.



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