Opinion

Trump’s Virtual Wall

CAMBRIDGE –In many ways, the Republican Party’s plan to implement a “border adjustment tax” in the United States is the virtual complement of the physical wall President Donald Trump plans to erect on the US-Mexican border. Although the border adjustment tax has not seeped into public consciousness in nearly the same way as Trump’s physical wall has, it could end up affecting the average American a lot more – and not necessarily in a good way.


On the surface, the basic idea is to slap a tax of, say, 20% on imports, and to provide tax breaks worth a similar amountonexports.Most populists’ gut reaction is that this must be fantastic for US jobs, becauseit discourages imports and encourages exports. Unfortunately, as many have pointed out, there is a loose screw in this logic, which is that the United States has a floating exchange rate.

A stronger dollar –a likely result of imposing a border adjustment tax –makes it cheaper for Americans to buy imports (because a dollar buys more foreign currency); conversely, a stronger dollar makes US exports more expensive to foreigners. In fact, the baseline textbook result is that the exchange-rate effect would fully offset the tax, leavingthe trade balance unchanged. If you think the Republicans’ proposal sounds like hocus pocus, you might be right, but let’s hold that thought.

Several highlyregarded academic economists favor the border adjustment idea, but for entirely different reasons. They take it as an article of faith that the exchange rate willin fact rise to neutralize the trade effects of a border adjustment tax. But they like it anyway.

First, the US imports a lot more than it exports, so it runs a large trade deficit, with the broadest measure (the “current account”) at around 2.5% of GDP. While that is a vast improvement over the 6%-of-GDP deficits the US was running a decade ago, the US still imports considerably more than it exports, meaning the government stands tocollect far more revenues from its 20% tax on imports than it would have to give in tax breaks to exporters. Indeed, the tax-subsidy schedule could, on paper at least, bring in roughly $90 billion a year.

And the magic doesn’t stop there. Although it might surprise people who are used to thinking of imports and exports as a pure “us versus them” phenomenon, in fact roughly half of all trade is intra-firm – transactions between foreign and US divisions of the same company. And because US corporate taxes are among the world’shighest, firms will go to great lengthsto assign as much value as they can to foreign subsidiaries, and as little as possible to US companies.

One way to do this is by puttingan artificially high bookkeeping price onintra-firm imports, and an artificially low bookkeeping price onexports. Under- and over-invoicing is a time-honored way to get around taxes and controls. When a transaction is all “in-house,” it essentially just involves accounting sleight of hand to book profits in low tax jurisdictions.

As the University of California at Berkeley’sAlan Auerbach first pointed out, the border tax adjustment is a way to push back on under- and over-invoicing ina high-tax jurisdiction such as the US. So, all in all, even if a border adjustment tax does not directly make US goods more competitive, it is an efficient way to raise revenues, potentially making room for other tax cuts.

So what could possibly be wrong with such a technocratically sound idea? First, it relies on some heroic assumptions – for example, that people cannot easily game the labyrinthine system and that foreign governments will exercise restraint in retaliating. Second, it ignores a host of difficult transition problems.

For starters, the overwhelming majority of US imports are priced in dollars, not foreign currency. So, even if foreign currencies become cheaper, it might not help importers locked into dollar contracts. Their costs would just be 20% higher because of the import tax. And, despite the tax subsidy, some exporters would lose, because, as a recent New York Federal Reserve note points out, they rely on imported intermediate goods in producing their products.

Another problem is that a strongerdollar would mean a massive wealth loss for Americans, because the value of many foreign assets would go down, as my colleagues Emmanuel Farhi, Gita Gopinath, and Oleg Itskhokihave discussed. The biggest problem of all, though, is the blithe assumption that the dollar exchange rate would neatly move to offset the tax/subsidy scheme.

If there is anything that the past 40years of exchange-rate research have taught us, it is that exchange rates canmove wildly away from their fundamentals for many years at a time. It is thoroughly unrealistic to assume that a border tax will quickly lead to a sharp offsetting movement of the dollar. The process could take many years, and the short-term effects on US unemployment easily could be negative.

True, high border taxes could boost US employment. The scheme wouldrequire a huge increase in customs agents, and it would most likely lead to significant expansion in the underground economy as people seek to evade the taxes. But are those really the typesof jobs proponents of a border tax have in mind? Kenneth Rogoff, a former chief economist of the IMF, is Professor of Economics and Public Policy at Harvard University.

By Kenneth Rogoff

France’s Extraordinary Election

PARIS – Sixty years after the signing of the Treaty of Rome, France is poised to hold an election that could make or break the European Union. A victory for the pro-EU independent centrist Emmanuel Macron could be a positive turning point, with France rejecting populism and deepening its connections with Germany. If, however, French voters hand the presidency to the far-right National Front’s Marine Le Pen – who was, tellingly, just warmly received by Vladimir Putin in Moscow – the long European project will be finished.


Clearly, this is no ordinary French election. With the EU’s survival on the line, the stakes are higher than in any election in the history of the Fifth Republic. So, does France’s nationalist, xenophobic right have a real chance of coming to power?

To be sure, the National Front is well established in French political life. Le Pen’s father, Jean-Marie Le Pen, founded the party in 1972, and led it until 2011, when his daughter took over. But its electoral success has so far been limited. While Jean-Marie made it to the second-round runoff in 2002, he ended up losing badly when the center and the left united behind Jacques Chirac.

Like her father, Marine Le Pen is likely to make it to the second round in May; indeed, polls have her winning the most votes in the first round. Many remain confident that she will be defeated in the runoff: Macron is projected to win 63% of the vote in a head-to-head contest against Le Pen. But populist victories in 2016 – particularly the Brexit vote in the United Kingdom and the election of Donald Trump as US president – have shown that the unthinkable can happen.

In fact, the old French proverb, “never two without three,” may seem to indicate that, after those two votes, a Le Pen victory is all but inevitable. Then again, maybe France will be the third electoral loss for extreme-right candidates, after those in Austria and the Netherlands, providing definitive proof that the populist tide can be resisted.

Exceptional circumstances do sometimes favor the emergence of exceptional personalities, as in the 1930s – a tragic decade to which today’s political hysteria has often been likened. But, like the proverbial “rule of three,” the results can be negative or positive. Just as US President Franklin D. Roosevelt emerged as a ray of hope during the worst economic crisis in America’s history, Macron is spreading optimism among a French public disillusioned by a combination of violence, mediocrity, corruption scandals, and ideological confusion.

Macron’s wife jokes that he takes himself for Joan of Arc, the French peasant who saved the country from the British in the Middle Ages. Physically, Macron evokes more the young general, Napoleon Bonaparte, during his first campaign in Italy. Some see in Macron a romantic figure straight out of a Stendhal novel, a modern Fabrice del Dongo, who decides not to be a mere spectator of the world, but to act on it. He advances his mission through a combination of youthful energy, self-confidence, political cunning, technocratic competence, and a sense of moderation.

Macron embodies a sea change in French electoral politics: the erosion of the traditional cleavage between right and left. He is representing his own centrist movement (En Marche !). No independent has ever won the French presidency, but, again, this is no ordinary election.

In fact, neither of the two main parties – the Socialists and the Conservatives (Les Republicains, as they now call themselves) – is likely even to reach the election’s second round. This rejection of traditional parties echoes the rejection of Socialist President François Hollande, whose popularity sank so low (to just 4% at one point) that he opted not to seek another term, a first in the Fifth Republic’s history. It is also reflected in the risk of substantial voter abstention, unusual for a country that takes presidential elections very seriously.

Many French have perceived this election as a kind of eternal reality-television show. It may be fascinating, but there is little confidence that the myriad issues that are shaping it, from unemployment to terrorism and security to retirement benefits to the moralization of political life, will be resolved. (Here lies another difference from previous elections, which were largely shaped by one or two major issues.)

Like Dongo – or Macron – the French people now will have their chance to go from spectators to autonomous actors. They can elect their candidate of hope, like Americans did in 2008, when they chose Barack Obama. Or they can elect their candidate of fear, like Americans did in 2016, when they chose Donald Trump. In either case, the effects of their choice – like the choices of their American counterparts – will be felt by countless others.

Of course, France is not America; it is, for one thing, less strategically important to the world. But France is strategically vital to the EU. And, in a sense, the composed and politically savvy Le Pen may be even more dangerous than the erratic political novice currently occupying the White House. That is why much of the world – at least the democratic part of it – is watching this most unusual of French elections unfold with bated breath. Dominique Moisi is Senior Counselor at the Institut Montaigne in Paris.

By Dominique Moisi

How Fake News Wins

WASHINGTON, DC – In response to the wave of fake news that inundated the recent presidential election campaign in the United States, much attention has been devoted to those who produce or spread those stories. The assumption is that if news outlets were to report only the “facts,” readers and viewers would always reach the right conclusion about a given story.


But this approach addresses only half of the equation. Yes, we need news organizations to deliver reliable information; but we also need those receiving it to be savvy consumers.

For decades, the US government has supported programs to foster independent media in authoritarian, resource-deprived, or dysfunctional countries. But these programs tacitly assume that the US itself is immune to the problems people in other countries encounter when they create or consume information. We in the US also assume that American media, sustained by advertising, will continue to thrive; that independent journalism is the norm; and that most people are capable of thinking critically and making sound judgments about the information they receive.

In fact, some of the lessons that we have learned while supporting vibrant information gathering and distribution abroad are equally relevant to the US. In the 2016 election, the personal beliefs that drove millions of voters’ decisions were based not only on each person’s experiences and the information they accessed, but also on how they processed those experiences and that information. Voters’ own relationships with content producers, their motivation to believe or disbelieve facts, and their critical thinking skills all determined how they interpreted and acted on information.

In the election, most mainstream pundits did not seem to “get” millions of Americans’ beliefs or viewpoints, so it is little wonder that those millions of Americans were turned off by the pundits’ incessant chatter. To these voters, the pundits were simply information peddlers with no attachments to the issues that matter. Men and women talking in front of TV cameras are too far removed from the factories, offices, bars, churches, schools, and hospitals where viewers form the relationships that determine how they process information. The so-called digital revolution did not render superfluous the importance of human connection in shaping people’s interpretation and response to the information they receive.

Relationships are built on trust, which is essential for ensuring that consumers accept information that challenges their closely held beliefs. But, according to Gallup, only 32% of Americans have a “great deal” or “fair amount” of trust in traditional media outlets – an all-time low. That is deeply problematic, and it suggests that many citizens are throwing out the good information with the bad.

As with any other good, how information is consumed reflects economic and political opportunities, personal incentives, and institutional or cultural norms. Workers in Ohio whose wages have stagnated, or unemployed voters in Michigan whose jobs have migrated overseas, will consume information in a way that reflects their economic situation. Not surprisingly, they will often select sources – whether credible or not – that are critical of globalization and current fiscal and economic policies.

An ample supply of sound information is not sufficient to make good choices; news consumers need critical-thinking skills. Information is much like the food we eat: we need to understand its ingredients, and where and how it is produced, and the effects of overconsumption.

It will probably take decades to rebuild trusting relationships between consumers and mainstream news media. Information consumers will always have biases and incentives to select one piece of information over another. Even so, we can improve critical-thinking skills so that citizens know how to pick trustworthy sources, and resist their own biases.

Cultivating critical-thinking skills takes time and practice, which is why it is more important than ever to invest in education. Some of the models that have been used abroad may work in the US, too. For example, in Ukraine, a recent initiative carried out by IREX mobilized librarians in an effort to neutralize the detrimental effects of Kremlin-funded propaganda. Fifteen thousand Ukrainians were taught concrete skills in avoiding emotional manipulation, verifying sources and credentials, detecting paid content and hate speech, and debunking fake videos and photos.

The results were impressive: participants improved their ability to distinguish trustworthy news from false news by 24%. Better yet, they then trained hundreds more people to detect disinformation, thus multiplying the initiative’s overall impact.

With a rather modest investment, we can make teaching these skills a standard practice in school curricula. Philanthropists can also create or support grassroots organizations that work with citizens to strengthen their ability to consume information critically.

Accurate information and critical-thinking skills are indispensable to democracy. We cannot take them for granted, even in America. That is how fake news wins.

Aleksander Dardeli is Executive Vice President of IREX, a global nonprofit organization that works to strengthen good governance and access to quality information and education.

By Aleksander Dardeli

Trump the Destroyer

LONDON – With all the skill of an experienced arsonist, US President Donald Trump is preparing America for a firestorm. His actions have heightened insecurity, instability, and fear, while potentially making populations elsewhere in the world even more susceptible to political fire-starters. Voters in the United States who thought they were supporting the only capable firefighter around have been played.


But Trump has a knack for manipulating perceptions. To deflect attention from potentially incendiary policies, he launches baseless accusations against his supposed enemies – beginning with the media. Portraying negative coverage as “fake news” has helped Trump to distract from scandals big and small: his family’s conflicts of interest, his dodgy business deals around the world, white supremacists among his senior staff, the rejection of ethics training for senior White House staff, and much else.

Perhaps the most prominent such scandal concerns the string of revelations tying Trump’s administration to Russia, including the resignation of National Security Adviser Michael Flynn over “misleading” the vice president about the nature of his pre-inauguration conversations with Russia’s ambassador to the US. When the charge of “fake news” proved inadequate to silence the whispers, Trump pulled out the big (still imaginary) guns, tweeting that former President Barack Obama had Trump Tower’s “wires tapped” before the election.

Amid the bread and circuses, Trump continues along his path of demolition. His first proposed budget would slash funding for social programs, efforts to reduce drug use and trafficking, the arts, climate science, medical research, education, Meals on Wheels (food delivery for the elderly), financial assistance for low-income college students, the Supplemental Nutrition Program for Women, Infants, and Children, and much else. He is determined to eliminate environmental protections as well: one of his first major actions was to eliminate a rule restricting coal companies from dumping mining waste into streams. In the meantime, Trump will pursue his goal of drastically increasing defense spending, even as his policies put some members of US military families at risk of deportation.

Such moves are egregious, and companies must resist taking advantage of them, even if they seem to benefit the company in the short term. Board members and executives must remember that they are also parents, children, partners, and friends. They should fear a future of overwhelming pollution, inadequate education, poor working conditions, increasingly extreme weather events, geopolitical conflict, and the destruction of programs and policies created to build a safer, more secure, and more prosperous future for all.

Trump is no leader; he cannot create, only distract and destroy – and put his name on what others have built. That is also true of his proposed wall on the US border with Mexico, which will outshine all the buildings around the world – from Brazil to Indonesia – to which he has licensed his name. In size, scope, and fame, the wall will surpass the Hoover Dam and Mount Rushmore. No highway or airport named after a US president will come close. (The one thing on which Trump does not want his name is the Republicans’ widely derided new health-care proposal, intended to replace Obama’s signature Affordable Care Act.)

What’s next? Perhaps Trump will follow the example of SaparmuratNiyazov, Turkmenistan’s first president for life, and start renaming the months of the year, beginning with “Trumpuary.”

The absurdity need not end there. Having already run roughshod over nepotism norms, why not, appoint his wife Vice President, as the presidents of Azerbaijan and Nicaragua have done. Or he could start marching around in a faux military uniform, made to his own specifications (by a Trump Organization subsidiary and manufactured in China, of course). He already visited an aircraft carrier in a bomber jacket and cap.

Not even Trump believes his own act. He certainly can’t sustain it for long. His governance by id means that he will always reveal his true self, whether in the form of maniacal claims like those about being wiretapped, or when he reveals his true intentions by saying that his latest travel ban is just the old one watered down. So when does it all become too ludicrous? At what point will commentators stop gushing that Trump has finally become “presidential” every time he sticks to a script? When they will stop treating every raving tweet as part of a rational plan?

Trump’s cohorts, many of whom are not accustomed to life in the spotlight, only make matters worse. Secretary of State Rex Tillerson, for example, noting that he is “not a big media press access person,” flies around the world without a press entourage – unsurprising for a former CEO of a multinational oil company, but highly unusual for the top US diplomat. And Tillersoncut short his trip to South Korea – in the midst of a growing crisis on the peninsula – due to fatigue (a reminder never to send a man to do a woman’s job).

As Trump occupies himself with manipulating appearances and performances, the rest of the world is concerned about North Korea’s nuclear and missile programs, the crisis in Syria, the Brexit negotiations, climate change, and the growing threat of starvation and famine in Yemen, Somalia, South Sudan, and Nigeria. Against this background, the last thing the world needs is a volatile and unabashedly dishonest US president, much less one who likes to play with matches.

Lucy P. Marcus is CEO of Marcus Venture Consulting.

By Lucy P. Marcus

Why Some Drug Prices Should Be High

SAN FRANCISCO – US President Donald Trump recently told the US Congress that Americans must “work to bring down the artificially high price of drugs and bring them down immediately.” He is right that, in the United States, prescription medicines are very costly – a reality that has prompted much public anger. But, in tackling this problem, Trump must be careful not to undermine scientific innovation.


The relationship between unmet medical need, innovation, and high drug prices is complex and politically fraught. For example, the 1983 introduction of the US Orphan Drug Act successfully supported the development of treatments for rare conditions. But, despite the financial incentives (like tax reductions) that the act provided to companies for research and development, the resulting treatments carry jaw-dropping price tags. And some companies gamed the system, repurposing old drugs as much more expensive orphan drugs – a practice that deepened public anger.

However justifiable some of that anger may be, the reality is that the process of discovering and developing new drugs is highly challenging and laden with risks. The aberrant processes underlying many diseases remain a mystery, and it is difficult to perform experimental medical studies that are both ethical and effective.

As a result, the drug R&D process is prone to failure. Only seven of 100 cancer drugs that reach the clinical-testing phase end up gaining regulatory approval. Most drugs fail long before this point. All of this costs money.

Further increasing drug costs is the approval process, which Trump describes as “slow and burdensome.” Of course, the approval process is designed to protect consumers, but that doesn’t change how expensive it can be for innovators. Add all of these costs together, and the top 15 spenders in the pharmaceutical industry are investing about $3 billion in R&D, on average, for each successful new medicine.

But innovation is not being carried out solely by huge pharmaceutical firms. On the contrary, innovations in drug development have historically been the domain of small independent companies like Silver Creek Pharmaceuticals, of which I am CEO. Such companies then sell the drugs they develop, or even the entire company, to larger firms.

To secure investment, firms like mine must prove that, once a drug gets to market, the rewards will more than offset the costs of unsuccessful attempts. There is no special dispensation, based on the moral imperative to heal the sick. In seeking funding, we are competing for the same capital as anyone else, including, say, the gaming sector, which offers excellent returns for investors, but questionable benefits for humanity.

The price of a novel drug has a direct impact on the availability of capital to fund development of the next one. This matters for all health-care systems, but especially for the US, because scientific innovation, including in pharmaceuticals, represents its main competitive advantage – and one of its most important contributions to the world.

My high-prices-for-innovation argument may sound comforting to pharmaceutical lobbyists. But we cannot forget the other side of the issue: ensuring that drugs are accessible to those who need them.

I spent 20 years working within a system that, in many ways, exemplifies this second imperative: the United Kingdom’s National Health Service (NHS). During that time, I chaired my hospital’s “Use of Medicines Committee,” which selected the new medications on which to spend our limited drug budget. Our criteria were simple: safety, efficacy, and value for money. Even though my role has changed, my opinion on what represents value for money in a medicine has not.

At times, medical colleagues were frustrated, because we could not provide them with the newest “miracle” drug; the price tag was simply too high. We, like the NHS in general, had to maximize our budget, by aggressively switching to generics and managing the drug choices that were available to prescribers. I’m proud of our record of securing genuinely innovative drugs for our patients, without bankrupting the hospital.

In deciding the prices of drugs, the country of my birth and my adopted country have clearly chosen different paths. We can learn from both experiences.

In the UK, the state effectively picks winners. While this expands access to many drugs, it also implies considerable costs (because it leaves room for delays and lobbying, with non-experts making the decisions) and limits innovation. It is worth pointing out, however, that the NHS covers 100% of the UK population with little or no out-of-pocket expenses, and spends less than half as much as the US, as a share of GDP, on health care.

In the US, where the free market determines drug prices, the result is higher prices, covered insurance, taxes, and copayments. This enables continued pharmaceutical innovation, but also makes it difficult for some Americans to afford the medicines they need. In this sense, Americans are effectively (and unfairly) shouldering the burden of financing future drug innovations that will benefit the entire world.

The Trump administration now faces a dilemma. If average drug prices are not lowered, popular anger will continue to intensify. If they are slashed indiscriminately, capital will flood out of the US, into countries more sympathetic to drug development, or out of drug development altogether.

This is why the Trump administration should encourage a rational discussion involving representatives from all areas of the health-care industry. To prevent such a discussion from falling prey to populism or industry lobbying, it should be informed by lessons from systems like the NHS (which Trump has praised in the past) concerning how to reduce overall health-care expenditure and take advantage of good-value innovations.

Only such an open-minded and nuanced approach can balance the imperatives of ensuring Americans’ access to medications and preserving America’s competitive advantage – and contribution to the world. The Trump administration should spearhead this effort.

Ross Breckenridge was a physician and clinical scientist for 20 years in the UK National Health Service, and is now the chief executive of Silver Creek Pharmaceuticals in San Francisco, California.

By Ross Breckenridge

Why Some Drug Prices Should Be High

SAN FRANCISCO – US President Donald Trump recently told the US Congress that Americans must “work to bring down the artificially high price of drugs and bring them down immediately.” He is right that, in the United States, prescription medicines are very costly – a reality that has prompted much public anger. But, in tackling this problem, Trump must be careful not to undermine scientific innovation.


The relationship between unmet medical need, innovation, and high drug prices is complex and politically fraught. For example, the 1983 introduction of the US Orphan Drug Act successfully supported the development of treatments for rare conditions. But, despite the financial incentives (like tax reductions) that the act provided to companies for research and development, the resulting treatments carry jaw-dropping price tags. And some companies gamed the system, repurposing old drugs as much more expensive orphan drugs – a practice that deepened public anger.

However justifiable some of that anger may be, the reality is that the process of discovering and developing new drugs is highly challenging and laden with risks. The aberrant processes underlying many diseases remain a mystery, and it is difficult to perform experimental medical studies that are both ethical and effective.

As a result, the drug R&D process is prone to failure. Only seven of 100 cancer drugs that reach the clinical-testing phase end up gaining regulatory approval. Most drugs fail long before this point. All of this costs money.

Further increasing drug costs is the approval process, which Trump describes as “slow and burdensome.” Of course, the approval process is designed to protect consumers, but that doesn’t change how expensive it can be for innovators. Add all of these costs together, and the top 15 spenders in the pharmaceutical industry are investing about $3 billion in R&D, on average, for each successful new medicine.

But innovation is not being carried out solely by huge pharmaceutical firms. On the contrary, innovations in drug development have historically been the domain of small independent companies like Silver Creek Pharmaceuticals, of which I am CEO. Such companies then sell the drugs they develop, or even the entire company, to larger firms.

To secure investment, firms like mine must prove that, once a drug gets to market, the rewards will more than offset the costs of unsuccessful attempts. There is no special dispensation, based on the moral imperative to heal the sick. In seeking funding, we are competing for the same capital as anyone else, including, say, the gaming sector, which offers excellent returns for investors, but questionable benefits for humanity.

The price of a novel drug has a direct impact on the availability of capital to fund development of the next one. This matters for all health-care systems, but especially for the US, because scientific innovation, including in pharmaceuticals, represents its main competitive advantage – and one of its most important contributions to the world.

My high-prices-for-innovation argument may sound comforting to pharmaceutical lobbyists. But we cannot forget the other side of the issue: ensuring that drugs are accessible to those who need them.

I spent 20 years working within a system that, in many ways, exemplifies this second imperative: the United Kingdom’s National Health Service (NHS). During that time, I chaired my hospital’s “Use of Medicines Committee,” which selected the new medications on which to spend our limited drug budget. Our criteria were simple: safety, efficacy, and value for money. Even though my role has changed, my opinion on what represents value for money in a medicine has not.

At times, medical colleagues were frustrated, because we could not provide them with the newest “miracle” drug; the price tag was simply too high. We, like the NHS in general, had to maximize our budget, by aggressively switching to generics and managing the drug choices that were available to prescribers. I’m proud of our record of securing genuinely innovative drugs for our patients, without bankrupting the hospital.

In deciding the prices of drugs, the country of my birth and my adopted country have clearly chosen different paths. We can learn from both experiences.

In the UK, the state effectively picks winners. While this expands access to many drugs, it also implies considerable costs (because it leaves room for delays and lobbying, with non-experts making the decisions) and limits innovation. It is worth pointing out, however, that the NHS covers 100% of the UK population with little or no out-of-pocket expenses, and spends less than half as much as the US, as a share of GDP, on health care.

In the US, where the free market determines drug prices, the result is higher prices, covered insurance, taxes, and copayments. This enables continued pharmaceutical innovation, but also makes it difficult for some Americans to afford the medicines they need. In this sense, Americans are effectively (and unfairly) shouldering the burden of financing future drug innovations that will benefit the entire world.

The Trump administration now faces a dilemma. If average drug prices are not lowered, popular anger will continue to intensify. If they are slashed indiscriminately, capital will flood out of the US, into countries more sympathetic to drug development, or out of drug development altogether.

This is why the Trump administration should encourage a rational discussion involving representatives from all areas of the health-care industry. To prevent such a discussion from falling prey to populism or industry lobbying, it should be informed by lessons from systems like the NHS (which Trump has praised in the past) concerning how to reduce overall health-care expenditure and take advantage of good-value innovations.

Only such an open-minded and nuanced approach can balance the imperatives of ensuring Americans’ access to medications and preserving America’s competitive advantage – and contribution to the world. The Trump administration should spearhead this effort.

Ross Breckenridge was a physician and clinical scientist for 20 years in the UK National Health Service, and is now the chief executive of Silver Creek Pharmaceuticals in San Francisco, California.

By Ross Breckenridge

Rebuilding the World’s Forests

OXFORD – Humankind has always had a tricky relationship with forests. We depend on them to regulate the climate and rainfall, clean our air and water, sustain myriad species of plants and animals, and support the livelihoods of over a billion people. Yet we continue to destroy them, to the point that only half the world’s original forest cover remains.


The price of deforestation can hardly be overstated. Trees consume large amounts of carbon dioxide as they grow, making them vital tools for absorbing the greenhouse-gas emissions – from cars, factories, power stations, and livestock – that result in climate change. If we continue to lose forest cover, the Paris climate agreement’s goal of limiting global warming to less than two degrees Celsius (above pre-industrial levels) by 2050 will be impossible to achieve. In fact, to meet that target, we will need to restore a significant amount of forest cover that is already gone.

There are two ways to approach reforestation. The first is to allow agricultural lands to fall into disuse, and then wait for them to revert naturally to forest. This wouldn’t cost much, but it would take decades. The second option is more proactive: plant billions of new trees.

As part of the New York Declaration on Forests, signed in 2014, governments pledged to restore hundreds of millions of hectares of forests. But, with most governments short on cash these days, financing the pledge has proved challenging. Against this background, we must try to engage the private sector to deliver the needed investment.

When forests have an economic value, they are more likely to be cultivated than destroyed. And, indeed, trees have been cultivated for profit for millennia. Today, productive forests cover an area of more than a billion hectares, or about one-quarter of the world’s forested land.

Such forests produce fuelwood, which accounts for about half of tree removals. They also produce materials for clothes, oils for soaps and lubricants, fruits, and other foods, such as cocoa. Demand for these products is growing, though not as fast as demand for newspaper print falls as a result of computerization.

How can demand for forest products be increased? A promising opportunity lies in construction.

Timber has always been an important building material, and remains so for residential construction in places like the United States, Scandinavia, and parts of Southeast Asia. But most buildings today are constructed using bricks and mortar, concrete, and, for larger structures, steel – all materials that produce substantial carbon emissions during the manufacturing process.

While it is unlikely that timber can fully replace any of these materials, new types of engineered wood are making it more competitive. One of these is cross-laminated timber (CLT), which is made by gluing together layers of wood to create panels that are as strong as steel or concrete, and thus can replace those materials in buildings.

More research is required to determine the precise benefits of using timber to cut CO2 emissions. One estimate comes from architect Anthony Thistleton-Smith, one of the United Kingdom’s leading experts on wooden buildings. He recently noted that, whereas a typical British home has a carbon footprint of around 20-21 tons, a CLT home has a negative footprint of 19-20 tons. In other words, every home built with CLT saves 40 tons of CO2 emissions. If the 300,000 new

homes targeted for completion in the UK this year were built using CLT, it would be like taking 2.5 million cars off the road. The climate benefits could be massive.

As with so many climate measures, cost can be a major barrier to implementation. And, according to a United Nations report, CLT is more expensive than concrete in Europe. But CLT is still in its infancy, with only a handful of factories in operation. As the CLT supply chain develops, costs will inevitably fall, as has happened with renewable energy.

Moreover, builders report that the total costs of building with CLT already end up similar to those of building with concrete, because it takes less time. After all, unlike concrete, CLT doesn’t need time to set.

Of course, delivering such a transformation will not be easy. Vested interests – pressure from industries producing traditional building materials – must be overcome, including by ensuring a level playing field in terms of subsidies. Furthermore, public concerns – for example, regarding fire safety or infestation prevention – must be addressed, and builders will have to learn new skills. Most important, monitoring will have to be improved considerably, so that increased demand does not result in more deforestation.

For many countries, the economic opportunities should be sufficient to make addressing these challenges worthwhile. New plantations could regenerate rural areas, as new factories created opportunities for investors and entrepreneurs. Governments and larger companies would be able to tap the fast-growing green-bond market to fund the early transition, including the creation of systems using drones and satellite imaging to monitor for unsustainable forestry practices.

Opportunities to align economic development with the reduction of greenhouse-gas emissions are rare. Yet that is what reforestation offers. We must take advantage of this opportunity, by pursuing a construction transformation based on restoring trees, the world’s most effective carbon-capture tool. In this “new age of timber,” we would grow wood, build with wood, and allow our forests to thrive.

By Justin Adams

Trump’s Virtual Wall

CAMBRIDGE – In many ways, the Republican Party’s plan to implement a “border adjustment tax” in the United States is the virtual complement of the physical wall President Donald Trump plans to erect on the US-Mexican border. Although the border adjustment tax has not seeped into public consciousness in nearly the same way as Trump’s physical wall has, it could end up affecting the average American a lot more – and not necessarily in a good way.


On the surface, the basic idea is to slap a tax of, say, 20% on imports, and to provide tax breaks worth a similar amount on exports. Most populists’ gut reaction is that this must be fantastic for US jobs, because it discourages imports and encourages exports. Unfortunately, as many have pointed out, there is a loose screw in this logic, which is that the United States has a floating exchange rate.

A stronger dollar – a likely result of imposing a border adjustment tax – makes it cheaper for Americans to buy imports (because a dollar buys more foreign currency); conversely, a stronger dollar makes US exports more expensive to foreigners. In fact, the baseline textbook result is that the exchange-rate effect would fully offset the tax, leaving the trade balance unchanged. If you think the Republicans’ proposal sounds like hocus pocus, you might be right, but let’s hold that thought.

Several highly regarded academic economists favor the border adjustment idea, but for entirely different reasons. They take it as an article of faith that the exchange rate will in fact rise to neutralize the trade effects of a border adjustment tax. But they like it anyway.

First, the US imports a lot more than it exports, so it runs a large trade deficit, with the broadest measure (the “current account”) at around 2.5% of GDP. While that is a vast improvement over the 6%-of-GDP deficits the US was running a decade ago, the US still imports considerably more than it exports, meaning the government stands to collect far more revenues from its 20% tax on imports than it would have to give in tax breaks to exporters. Indeed, the tax-subsidy schedule could, on paper at least, bring in roughly $90 billion a year.

And the magic doesn’t stop there. Although it might surprise people who are used to thinking of imports and exports as a pure “us versus them” phenomenon, in fact roughly half of all trade is intra-firm – transactions between foreign and US divisions of the same company. And because US corporate taxes are among the world’s highest, firms will go to great lengths to assign as much value as they can to foreign subsidiaries, and as little as possible to US companies.

One way to do this is by putting an artificially high bookkeeping price on intra-firm imports, and an artificially low bookkeeping price on exports. Under- and over-invoicing is a time-honored way to get around taxes and controls. When a transaction is all “in-house,” it essentially just involves accounting sleight of hand to book profits in low tax jurisdictions.

As the University of California at Berkeley’s Alan Auerbach first pointed out, the border tax adjustment is a way to push back on under- and over-invoicing in a high-tax jurisdiction such as the US. So, all in all, even if a border adjustment tax does not directly make US goods more competitive, it is an efficient way to raise revenues, potentially making room for other tax cuts.

So what could possibly be wrong with such a technocratically sound idea? First, it relies on some heroic assumptions – for example, that people cannot easily game the labyrinthine system and that foreign governments will exercise restraint in retaliating. Second, it ignores a host of difficult transition problems.

For starters, the overwhelming majority of US imports are priced in dollars, not foreign currency. So, even if foreign currencies become cheaper, it might not help importers locked into dollar contracts. Their costs would just be 20% higher because of the import tax. And, despite the tax subsidy, some exporters would lose, because, as a recent New York Federal Reserve note points out, they rely on imported intermediate goods in producing their products.

Another problem is that a stronger dollar would mean a massive wealth loss for Americans, because the value of many foreign assets would go down, as my colleagues Emmanuel Farhi, Gita Gopinath, and Oleg Itskhoki have discussed. The biggest problem of all, though, is the blithe assumption that the dollar exchange rate would neatly move to offset the tax/subsidy scheme.

If there is anything that the past 40 years of exchange-rate research have taught us, it is that exchange rates can move wildly away from their fundamentals for many years at a time. It is thoroughly unrealistic to assume that a border tax will quickly lead to a sharp offsetting movement of the dollar. The process could take many years, and the short-term effects on US unemployment easily could be negative.

True, high border taxes could boost US employment. The scheme would require a huge increase in customs agents, and it would most likely lead to significant expansion in the underground economy as people seek to evade the taxes. But are those really the types of jobs proponents of a border tax have in mind?

Kenneth Rogoff, a former chief economist of the IMF, is Professor of Economics and Public Policy at Harvard University.

By Kenneth Rogoff

Trade Truths for Trumpians and Brexiteers

LONDON – Here’s a reality check for British and American policymakers, and for the many pundits who frequently comment on world trade without understanding its realities: data on Germany’s total exports and imports in 2016 indicate that its largest trading partner is now China. France and the United States have been pushed into second and third place.


This news should not come as a surprise. I have often mused that, by 2020, German companies (and policymakers) might prefer a monetary union with China to one with France, given that German-Chinese trade would likely continue to grow.

And so it has, driven primarily by Chinese exports to Germany. But German exports to China have also been increasing. Notwithstanding a recent slowdown, Germany could soon export more to China than to its crucial neighbor and partner France, and it already exports more to China than it does to Italy. For German exporters, France and the UK are the only European national markets larger than China.

Seasoned observers of international trade tend to follow two general rules. First, the level of trade between two countries often decreases as the geographic distance between them increases. And, second, a country is likely to conduct more trade with big countries that have strong domestic demand, rather than with smaller countries that have weak demand.

The latest German trade data confirm both rules, but especially the second one. A big but geographically distant country is different not only in size, but also in kind from a smaller one. This is too often forgotten in discussions about trade agreements, especially in such charged political atmospheres as currently prevail in the United Kingdom and the US.

In the UK, the House of Commons has already adopted a bill to establish a process for withdrawing from the European Union; but the House of Lords is now demanding that the bill be amended to protect EU nationals living in the UK. In my own brief contribution to the marathon House of Lords debate last month, I argued that, even if Brexit is not the UK’s biggest economic-policy challenge today, it will likely exacerbate other problems, including persistently low productivity growth, weak education and skills-training programs, and geographic inequalities.

Moreover, I warned that the UK will need to adopt a far more focused and ambitious approach to trade, not unlike that of China or India, if it is to fare well after Brexit. Sadly, the UK’s post-Brexit trade strategy is being determined by internal politics, such that it is “patriotic” to focus on new trade deals with Australia, Canada, New Zealand, and others in the Commonwealth, while ignoring harsh economic realities.

New Zealand may be a beautiful country, but it does not have an especially large economy, and it is a very long way from the UK. In fact, despite its massive problems, Greece’s economy is still larger than New Zealand’s.

Many UK policymakers – and all members of the “Leave” campaign – are ignoring the likely costs of exiting the EU single market. But this factor alone demands serious attention, given the single market’s size and close geographic proximity. It is very important that the UK maintain strong trade ties with many EU member states after Brexit. To that end, Britain should be shoring up its exports of services, a sector where it arguably still has a real net natural advantage.

At the same time, the UK should urgently be trying to take its relationship with China – or what former British Prime Minister David Cameron called the “golden relationship” – to a new level. If there is any country with which the UK should want to strike a new trade agreement, surely it is China. During my brief spell in the British government, I helped then-Chancellor George Osborne persuade Cameron that we should aspire to make China our third-largest export market within a decade. Does the new government still consider this a priority?

Beyond China, Britain also needs to be far more focused on its trade ties with India, Indonesia, and Nigeria, all of which will have significant influence in the world economy and global trading patterns in the coming decades.

In the US, President Donald Trump and his economic-policy advisers need to return to reality, especially on trade. They can start by studying Germany’s trade patterns, especially vis-à-vis China. To be sure, China has a large bilateral trade surplus with the US; but it also constitutes an expanding export market for US companies. And if trends from the last 10-15 years continue, China could soon supplant Canada and Mexico as America’s most important export market.

As Chinese household income continues to rise, demand for some of the US’s most competitive goods and services will only increase. Trump, rather than spewing nonsense about China manipulating its currency, should be encouraging market forces to rebalance bilateral trade.

The same can be said for the US’s overall external deficit. Unless the US can boost its savings rate relative to its internal investment needs, it will continue to need foreign capital inflows. And this, in turn, will require it to maintain a trade and current-account imbalance.

Finally, by pushing for a renegotiation of the North American Free Trade Agreement, Trump is taking a risk similar to that of the Brexiteers. Despite China’s recent gains, Canada and Mexico are still close neighbors and crucial trade partners. By potentially disrupting import patterns with all three countries, Trump’s policies are more likely to push up import prices, while jeopardizing US export growth.

Jim O’Neill, a former chairman of Goldman Sachs Asset Management and former Commercial Secretary to the UK Treasury, is Honorary Professor of Economics at Manchester University and former Chairman of the British government’s Review on Antimicrobial Resistance.

By Jim O’Neill

Addicted to Dollars

FRANKFURT – Since the end of World War II, the United States’ share in world GDP has fallen from nearly 30% to about 18%. Other advanced economies have also experienced sustained declines in their respective slices of the global pie. But you wouldn’t know it from looking at the international monetary system.


Over the same period, China’s share of world GDP almost quadrupled, to around 16% (just behind the US), and emerging markets now account for about 60% of global output, up from about 40% in the immediate post-war years. Given that advanced-economies’ growth prospects remain subdued, these trends are likely to continue – even with the evident slowing in China and other emerging markets.

And yet global finance has not mirrored this shift in balance from the advanced to the emerging. The post-war Bretton Woods arrangements institutionalized the role of the US dollar as the main reserve currency, and until the 1970s, about two-thirds of global GDP was anchored to the greenback. The remainder was largely split between the British pound and the Soviet ruble.

In a recent study that I undertook with Ethan Ilzetzki and Kenneth Rogoff, we document that the US dollar has retained its dominant position as the world’s reserve currency – and by a significant margin. Over 60% of all countries (accounting for more than 70% of world GDP) use the US dollar as their anchor currency. Other metrics, which include the proportion of trade invoiced in dollars and the share of US assets (notably Treasuries) in central banks’ foreign exchange reserves, suggest a similar degree of “dollar dominance.”

The euro is a distant second. From the early 1980s until the introduction of the euro in 1999, the Deutsche Mark’s (DM) influence expanded first in Western Europe and later in Eastern Europe. But the rise of the euro, which consolidated the DM and French franc (Africa) zones, appears to have stalled. By some measures (given the shrinking share of Europe in world output), its global importance has declined.

No other major established international currencies currently compete for global leadership.

The divergence between the trends for production and finance, shown in the figure, emerges as a relatively smaller US economy supplies reserve assets in step with rising global demand for them (primarily from emerging markets).

[chart]

This divergence is not entirely new. With recovery from WWII underway in Europe and global trade expanding, demand for reserves grew rapidly in the 1950s and remained high into the early 1970s. At that time, the US dollar was backed by gold. Given that the world’s gold supplies were not increasing as fast as global demand for reserves, the gap was filled by US (paper) debt.

Over time, fulfilling the global demand for reserves caused a steady rise in the ratio of “paper dollar” reserves to gold reserves, which was incompatible with maintaining the official dollar/gold parity. The incompatibility of the national goal (maintaining the parity) and America’s international role as sole provider of the reserve currency was the essence of the dilemma that the Belgian economist Robert Triffin foresaw (as early as 1960) as a risk to the Bretton Woods system.

Two devaluations, relative to gold, in December 1971 and February 1973, were not enough to correct the “overvaluation” of the US dollar. The Bretton Woods system came to an end in March 1973, when the dollar and other major currencies were allowed to float and the dollar depreciated further.

Now as then, the US could meet the rest of the world’s appetite for dollars by issuing more dollar debt. This would require the US to run sustained current-account deficits, mirrored in fiscal deficits. Of course, while the link to gold is passé, any domestic fiscal objective to curb US debt growth would be at odds with the international role as sole provider of the reserve currency.

One way or another, China will figure prominently in the resolution of this modern “Triffin dilemma.” One possibility is that the inevitable reduction of US current-account deficits (whenever that comes) may result from sustained dollar depreciation (as in the 1970s), implying a capital loss for China and other major holders of US Treasuries. Alternatively, China could eventually become a new supplier of reserve assets. In this scenario, the supply of the reserve asset would align with the world’s fast-growing regions.

This connection could be direct, if the renminbi acquires reserve-currency status; or indirect, if the International Monetary Fund’s unit of account, special drawing rights, becomes a favored asset of reserve managers, as the renminbi is now in the SDR currency basket. Reserve status for the SDR is a long-held IMF ambition, though the idea has never gotten much traction.

But there is a third possibility: global demand for US reserve assets may subside. While China’s ongoing capital flight is fueling an immediate and substantial decline in demand for US Treasuries, a more sustainable scenario would entail China’s transition to a managed floating exchange-rate regime with a deeper domestic financial market – and less emphasis on maintaining a credible war chest of foreign reserves.

Carmen Reinhart is Professor of the International Financial System at Harvard University’s Kennedy School of Government.

By Carmen Reinhart

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