Category Archives: China

How to Win a Trade War

I believe we have been in a trade war with China for 20 years. They have been fighting every day and gaining ground. We have been acting like Stalin at the beginning of Operation Barbarossa – mired in disbelief and incompetence. It was so much easier to think China was just giving us what we wanted (cheap consumer goods) without any cost to our own economy or security.

Thanks to Trump many more Americans and even economists are recognizing that we have been taken for a ride. There are confessionals everywhere; Few who now defend China in light of such public documents as Made in China 2025. This seems to have sent Trump and his team into a sort of frenzy, attacking every country as though it’s China. He even attacked a country that we have a trade surplus with (and there aren’t many of those) – Canada!

Memo to Trump: How to Conduct a Trade War

  1. Set an example by attacking the leader of global trade crime – China. (Let’s give a big shout out to Marco Rubio for this bill.)
  2. Clearly explain why it has been singled out so others know what the new rules are.
  3. Attack transhipping to prevent new tariffs against China from being circumvented.
  4. Pick a favorite country to use as an example of good conduct – one that has a deficit with us ideally and who we can trust under any situation to deliver needed goods in case we have a (military or trade) war. Canada or England will do. Celebrate their fairness.
  5. We must use tariffs and subsidies in case the spinoff effects of higher prices are too costly. Some combination of the two makes sense with steel, solar panels, and LCD screens.
  6. Make sure critical inputs like rare earth metals and pharmaceuticals are stockpiled or brought in only from friendly sources.
  7. Someone call up Peter Navarro and tell him you can’t win a war without allies.

Trump is right about one thing – every country in the world has been targetting debt-loving, consumption-crazy Americans. We have been in love with policies that favor consumers over producers/workers for thirty-five years.  It is a shock to wake up and be told that something you buy or use as an intermediate good in your business may go up in price. For every other country in the world, that’s a normal day. Everyone (except in America) pays extra for something, knowing they do so to grant a higher wage (or social service) to a neighbor. That’s why they accept higher tax rates and/or a VAT.

Surely Americans can see the absurd place this has gotten us – we have a (fake) unemployment rate of 3.8% and wages are barely keeping up with inflation. There are a ton of unfilled jobs out there – at Chinese wage rates! Corporate outsourcers have reset the price on domestic labor. Unless we break with the global trade parasite we shall continue to circle the drain with huge tax shortfalls and an opioid epidemic.  The war has begun and we must all be drafted to pay something for our safety, our sovereignty, and higher wages. We should accumulate allies to fight with us – sing along with me: Oh Canada (… or God Save the Queen).

Let’s not continue to act like Stalin in 1941.

A Moron with a Flashlight


The United States just ended its first session of trade talks with China. In theory, this is supposed to be a negotiation where China confesses to voluminous trade crime and the United States walks away with big concessions. No confessions or concessions will ever be made. So what’s the point?

Simply having these talks opens up the subject within the United States. Free trading globalists who consider themselves to be more moral than protectionists are forced to answer reasonable questions like:

  • Does China steal American intellectual property?
  • Does China require all American companies to set up partnerships with Chinese companies if they want to produce goods for the Chinese market?
  • Does China block Google, Facebook, and Microsoft from their market or are these companies simply unable to compete locally?
  •  What is the “Made in China 2025“ initiative?

It is virtually impossible to respond to these questions without conceding that China is engaged in rampant protectionist behavior.   The question then changes: Are we OK with trading with China on their/these terms? This is big progress.  For the past 20 years trade with China has been called “free“.   American presidents going back to Bill Clinton have sought popularity by facilitating unlimited imports of opium (cheap consumer goods) from China. We have been in a consumption stupor, unable or unwilling to see the costs.

My sense is that even the most liberal media outlets who want to denounce all Trump initiatives are really struggling with the narrative surrounding these talks.  They have changed their argument [weakened it] to excoriating steel tariffs but they know that such denouncements don’t address the greater problem. Fine, steel tariffs have a poor return, so how (else) do we fight back against dumping?

This situation is so outrageous that even Donald Trump can’t soil it by association. He still may screw it up with inappropriate policy but the genie is out. It’s hard for me to see politicians coming out in favor of globalism and its embedded free trade beliefs ever again. They may eschew populism as pandering to xenophobes but they see the merit of this trade fight. Authors like Ian Bremmer and Robert Kuttner are on the circuit offering intellectual support. Even The World is Flat – guy – Tom Friedman issued a sort of mea culpa last week! Up to now such voices were mute.

The hard part is still ahead of us – applying good policies that may raise the price of that 4K TV you wanted. We need to swing the pendulum back toward workers and away from consumers or else we will continue to see zero (real) wage growth forever (regardless of how low the fake unemployment rate goes.).

Democracy Loses Popularity

There are a lot of new polls that show that people [especially millennials]  don’t seem to be as committed to democracy as their parents or grandparents. This is logical since the end of the Cold War means we don’t have a nemesis who favors the alternative, totalitarianism.  China is the other reason:

Our current greatest economic competitor is China and it seems to be winning some of the hearts and minds of our people. Even though it is nothing more than a global economic parasite it preduces a tremendous amount of propaganda devoted to celebrating its burgeoning economic success. It publishes  spectacular growth statistics and suppresses all dissenting voices.  It manufactures most of the consumer goods we buy every day. How can such a bad place with bad people make all the toys and clothes we love?  Apparently their version of totalitarianism seems to work quite well.

On the other hand we have perfect proof that democracy is failing because we have elected a brainless narcissist to be our president. This juxtaposition naturally supports the thesis that a competent  dictator is better than an elected  idiot.  Democrats revere China while Republicans revere Russia.  Consumerism has defeated economic nationalism in such a way that people look to Apple Computer for guidance rather than their political leaders.  FIfty years ago Dell Computer would never have considered Cuba or the Soviet union as places to locate offshore production to take advantage of lower wages. They would’ve been pilloried both for offshoring and for being pro-communist. (Their goods would have been stopped at our border.)

Yes, the cold war is over so such fear and paranoia would be misplaced in today’s world. But we have a new adversary – one that is utterly ethnocentric and unpredictable. They suck our blood, suppress free speech, block our exports and we love them because iPhones are cheap.

If their products are so good, how bad can their political system be?  Or to put it the other way, if we seem to be economic losers then maybe our political system needs to be reworked a la Hungary or Poland?  Nationalists are Nazis now so  sovereignty is bad and globalism must be good. Manichaeism works.  Ironically, the countries whose political systems we revere are completely nationalist in nature. You can’t hate the alt right and be indifferent towards democracy, just like Germans couldn’t embrace Hitler and free speech.

The problem we have is that Chinese totalitarianism and highly controlled economy is succeeding with regard to its primary goal – catching up to us. Yes they have a terrible maldistribution of income but so do we. Our economists detest government ownership of industry but when it comes to China they’re OK with it. Young people see these mixed signals. We can’t pronounce our love of freedom and congratulate Putin on his election victories. We can’t abhor protecting our own steel industry while looking the other way when China protects all its industries.

Every new American college graduate should be made to spend a week wearing a gas mask in Shanghai – then we should hear less about their indifference towards democracy.

The Best Word in any Language

What’s the one word that is indisputably good? 

 Free 

We love free association, freedom to travel and freedom to work anywhere in any profession. We love free information on the web and free love. We all look for promotions that offer free goods. As consumers, we like free competition. Freedom and liberty are almost synonymous in a consumer society. If we put the word in front of anything it makes it better. That’s how we got the term free trade.  

The question at hand is: Is anything ever free? 

We have been trained to be skeptical of the term on TV but gullibly optimistic at the same time. We click on internet ads to see if their free offerings are true. We know not to believe car salesmen and promotions which only require your email address. This cynicism matches our disbelief in big corporations. Few of us think they are working with the greater good in mind. It’s all about the stock price. 

Why then do we shed this skepticism when it comes to trade. Every journalist is willing to accept the idea that all global trade relationships are fair and honest. Even when we trade with global pariahs and communist countries, they seem sure that it’s all pure perfect competition. They cite Adam Smith and David Ricardo as though they were two of Jesus’s disciples. And they love to use the term free. They are daring opponents to say that free is not good. In this case, to be free there must be no barriers or tariffs on imports and exports. It’s easy to see that we don’t tax or block imports so everyone presumes that our trading partners do the same. They don’t. 

Yes, I think Donald Trump is a corrupt moron but on this issue, he is absolutely correct. Who knows why people glom onto certain subjects (see below)? There is a huge risk that his advocacy will stain the cause but I must stick to my principles. Yes, huge importers will hate tariffs on Chinese imports but they are not our friends. They don’t reward society by paying workers more when their profits rise. The more they make, the harder they work to avoid taxes. If there are tariffs applied to their Chinese made goods they will seek to evade them.  

The stock market will be similarly irritated. It loves companies who dodge taxes and put all their production offshore. It’s also good with hidden pollution and price collusion. If most Twitter followers are fake – great, as long as total measured traffic rises. The market is fine with Facebook selling everyone’s data to Russian bots, as long as they get a good price. Taking comfort in your position by looking to Wall Street for corroboration is a very naïve practice. 

Trade crime is a thing just like corporate crime. Every other country seeks to protect its own interests and we are blind to it. Try signing up a car dealership in Japan that will market your US made brand. How easy is it to buy Excel in China? (Hint: it’s the same as buying meth.) Why are Americans so willing to be scammed? Has no one figured out the trade-off between jobs and cheap TV’s?  China certainly has. 

So why is Trump on board? Perhaps a man who has run a variety of business scams such as selling steaks and university degrees knows a dishonest scheme when he sees one. And so do we. Deep down everyone knows when they buy a dirt cheap electronic gadget or shirt, there is a cost in American jobs. Everyone knows that when an illegal immigrant sneaks into the country and works for you for far less than a US citizen, they’re getting away with something. Every low wage worker is a casualty. That’s why globalism is under pressure in most of the developed world.

We are all to blame.

 

Open Borders and Cheap Imports

In order to make a credible  argument in favor of granting all illegal immigrants green cards, you must also have a plan to control and limit future immigration. Otherwise you are simply saying you don’t believe in countries, sovereignty and the rule of law. Similarly, before you defend cheap imports you must explain where you draw the line between illegal trade practices (such as dumping and foreign subsidies) and the free and fair global trade system. It’s easy for anyone to argue that cheap foreign stuff saves consumers money.  Why should we stop China from giving us steel for free?  Locally produced car companies would be very happy and there are many more jobs making cars than there are making steel [in the United States] . We could extend this argument to everything – solar panels, computers, clothes, toys, furniture. Even if China is subsidizing all those exports to gain market share and/or bankrupt first world producers- so what. This is modern economic Darwinism -right?

Why should I start a business knowing that at any moment China et al could target my product group? What happens to manufacturing employees after they are casualties of dumping?  Pass them some opioids along with a python textbook. Those whining car companies are next on China’s target list. I suppose the New York Times will then defend China saying consumers should be able to buy cheaper cars made in China. And so on until the only business is debt issuance so people can buy foreign goods. Comparative Advantage is a quaint anachronism in this world of parasitic mercantilism.

Quite simply – If you want to sustain a strong American economy you must draw a line somewhere regarding trade cheaters. You must then penalize them. That doesn’t mean putting tariffs on all steel importers – just putting them on the cheaters. Punishing Canada for the crimes of China is shockingly stupid. [China is number 11 on the list of exporters of steel and aluminum to the United States but it is the sole perpetrator.)

The problem here is not that Trump is trying to punish cheaters, rather it is that such punishments have been applied so infrequently in the past.  We have allowed trade crime to run rampant so that now when we act it seems unfair – like ticketing a particular car for speeding after allowing fifty other speeding cars to go by. The broken windows crime prevention theory tells us we should be putting up trade barriers quickly and often. (That’s exactly what China and Japan do.)

If the press and economists in general are so outraged by the economic inefficiency of tariffs then why did they not yell and complain when China completely blocked Google, Facebook and Microsoft from doing business in China? They seem far more willing to defend foreign producers of goods than American companies. Maybe they’re just in love with rampant debt crazed consumerism. Whatever is best for consumers is always the way to go… we buy everything from everyone and ultimately sell nothing. Is that a path to prosperity? These economists frequently revere the recent economic success of China – but it has exactly the opposite model(?!)

Keep calm, there will be no trade war since we hold all the cards. The stock market won’t be happy but it is a corrupt entity in this regard – it would prefer if all Americans worked at Walmart, hopelessly indebted – buying only marked up foreign-made goods. That way profit margins are maximized. The S&P 500 will worry about the debt later, besides it’s good business for banks. Sovereignty and domestic solvency are the enemies of the stock market. (That’s why Trump’s corporate tax cut was received so well.) so please stop using stock market declines as proof of the validity of your anti-tariff position.

I’m tired of hearing about white nationalists, I want to know why we have no economic nationalists. What happened to those anti-WTO protestors? America loves its military but it is the least patriotic country in the world. Let’s not oppose tariffs because Trump is for them.

A broken clock is right twice a day.

Our Post Industrial Economy

Economics professors have always agreed about what comes after an industrial economy: a knowledge-based economy. Service industries would rise up to push around the money we made, inventing and utilizing new technologies. Workers would be data crunchers. They would be accountants, economists, health care workers and computer scientists. Great – no problem we all said. Just stay ahead of the (education) curve and don’t expect to get rich as a steel or car plant worker.

There is, however, another path. What if our remaining industrial base becomes so denuded that it (virtually) no longer produces goods. We won’t need as many engineers to improve productivity or to build robots to replace workers. We won’t need accountants or investment professionals to manage the wealth created by these industries. We won’t need scientists to do R&D since that always takes place near the production facility. (Why do R&D anyway in a world of rampant global IP theft?)

China has replaced us as the new industrial behemoth. They need raw materials for their factories and food for their army of peasant labor. Yes, they need services too but those markets are completely closed to foreign providers. (Just ask Google and Microsoft). Who shall feed the beast?

The Future: Our industrial capacity is shrinking towards irrelevance and our service sector is stalled out. We are the global consumer and without any trade barriers, everyone is just chewing on our flesh. We can still buy their goods but it’s all paid for with borrowed money. So now we are to go back to what we used to do – before the 2nd industrial revolution. We will produce food, minerals, and fuel and sell them to China and Japan just like Africa, Australia, and the Middle East. There are no import barriers on oil or wheat. This is economic development in reverse. It is, of course, a path to poverty and massive income inequality. The whole idea behind trade barriers was to protect young industries (and countries) until they have improved efficiency and become innovative. We have been doing the opposite for 20 years and it’s killing us.

Am I  being too cynical? Let’s look at the data. In 2017 6/10 of the top exports (by category) to China were commodity goods. Only three of the top ten were commodity sectors in 2007. ” In 2007, the U.S. manufacturing trade deficit … accounted for 76.99 percent of the overall merchandise deficit on a Census basis. The 2017 figure? 116.50 percent.”

The race to the bottom that began when China got MFN status is in its final stages. To sustain 2.5% growth we are bankrupting the state.  We have manufactured the illusion of increased wealth by virtue of massive debt increases. The robotics wave will have a greater effect on Chinese and German productivity since that is where global manufacturing now resides. We must get it back. Mercantilism can save us just like it made us in the 19th century but we’ll need a new mindset and new leadership.

Let’s dig up Alexander Hamilton.

 

Nukes versus iPhones

President Trump proposed the idea that in order to stop North Korea we should stop enabling it by trading with any country that trades with it. This is necessary because US sanctions are worthless since we don’t trade with Nort Korea. The biggest impact would be on China since they are N. Korea’s biggest (only) trading partner and a large part of the Chinese economy depends on western (US) buyers so we have leverage.

We can argue about the efficacy of such a policy. If Europe doesn’t go along then China could just reroute exports to other countries which are not being sanctioned. We can worry about the time it would take to replace critical imports with locally produced substitutes. There are some goods that would become more expensive since you can’t really replace a billion peasant laborers. Inflation would rise as would wages. Finally, we could discuss the impact on raw material suppliers (to China) that would lose business by virtue of a big decline in Chinese economic activity.

What I hear instead is a lot of contempt and outrage over the idea simply because it would affect our supply of cheap stuff. The idea that we would use a powerful stick like trade as an incentive to get countries to behave appalls people. Is it not reasonable to ask: Why do we trade with Russia (or Turkey or Azerbaijan or…) at all? These are totalitarian states engaged in global crime, sometimes devoted to wrecking our elections. How many more reasons do you need to cut them off?

China keeps North Korea functioning and North Korea is considering nuking Los Angeles!

We have seemed to reach the ultimate victory of consumerism over sovereignty and safety. How many tainted elections can you accept to keep Russian oil flowing? How many lives are you willing to spend in LA to keep your iPhone below $35/month? The one weapon we wield is the power of the US consumer to buy foreign stuff. Every country in the world sets policy and obsesses over us. Yet when we need something, they are utterly indifferent. Their nerve makes me crazy.  When our own press and corporate lobby facilitate it, we become our own worst enemy.

The artificiality of social media tells us that such real, bad things, can’t actually occur – not at least while we’re taking a selfie with our beautiful dinner salad. What’s real is Facebook updates, Twitter attacks, and Instagram bikinis. In that world, a real nuclear attack is only something you might see on an old youtube video. Politicians don’t want to disturb those people from their virtual world…

It would be bad for business.

The Populist Vote is Up For Grabs Again

It is pretty clear that Donald Trump has abandoned all his promises, including those he made about keeping jobs in America. He has eaten chocolate cake with the President of China, now they’re in love. The Prime Minister of Japan was the first to get a deal after he supplicated himself. Is Trump canceling NAFTA?  – not as far as I can tell. He has even come out against a border tax in the next budget – something that Paul Ryan was going to put in.

His one touchstone (promised) policy that resonated with (almost) everyone (especially me) has been abandoned completely. That means the Democrats can grab it and grab it, they must. Forget all this identity politics and globalism nonsense. They desperately need an economic program that will resonate with laborers even if they’re white. They can dump the elitist nauseating position of the Clinton’s and get back to where they are supposed to be – right next to Bernie Sanders. Sorry, Joe, speeches about your love for the LGBT community won’t win elections.

This needs to happen immediately as it is becoming clear that time is running out. About five years ago I wrote about how China wasn’t looking to just steal low wage jobs, it wants everything. The two biggest value added industries we have are cars and airplanes. We need to protect those with our lives. The New York times recently wrote about how Ford is going to produce their next flagship compact car in China.  My nightmare is coming true.

If the Dems stand up, their losses could be limited to the 2016 election and they would grab back their brand. They let it be stolen by a fake billionaire with no conviction about anything. Al Franken – are you listening? You should put this issue right next to Medicare-for-all and hit the road.

This is your time.

Does immigration produce economic prosperity?

There seems to be a popular narrative that says that immigration acts as a sort of economic engine. People arrive, many without skills, and get trained. They work their way up feverishly. They use their new money to educate their children. The next generation is entirely American. They know little of their parents’ homeland and have no desire to move there. They see that they would have never have been so well off if their parents had not emigrated.

The twentieth century provides a sort of glorious history with regard to labor empowerment and enrichment as long as you can live it in fast forward by reading a textbook and avoid one critical fact.

Hordes of people arrive in the 19th century and live horrible lives in poverty and misery while robber barons become rich on the back of labor’s woes. By 1910 everyone understands that the labor glut is killing any chances for labor advancement. Teddy sets up an arbitrator to rule on the coal strike of 1910. The union/labor movement is born. 

Before we continue, allow me to inject an irritating fact:

immigration

As you can see the percent of foreign born people peaked in 1910 – at the exact same time as the labor movement was born. What allowed it to succeed was the steady decline in new cheap foreign labor – until 1970. I’d like to continue my history of economic success and upward mobility by virtue of innovation, foreign wars, government stimulus and the accumulation of skills and education by the great American workforce but, unfortunately, this chart has ruined the narrative.

All those factors put the wind at the backs of labor. When we virtually stopped immigration we saw wages grow with GDP and productivity. An economist must make a hard argument to claim that everything will be fine this time just like it eventually was for our great grandparents in 1910. They have to argue for foreign wars that kill lots of people in countries we trade with and we need a sort of reverse industrialization where labor is needed to boost production rather than machines. If you can’t see either of those two things happening then there is only one way labor recovers from the hole it’s in – we must stop immigration or at least slow it to a trickle. (Need I point out that median wages peaked in 1974?)

Immigration by Another Name

But what about all those poor desperate people who just want a shot at the American dream? (You cry.) I see examples of them every night on the news. Well, there is another answer. Foreign immigrants come into the country in another way: They trade their way in. If we have no tariffs with China then we essentially allow every Chinese peasant to work here. There are hundreds of millions of them. If you want to help a poor Guatemalan immigrant you have to stop buying goods made by that Chinese peasant. Think what the chart would look like if I added in all those Chinese peasants.

This is, of course, nothing more than an argument based on supply and demand. If you expect to have a system that will benefit US labor then you have to have less labor. If you are an open border person (such as Mayor de Blasio) then you have to live with this:

Corporate-Profit-Margins

Once again, I must point out that labor’s share peaked in the 1970’s. Maybe it was too high? It couldn’t last and it wasn’t fair that an hourly worker at Ford without any education at all could make more than a college professor. True. Foreign competition and corporate outrage broke up union power but did we want it all to be completely destroyed so we could go back to the gilded age?

When I hear Silicon Valley whining about immigration bans I have no sympathy. Let the price rise and a labor shortage ensue. Let them train people and push them up the system. Sorry Mr. Zuckerberg, your costs may rise a little and your next useless feature may get delayed. Is there a foreign competitor you are worried about? I don’t hear China whining about not being able to hire Indian programmers. They buried and replaced Google and their economic growth seems to be unaffected. The arguments that begin by decrying our prospective loss of competitiveness are absurd and self- serving. If you repeat them then you have become a dupe for CEO’s desperate to pad their own pockets.

Alas, Trump the idiot has stumbled upon the correct policy of America First = less immigration and a tax system that favors “insourcing”. Beware of malevolent morons executing good policies. The policy may end up being desecrated.