Friday, September 10, 2010

Consider the word "trade"

Please read this post in conjunction with my basic position paper "What is this blog all about?". 

Everyone knows that there is a severe debt and unemployment problem in the United States at this time. 

I make the very simple statement that the cause of the problem is the transfer of millions of manufacturing jobs to China and other overseas locations.  I further say that there is one and only one way of solving the problem, and that is to get the jobs back from China, and from other overseas locations. 

The financial, economic, and employment situation of the United States is so bad that no one in government is brave enough to face up to it.  No one is prepared to admit that the present situation is our own fault, in that we allowed our manufacturing jobs to be sent out of the country. 

There have been and are many apologists for sending the jobs out of the country.  Frequently their incorrect and nonsensical reasoning is based on incorrect use of information in classical economic texts such as "Wealth of Nations".   Specifically, this book is often used, incorrectly, to justify the phenomenon of unlimited and uncontrolled international free trade, otherwise known as globalization.

The book was published in 1776 by an English scholar and philosopher, Adam Smith.  The book deals with a wide variety of economic and social issues, including manufacturing and trade.  The lengthy title of the book includes the phrase "Wealth of Nations", the latter phrase being used as a short-hand way of referring to the book.  The most-quoted theory in the book is that when thousands of business owners act in their own best interest, the result is an optimum outcome for society as a whole. 

The book envisions manufacturers in each country, country "A" as an example.  Country A strives to produce better goods at lower prices, so that domestic customers and ultimately foreign customers, in country "B" as an example, will want to buy.  If a country A item is more attractive in country B than the domestic equivalent, then the country A manufacturer may come to specialize in that item and provide it domestically and in several foreign countries.  In this way, according to Adam Smith, all consumers will benefit.

In the 234 years since the book was published, the world has changed.   Now we have the situation of "trade" between United States and China.  Obviously the author did not envision "trade" between two nations, one having four times the population and 50 times lower wages in comparison with the other.  "Trade" in the present context is grossly and pathologically different in comparison with trade as discussed 234 years ago.  Adam Smith clearly envisioned each country becoming the specialist supplier of a few items, not today's pathological situation of one country, China, becoming the specialist supplier of thousands of items to the whole world.

The word "trade" does not apply in any way, shape, or form to the economic relationship between the United States and China.  Trade means give and take.  You have something and you give it to another party, and in return that party gives you something of approximately equal value.  In view of the huge and growing negative balance of "trade" in manufactured goods between the U.S. and China, it is not trade.  It is a one-way street of exploitation and economic destruction of the U.S., with money flowing to China in such quantities that they don't know what to do with it (see below). 

The author of "Wealth of Nations" also never envisioned one country voluntarily closing a very substantial fraction of its factories, and setting up new factories in another country to manufacture the goods.  I am sure Adam Smith would have agreed that this process is insane.  It is not "trade" in any sense of the word.

In breaking free of our enslavement to China, we don't have to be afraid of China.  The United States and China are locked in a "MAD" scenario (mutually assured destruction), similar to the nuclear weapons stand-off of the Cold War.  China made a big mistake in allowing itself to get into this situation.  The result is that China's options are actually quite limited, in the event that America undertakes some actions China does not like.  The example of "actions" that I have in mind is of course a major increase in domestic manufacturing of consumer, commercial, and industrial goods.

China has used a large amount of the money it receives to buy U.S. treasury securities.  According to a key theory taught in Economics 101, if a country imports too much, as the United States is doing, its currency goes down in value, in comparison with the currency of another country that is actively manufacturing and exporting.  True to this theory, the U.S. dollar has been going down. 

China is concerned that the value of its U.S. dollar-denominated investments is going down.  But China can't sell its U.S. investments because they are so large.  Even relatively small sales would cause the U.S. dollar to go down even more, further threatening the value of the Chinese investments.  And if the U.S. dollar goes down more, Americans will not be able to buy the same volumes of imported goods.  So there is another negative effect on China, resulting from any attempt to unload its U.S. investments.  Finally, if China starts unloading its investments, other foreign holders may also unload, further driving down the U.S. dollar.

In 2009, China's holding of U.S. Federal government securities was approximately $1,400 billion, or in other words $1.4 trillion. 

It is clear that China is trapped in a "MAD" situation, and could not retaliate economically if America were to begin a program of barring or taxing imports, and increasing domestic manufacturing.  However, could or would China retaliate militarily?  No country poses a threat to China.  But China, already a very major military power, is actively increasing the size of its armed forces.  It is a mystery why they are doing this.  Maybe they are having difficulty spending all the money that is coming in, so they are using some of the money to increase the size of the armed forces.  China is also supplying weapons to a number of other countries, some of which are a threat to the United States.  So, via China, our money is being used to increase the threat against us.  Another reason why we have to reduce our buying from China.

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