China is our deadly enemy

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


When American manufacturers first transferred jobs to China, 40 to 50 years ago, Chinese government officials probably did not see great significance in the event.   I suspect, however, that as more and more jobs were transferred, and as high tech factories were built by American companies, China began to see the possibility of becoming the dominant manufacturing nation in the world. 

One of the key aspects was that through this process China was handed the latest technology, which otherwise would have taken many decades to develop.

The economies of all the western countries have been gutted through transfer of manufacturing activity to China and other low-wage countries.  It is not only America that is suffering.

I am trying to figure out when the American government and the American people will wake up to the severe damage done to the economy by having our manufacturing done for us by foreign countries.  If we look around our country today, and see the problems of unemployment and huge government deficits, don't we see enough damage to wake us up?  Or, do we have to wait until it gets much worse before we wake up?

There is a strong censorship in effect, preventing mention or discussion of the real issues and causes of our present economic situation.  This censorship may come from American corporations that have invested in manufacturing facilities in China.  The censorship may come from pressure groups controlled by China.  Regardless of who has originated the censorship, I can't see how any sector or interest group in America stands to benefit from complete destruction of American manufacturing and thereby complete destruction of the economy. 

Censorship is doing tremendous damage by delaying understanding of the problem and thereby delaying the inevitable wake-up call.  We have to get out from under this ridiculous censorship and speak frankly about our economic problem. 

When our leaders talk about "building our relationship with China", or sit down with Chinese officials to talk about human rights, it is clear how far the government is from waking up to see China as the deadly enemy it is.

What is going to happen to our economy?   The economy is not going to improve without very forthright actions (see below).  The President and his officials, and the Senate and House, are in a waiting and hoping mode.  This passive attitude expresses a "deer-in-the-headlights" fear of taking any action, obedience to the censorship, and political correctness toward China.   The latter two phenomena are closely intertwined. 

Students in Economics 101 learn that some economic problems are self-correcting.  A country that is importing too much and exporting too little will see its currency go down and down in value until imported goods become too expensive.  At that point entrepreneurs will spring up and will begin to manufacture the goods domestically.  The country will benefit dramatically from the increased domestic manufacturing activity and the economy will begin to improve.  Employment will increase.  I am praying that this phenomenon will kick in sooner rather than later, and save us from ourselves and from government inaction.

In at least one case, this phenomenon is already happening.  Several years ago a European auto manufacturer announced that the U.S. dollar had decreased to the point that it had become attractive to do more of its manufacturing in the United States.

All the people who say that manufacturing in the United States is impossible because costs are too high, or impossible for other reasons, and all the people who say that manufacturing employment is not important to the economy, will be proven totally wrong.  

But now there is a new threat from China that should assist people to wake up sooner rather than later. 

Let's note that we are currently selling some manufactured goods to China.  However, as everyone knows, the problem is that we are importing much more from China than we are exporting to China.  in fact we are importing four times more from China than we are exporting.  This situation is expressed by our negative balance of trade with China in manufactured goods of more than 270 billion dollars per year. 

But what happens if China no longer buys anything from us? 

This situation is foretold in new policy announcements made by China several months ago.

China has announced a policy in which by 2020 individual items currently purchased from the United States and other western countries will be reverse-engineered without reference to patent or  intellectual property rights, and thenceforth will be manufactured in China.  Some U.S. manufacturers are already aware that they  have only another 5 to 10 years to sell these items to China.  After that, the items will be "dead" because China will be manufacturing the items for its own use and for sale on the world market.  In an environment of unrestricted entry of Chinese products into the U.S., these U.S. companies may close down completely because they won't be able to sell their products in the U.S. market or any other market. 

China has announced a further policy which states that by 2050 China will be self-sufficient in all manufactured goods, including, presumably, more complex products such as airliners, communication systems, and railroad systems. 

Anyone who does not experience the same cold chill and near physical illness that I felt on learning of these announcements simply does not understand the threat.

China is telling us several things here:

1.  A smart and efficient country, a country that wants to get ahead of other countries in the world, ensures that needed goods are manufactured domestically.

2.  China's objective is to complete the destruction, already well along, of the manufacturing sectors of the United States and other western countries.

China has made some financial mistakes.  But China also has 5000 years of experience in operating a country that in many periods of history has been far advanced in relation to other countries.  And China is signalling  that it is not wise to be an importer of manufactured goods.

Now we go on to a more sticky issue.  I am sure that China is assuming that U.S. and other western countries will continue to purchase manufactured goods from China, even after China ends all purchases from the west.


I hope to heaven that the U.S. and other western countries are not going to be so stupid as to behave according to this Chinese scenario.

The United States of America and other western countries have a very clear choice:

1.  Continue to buy manufactured goods from China, and from other countries that don't buy approximately equal amounts from us.  Continue to do this until our economies are completely destroyed and we have no money left to buy anything from anyone.

or:

2.   Immediately, this month, begin a forthright program of fending off the deadly threat posed by China.

Which choice do you favor?

What are the specific actions that are urgently needed?

+  The President must find the bravery and leadership to renounce political correctness toward China and political correctness toward existing trade agreements.  How can any country be expected to commit complete national economic suicide because of what is written on a few sheets of paper?

+  The President must find the bravery and leadership to go past the censorship and repeat what he said during the campaign in 2008:  "We have to get the jobs back from China."

+  The President must find the bravery and leadership to acknowledge to the American people that we have a negative balance of trade in manufactured goods with all foreign countries of over half a trillion dollars per year, and we cannot afford to lose this huge amount of wealth. 

+  The President must find the bravery and leadership to acknowledge to the American people that we have a further hemorrhage of half a trillion dollars per year, in the form of a variety of other foreign expenditures, including support of three foreign wars.  We cannot afford this loss of wealth and as a first step we have to end our involvement in these wars this year. 

+  The President must find the bravery and leadership to place an immediate tariff of 25% on manufactured goods coming in from China and from other countries that don't buy from us in approximately equal amounts.

+  The revenue from the tariff to be used to assist entrepreneurs to re-open factories or start new factories to manufacture here at home goods currently being imported.

+  Tariff to be increased to 50% on January 1, 2012, and 100% on January 1, 2013.  Further actions to be taken in 2013 and beyond.

These actions will give immediate hope to the American people and to the people of the other western countries.  The economy will pick up within weeks.

These actions will create tremendous consternation in the Chinese government.  The government will be forced to devote its resources to helping its own people, rather than working to destroy the economies of other countries.

APPENDIX

President Obama has stated that we will solve the unemployment problem by creating new technological industries.  This statement contains very sad overtones because it implies that we are writing off the jobs that have been transferred to foreign countries.  No attempt will be made to get them back.

The other problem is that once the new technological industries get going, the new employment will probably be quickly   transferred to China and other foreign countries.

I say that before we can do anything about the unemployment problem, we have to put in place a tariff of at least 25% on imported goods from China and other countries that don't buy from us in equivalent amounts.  This initial tariff has to be accompanied by a firm commitment to further increase the tariff on a time schedule.

In other words, an encouraging and predictable environment has to be established, before anyone will work to develop new technological industries or will work to increase or re-start manufacturing of thousands of items now imported.

An initial tariff of 25%, or any tariff, is not a bar to importation of manufactured goods from China or any other country.  China or other foreign country can continue to ship goods in whatever amounts they wish.  What the tariff does is express through real actions, not just words in speeches, that U.S. government policy is to level the playing field and give our own people a chance to work and to compete.

Another type of fantasy

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

There is another type of writer, columnist, analyst who is even more damaging than those who put forward "Fantasy Explanations" for our economic problems.  (See previous post).

What shall we call these writers, for ease of reference?  Maybe "elephant in the room" boys.  The "elephant in the room" boys (and probably some girls) write about and analyze our economic situation without once mentioning such huge issues as unemployment.  Without ever mentioning the fact that our negative balance of trade in manufactured goods is half a trillion dollars per year.  Without ever mentioning that our wealth is hemorrhaging out of our country at the rate of a trillion dollars per year.  These are huge elephants but these writers have selective vision and don't see them.

Illustration:  Suppose your car is not working well.  The car is very sluggish on the road.  You look over the car with keen eyes.  Two tires are flat but you don't see that.  You keenly look under the hood, you check the gas tank, and you look at the drivetrain, but due to your selective vision you never see the flat tires.  This is how the "elephant in the room" boys operate.

Anthony Mirhaydari is one of the worst  "elephant in the room" boys.  He published a lengthy article on April 21, 2011,   In the article he discusses America's debt problems.  There have been similar articles in the past.

In the present article he says that China has had a "roaring recovery".

Here is a letter I have sent to Mr. M.:

Dear Sir:

Aren't you aware that we are sending China the money that is powering their "roaring recovery"?

Isn't it possible that if we kept our money here at home and paid our own workers rather than workers in China we would have the roaring recovery?

Do you ever go shopping?  If so, have you noticed that many stores are filled 99% with goods made in China?

Are you aware that our negative balance of trade with China is over 270 billion dollars per year?  If you are aware of this fact, isn't it something that should come into any discussion of the U.S. economy?

Are you aware that our negative balance of trade in manufactured goods with all foreign countries is over 500 billion dollars per year?  If you are aware, isn't this huge hemorrhage of wealth a material fact that should be mentioned in any analysis of the U.S. economy?

Are you aware that in addition to the above, China, Japan, and other foreign countries have used money we unwisely sent them to buy U.S. Trreasury securities, so that we have to send them 100 billion dollars per year in debt serviice?

Are you aware that in total our foreign expenditures are on the order of one trillion dollars per year and that foreign expenditures are much more damaging to the economy than domestic expenditures?

Have you ever thought that the largely wasteful and unnecessary foreign expenditure of one trillion dollars per year if re-directed to getting manufacturing going again at home would go a long way toward solving our economic problems?

Are you aware that many millions of manufacturing jobs have been transferred to foreign countries?  Are you aware that one result of this process is that tax revenue has been lost because foreign workers don't pay U.S. taxes?  Has it ever occurred to you that if we could get our own workers back to work they would pay taxes that would help to reduce the deficit?

You say in your article that "IMF has lambasted U.S. leaders for the lack of a credible strategy to reduce debt".   Yet if America stopped import of goods from foreign countries that don't buy from us, and put our own people back to work so they could pay taxes, IMF would be totally shocked and would also "lambast U.S. leaders" for abrogating the very trade arrangements that created the debt!

If you cut yourself badly on the edge of your computer, you would want a doctor right away to stop the hemorrhage.  Yet inexplicably you write analyses of American economic problems without apparently seeing and certainly without mentioning America's wealth hemorrhage of one trillion dollars per year, going to foreign companies and foreign countries, never to be seen again. 

Your articles are purveyors of disinformation, confusion, and chaos.

Yours truly,

Ed Farkas

Censorship

Manufacturing employment provides a critically-important wealth-creation effect (also referred to as the value-added effect).  Manufacturing employment enriches the economy.    

In manufacturing, materials and components of relatively lower value are assembled into finished goods which are of higher value and which people are prepared to pay for and use.  


Over the last 50 years, America has voluntarily transferred millions of manufacturing jobs to foreign countries.  The result is that we have lost a large portion of the wealth-creation effect, and ALSO we have lost tax revenue, i.e., income tax paid by manufacturing workers. 

The further result is that America, a large net exporter in 1960, is now a large net importer of manufactured goods, in the amount of half a trillion dollars annually.

So now the American economy is in bad shape.  Everyone knows that.  But it is not enough that America is suffering huge government deficits and huge unemployment.  In addition, America is suffering from censorship which prevents mention or discussion of the real cause of our economic problems, namely the facts presented above. 

People in the media, whether commentators, columnists, analysts, appear only too happy to cooperate with the censorship.  They cooperate by inventing fantasy explanations as to how we got to the economic situation of today.  These fantasies are a huge disservice because they distract from meaningful discussion that could lead to understanding and improvement of the situation. 

Fantasy Explanation 1:  The cause of our economic problems is people living too high and consuming too much of the nation's wealth.  (See also previous post.) 

Fantasy Explanation 2:  Manufacturing employment is lower because American manufacturing has become so much more efficient. 

(Other Fantasy Explanations are also circulating.)

The simple facts in answer to Fantasy Explanation 1:   Rather than the Fantasy Explanation, isn't it much more likely that wealth has disappeared due to sending wealth-creating jobs to foreign countries?  Isn't it much more likely that wealth has disappeared because we now have to send out half a trillion dollars every year to foreign countries to pay them for doing our manufacturing, while our workers stand in line at unemployment offices?

The simple fact in answer to Fantasy Explanation 2:   Yes, agreed, our manufacturing sector is more efficient.  But this is only one component of the situation.  More generally, if our manufacturing sector is so efficient, why do we have to import on a net basis manufactured goods valued at half a trillion dollars annually?  This net importation is a direct measure of the amount of manufacturing employment that has been transferred to foreign countries.

Our politicians in Washington are engaged in a huge effort to cut government deficits.  They are looking only at domestic expenditures, thus missing the really important issues.  

If the government wastes money by paying too much for highway construction, or pays for highways to nowhere, at least the money remains in the country, unless of course the contractor uses his profits to buy Chinese-made goods!

However, money sent out of the country to foreign companies and foreign countries is gone forever, never to be seen again. 

Clearly, there is a huge difference between domestic expenditure and foreign expenditure.  Foreign expenditure is much more damaging to the economy and the nation, in comparison with domestic expenditure.

Our shocking total of money going out of the country is one trillion dollars per year:

+  Negative balance of trade in manufactured goods of half a trillion dollars per year, as mentioned above

+  A further half trillion dollars per year made up of debt service on U.S. treasury securities purchased by foreign countries (using the money we have sent them!);  local purchases of fuel and other supplies to support wars in Afghanistan, Iraq, and Libya, and to support military bases in over 100 other countries;  local purchases of services and supplies, and hiring of local staff, for embassies and consulates;  purchases of foreign oil;  costs of operating our spy program;  and undoubtedly other items.

If politicians want to cut, the place to start is our foreign expenditures.  Keep our money at home, and keep it working in the domestic economy.  

Our economy and our nation will continue to go down and down if we don't cut our foreign expenditures.  A hemorrhage of one trillion dollars annually is more than our nation can stand.

To make the situation more comprehensible, we can truthfully say that the foreign hemorrhage is over $2500 per year for every man, woman, and child in America.  This is not a theoretical quantity coming from economic analysis.  This is real physical money, and real physical wealth, going out of our country, never to be seen again.  

One further point as a general comment and also in further rebuttal to Fantasy Explanation 1.  In Economics 101 the principle is presented that if Country A is in unfettered trade with Country C, and the standard of living in Country A is initially higher, then over time the standard of living in Country A will move down toward equalization with that of Country C.  Obviously all of our presidents, senators, and House members over the last fifty years sat through Economics 101 without learning anything,  If they had retained the information and applied it in their daily work in government, we would not be in a big economic mess now.