Friday, October 28, 2011

An economic war not a trade war


Bipartisan action in Washington!

Under the leadership of Senator Stabenow of Michigan and Senator Brown of Ohio, and other senators, on October 11, 2011, the Senate passed a bill related to unfair currency manipulation by China and other trading partners.

The measure passed by a vote of 63 to 35, showing that Democrats and Republicans voted for the bill. 

According to an article by Oliver Knox of Agence France Press, October 11, 2011, “the bill would empower U.S. businesses, and in some cases labor unions, to trigger a U.S. government investigation into alleged currency manipulations and seek retaliatory duties on imports from offending country or countries”.  The bill “…also aims to make it harder for the U.S. Treasury to stop short of labeling China a currency manipulator, and restricts the White House’s ability to waive the resulting sanctions.”

Ed Farkas comment: President Obama in the past has made speeches in which he was critical of China in relation to the low value of its currency.  However there was no action.  This bill is an attempt to force the President and his Administration to act.

People are always asking for bipartisan action in government, to end gridlock and solve our problems. Here is a bill supported by both Democrats and Republicans, and yet unfortunately President Obama and his Administration do not support this bill.  Why?  That is a whole other story!


Reaction to passage of the bill in the Senate

The Knox article goes on to state:  “China repeatedly condemned the proposed bill as it advanced in the Senate, accusing U.S. lawmakers of scapegoating Beijing for their own incompetence, and warning the bill could trigger a trade war.”

Republican Senator Graham stated:  “The (passage of the bill) shows that we will not be bullied by China when it is clear they are in the wrong.  We ignored the threats and do not apologize for taking this action.”

House of Representatives Speaker and Leader of the House, Republican John Boehner, “has signaled that he will not bring the legislation to a vote, calling it dangerous to economic relations (with China)…You could start a trade war.  And a trade war, given the economic uncertainty… - it’s just very dangerous and we should not be engaged in this.”

“President Obama…worried (that the legislation) could violate World Trade Organization rules even as he accused China of ‘gaming the trade system’ in a way that hurts the U.S. economy.”

“Treasury Secretary Geithner reiterated Obama’s concerns about breaking international trade rules.  However when asked whether senators had fired the first shot in a trade war, he replied ‘They did not’.”

Obama and Geithner on the Fence

Obama and Geithner are trying to have it both ways.  They criticize China but aren’t brave enough to actually do anything to solve the problem. 

Their comments bring out the really central issue we face:

Do we continue to obey World Trade Organization rules at the cost of complete destruction of the economy of the United States of America?  (A destruction process that is already well along.)

Or,

Do we end automatic lockstep adherence to World Trade Organization rules, and instead work to reverse the damage done to the American people and the American economy?


U.S. Trade – Broader Prospective

People say that if we put restrictions on China, manufacturing will simply move to Malaysia or Viet Nam.  Yes, this is correct.  The answer is that we have to look at all countries in our foreign trade situation. 

Our negative balance of trade in manufactured goods with all foreign countries is over $500 billion per year.  Somewhat over half of this amount is due to China. 

Here is the list of the main countries we trade with:

China
EU
Mexico
Japan
ASEAN
Canada

I have left out OPEC, on the assumption that trade with OPEC is mainly oil, rather than manufactured goods. 

Mexico and Canada provide manufactured goods and oil.  I estimate that trade in manufactured goods with Canada is less than 4% of the total of over $500 billion, substantially smaller than any of the others listed above.

ASEAN is The Association of Southeast Asian Nations.  ASEAN is made up of Indonesia, Malaysia, Philippines, Singapore, Thailand, Brunei Darussalam, Viet Nam, Lao PDR, Myanmar, and Cambodia, ten countries in all.

The important thing to note is that our balance of trade in manufactured goods is NEGATIVE with every one of the countries or groupings listed above, repeated here for clarity: 

China
EU
Mexico
Japan
ASEAN
Canada

In other words, we are a net importer of manufactured goods from every country or grouping listed above. 

In simplest words, this is not good!

Trade

The word “trade” carries a meaning of some degree of equality.  If two ten-year-old boys are trading baseball cards or chaotic cards, we are not going to see one boy giving all his cards to the other boy and receiving nothing in return. 

So the word “trade” absolutely does not apply to our economic relations with the other countries of the world.

Trade War

As quoted above from the Knox article, people say that we could get into a trade war if we try to do anything about China’s currency valuation. 

Senator Brown, also referred to above, is much more perceptive.  Referring to the bill that was passed by the Senate, Senator Brown said:

“We are in a trade war.  But today we’re fighting back.  (We want to end)  the unilateral disarmament approach we’ve taken for the past decade.”

Senator Brown understands that we are already in a trade war, really an economic war, but up to now we have not defended ourselves in this war.  . 

So the dire warnings that “we could get into an economic war” are absolute nonsense. We are already in a war and further we are very close to being utterly defeated in this war.

The issue of China

When I mention or discuss China, I always have in mind the additional countries that are not buying from us in approximately equal amounts.

It is an easy shortcut to say “China” without adding the above proviso.

“Scapegoating China” is the most stupid phrase to come out of the whole mess we are in.  No one is scapegoating China.  If we blame China for things it has actually done, that is NOT scapegoating.  China has manipulated its affairs so as to keep its currency artificially low.  China has announced a policy of becoming self-sufficient in all manufactured goods.  The policy includes stealing technology from the United States and other western countries.

To clarify and emphasize, China wants to reduce purchasing from the United States and other western countries, from the present moderate levels TO ZERO.

China wants to supplant U.S. firms that are manufacturing items being sold to China or other foreign country.  China wants to become the world’s supplier of these items.

China is supposed to be very clever in economic issues, with over 5000 years of experience.  Certainly China runs rings around na├»ve western negotiators such as President Clinton, President Bush, President Obama, Secretary Geithner, and Secretary Clinton. 

China has set itself two objectives:

Item 1.  Keep the United States as a large consumer of Chinese-made products.  In support of this objective, China works to prevent discussion in the U.S. media of the problem of importation of Chinese goods and ways to reduce the resulting damage to the American economy.

Item 2.  Develop China as THE world supplier of all manufactured goods, and in support of this objective complete the destruction of the U.S. manufacturing sector. 

You don’t have to hold a PhD in economics to see that these two objectives are mutually exclusive.  They are in total conflict with each other.  So the Chinese aren’t so smart after all.


Huge Mistake

This is the same mistake made in the 1960s when U.S. manufacturers began to send their manufacturing jobs overseas.  If Americans don’t have employment, how are they going to buy the goods made overseas? 

The first companies sending their manufacturing overseas were OK because other American companies were still employing Americans. But it is a “reductio ad absurdum” situation.  Now, 50 years later, so many jobs have been transferred overseas, with resulting loss of so many jobs, that there is significant reduction in ability to buy.

It is very funny, in the sense of dark humor, to see executives of U.S. manufacturing companies complaining about slow sales in the U.S., when these are the very companies that sent jobs overseas.  It is equally darkly humorous to see the CEO of Wal-Mart testifying before Congress about poor business conditions, when the CEO of Wal-Mart has helped create poor business conditions by insisting on sourcing from China rather than from thousands of existing American domestic manufacturers.

Speaker Boehner says the recent Senate action is "dangerous to economic relations with China".  He has it all wrong.  What is really "dangerous" is having "economic relations with China"!

I say that the only way to save America is to cut all economic ties with China and other countries that don’t buy from us in approximately equal amounts.  I predict we will not be successful in getting an adjustment in the value of Chinese currency, or in getting China to reduce or stop the stealing of our technology.  These things simply will not happen.  But even if they did happen it would not solve the problem of our unsustainably large importing of manufactured goods from all foreign countries.

Wednesday, October 12, 2011

One explanation for the mess we are in!


China is of special concern

Our negative balance of trade in manufactured goods in 2010 was over $500 billion.  China accounts for something over half of this amount.  Obviously we must always keep in mind the other countries involved.  But our negative balance of trade with China is much larger than with any other country. 

China is of special concern for other reasons.  China has published a policy document clearly setting out the objective of complete destruction of the manufacturing sectors of the United States and other western countries.

China has maintained its currency at an artificially low level for many years, through complex financial maneuvers. If the Chinese currency were allowed to reach its level through normal market forces, millions more Americans would be setting out for work this morning!

President Obama has repeatedly made speeches about this problem, but has done nothing concrete about it.

Now a group of Senators is trying to get a law passed that would essentially force the U.S. government to bring an action against China for unfair trade practices. (Why do we have to “force” our government to act in the interests of all the people?)

The reaction of the business community has been swift.  As stated in my previous blog post, “a coalition of 51 U.S. business groups” is trying to torpedo the proposed Senate action.


Who controls U.S. government policy?

The action of U.S. business interests against a modest Senate proposal explains why successive Presidents, successive Administrations, and successive generations of Senate and House members during 50 years have done nothing to prevent or at least reduce transfer of manufacturing jobs to low-wage countries including China.  

This situation explains the censorship that currently governs what appears in newspapers and on TV, and governs what politicians are allowed to say. 

The “51 U.S. business groups” and probably additional business groups, have been waiting and hoping for three decades that they would be allowed to sell directly to the one billion people of China.  They drool when they think of this huge market.

While these “business groups” are waiting and hoping for something that clearly is never going to happen, they don’t want anything done that will annoy the Chinese.  Thus their opposition to action on Chinese currency.

News Flash!  And it is Good news!  The proposed bill to force action on Chinese currency has been approved by the Senate!  Congratulations to Senator Stabenow of Michigan and other senators who worked very hard to develop this bill and get it through the Senate.


Collateral Damage!

In support of their own narrow and selfish interests, “business groups” completely control government policy.  The interests of these “business groups” are paramount in government policy, with no concern whatever for collateral damage:

  • America has lost its technological leadership in R & D and manufacturing capability
  • Hemorrhage of many hundreds of billions of dollars every year, real wealth going out to foreign countries to pay them to do our manufacturing for us.
  • Loss of manufacturing employment, and loss of the value-added effect of manufacturing, which otherwise would be enriching our economy and nation
  • Half of all households need social assistance at tremendous cost, paid for by increased government debt and higher tax burden on those who still have employment
  • At least 25 million unemployed.  Half of Americans pay no tax because they have no income
The collateral damage outlined above adds up to trillions of dollars, the hidden cost of saving a few dollars by buying a Chinese-made item.


Where are the protests?

Collateral damage began in the 1960s when manufacturers started to transfer jobs overseas.  The damage and the devastation have steadily mounted over a period of 50 years. Millions of people should have been in the streets decades ago protesting this damage to our nation.  But Americans have been uncharacteristically passive.

Finally now the “Occupy Wall Street” people are in the streets. Very good!  However they are going after a secondary target. Wall Street is very annoying but is not the cause of the real problem. 

The real problem in America is that 25 million people, and probably more, are unemployed.

All the commentators and politicians who are so hysterical about debt and deficit should really be concerned about unemployment, the CAUSE of debt and deficit.

And the unemployment is caused by the tail wagging the dog.  The unemployment is caused by government obedience to the narrow interests of business, rather than obedience to the interests of 312 million Americans.

Ironically, many large companies are complaining about poor business conditions in the United States, lower store sales, etc.  They don’t understand, or at least PRETEND not to understand, that the cause of the problem is the unwise policies they themselves forced on the government and the people of America! 

Occupy Wall Street should be demonstrating against the “51 U.S. business groups” and their allies. There should be not thousands but millions in the streets in Washington, protesting the devastation of 50 years of allowing narrow business interests to control government trade and economic policy.


Prospects for solving the problem

Under the censorship, no one is allowed to say “We have to get our manufacturing jobs back from China” (and other low-wage countries), let alone discuss how getting the jobs back could be accomplished.

But the ONLY way to save America and other western countries is to get the manufacturing jobs back. OK, President Obama came into office soon after the crash in Fall 2008. Not his fault. But now he has sat for three years waiting and hoping for something to happen, rather than taking strong action to control the flow of foreign-made goods.

“New industries” and “re-training for new industries” are pipe dreams. They will never provide enough jobs to make a dent in 25 million unemployed.  And, without strong policies in effect, any new technology and new employment in new industries will drain away to China.

We have to get the mass employment back from overseas, the employment that produces tens of thousands of consumer, commercial and industrial items.  Like a person who has been ill, we would start with simpler items.  We would have to re-build our technological and manufacturing skills, and then take on more complex items.

The ordinary people of America know that we have to get the jobs back from overseas.  They know we have to rebuild our technological capability. 

The “coalition of 51 U.S. business groups” and their allies in business and government are scared.
 
Desperate responses come from scared people. Basically with the censorship and other measures they are trying to prevent Americans from learning what they already know.

There is one industry in America that is hiring, and that is the industry of creating fantasy explanations for how we got into our present mess.  Censorship Fantasy explanations

Hired guns are saying nonsensical and ridiculous things:

  • Hillary Clinton said in a speech in January 2011 that our trade with China is still less than our trade with EU (i.e., she is claiming that imports from China have not yet reached a significant level!).  Hillary Clinton speech
  • The Federal Reserve Bank of San Francisco produced a calculation purporting to show that Chinese goods constitute only 2.7% of our economy.  Federal Reserve Bank SF
  • Robert Reich recently said, “It is stupid to punish China” over the currency issue, and “China merely assembles”.
If “assembly” is so “mere”, let’s do it in USA and put five or ten million people back to work!


READER COMMENT

Mr. M. states "It is not just China.  All emerging markets, Vietnam, India, Brazil, with lower costs and attractive tax structures, are of concern." 

Ed Farkas comment.  True, all of these countries are of concern.  But our negative balance of trade with China is very much larger than our negative balance of trade with any other country.  Further, these other countries don't have a published, active and organized plan to destroy the American manufacturing sector completely.  But generally the answer to Mr. M's comment is that we need to apply a tariff to goods from China and from any other country that does not buy from us in approximately equal quantities (measured in dollar value).  We can't continue to have a negative balance of trade with each of dozens of countries.  The negative balance of trade is real money and real wealth going out of our country, impoverishing our country.  The negative balance of trade number is a direct indicator of how many Americans could be working but are not working.  The tariff applied would be largest for goods from China, and smaller for other countries with smaller negative balances.  As soon as I say "tariff" some people invoke the empty scare word "protectionism".  The fact is that America's negative balance of trade in manufactured goods in relation to the size of our economy is so large as to be absolutely unprecedented in world history.  The resulting damage we are doing to our own country is also unprecedented.   The damage we are doing to ourselves by allowing our existing negative balance of trade to continue is far greater than any possible alleged damage that could occur through "protectionism".

READER COMMENT

Mr. H. asks:  "So how and what can be done to get Americans back to work?  It's obvious that many existing jobs are gone - most likely for good."

Ed Farkas comment.  I believe that jobs will come back if the economic conditions are attractive.  Manufacturing costs in some areas of the United States have decreased while manufacturing costs in China, as one example, have increased, to the point where USA is competitive with China.  Some foreign corporations have looked around the world and have concluded that their best bet for new manufacturing facilities is USA!  Some American corporations have re-analyzed costs of their China operations and have concluded that manufacturing in USA is now more attractive.  They are bringing work back to USA.  Where the jobs are not coming back fast enough, and tens of millions of Americans are suffering, without jobs, without income, without dignity, we must apply a suitable tariff.  I believe that even a small tariff of 20% would bring millions of jobs back from China.  I believe there is no such thing as a "job gone for good"!

READER COMMENT

Mr. S. says:  "We let clowns dismantle our strengths and make huge profits selling us out.  That is treason in my view!"

Ed Farkas comment.  Absolutely true.  John Kerry, not the sharpest politician we have, referred to "corporate Benedict Arnolds" during the 2004 presidential election campaign.  But he only said it once, because of the censorship that is in effect.

President Obama said, during the 2008 campaign, "We have to get the jobs back from China".  But, again, he only said it once.  He probably had a rough night with his advisers, after making that comment, with his advisers undoubtedly explaining to him that no one is allowed to say that!

READER COMMENT

Mr. W. says: "Nice article".

Ed Farkas comment:  Thank you!