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.

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