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Foreign policy vs. economic trade policy in dealing with China

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One of the problems with trade policy is that the State Department has been predominant in using it for foreign policy without regard to economic impact.  The Department of Commerce, which has more purely economic interests, is sidelined, except for merely doing export promotion administrative tasks in several agencies.  Our fraying Washington Consensus of free trade is practiced as an ideology, with folks motivated by beliefs and impervious to facts.

But a strong argument can be, and is often, made that America’s pivot from mercantilism to free trade after World War II had more to do with bribing other countries to be our friends (in light of the Soviet threat) than economics.  What was the bribe?  Access to the U.S. market.  Basically foreign policy and the State Department influence was and is primary, with economic results taking a far back seat, if not the trunk of the car.

The Trans-Pacific Partnership is another bribe.  We are trying to make Pacific countries our friends in light of China’s rise.  While we hear the “export growth” argument time and time again, the fact is that trade agreements don’t give us a net trade benefit.  Boeing and Caterpillar and Wal-Mart benefit, but not the country because the net effect is a either a growing trade deficit or a hampered ability to get on track to balanced trade.  The State Department is integrally involved in the TPP negotiations… both me and CPA board member Dave Frengel have attended and seen them there.  The USTR takes a lead role, but is within the White House, not the Commerce Department.  The Commerce Department is virtually absent.

I don’t necessarily presume that Commerce Department involvement would save the day, because it depends upon agency and Presidential leadership.  But their mission is more directly related to U.S. economic performance instead of other issues.  Other countries trade negotiators come from ministries that are the equivalent of our Department of Commerce, not their foreign ministries.

So you really have a unity of U.S. foreign policy bureaucrats using trade to make global friends – supported by the coalition of free traders that are either ideologically resistant to reality or are pushing for the narrower interests of the companies that benefit from offshoring.

The NY Times has an article today called “Obama’s Evolution to a Tougher Line on China.”  The title suggests Obama has gotten tough on China, which I would disagree with.  But the text of the long piece outlines how the foreign policy types look at China through diplomatic and human rights lenses.

I did get a bit of a kick out of this paragraph, from an interaction back when Lawrence Summers was White House Chief of Staff.

In meetings, Mr. Obama liked to tease two of his advisers, Mr. Bader and Lawrence H. Summers, who had helped negotiate China’s entry into the World Trade Organization during the administration of Bill Clinton. “Did you guys give away too much?” he asked them, according to a senior aide, who described it as “a running joke.”

Clinton was the President who pushed China’s entry to the WTO, at the behest of Summers, Robert Rubin and others.  And of course they did give up too much.

But then there is this paragraph.

At the center of the internal debate on China was a president, who despite being born in Hawaii and spending childhood years in Indonesia, is less beguiled by China’s history and culture than many of his predecessors were, aides said. Once in office, they said, Mr. Obama came to view China primarily through an economic prism. He is angry at what he sees as Beijing’s refusal to play by the rules in trade, and frustrated by the United States’ lack of leverage to do anything about it.

I would be pleased if Obama did view China through an economic prism, but the continued jawboning on currency (instead of action) and the failure to deal with state-owned enterprises just does not cut it.  The stepped up enforcement is necessary, but ultimately weak tea given the massive, multi-faceted Chinese trade strategy which includes but goes far beyond merely violating the terms of the WTO agreement.

After World War II, the U.S. was the last economy standing.  We had massive production.  We also had massive debt, but our production caused us to easily grow our way out of that debt.  We could afford to bribe other countries to be our friends.

But we can’t afford it now.  National economic interest means that balancing trade or achieving net exports is the primary path to growth for us.  The GATT, which I have mixed feelings about, envisioned a manageable balance of trade.  Persistent trade imbalances are anti-free trade.  And anti-smart trade. I.e. it is dumb.

The U.S. cannot be a global power of consequence without a strong economy.  We cannot have a strong economy with a persistent and massive trade deficit that bleeds our jobs, our wealth, our production, and our present and future innovation.

Hopefully Mitt Romney and President Obama will continue dueling on who is stronger on China and trade.  This will give the eventual winner the mandate to be stronger when in office, and to bring reluctant Senators and Representatives into line.

14 Responses to “Foreign policy vs. economic trade policy in dealing with China”

  1. Bruce Bishop says:

    Mr. Stumo says: “Boeing and Caterpillar and Wal-Mart benefit, but not the country because the net effect is a either a growing trade deficit or a hampered ability to get on track to balanced trade.”

    Wal-Mart would benefit more if they were able to replace the cheap Chinese goods with more expensive U.S. made products. This would increase their total revenue and their profit in total dollars.

    While Wal-Mart was doing its best to save U.S. manufacturing jobs, Sears, JCPenney, K-Mart and other retailers were busy building relationships in the Pacific rim.

    Contrary to popular belief, Wal-Mart’s success has nothing to do with cheap Chinese imports, but is the result of a superior business model.

    The problem is not “greedy” corporations. The problem is our greedy government.

    • Tom T. says:

      Bruce, we get back to the example of the Tragedy of the Commons:

      http://en.wikipedia.org/wiki/Tragedy_of_the_commons

      In this case the commons is the economy of the United States and the purchasing power of the middle class that is the engine of a well functioning economy.

      One can easily blame the government that allowed this to happen, it is the equivalent of market failure (this isn’t the only one). One can easily put the blame also on “greedy corporations” who have put their interests above the commons and who have secured a place of influencing the government through the wealth they have harvested.

      I don’t think it is an either or. It is both. One can easily blame the largest benefactor of the tragedy of the commons. It decreases the wealth of the total in exchange for the self interests of the few. The lesson of the tragedy of the commons is not just the failure, but that the total wealth of the total is reduced. I think the incentives for this to happen for the Walmarts of the world to capture so much of the wealth for themselves at the expense of the commons is a problem. We did have a much more progressive tax system that would require companies like Walmart to contribute more of a share to the general welfare. The love and power of money has undone those policies and I believe it is part of the market failure. Policies are the responsibility of government. To the extent that wealth influences those policies, it becomes a prime contributor of the market failure.

      We have huge trade deficits and fiscal deficits because the commons have been trampled on. We have a political class that has been guilty of market failure from both parties (both parties have had majority power in government and have not fixed the policies underlying the problems).

      I take your point that it is primarily a government failure but that failure has been influenced by the power of wealth and money on the system. Politicians have catered to wealth and its interests over the interests of the commons. It is one of the reasons we are seeing a huge variance in wealth and income distribution and the equivalent of market failure.

      Tom T.

  2. Bruce Bishop says:

    Tom,

    I haven’t yet convinced you, apparently, that Wal-Mart would be better off if we stopped importing from China.

    I would suggest that, to the extent that Wal-Mart lobbies our government, they do it to help create stability, not special favors. A government that bails out sick corporations and makes bondholders go the the end of the line is capable of anything. Corporations rely on stability when making investment decisions. The Obama government is a friend to the “sick,” the corrupt, and the special interests. Wal-Mart is not in favor with the Obama government.

    Thomas Sowell says: “Wal-Mart has done more for poor people than any ten liberal Democrats, nine of whom are guaranteed to despise Wal-Mart.”

    The choices we have are to either increase the power of the government and expect it to rein in the “greedy” corporations, or to rein in the greedy government. You seem to favor the former, I favor the latter.

    In favor of your solution is the fact that it would be very easy for us to make the government more powerful. All it requires is for those of us who are fighting against the growth of government to stop fighting.

    The solution I prefer is to shrink government to a managable size and force it to fulfill its intended purpose. This is a tough uphill battle. We are not only fighting those career politicians who have rigged the system to keep themselves in office, we are also fighting with people who think that equality as serfs is preferable to inequality as free men.

    • Tom T. says:

      Bruce, you mistake my intentions. I am not in any way upset that Walmart makes money. In fact, making money is not a sin but a virtue. The difference you and I have with Walmart is how they made it, not that they made it. One of the ways they have made it is with our “free trade” selling of our markets and, outside of the trade discussion, by breaking other economic laws like the Robinson Patman Act. If Walmart makes money by being the best at what they do, I say more power to them. If they make it because they “cheat” the labor force or suppliers, then they should be held to account. If they make money because they pay their workers so low that taxpayers have to pick up their worker’s expenses, then they are getting a subsidy from taxpayers. The outrageous subsidies they get for locating to certain areas is another problem. What ends up happening is that all other taxpayers end up paying their own taxes and those that Walmart or other businesses like them get. You will find examples in this book:

      http://www.amazon.com/The-Fine-Print-Companies-English/dp/1591843588

      In specific, their lobbying efforts and market power is used to gain even more tax breaks from governments:

      http://www.walmartsubsidywatch.org/state_detail.html?state=TN

      If they do it then their competition will do it and everyone goes to the least common denominator. The competitive impact is a lowering of the quality of everyone. This is why both you and I agree that their arbitraging of the U.S. manufacturers to Chinese suppliers is bad for the economy as a whole. For these companies like Walmart, it is a whole lot more. If tax abatements are given to Walmart or other companies, then all the other taxpayers have to pick up those costs and decreases their relative competitiveness. This is nothing but a transfer of wealth thanks to governments who pander to those who have economic power. This isn’t governing, it is political pandering and corporate welfare masquerading as “good business”.

      Tom T.

      • Bruce Bishop says:

        Tom,

        You have changed the subject. My concern is with the fact that our government allowed our manufacturing jobs to go offshore. That has cost me, personally, in excess of $1 million.

        I don’t really care what incentives cities, states or counties are offering Wal-Mart to build in their jurisdictions. They would still be pi$$ing away the taxpayers’ money on something more frivilous and with less benefit to the taxpayers than a Wal-Mart. We have two Wal-Mart SuperCenters, and our city government is pushing to spend $500,000 on a fountain, to “enhance the downtown experience.” Of course, our downtown is practically a ghost-town, like so many other cities.

        What evidence do you have that Wal-Mart has violated the Robinson-Patman Act?

        As to Wal-Mart selling goods make in China, I will say it one more time: Wal-Mart has no alternative to selling goods made in China if they are to provide the lowest price to their customers. Wal-Mart was the last major retailer to capitulate to the “Chinese Price.” Wal-Mart would make MORE money if we were to re-shore manufacturing and U.S. suppliers could, once again, provide the lowest price, or at least a reasonable “best value,” option.

        Poor people (as a rule) will pay the lowest price, no matter what. They don’t have the luxury to consider “best value,” if it means paying more for something they need right now. A testament to this is the fact that Dollar General has been growing much faster than Wal-Mart. Thanks to our government, the ranks of “poor people,” are growing rapidly.

        Our economy is dying. 20+ million people are unemployed or under-employed. Most of these people are forced to shop at Wal-Mart or Dollar General in order to stretch their limited dollars as far as they can.

        The elites don’t have a clue as to what is happening at the lower levels of society. Unless they can leverage the poor for political advantage, they don’t really give a rat’s rear-end about them. Liberal altruism is a total myth, concocted by the liberals to help them gain political power.

        • Tom T. says:

          Bruce, we agree on the trade issue. It has been a policy that developed out of foreign policy objectives that has mutated into a cancer on the economy.

          As far as the Robinson Patman Act, here is what the act is about:

          I. The Robinson-Patman Act: General Principles

          The history of the Robinson-Patman Act actually begins in 1914, when section 2 of the Clayton Act became the first federal statute that expressly prohibited certain forms of price discrimination. In 1936, section 2 of the Clayton Act was amended by the Robinson-Patman Act, and it became a far more complex statute. 1 It is important to consider the context in which the amendments were adopted. In 1936, Congress believed that large firms could dominate markets through predation and other forms of economic warfare directed against smaller firms, and felt that “power buyers” such as large retailers could use their market power to extract price concessions from manufacturers and other sellers that were unavailable to their smaller competitors. As the Commission has stated, [t]he major legislative purpose behind the Robinson- Patman Act was to provide some measure of protection to small independent retailers and their independent suppliers from what was thought to be unfair competition from vertically integrated, multi-location chain stores. 2

          http://www.ftc.gov/speeches/other/patman.shtm

          Anyone who who doesn’t think Walmart does these things have their head in the sand and quite frankly are not worth arguing with. It is just another economic law that is not being enforced and is helping contribute to the concentration of wealth and economic opportunities in the USA.

          The point about tax incentives to get business is that the Walmarts of the world are not paying for the fountain you speak of and everyone else is having to. That creates a competitive disadvantage to the little businesses.

          I agree with just about everything else you say.

          Again, I am not against Walmart making money. I am concerned about their methods. Making money is not wrong or bad but the methods to make it can be. That is the difference between a drug dealer and a legitimate business’s income. The income is not the issue but the method of income generation certainly is.

          Tom T.

          • Bruce Bishop says:

            Tom,

            If Wal-Mart is truly in violation of Robinson-Patman, it would be easy to prove. Why hasn’t one or more of Wal-Mart’s competitors filed suit in Federal Court? They have some pretty deep pockets too.

            The argument about Wal-Mart driving the “Mom&Pop” stores out of business is a lot of hogwash. Wal-Mart provides a variety of niche opportunities for smart entrepreneurs to exploit. Drive around any new Wal-Mart SuperCenter and you will see dozens of new small businesses that are enjoying opportunities untouched by Wal-Mart as well as the constant flow of Wal-Mart traffic. No doubt Wal-Mart has provided a convenient excuse for some businesses who failed to keep up with the times or who failed because of a poor business plan.

            The elites and the liberal media hate Wal-Mart. If Wal-Mart was guilty of any significant infraction, they would have been hauled into court long ago. If there is one area where the mainstream media is playing its proper role, as watchdog instead of lapdog, it’s in staying on top of Wal-Mart.

            The people who call themselves “progressives” hate progress. Wal-Mart represents progress. The benefits of consolidation-of-resources and economies-of-scale fall to the non-wealthy people who shop at places like Wal-Mart. Thirty years ago, it was K-Mart catching hell for driving the “Mom&Pop” stores out of business. Forty years ago, it was IGA, Kroger and Kresge that were driving the “Mom&Pop” stores out of business. Eventually, someone will come along who will challenge Wal-Mart.

            There is nothing to stop the Chinese from setting up a competing chain — except for the fact that Wal-Mart’s wafer-thin profit on sales (3.5%) doesn’t make it a very attractive target. China could, however, undercut Wal-Mart. That might present an interesting case for a Robinson-Patman claim.

            Our only hope is for our government to mandate “balanced trade.” They must limit imports from China to no more than China imports from us. If they fail to do this, China will eventually own us.

            All of the belated talk about currency manipulation during this election season is nothing more than kicking the can down the road. If China were to suddenly increase the value of their currency to what the experts consider a fair level, it wouldn’t change a damn thing. They could still produce anything we could produce at a sixty percent cost advantage. In other words, anything we can produce and sell for $100, they can produce, deliver and sell for $30. If they revalued their currency, they could still sell the same product for $40 as opposed to our $100.

            For U.S. entrepreneurs to invest the time and money to get back in the game, they must have the entire playing field to themselves. A “level” playing field would still leave us with an insurmountable disadvantage. Only a government that cares about our future can fix this.

          • Tom T. says:

            Bruce, Judge Bork changed the standard of proof on RB claims — here is an analysis of judgments on RB:

            http://www-bcf.usc.edu/~dukes/Papers/Dukes13_EndofRP_MgtSci_10.pdf

            If you go back and read the RB law, it wasn’t just about competitors, as you have suggested. That was a court manufactured excuse.

            I hear a lot of “liberal media hates Walmart” kind of talk from you that has nothing to do with real analysis and more what seems to be your bias. The real issues have to do with market power and its abuses while the courts have gone with the excuse that there has to be a loss of consumer welfare. I wish they were so ideological when it came to the examples in the book I mentioned before, “The Fine Print”.

            We have some of the biggest corporate smooching in the courts when it comes to actually administering the law. They will bend over backwards in one area at the behests of the corporate lawyers and bend over another way in others to protect corporate profits. They are the trump card.

            In the end, I am very happy someone like you can see past all of this kind of talk and pick up the progressive trade reform. I think you are totally right on that.

            Have a good weekend.

            Tom T.

  3. Mo says:

    Washington is only interested in foreign policy and not economic policy. The gov’t wants offshoring to continue because it can export inflation. Thats why so many countries in the world today have hundreds of billions if not trillions in dollar reserve assets. Currently all that Washington is interested in doing is printing money out of thin air to fund military conflicts, overseas military bases, financial speculation, offshoring and consuming. Other countries knowing this like China adjust their monetary policies to encourage the US to offshore and transfer technology. But remember it takes two to tango, countries may implement policies to encourage offshoring but in some cases only after US multinationals have made it in their interest to do so like promises of tech transfers.

    The trade problems the US has with countries is really a symptom of the flawed monetary system we have today. When the US was under Bretton Woods which wasn’t an ideal gold standard because the dollar was really only nominally backed by gold but it did impose restraints on money creation, the standard of living and real wages were higher. Also there was less income equality where the top 1% made at most 30-35 times the average worker. Today the top 1% can top over 500 times the average worker which is due to unlimited money printing being directed to certain areas of the economy or certain asset classes.

    Also under the gold standard weather it was the classical gold standard or bretton woods, there was less banking and currency crises, lower inflation as well as higher GDP growth. The Bank of England came out with a recent paper in December 2011 that showed if the trends of Bretton Woods continued, real income would be 50% higher, inflation 50% lower, trade deficit 1/3 lower and in the last 4 decades the world economy would have suffered 4 banking crises not 104.

    References:

    1.http://www.dailyfinance.com/2012/01/24/are-goldbugs-crazy/

    2.http://www.forbes.com/sites/charleskadlec/2011/12/19/an-international-gold-standard-beats-the-rule-of-the-governing-elite/

    3.http://www.bloomberg.com/news/2012-05-02/gold-standard-for-all-from-nuts-to-paul-krugman.html

  4. Maggie says:

    The longstanding bipartisan policy of propping up consumerism while offshoring production leads to an inevitable credit crunch and collapse. Diplomats believe in buying friends with $$$ and economists insist that everything must be globalized to maximize “efficiency” in $$$, or some sort of hocus pocus like that have no regard at all for dynamic instability in large complex systems.

    • Tom T. says:

      I think you nailed it, Maggie. It also concentrates the wealth of the nation which destabilizes governments.

      Tom T.

    • Jim Cochran says:

      Yeah Maggie, who would make a decision to save 2-3,000 dollars a year and give up a $60,000 a year job. When you follow the pathology of saving only and ignoring loss of jobs, it eventually gets around to everyone.

  5. Tom T. says:

    Foreign Policy vs. Economic Policy is also hard because Hillary Clinton was on the Board of Walmart and Walmart’s supply lines are through China. Having your Secretary of State in such a duel position easily makes the problem larger.

  6. Mo says:

    What has happened to our money? should be the question that a lot more people should be asking. The Bank of England came out with a recent paper in December 2011 that showed if the trends of Bretton Woods continued, real income would be 50% higher, inflation 50% lower, trade deficit 1/3 lower and in the last 4 decades the world economy would have suffered 4 banking crises not 104.

    This is significant considering that inflation always leads to trade deficits which is a very important issue and that it cost trillions to bail out the financial sector. The decline in real wages, increase in trade deficits and offshoring, increasing budget deficits due to future costs being higher than forecasted and the increasing cost of bailouts all point to a monetary system that is unsound and in need of reform.

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