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D.J. McGuire: Obama may be "best-equipped American leader to take the CCP on"
Howard Richman, 11/24/2010

In a November 23 commentary (Is Beijing Using North Korea Again?) D.J. McGuire argues that President Obama is uniquely qualified to get tough with the CCP, China's Communist Party:

Nixon’s fervent anti-Communist history made him practically the only American politician who could reach out to the CCP. Conversely, Obama’s left-wing history may make him the best-equipped American leader to take the CCP on.

President Obama has already started taking a tough stance with China. McGuire notes:

It began when the CCP tried to declare the South China Sea as its own lake. As expected, numerous nations in Southeast Asia cried foul. Not so expectedly, the United responded, essentially, “No.”

One can only imagine the shock in Zhongnanhai from that.

Perhaps the Communists believed that this was mere posturing for the voters. That notion disappeared with the President’s post-election tour of Asia (India, Indonesia, South Korea, and Japan). It could have been called the China Containment Tour.

As I earlier pointed out, the United States has a wonderful opportunity at the moment. If the President and the Republican House each do what it has the power to do, without the other's consent, then America could balance trade and budgets at the same time. 

President Obama could balance trade through a scaled tariff without congressional consent and the Republican House could balance the budget by refusing to raise the U.S. debt ceiling, without presidential consent. Together, these actions would solve America's long-term economic problems:

  1. The increased aggregate demand from balancing trade would offset the reduced aggregate demand from balancing budgets.
  2. The reduced real long-term interest rates from balancing budgets would offset the increased interest rates from balancing trade.
  3. Long-term economic growth increases when government spending and trade deficits go down.
  4. Otherwise the U.S. faces an eventual crash either caused by a loss of government credit (due to budget deficits) or a dollar collapse (due to trade deficits).

God has given the United States a unique moment. President Obama and the Republican House can, right now, fix America's economic problems. Will they do it?

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Comment by Bill Jencks, 11/26/2010:

Regarding the solution, I believe that Mr Richman has made too many assumptions as well as telling only half the story. 

Point by point, if scaled tariffs were put onto China -- and let's not kid ourselves here, these tariffs would also apply to most of the BRICs as well as Taiwan, Japan and Germany -- then this would certainly stunt US demand even further, because instead of being able to buy goods cheaply, Americans would have to spend more to buy the same goods. The most detrimental effects would be to both raise the cost of living for all Americans as well as pose huge problems on US manufacturing that relies on cheap Chinese imports. This measure also takes no account of how China or any other developing country would reply in kind with their own tariffs. Therefore this is a dumb policy. It is therefore also a wild assumption that economic growth would increase and spending and trade deficits would go down.

Yes, America does face the prospect of and eventual crash. Although America blames China and the developing countries as causing the "world trade imbalances", all the blame goes onto the foreigners, none of the blame seems to find America whose gross debt policies over decades have undoubtedly helped to ruin America's industrial manufacturing base. America, therefore, must do much more to act to relieve her own budget and trade deficits. This means moving right away from cumulative debt policies and becoming a real competitive trading country once again. With a manufacturing sector now at 22% of GDP and a servicing secor(producing nothing) at about 76%, America must severely restructure her own industrial base. So instead of forcing other surplus countries to suffer, America deserves her own pain through economic change. If this restructuring is not achieved, there will be more and frequent crashes in the future for America, a downward spiral if you like, that will end in financial disaster and economic catastrophe.

America should stop sucking the savings out of developing countries to support her gross credit/debt problems and start competing on a level playing field, just like everyone else. Dumping the dollar as a world reserve currency would be a great place to start, this would be a real wake-up call for the US. What you gonna do when you don't have anymore cheap credit? 

 


Comment by Howard Richman, 11/26/2010:

Bill,

Thank you for your thoughtful comments. I will reply to your points:

1. If scaled tariffs were put into China most of the other mercantilists, it would indeed raise American prices on those particular goods. At the same time, it would raise American incomes much more than it would raise those prices. This is true because it is a tariff that balances trade and imports subtract from income whereas exports add to income.

2. It would not hurt those American manufacturers who rely upon cheap Chinese imports except when they are selling to the U.S. market. If they are exporting, tariffs would be rebated as per current law.

3. It does take into account how China and the other mercantilists would respond. If they respond with restrictions upon our exports to them, such as their own tariffs on our products, the scaled tariff rate goes up even further. That's the genius of the scaled tariff.

You portray the United States as sucking demand out of the other countries. This is a mischaracterization of what is happening. Mercantilist governments are gathering their people's savings and sending them to the United States as a byproduct of their currency manipulations.

At the moment, China is tightening up on its money supply. It's interest rates are growing, where credit is even available. At the same time they are buying dollars and then lending those dollars to us driving our interest rates into negative territory according to US Treasury Inflation-Indexed Securities (TIPS).

If we had high interest rates, your argument that we are sucking in the world's savings would be correct. That was indeed the case in 1984, for example. But currently our interest rates are negative. We are not sucking foreign savings in from anywhere. The mercantilist governments are forcing their savings into our country and have pushed our interest rates much too low.

Howard




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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

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  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

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