Instead of Trade Wars

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It tells a lot about our current economic policy to compare it with China’s own plan for their economy.  They want to move up the value chain—to be Apple with the big profits instead of a hardware supplier in a highly-competitive business.  They want to do that across the board in all technologies.  They aren’t afraid of automation’s impacts; they want to push it as hard as they can.  Having transitioned their economy to free market concepts, they are ready to transition their workforce to what it takes to win.  They want to be us!

Except that we don’t want to be us anymore.  We don’t like Apple, Google, Facebook, etc. because those companies don’t hire very many people without technical skills.  We need to set tariffs to bring back the 1950’s, so that those people can have jobs.  And our country is a disaster area until we do that.  So we need trade wars to be great again.

There are a number of problems with that logic.

1.You can’t support our standard of living on non-competitive businesses. To be rich you need to be on top of the value chain.  That involves a number of factors, such as

–  A skilled workforce.  Implies support for education.

–  Equality of opportunity, so that we can use all talents and ideas.  Education is a big part of it, but healthcare and other contributors to family stability are important too.

– To be the place where people with entrepreneurial ideas will want to come realize them.  Google (with an immigrant founder) and Apple (Steve Jobs’ father was a Syrian immigrant) are convenient examples.

– Creating a global environment for trade and cooperation where we can be successful.  That means international engagement.

If we want to maintain our standard of living, these items are primary and we should be doing everything necessary to be successful.  There is not necessarily just one winner, but you have to be playing the right game.

2.The well-being of the population requires separate attention. The problems today are not because business is hurting.   It isn’t.  The population is not prospering as it should from our financial success, because we (through our government) have chosen NOT to make it happen. We have blocked investment in the population and the public good, and just given more and more of the created wealth to the wealthy.  That’s why we can’t fund education or infrastructure.  The new tax plan is a recent and extreme example.

It says a lot about the political climate that Trump can make a statement like “cash-strapped cities cannot hire enough police officers or fix vile infrastructure” (in rejecting the Paris Climate agreement) and get away with it.  The statement is true, because he and others like him have made it that way.

3.Tariffs are not a miracle solution; they are a tax. Tariffs are designed to raise the price of the products sold internally, so as to protect domestic businesses. That means that non-competitive businesses are supported at the expense of others (businesses or individuals) that use those products (e.g. steel).  The markup is effectively a tax.   You can do some of that, but just as with any other tax you have to look at who gets hurt (e.g. anyone who builds with steel or buys steel products).   The effect is not all that different from using taxes to support public works.  And with public works projects you at least know what you get.   Rather than subsidizing companies and hoping for the best, they pay people for necessary work that the private sector won’t do.  Education and infrastructure are only under-funded because we choose it that way.

It should be noted that protected companies have little incentive to make themselves more competitive on an international scale, so the tax is usually forever.  Also companies that need tariffs to compete are by definition highly cost-sensitive, so wages need to be tightly controlled.  Tariffs—like other presents to businesses—are a way of dealing with exceptional or temporary issues (e.g. real national security or bankruptcy), and they certainly don’t help with automation.  They are not a miracle tool for recreating the 1950’s.

4.Isolating ourselves behind trade barriers is conceding the game to China. Compared to Europe, the US had a much bigger domestic market than any other player, and that helped the US to evolve for financial success.  China already has a bigger domestic economy than we do, and they’ve just gotten started.  They’re putting money into infrastructure and education.  Their AI systems have bigger databases to learn from.  They’ve taken over our leading role for technologies of climate change.

With trade barriers, and xenophobia, and intellectual property paranoia we risk losing our edge.  China’s industrial espionage is a problem that requires continuing attention, but the effects of our new isolation policies may make matters worse.

 

That’s where we’re going.   What’s especially bad about it is that we’re making a mess of what is actually a promising situation.  The rise of China is at this point an opportunity, and we’re missing the boat out of sheer greed and ego.  What has to happen is

1. We need to open the Chinese market. China is now rich enough to be significant as a market.  One way to think of the opportunity is the enormous recent increase in the number of Chinese now traveling abroad.  Those people are our potential market and even the Chinese government has to listen to them.  Further, the US plus Europe represents 36% (18 + 18) of the Chinese output.  With that kind of leverage we don’t need a trade war (as emphasized by the Business Roundtable of corporate CEO’s), we just need to use it for the situation we’re in.  Instead we are stuck with two trade wars, because in Trump’s world we’re fixated on being the only winner—a good way to make sure that everyone loses.

2. We need to do everything possible (including all points noted earlier) to support the economic strength of the country in the current technological world—as opposed to the world of the 1950’s.

3. We need to go back to translating economic success into well-being of the population. It is to our benefit to get everyone on-board with what it takes to be successful.  Furthermore, we need to remember that there is an important place in the economy for public works—and not just roads and bridges.  There’s no shortage of work that needs to be done, and we just gave companies $1.4 T to not do it.  Even Adam Smith knew that not every job that needs doing will be magically performed by the private sector.

It’s a simple as that.  Most wars are fought out of stupidity.  Including trade wars.

 

One thought on “Instead of Trade Wars

  1. Pingback: The Firebug | on the outside

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