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Cooperation, Not Combat

The trade war with China accelerates as the Trump administration’s latest tariffs have been matched. Talks have broken down, and Trump seems to think that the taxes are paid by China, not US consumers. He’s not going to back down anytime soon.

Where does it stop? If the end goal is an even trade between the two nations, it’s not actually possible to accomplish it this way – unless it drops to zero. There are systemic problems in world trade generally and China specifically which create this issue that can and must be worked out. A competent administration would do that hard work and create a world that is much more even all around.

But no, we’d all rather just bully our way to prosperity or something.

Where are all those containers going?

What exactly are the disputes with China which are valid? The list is rather long and includes the most important aspects of a modern economy – strict intellectual property rights enforcement, an open banking system, and free exchange of services.

All of these issues were present when Japan, South Korea, and Malaysia were on the rise, to name three examples from three generations of the expansion of the developed world. Yet in all these cases the gradual absorption by the developed world was made easier by their relatively small size. China is simply too big to absorb without trauma.

Rather than run down the list in great detail, a general discussion of principles is probably the best place to start. From that, the division of these issues into areas where we can help and smaller pieces we can isolate and absorb slowly becomes obvious.

A top leader from all 31 of China’s provinces has been removed for corruption since 2012. They are serious about this.

This has to start with the rule of law and the protection of intellectual property in the form of copyrights, trademarks, and patents. China has pledged for decades that it will improve these protections but remarkably little has happened. Either the nation will not or can not do anything about it.

It is probably the latter which is the issue, strangely enough. The central government wants everyone to believe that it has strict control over everything, but in reality it does not. The issue at hand is corruption, which internally is the key issue in China and the centerpiece of Xi’s agenda. He knows perfectly well that the ability to pay a bribe to get local officials to look the other way is the main problem in China for a whole host of reasons, most of which make their own policies more difficult to implement and cause civil strife which makes the Communist Party increasingly unpopular.

Something has to be done for China, as much as it has to be done for US trade. Our interests actually align.

Money flows around the world far too easily, including dirty money.

The ability of local officials to get away with this depends in large part on their ability to move ill-gotten money outside of China. Their favorite destination? The US, where safe investments in the form of real estate and treasury bills can form a nice overseas cushion ready for a fast escape when the authorities close in.

We’ve written before about the money fleeing China, but not about how much of it comes from corruption. The long and short of it is that it’s a decent percentage and no matter what all this money coming in from China heavily distorts many things in the US. Chief among these is real estate on the Pacific Coast, where the price of everything has gotten completely out of hand.

What can we do about this? If Trump wants to build a wall to keep something foreign out, walls to keep this money out of the US would be a great place to start. In the long term, this necessarily means ending the global US dollar standard and creating a world currency to replace it, but in the short term strict currency controls would help a lot.  But these are also brute force measures, and it’s important to be careful – and temporary.

Yes, this would cause a serious reaction on Wall Street. But it would be far more effective than punishing farmers and small industry.

The journey of 10,000 li begins with the first step.  That includes climbing the mountain to becoming a developed nation.

Can the US actually help the situation rather than destroy everything with a trade war? The long and short of it is that yes, there is no doubt that we can. We are right to insist that China open up and that they create ways that they can keep money at home for proper investment in the growth of China. There are definitely things that we can and should do to help everyone work through this and gradually bring China into the developed world.

A trade war is, without doubt, the stupidest possible thing. Rather than threaten, we should be listening and looking for places where our interests align. Temporary measures are going to be necessary to work through major issues. But with cooperation we can do it. With retaliation we cannot.up the mounta

7 thoughts on “Cooperation, Not Combat

  1. Seems to me, Erik, that you have again slipped into writing about this from the standpoints of capital and intellectual property, without regard to “labor” and human rights. Since my priorities are different, I won’t say more…..

    • You are absolutely right! A fair criticism, for sure. What I would add is that the interests of labor align remarkably well with many of these issues, too. Capital restrictions are a good example of controlling the rich without damaging jobs and farm income. That’s really the main point.

  2. I agree with Alan. The goal has to be to support or shield or whatever the working people. I get the feeling that the Chinese government is there to increase the amount of work for people so why isn’t ours? If that means controlling the flow of money than I am all for it.

    • Again, the interests align here which is what I really meant. Looking at this things from a strictly national perspective is tricky in that it does leave out what’s important, but that is what I meant this time. Everyone would benefit from some capital controls and other re-alignment of how trade is conducted, particularly the end of the US Dollar as the world currency.

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