The True Axis of Evil (Part I)

The True Axis of Evil (Part I)

 “… the Reagan administration has failed to promote free trade. Ronald Reagan by his actions has become the most protectionist president since Herbert Hoover, the heavyweight champion of protectionists.”

 - The Reagan Record on Trade, Rhetoric versus Reality, by Sheldon L. Richman – Published by the Cato Institute.

By J.M. Hamilton (Originally Published 10-10-10)

George Bush first used “axis of evil” on January 29, 2002, during a State of the Union address, to describe the primary threats to U.S. and world stability: Iraq, Iran, and North Korea.   We now know that Iraq was not a threat (nobody is looking for WMDs, anymore).  And North Korea’s Kim Jong-Il, dictator of death’s twilight kingdom, when he’s feeling fine, only pokes his head up long enough to extort aid and financial assistance from the West.  For the moment, Iran’s nuclear ambitions are being sidetracked by a computer virus named Esther (who needs standing armies, the U.S., probably, has computer geeks writing malware code).   So much for the threat to the West poised by President Bush’s axis, instead we have two very serious threats to U.S. national security and world stability, and J.M.H. aims to take them both on.

The threats identified in this two part piece are, possibly, far more frightening than Islamic fundamentalist bent of global jihad, or rogue petrol states seeking nukes…. For the threats offered up cut to the core of the American economy, and have already begun to carry out the American dream.

A Slam Dunk for Bipartisan Support

Of the two threats, by the far the easiest one to target, politically, is China.  For Democrats, attacking this job draining succubus appeals directly to its core constituency, unions and labor.   By pegging the Yuan to the U.S. dollar and exploiting a limitless labor pool of impoverished Chinese, China literally exports its demographic problems and political unrest right onto America’s shores; and it holds with an iron fist the U.S. dollars, utilized to purchase China’s products.  Otherwise, the Yuan, if allowed to float, would naturally rise in value, making American products more affordable in the global market.   Therefore, the pegged Yuan, and the vast stores of U.S. dollars retained, gives China an unfair trade advantage over U.S. products.

For Republicans, taking on the People’s Republic of China harkens back to the days when the G.O.P. nearly ruled the known U.S. political universe.  For inspiration, think of the glorious commie bashing days of Eisenhower, Nixon, and Reagan!  What could invigorate the Republican base more than resurrecting the arch-nemesis of God, country, mom and apple pie?  Who said Reagan’s evil empire was defeated?  Why it’s alive and well, and kicking our economic ass; but not because of any superiority over American labor or American ingenuity, but rather, because of unfair trade practices and a U.S. government that has allowed this to happen.

Together, Democrats and Republicans can unite to defeat an economic foe, for entirely different political and ideological reasons.

Trade-o-lanche

In making our case, the U.S. Bureau of Economic Analysis provides us with some cold hard facts:

Period		Balance
	Total	Goods	Services
Annual
1992	-39,212	-96,897	57,685
1993	-70,311	-132,451	62,141
1994	-98,493	-165,831	67,338
1995	-96,384	-174,170	77,786
1996	-104,065	-191,000	86,935
1997	-108,273	-198,428	90,155
1998	-166,140	-248,221	82,081
1999	-264,239	-336,310	72,072
2000	-378,780	-446,233	67,453
2001	-364,393	-421,980	57,586
2002	-420,524	-475,345	54,821
2003	-494,183	-541,544	47,361
2004	-609,345	-665,631	56,286
2005	-714,176	-783,801	69,625
2006	-759,240	-839,456	80,216
2007	-702,099	-823,192	121,093
2008	-698,802	-834,652	135,850
2009	-374,908	-506,944	132,036

From the table: U.S. International Trade in Goods and Services: Exports, Imports and Balances

We can project from this table that the advocates of “free trade” have provided America with trade deficits that, if left unchecked, could ramp up to a trillion dollars, annually, very soon.

One sees from the BEA’s figures that a whole lot of jobs are being exported outside the United States.

We now know there is nothing free about “free trade,” when it costs Americans jobs, erodes the U.S. tax base, and leads to tremendous drain on our government, in the form of social payments and unemployment insurance.  “Free trade” also directly feeds our national debt – by cutting America’s taxable income base and increasing the aforementioned social service expenditures; and “free trade” further feeds the U.S. jones for easy debt financing, both private and public, as net Exporter countries send some U.S. dollars back to America in the form of debt financing.  

And the single largest contributing nation to the U.S. trade deficit (?), well this very same Bureau of Economics will tell you that would be China.

Slave Trade

To fight this true force of evil, the U.S. should leverage its preeminence as a world market to assist China in bringing about necessary societal reforms, so that China can become a global market that aids America in driving the world economy.  As it stands now, an elite cadre of communist party leadership, and a handful of crony capitalists, surfs a massive wave of Chinese humanity that is exploited daily as inexpensive labor; moreover, this leadership employs all, or nearly all, of the tools designed to curtail U.S. exports to China: from tariffs and taxes to insisting that American business, wishing to operate on China’s shores, partner with Chinese business.

In the worker’s paradise, Chinese labor does not enjoy the basic social services or safety net that Western democracies provide for its citizens; instead, the average Chinese worker, operating in an economic gulag, is paid a fraction of his American counterpart, and must save to provide for catastrophic medical care, and retirement.  So that by allowing China to carry on like this, we not only do America and American labor a tremendous disservice, but we allow Chinese leadership to continue to exploit nearly 20% of world’s population for communist elite enrichment.

If the Chinese government had any sense of morality at all, it would take some of its profits, and foreign reserves, and invest them in setting up a social safety net that would allow Chinese workers some semblance of dignity and discretionary income.  The result: a Chinese consumer society, and a self sustaining market for China’s massive productive capacity, and a rising middle class; of equal importance, it would take the monkey off America’s back to be the engine of global economic consumption, help prevent global currency and trade wars, and give the world’s exporters a new market with exceptional potential.

The Fear Card

China’s Red Leadership is no hurry to adopt these reforms, for they like things the way they are – with an elite fraction of society on top, reaping incredible profits, and more than a billion citizens beneath them, operating at a near sustenance level.  Setting up a safety net for China’s population will, undoubtedly, prove expensive in the short to intermediate run, as the cost of China’s labor rises; but in the long run profits should soar, as China transforms into a consumer society, and, ultimately, a preeminent world market.

To be sure some Western multi-nationals, of a manufacturing focus, may not like such an economic and social transformation, as the rising cost of labor increases the costs of goods sold, or erodes fat and rich profit margins on consumer electronics and other products.  Not to pick on Apple, whose products we all know and love, but does this company really need to enjoy a greater than 50% profit margin on iPhone, courtesy of suicidal Chinese labor and the predatory Chinese company, Foxconn?

No, unfortunately, in order to assist China’s Red Aristocracy to move forward, America is going to have to pull out every stop in the economic and political play book to leverage China into doing the right thing.  Trade sanctions and taxes on Chinese imports are a great beginning.  Labeling China a currency manipulator is another step.  Or worst case, by simply freezing China’s imports out of the U.S. market, we tap into the communist party leadership’s greatest fear: political and societal unrest. 

If you think the fat cats in Beijing and Hong Kong are tough, just think what hundreds of millions of angry and hungry Chinese workers looks like moving en-masse.

And will China actually dump its massive stockpiles of U.S. currency reserves, the scenario U.S. leadership fears most?  Not likely, for such an act will only serve to devalue China’s own holdings, remove their leverage card, and make American goods and services that much more competitive, globally.

The Long March!

A myth has sprung over the last couple of decades that China and the Chinese government are this warm cuddly capitalist bear, who means the world no harm.   Mr. Alan Abelson, of Barron’s, a financial weekly, over the course of many Saturdays, has eviscerated this fantasy that China is some sort of free market Disneyland, when nothing could be further from the truth.  Mr. Abelson’s weekly editorial, Up & Down Wall Street, gives us a clearer picture (e.g. IPOs and stock market to the contrary, the majority of China’s largest businesses remain under the control and watchful eye of the state; the economic planning of this command economy, and the infusion of funds into these large Chinese companies, is directed by technocrats within the big red machine; and the captains of Chinese industry who run these large companies work side by side with communist party cadres).

Chairmen Mao wrote in 1935:  "The Long March is a manifesto. It has proclaimed to the world that the Red Army is an army of heroes, while the imperialists and their running dogs, Chiang Kai-shek and his like, are impotent. It has proclaimed their utter failure to encircle, pursue, obstruct and intercept us. The Long March is also a propaganda force. It has announced to some 200 million people in eleven provinces that the road of the Red Army is their only road to liberation.”

Chinese leadership today, under threat from few if any countries, seems to have chosen a different path to “liberation,” one of crony capitalism and command economy; but the world should make no mistake that China’s leadership remains on that long march, even if it means a short run detour into faux capitalism.  American leadership has nothing to fear from an exploited and humble Chinese people, but should be highly weary of the goals, ambitions and designs of China’s communist party leadership, who appear bent on economic and political hegemony.  Perhaps a less sinister, but ultimately naïve read of the situation is: This same leadership is just trying to stay one step ahead of 20% of the world’s population?

This blog’s greatest concern is that China has, for the last couple of decades, lulled America into a sense of economic calm and a consumer opiate haze, as U.S. jobs have been shipped overseas, and America  and the American government has become addicted to cheap debt financing.  Meanwhile, Federal deficits spiral out of control, from over consumption, lack of national savings, and a shrinking tax base, and the need for ever increasing unemployment benefits.   And to what end (?):  A weakened, declining and debilitated United State of America.

Who also benefits by a diminished manufacturing base within America?   Why that would be U.S. banks and the shadow banking industry, who have become one of the larger employers in America, and who can in turn leverage this fact against our own government to pay for Wall Street’s financial disasters.

“You will never find a more wretched hive of scum and villainy. We must be cautious.”

Without firing a shot, China, and in this country a band of free market zealots (like some fifth column working its evil from within), has done more to harm and damage America, economically, than the Red Army ever could have done.   Why merely check out this nation's unemployment and underemployment rate of 20% or greater.   Look no further than Federal and State budgets and a government debt that is spiraling out of control; and glance at the last gasps of Federal Reserve policy, with yet another round of bank bailouts under the auspices of QE2, wearing the mask of monetary stimulus.

To be sure righting the balance of trade is not the answer to all of America’s economic ills, but it’s a good start; and to be sure, China is not the only nation who has exploited America’s “free trade” dogma for their economic betterment.  

But what is absolutely sickening are the elites at the Chicago school of economics who still tout this faded catechism as some absolute, when they are surrounded by the decay “free trade” has wrought, in Cleveland, Pittsburgh and Detroit.  There is no such thing as utopian “free trade,” only wealthy industrialist and manufacturers seeking out labor, tax and regulatory arbitrage, in order to maximize profits (and governments who in turn profit, or lose, but nearly always – at the expense of its people).

America’s share of the world economy has shrunk over time, but approximately 24% of global GDP still resides within U.S. borders, and we must leverage this fact in establishing U.S. trade policy.  We owe it to ourselves, and ultimately for the betterment of the citizens of the world, to insist upon fair trade and U.S. trade policies that mitigate the advantages of labor, regulatory and tax arbitrage.  It’s good for America and it forces some developing countries to catch up with the American economy, by creating their own, internal, markets to rely upon.  Once these self sustaining markets are established globally, in the so-called BRIC nations, and when the differences in tax codes, regulation and the cost of labor are mitigated, then fair trade and the global economy can take off as never before.

But until then, the U.S. should insist upon fair and equitable trade from its global partners, all the better to protect against predatory trade policies.

The True Axis of Evil, Part II, coming soon.

 Copyright JM Hamilton Publishing 2013