America • Infrastructure • Post • Technology • Trade

Boeing Max 8 Lesson: Why Domestic Manufacturing Is Vital

On March 10, Ethiopian Airlines Flight 302 crashed outside of Addis Ababa, killing all 157 passengers and crew. This followed October’s crash of Lion Air Flight 610 in Indonesia, which killed all 189 onboard. Both crashes involved Boeing’s 737 Max 8 jetliner.

China, Indonesia, and Ethiopia grounded the aircraft on March 10, suspecting the crashes were caused by technical problems. The European Union followed on March 12. The Federal Aviation Administration grounded all U.S. flights the next day.

Investigators revealed that the crashes likely were caused by mistakes in the plane’s software, which pushed the planes into uncontrollable dives because of bad data from a single sensor. Evidently, no software or hardware redundancies were in place.

Bloomberg reports that the Max Maneuvering Characteristics Augmentation System (MCAS) and flight-testing software, was in no small part written and developed by Indian subcontractors who had little or no prior experience in the aviation industry. Why would Boeing hire Indian subcontractors to tackle critical tasks? Because American engineers cost between $40 and $80 an hour. Their Indian replacements, in contrast, worked for  $9 an hour.

Boeing assumed that by moving its production to the Third World, it could exploit cheap foreign labor. This would allow Boeing to undercut its competitors, thereby gaining market share, boosting profits, and benefiting consumers all at once. No downside.

But that’s not how the world works. Everything has a price. In this case, while Boeing saved money on labor it also burdened itself with extra complexity and exposed itself to more “O-ring” vulnerabilities.

My Kingdom for an O-Ring
In 1993, Michael Kremer, a Harvard-educated developmental economist, wrote a paper called “The O-Ring Theory of Economic Development” in which he tried to explain why workers in some countries earn exponentially more than workers in other countries, despite doing the same job.

The theory also sheds light on how complexity can destroy not just a business, but the economy itself. Let’s start with an example.

Pretend you own a factory that makes glass vases. Two workers can make one vase: one blows the molten glass while the other paints the vase. If the vase is dropped then it shatters and becomes worthless.

You hire four workers. Two never drop vases and two drop them half the time. How should you divide your workers for maximum productivity? We instinctively want to pair a good with a bad worker—each team will have someone competent guiding it. Bad idea. If you do this then both teams will break half the vases.

Instead, you should pair the good workers together and let the droppers make a mess. Why? Together the good workers would succeed 100 percent of the time, while the droppers would succeed 25 percent of the time. On average, the teams would make vases 62.5 percent of the time—much better than half!

There are two lessons worth noting. First, vase production is fragile—a mistake at any point in the production-chain destroys the whole vase. This means that the chain is only as strong as its weakest link. Second, increasing the production chain’s complexity will increase the fragility in a nonlinear way. How?

Imagine you must also paint the vases. Although the two good workers succeed 100 percent of the time, they’re now forced to work with a dropper. Suddenly the factory’s productivity decreases to just half—one dropper ruins everything.

Now pretend you must varnish the vases too, adding a fourth step. Because your last worker is also a dropper, the factory’s output plummets to 25 percent.

Finally, let’s pretend that it takes 100 steps to make a vase. You hire 97 employees who always succeed, but three droppers slip through the cracks. In this case, your factory’s efficiency would decrease to just 12.5 percent—despite the fact that you have 97 perfect workers!

Thankfully, much of the economy is not subject to O-ring vulnerabilities because precision isn’t always critical, and many times mistakes can simply be fixed. For example, if a baker adds too much salt to his dough, the bread may taste salty but it will still be edible.

This is in stark contrast to many technologically-sophisticated products—like commercial jets—whose value can be erased by a mistake anywhere along the production chain. In Boeing’s case, a software failure relating to a single sensor can destroy the entire jet.

Subcontractors All the Way Down
I wrote in January that Boeing is a prime example of a company whose production-chain is subject to “O-ring” vulnerabilities. Why? In order for an aircraft to operate safely many critical components must work together more-or-less perfectly—the margin of error is tiny. This means that “droppers” pose a heightened risk.

Further, aircraft are technologically sophisticated products with long, complicated production chains. Because of the non-linear dynamics present in O-ring vulnerabilities, adding more steps to an already long production chain greatly increases the risk of failure.

Enter the Indian subcontractors.

Mark Rabin, a former Boeing software engineer, told Bloomberg that hiring Indian subcontractors “was far less efficient than Boeing engineers just writing the code” as “it took many rounds going back and forth because the code [written by the subcontractors] was not done correctly.”

Violà, the Indian subcontractors were the “droppers.”

Even if we assume that the Indian subcontractors were just as competent as their American counterparts, hiring them was a mistake simply because they added an extra link to the production chain. And as we know, this increased the risk of overall failure in a nonlinear way.

Unfortunately, passengers paid the ultimate price for Boeing’s obsession with complexity. I say obsession because this is not the first instance of Boeing being bitten by complex production chains.

Boeing’s 787 Dreamliner also suffered onerous delays, cost-overruns, and safety problems. Why? Boeing outsourced the design and production of the aircraft to some 50 different contractors, and the company likewise subcontracted the planes’ production.

In the end, God only knows how many different subcontractors, located in how many different countries, contributed to the aircraft.

Boeing in effect was building a puzzle in the shape of an aircraft, without any way of knowing if there were any “droppers” until it was too late. This is the economic equivalent of the Hindu’s infinite regression—it’s subcontractors all the way down.

O-ring vulnerabilities are not just Boeing’s problem: they’re America’s problem. Why? The supply chains of most American corporations are so entangled with foreign producers that at this point even small disruptions or mistakes in remote corners of the world could bring leviathans of industry—like Boeing or Apple—to their knees. And with them, America itself.

America’s Founders were well-aware of the risks that complexity and foreign suppliers posed, and it is part of the reason that America’s first substantive piece of legislation was the Tariff Act of 1789. If America is to remain prosperous and free, we must simplify our economy by removing unnecessary steps—by firing our Indian, Chinese, and Mexican subcontractors.

We need to bring our factories home.

Photo Credit: Mark Wilson/Getty Images

America • Democrats • Economy • Elections • Hillary Clinton • Post • Republicans • Trade

Richard Trumka and Big Labor Try to Come Home

Richard Trumka needed to come home.

Walking into the union hall at the Pittsburgh Federation of Teachers building along the Monongahela River, the AFL-CIO president shed the twisted expression on his face as he shook hands with his rank-and-file organizers. With the older union hands, there were no handshakes but instead familiar hugs.

Trumka, the son and son-in-law of coal miners, grew up in the Western Pennsylvania region, working the coal mines himself, in the hollers of the mountains before heading off to college.

He rose up the ranks of the United Mine Workers of America union during the bloody strikes in the 1980s and eventually became the head of the 12.5 million-member AFL-CIO, the nation’s largest labor union.

His passionate speech on race and labor in support of Barack Obama in 2008 is legend around these parts.

Trumka seems to recognize the men and women in the room here are the men and women who were ignored in the last presidential election. Hillary Clinton ignored them, not because she didn’t want their vote but because she took it for granted. Clinton’s campaign even persuaded union leadership that microtargeting voters on gender issues was more important than peer-to-peer communication among union families on the issues of jobs and opportunities.

Clearly, it wasn’t. The blue wall of Pennsylvania, Ohio, Michigan, and Wisconsin crumbled in 2016. Exit polls showed Clinton did win union households, but her shortfall among these households, compared with Obama’s numbers, was her downfall in Michigan, at least.

Democrats had lost sight of what mattered to working people, and they had made the union bosses forget as well.

During the 2016 election, labor leaders got caught in the middle of several transitions, explained Paul Sracic, a political science professor at Youngstown State University: “For years they walked lockstep with the Democratic Party. This made sense, because most Republicans were tone-deaf to the concerns of labor, and the Democratic Party still had enough social conservatives in it to allow union members, many of whom were very socially conservative, to not feel out of place.”

As the Democrats rapidly moved to the left on social issues and embraced identity politics, rank-and-file union members began to feel alienated from their own party. Economic interests, including trade, kept many of them in the party, but they were leaving even before Donald Trump.

When Trump went after trade, however, they got the push that they needed to join Trump’s party, explained Sracic. “Leadership, however, was busy in Washington D.C. and had longstanding relationships with Democratic politicians,” he said. “Hanging out with Republicans seemed unnatural, and in fairness, most of the Republicans in Congress, especially the Senate, wouldn’t have much to talk about with someone like Richard Trumka.”

In a way, though, the union leaders got co-opted and just went along with the leftward shift on social issues.

And as the Democratic Party became more coastal, its core voters became increasingly internationalist, including on trade.

Obama papered over these differences, running on anti-trade rhetoric to please people like Trumka and then governing as a free trader.

“The rank-and-file union members lost faith in the Democrats, and now leaders like Trumka are in a difficult position,” Sracic said.

Trumka kicked off a three-day tour, beginning in Pittsburgh Monday and followed with stops in Youngstown, Akron, Cleveland and Toledo in Ohio, as well as Detroit, in the following days. Why? To reconnect with “the people.” He wanted to hear what workers think about the new United States-Mexico-Canada Agreement, a trade agreement to replace the hated NAFTA.

“This tour is the people purpose. One it is to inform our members of the state of the negotiations we’re at with the trade agreement. And two, it’s to hear from them—get some instructions back from them,” he said.

Darrin Kelly, president of the Allegheny County Labor Council, said the AFL-CIO affiliate was pleased by Trumka’s visit. “It is important that we are heard. And we want everybody to know that the Rust Belt still has a strong voice in organized labor,” he said.

Dave Green was at Trumka’s roundtable visit in Youngstown. Green is the president of UAW Local 1112 and one of the final seven UAW workers to turn out the lights at the now-shuttered General Motors Lordstown Assembly Plant. He does not think labor failed the workers in his area in the last election. “I think the Democratic Party failed labor,” he said. “They did not talk about jobs, or opportunity, or the dignity of work.”

“And that’s why Trump won in my hometown, because that’s all he wanted to talk about: jobs and opportunity,” said Green, who himself did not vote for Trump.

It’s unclear who will earn labor’s support in 2020, but it’s crystal clear to Trumka what union leadership has to do, and he tells me his plan before he approaches the podium: “Listen.”

COPYRIGHT 2019 CREATORS.COM

Photo credit: Chip Somodevilla/Getty Images

America • Economy • Post • Trade

Free Trade and the ‘Cheap Goods’ Delusion

Between 1348 and 1352 a monstrous plague—the Black Death—ravaged Europe. The disease struck young and old, men and women, saint and sinner alike. Half the population died. Whole cities disappeared. Western Civilization was on the brink of collapse.

What caused this plague? Bad smells. Foul odors. The stench of decay. This was considered unequivocal, scientific fact—that is until we invented the microscope and discovered that an entire world of miniature animalcules existed right under our noses. In time we realized that these creatures caused illness: germ theory was born, and with it died the centuries-old miasma theory of disease.

Received wisdom—no matter how venerable—should always be treated with a healthy dose of skepticism. This is especially true when it comes to economics, as money brings out hucksters who sell snake-oil bottled as genuine emollients.

Bluntly: many economists are crooks and liars.

The biggest lie they tell us is that international free trade makes stuff cheaper. It doesn’t. It simply enriches the white-collar gangsters who run our banks—the very people who so often fund “libertarian” think tanks. Go figure.

The Bigger the Lie . . .
Free-trade theory is based on the work of the two titans of economics: Adam Smith and David Ricardo. In The Wealth of Nations, Adam Smith explained that prosperity is a function of productivity, and productivity is itself a function of labor specialization: more specialization means more productivity, and more wealth.

Smith fleshed out his idea in his now-classic example. Imagine two pin workshops. In one workshop each artisanal worker makes his pin from start to finish, meticulously stretching the wire and hammering-down the pinhead. At that rate each man “could scarce, perhaps, with his utmost industry, make one pin a day.” In the other workshop the men divide their labor so that each handles one simple task:

One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head . . . the important business of making a pin is, in this manner, divided into about eighteen distinct operations . . . I have seen a small manufactory of this kind where ten men only were employed . . . [and by dividing their labor] those ten persons, therefore, could make among them upwards of forty-eight thousand pins a day.

For Smith, the key to prosperity is an efficient division of labor. Likewise, the key to economic growth is to divide labor—to break production steps into smaller and smaller chunks. This works, but only in the short term. In reality, Smith’s pin-makers can only subdivide their task so many times before the process is maximally efficient. Once this point is reached, additional economic growth is impossible according to Smith’s theory.

And yet economic growth continues unabated. Why? Because technology drives long-run economic growth, not labor specialization. This fact is painfully obvious.

For example, books used to be made in monasteries. Lone monks would meticulously ink each word in delicate calligraphy, and illuminate the manuscripts with indigo dyes and beaten gold. The Book of Kells is one of the most glorious examples of this art.

By the dawn of the Renaissance, books were big business. Workshops filled with scribes copied texts, while binders bound the volumes, and illustrators illuminated the pages. Adam Smith would have been proud. By roughly 1450, the Europeans had maximized the division of labor in bookmaking—it was the end of the line for Smithian growth.

Then along came the printing press. Suddenly, whole pages could be printed in seconds by an illiterate peon. This increased productivity exponentially and dramatically reduced prices. In Renaissance Florence, for example, a scribe could produce a copy of Plato’s Dialogues for one florin. In 1483, the Ripoli printing press opened up shop. It could produce 1,025 copies of Plato’s Dialogues for three florins—the price to print this book plummeted by a multiple of 341, or 99.71 percent!

This is not an isolated incident: the same thing happened with the invention of railroads, forklifts, and computers. Technology, not labor specialization, is what drives long-run economic growth. This explains why the Soviet Union, despite its comically bad allocation of labor, was an order of magnitude richer than Victorian Britain, whose division of labor was par excellence—and infinitely more prosperous than Mycenaean Greece, despite the latter’s sophisticated and “internationally” integrated market economy.

Although this is news to most economists, my point is not new. Robert Solow in 1956 found that technological progress accounted for 80 percent of the long-term rise in America’s per capita income. The remaining 20 percent was caused by capital accumulation. How much was caused by a more efficient division of labor in a Smithian sense?

Zero.

This is a big problem for free traders, who argue that free trade makes America richer by increasing the available labor supply, and thus increasing the degree to which we can specialize our labor. Not only is this wrong, it lacks even the faintest air of reality—and yet propaganda mills like the Cato Institute churn out reams of articles dedicated to pushing this myth on the American public.

“Man . . . How Ignorant Art Thou in Thy Pride of Wisdom!”
In his magnum opus On the Principles of Political Economy and Taxation, David Ricardo explains that international free trade enriches countries by allowing them to maximize their comparative advantage. The theory of comparative advantage is the linchpin of the free trade movement. Unfortunately, comparative advantage is a sham.

At its heart, the theory is straightforward: countries should trade things they are relatively good at making for things they are relatively bad at making. This makes the economy more efficient, and therefore makes everyone richer.

To illustrate his point, Ricardo concocted a now-classic example: suppose there are two countries, England and Portugal. Both make cloth and wine. It takes England 100 man-hours to make a bolt of cloth and 120 hours to make a barrel of wine (220 hours to make one unit of each). Clearly England is relatively better at making cloth than wine.

Meanwhile in Portugal it takes only 90 hours to make a bolt of cloth and 80 hours to make the wine (170 hours to make one unit of each). Although Portugal is absolutely better at making both products, it is relatively better at making wine than cloth. Thus, Portugal has a comparative advantage in making wine, and England has one in making cloth. Ricardo concludes that each country should specialize in making what they are best at (England, cloth; Portugal, wine) and trade with each other to acquire the rest.

Mathematically, comparative advantage makes some sense. If neither country specialized, it would take 220 hours for England to make one unit of cloth and one unit of wine, while Portugal would take 170 hours. But if they both specialized and traded, then the same labor could make 2.2 units of cloth and 2.125 units of wine—like magic, specialization and trade makes everyone richer.

Free traders argue that this logic applies globally. If every region specialized in making goods for which it has a comparative advantage, then the global economy would be maximally efficient and we would all be richer.

The extrapolation is mistaken.

Ironically, the best critique of comparative advantage comes from David Ricardo himself, who acknowledges that his theory is domain-specific—it only applies when certain antecedent conditions are met. Ricardo writes:

. . . it would undoubtedly be advantageous to the capitalists [and consumers] of England… [that] the wine and cloth should both be made in Portugal [and that] the capital and labour of England employed in making cloth should be removed to Portugal for that purpose.

Ricardo says explicitly that comparative advantage suggests that it makes sense for England to import both cloth and wine from Portugal, and that England’s cloth-making industry should be—to use modern parlance—offshored to Portugal.

Of course, Ricardo knows this would be a losing strategy for England. If England imported everything and made nothing, it would have no economy. Further, England would be vulnerable to foreign suppliers. Ricardo adds an intellectual buttress to ensure that the temple of trade will not collapse. He writes: “most men of property [will be] satisfied with a low rate of profits in their own country, rather than seek[ing] a more advantageous employment for their wealth in foreign nations.”

There you have it, comparative advantage—global free trade itself—is based on the assertion that men love their country more than money, and will invest domestically because they are patriotic. Fat chance. Gordon Gekko was right: “greed is good.” Greed is the name of their game.

Ricardo also used a more technical defense of comparative advantage from this obvious flaw. He argued that offshoring is impossible because capital is immobile—England’s textile mills could not move to Portugal. This is the antecedent condition I mentioned earlier. Comparative advantage is domain-specific because it only applies when capital is immobile and thus offshoring cannot occur.

But of course, capital is highly mobile in today’s economy—a factory can be relocated from the United States to China virtually overnight and transportation for bulk goods is unbelievably cheap. Despite this obvious, and explicit limitation, the free-trade brigade routinely trots out the theory of comparative advantage in defense of free trade as if it were a prize stallion. In reality, it is a dead horse.

Because free trade has nothing to do with long-run economic growth, it necessarily has nothing to do with long-run reductions in consumer prices. As such, the entire “freer trade means cheaper goods” argument is nothing but a myth perpetrated by jesters and charlatans. Be warned.

Photo Credit: iStock/Getty Images

America • Center for American Greatness • China • Donald Trump • Foreign Policy • military • Post • Trade

To Beat China, Recognize Taiwan

The Sino-American trade war is only just beginning. Initial reports show that the American side is faring better than the Chinese, but these reports are hardly conclusive. As David P. Goldman has assessed, China still has a great deal of maneuvering room with which to bludgeon the United States.

What Washington needs in its ongoing trade war is greater leverage. And, that leverage will not be found in the economic realm.

True leverage would keep China’s leadership off-balance. To that end, the United States should recognize Taiwan’s independence.

Beijing has long insisted that Taiwan is part of China and that the two “will be united” . . . someday. Chinese President Xi Jinping, moreover, won’t rule out the use of force in achieving this long-standing aim. Beijing believes it is a fait accompli that Taiwan will be returned to Chinese rule just as the British ultimately gave up prosperous Hong Kong. And once Taiwan is brought under its dominion, China will have secured its maritime border.

One China, Two Systems?
The United States, for its part, has for 40 years tried to thread the needle between appeasing China and backing Taiwan’s independence in all but name.

Under the naïve leadership of President Jimmy Carter, U.S. policy shifted away from active support of Taiwanese independence. Instead, Carter embraced the Chinese concept of “One China, Two Systems.” This was a shocking giveaway to Beijing, trading real leverage for empty rhetoric. Ever since, Taiwan has existed in a precarious diplomatic gray zone: it is neither totally sovereign nor subordinate to China. What’s more, China has been emboldened to wage a ceaseless, decades-long economic war upon the United States.

“One China, Two Systems” is a lie. There is only one China, with its Communist system, and one Taiwan, with its democracy.

Given 40 years of history, China wouldn’t expect the United States to be so bold so suddenly—even with a disruptor like Donald Trump in the White House. In the past, the Chinese have said Americans would be unwilling to trade Los Angeles for Taipei—a thinly veiled warning that Beijing would respond to U.S.-backed Taiwanese independence with nuclear weapons.

Nuclear Perils
Would the Chinese go nuclear over Taiwan’s independence? China certainly poses a serious nuclear threat. Beijing has spent much time and effort building its “underground Great Wall,” an intricate, 3,107-mile system of concrete tunnels where the Chinese store and transport an unknown number of nuclear weapons.  

And certainly, China would increase its military brinkmanship. But China would also have to contend with the judgment of the world as its leaders make short-sighted decisions in competition with the United States.

And what would the United States do? Until recently, our options were limited. U.S. missile defenses are sparse. But what we do have is deterrence. It should come as no surprise that China has expressed concerns about the Trump Administration’s decision, at long last, to pull the United States out of the Intermediate-Range Nuclear Forces (INF) Treaty. The Cold War-era treaty barred the United States from developing intermediate-range ballistic missiles. China never signed the INF Treaty and so has pursued its mid-range missile program unhindered.

Today, as tensions between Beijing and Washington intensify—and as China has grown wealthier and more militarily capable—Beijing has become more bellicose toward Taiwan. Xi Jinping has not only vowed that Taiwan will be brought to heel at some point in his lifelong presidency, but under Xi, China’s military has made investments in amphibious warfare capabilities that would make an invasion feasible. China-watcher Ian Easton is concerned that China will act aggressively toward Taiwan within the decade.

Thus, the Trump Administration must take bold steps in not only increasing its defense of the besieged island of Taiwan, but Washington must officially recognize Taiwan as a separate state from China—privy to all of the same protections and benefits that are given to sovereign states.

Fall Like a Thunderbolt
Douglas MacArthur once described Taiwan as an “unsinkable aircraft carrier.” From the U.S. perspective, the island provides an advantageous geostrategic position for American and allied forces to undermine China’s hegemonic grand strategy. Lose that, and China has the ability to push beyond its maritime borders and threaten Japan, the Philippines, and other distant places.

For their part, the leaders of Taiwan have long abandoned the pretense that theirs is the only legitimate government of China and favored independence from their larger, authoritarian neighbor.

As the great Chinese strategist Sun Tzu once said, “Let your plans be dark and impenetrable as night, and when you move, fall like a thunderbolt.” If Trump were to suddenly announce a complete reorganization of America’s defense posture in northeastern Asia, the Chinese would be off-balance.

America’s goal is to either force China to comport with a “rules-based order” (which is unlikely) or to weaken China so much that it cannot threaten the U.S.-led international order any longer. Recognizing Taiwanese independence would completely upend the Chinese position.

Consider, too, if the United States announced that it would most—if not all—of its forces from South Korea and reposition them in Taiwan, this might also prompt Kim Jong-un to seek accommodation with the West rather than continue to let himself be used as China’s pawn.

Each time tensions between China and the United States increase, North Korea has conveniently been stirred into taking action that distracts Washington from dealing more forcefully with Beijing. At some point, Kim will want to remove himself from China’s vice-grip and secure his own interests.

Right now, the Chinese are convinced they can weather the Trump trade storm. But as Trump said in The Art of the Deal, “My style of deal-making is quite simple and straightforward. I aim very high, and then I just keep pushing and pushing and pushing to get what I’m after.”

The president can live up to those words with Taiwan. Let’s keep the Chinese off-kilter, right a historic wrong perpetrated by short-sighted U.S. leaders, draw Taiwan closer to the United States—and in the process ensure that China will never achieve hegemony over the Asia-Pacific, let alone the world.

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Center for American Greatness • Greatness Agenda • Trade

Trump Shows Value of Tariffs as Foreign Policy Tool

The great American foreign policy debate began with the two parties’ divide over Vietnam. Until the Vietnam War, Republicans and Democrats more or less held to a consensus on the value of containment. After the war, Republicans favored unilateralism, a strong military, and clear-sighted pursuit of national interests that included the use of force against foreign threats. George W. Bush exemplified this thinking, and his early, bold action in Afghanistan after September 11, 2001, found success in spite of knee-jerk criticism from the Left.

On the other side, the Democrats favored multilateralism, negotiations and diplomacy, and a preference for domestic wealth redistribution over military investment. A persistent Democratic criticism of the Iraq campaign was not that it tried to introduce democracy into a broken part of the world, but rather that Bush failed to obtain the blessing of France. Democrats, particularly John Kerry in the 2004 presidential campaign and Barack Obama in 2008, treated diplomacy like magic, where consensus was an end in itself. Mere talking would align other nations more closely to our preferred path.

The main foreign policy debate of the 2004 and 2008 elections was the Iraq war. In 2004, Bush remained firm in his conviction that we had to fight America’s jihadist enemies using our military and continue doing so until events had reached some reasonable level of peace. At that time, Americans were still scarred by the 9/11 attacks and optimistic about his solution.

By the 2008 election, however, much of the country—including many Republicans—had soured on interventionism and war. Obama ran and won as a peace candidate, whose sensibilities could not have contrasted any more sharply with those of John McCain. Iraq made the nation and the Republican Party more cautious about foreign policy adventurism.

Trump’s tariffs on Chinese and Mexican goods make great use of America’s economic leverage. American strength is its industrial base and economy. Foreign nations want to sell here, and they also want to buy what we are selling.

Obama’s stance on foreign policy and Iraq was very much in the mainstream of the Democratic coalition, emphasizing the importance of other nations’ viewpoints and often invoking his international upbringing. As with members of both parties, though, Obama was a “neoliberal” committed to the broad tenets of globalism. Thus, he favored the free movement of capital, goods, and people to wherever the economy dictated. Protectionism or the use of tariffs for other foreign policy purposes was anathema for him, as well as most other Democrats, just as it was for the pro-business, free-trade-oriented Republicans.

Until Trump, no one in either party seriously contemplated the use of tariffs as a tool, not of protectionism, but of foreign policy.

The binary choice was typically framed as one of war or diplomacy. Certain measures short of war—such as “no-fly zones” and sanctions—would also be recognized as useful, but all of these required the application of military power or international consensus to be successful. As such, they would only be used against the most hostile powers and for the most severe offenses.  They were an imperfect tool, as the costs they inflicted were often disproportionate to the issue at stake, leading to mass starvation in nations like Iraq and North Korea.

An Intermediate Option

Trump’s use of tariffs as a foreign policy tool is unique. While a familiar feature of America’s 19th-century political debates, those proponents of tariffs sought primarily to build America as an emerging industrial power. Tariffs were not then conceived of as a weapon to wield against foreign competitors. The debate was domestic, pitting the industrial North against the agricultural South, and later the agricultural Midwest.

In the 20th century, tariffs fell into disuse after the Great Depression. Economists blamed them for worsening the Great Depression—a complicated question—and, in spite of earlier views, Americans of all stripes strongly supported free trade when the nation emerged from World War II with the natural advantage of a large, intact industrial capacity compared to all of our foreign competitors.

During the Cold War trade was seen as a liberalizing force, where American pop culture, fast food, and consumer goods were used to demonstrate the economic and cultural vitality of the West in contrast to the drab Soviet system. One of the great cold warrior Ronald Reagan’s first acts was restoring grain exports to the Soviet Union. After the Cold War, hardly anyone questioned free-trade orthodoxy.

The role of trade in the devolution of the Soviet Union had much to do with trade liberalization with communist China. Even after the regime’s 1989 massacre of students at Tiananmen Square, full-throated condemnation was hard to come by. President George H.W. Bush vetoed congressional action seeking to impose tough tariffs.  Throughout the Clinton and George W. Bush presidencies, China traded with the West, the West’s investment in China increased, and China began to displace higher-priced manufacturers in the United States, Europe, and even developing countries like Mexico.

Trump came on the scene, and in spite of his alleged lack of expertise, made a clear-headed appraisal of reality. Namely, our military interventions in most of the world cost a lot and provided little benefit, and, at the same time, we were allowing China to play us for suckers through their unified economic and defense policy. China stole technology, restricted access to its markets, and was building an increasingly capable military, while western powers stuck to the outdated free trade formulae of the past.

Trump’s background as an actual participant in business had a more nuanced sense of how to pressure adversaries. The old paradigm—force versus diplomacy—was not realistic. Diplomacy must be backed by threats of force or some other sanction. But force is either too expensive, unrealistic, or overly provocative in certain situations. Less provocative and complex tools are called for that still send a message and impose a cost.

Trump’s tariffs on Chinese and Mexican goods make great use of America’s economic leverage. American strength is its industrial base and economy. Foreign nations want to sell here, and they also want to buy what we are selling. Our economic strength comes from our legal regime, resources, and people.

And our military power flows from our economic strength. While our military comparative advantage is significant, it is not infinite. American military power has achieved lackluster results in the more chaotic parts of the world, particularly the Middle East.

More importantly, this tool is not useful in relation to China, as there is no realistic way we would risk war with China or other large, nuclear-armed powers.

Tariffs, by contrast, do have an effect and can be realistically threatened prior to use. Like war and other applications of national power, they are not free. The economy has faced some headwinds from tariffs against China, and this week’s application of tariffs against Mexico has delivered an additional blow. That said, these are not necessarily permanent measures; they are foreign policy tools designed to encourage compliance. Without a stick, the only tool in the nation’s arsenal is the carrot of wishful thinking, which has delivered little previously in the way of compliance from either China or Mexico.

Mexico has failed to control the transit of Central Americans and other illegal immigrants into the United States. Like China, Mexico is highly dependent on access to American markets. While certain goods and industries may be disproportionately affected, tariffs are far preferable to endless jawboning by diplomats who have no ability to back up their words with pressure. A New York Post report shows some encouraging signs: “Mexico’s president suggested he was open to tightening immigration controls following a threat from President Trump to impose tariffs if the US’s southern neighbor doesn’t put an end to illegal immigration to the States.”

China, by contrast, has been more recalcitrant in both its economic and foreign policy, but one benefit of their decades-long limitation of access to their markets is that their exporters are more numerous and more dependent on American markets than the reverse. China tariffs will encourage domestic substitution or the growth of more friendly powers’ industries, lessen dependence on China, and show our nation collectively that slightly higher-priced consumer goods are a bargain compared to a continuation of the old policy. Tariffs also will show other nations that there may be real consequences for behavior that damages our nation and our economy.

Tariffs do accord with the Republican preference for unilateralism. Tariffs do not require the imprimatur of the United Nations the way formal sanctions do, and when a nation has “monopsony” power relative to exporter nations, they create real consequences that we have the power to impose upon hostile foreign powers.

Secondary Benefits

In addition to being a realistic, intermediate, and relatively low-cost foreign policy tool, tariffs provide other benefits.

They permit the shaping of trade relationships to further other policy goals. A wealthy and stable Mexico or Japan is good for America. In the case of the former, it reduces illegal immigration, drug-related crime, and the possibility of a massive refugee flow from the south. In the case of the latter, a friendly nation that has provided consistent diplomatic and other support is enhanced relative to a hostile China that threatens both nations.  

In addition, to the extent domestic manufacturing is substituted for imported Chinese goods, tariffs provide domestic benefits. They expand American jobs, American wealth, and reduce dependence on an uncertain and hostile foreign power. These are good results from the perspective of national power, even if such enhancement is not taken into account by traditional thinking on economics and foreign policy.

As I argued in January, “Trump’s tariff policy is ultimately restorative. It restores the balance between international finance and domestic manufacturing. It restores our country’s ability to be independent by preserving necessary industries like steel refining on which our national defense depends. It restores jobs to the country’s interior and wages to American workers, even if it may have some marginal impact on our mega-wealthy coastal centers.”

In this sense, tariffs are unlike sanctions, war, no-fly zones, or other applications of national power. Whereas these legacy tools impose high costs in the form of military spending, global prestige, and the loss of our servicemen’s lives, tariffs may actually increase national power and wealth while reducing that of our adversaries. But even if this wasn’t the case—and there are undoubtedly some costs and losers when we apply tariffs—the costs of tariffs to the nation are more bearable compared to the costs of war and more effective than the Obama-era paradigm of diplomatic negotiations unmoored from any realistic sanctions in the case of the failure to reach a deal.

Trump has occasioned massive resistance from the establishment, broadly understood. At the same time, he has exposed the establishment’s sclerotic and short-sighted thinking, its self-satisfaction in the face of mediocre results, and its failure to address long-term problems, such as the rise of a hostile China. Never does the intelligence and freshness of his thinking and approach contrast more sharply with that of the establishment than in his bold use of tariffs as a tool in foreign policy.

Content created by the Center for American Greatness, Inc. is available without charge to any eligible news publisher that can provide a significant audience. For licensing opportunities for our original content, please contact licensing@centerforamericangreatness.com.

 

America • Center for American Greatness • China • Donald Trump • Economy • Foreign Policy • Post • Trade

The U.S. Doesn’t Need China to Prosper

The latest numbers on U.S. economic growth are astonishingly good. The land of the free enjoyed 3.2 percent annual real GDP growth for the first quarter of 2019. It would have been even higher—3.5 percent—without the government shutdown.

The numbers vindicate President Trump’s position on trade. The dealmaker-in-chief has been saying for decades that a trade deficit is a drag on growth. And we now learn that almost 1 percent of our GDP growth was a result of a reduction in imports.

Imports are down because Trump’s tariffs are driving down the trade deficit with China. Now that he’s increased tariffs on $200 billion more of Chinese goods, expect the U.S. economy to grow even faster.

Even investors, who have long been wary of tariffs, are now beginning to understand this. Despite the uncertainty surrounding trade with China, the stock market has experienced only modest losses, reflecting the overall strength of the U.S. economy.

The United States has put up with Chinese economic aggression for far too long, under both Democrat and Republican presidents. The Trump Administration has taken a decidedly different tack, pursuing an economic nationalist agenda that insists:

  • We must defend ourselves against China’s relentless cyberattacks on American businesses, and its theft of hundreds of billions of dollars in intellectual property each year.
  • We must stop China’s state-owned, state-subsidized and state-controlled enterprises from the wholesale dumping of products. Flooding foreign markets with steel and aluminum, not to mention autos and robotics, is only the first step. The end game is the destruction of free-market capitalism altogether.
  • We must stop China from forcing America companies to hand over their cutting-edge technology as a condition of doing business there. Forced technology transfer is theft, pure and simply.
  • We must stop China from manipulating its currency to gain an unfair advantage in trade.
  • Finally, we must defend Americans from the flood of fentanyl and other dangerous opioids that are killing them by the tens of thousands. The first two Opium Wars were waged by Great Britain against China. The Third is being waged by China against the United States and its people, and it must stop.

For the past two years, President Trump has sought to reach an agreement with Xi Jinping on these and other issues. And when Xi, meeting with Trump at the G20 Summit in Argentina, asked for more time, the president generously extended the tariff deadline by six more months. The Chinese agreed.

As that June 1 deadline approached, Trump stated publicly that he was looking forward to inking a trade deal with Xi before the end of the month. But the Chinese quickly rebuffed the idea, suggesting that the U.S. president was simply trying to pressure them into a deal.

Then Chinese leaders reneged on large parts of the trade agreement that had already been negotiated—literally at the last minute.

It was a textbook example of bad-faith dealing.

Did Xi ever intend to keep his promises, or was everything he said in Buenos Aires a strategic deception, intended to lull the United States into complacency about China’s intentions and buy time?

Communist strongmen generally hold Western politicians in contempt. Xi may have believed that Trump would go for a soft deal that China could ink and then go back to cheating as usual. Or that he could string out the negotiations until the 2020 presidential election.

If so, it didn’t work. It was evident to Trump—as it should by now be evident to every American—that China simply refuses to play by the rules.

Indeed, in internal party documents, China’s leaders scoff at the very notion of “the rule of law,” viewing it as a Western plot to undermine their continued rule.

Fortunately, we have a president who is now more determined than ever to defend us, our jobs, and our industries from this unprovoked Chinese aggression.

And the first line of defense in the war of aggression being waged by China is tariffs.

The tariffs are bad for China but very good for America. American companies that in the past would have offshored production to China will stay put. Some companies that have already left will be coming back. Whatever the opposite of “offshoring” is—inshoring? reshoring?—we are about to see it happen.

We should expect that China—the Bully of Asia—will try to retaliate. In fact, they have already begun to threaten to do just that. It’s unlikely that President Trump will back down, however. He understands that we buy $5 worth of goods from China for every $1 the Chinese buy from us. That gives us much more leverage.

As far as the soybeans and other grains that China will no longer buy from us, Trump has already announced a plan to make sure that America’s farmers are not hurt. Some of the tariff money will be used to buy and ship grain to parts of the world suffering from chronic food shortages.

If there ever was a time for politics to stop at the water’s edge it is now. The good news is that there is growing bipartisan support for the president to stand up to China.

After decades of cheating in every way imaginable, China has finally worn out its welcome in Washington.

Content created by the Center for American Greatness, Inc. is available without charge to any eligible news publisher that can provide a significant audience. For licensing opportunities for our original content, please contact licensing@centerforamericangreatness.com.

Photo Credit: Jason Lee – Pool/Getty Images

America • Center for American Greatness • China • Donald Trump • Free Speech • Government Reform • Infrastructure • Post • Technology • Trade

Stop Whining About Google and Do Something

Some friends on the Right are angry about Google’s opaque efforts to block prominent conservative personalities and think tanks from the search engine and the company’s advertising program. Their anger is understandable, but why is anyone surprised? Despite a short-lived and undeserved reputation for libertarianism, the tech industry has always leaned left. Today, Silicon Valley is evangelically liberal and very rich—a nasty combination.

A move toward a kind of left-wing, techno-totalitarianism was predictable—and predicted.

Why else do you think Google happily made common cause with the most totalitarian state in the world, the People’s Republic of China, while at the same time repressing American conservative groups and individuals?

Don’t forget that the Department of Defense, in dire need of support from American tech firms, last year offered a $10 billion contract to whichever American tech firm could build the Pentagon’s cloud computing system. Google was among one of the top bidders. Google would have been a natural fit for the project, since the tech giant is a pioneer in cloud computing. But, following a protest from some employees about helping America’s “war machine,” Google took itself out of contention. Amazon remains a competitive bidder, but the fact that Google abandoned the project not because it might damage their financial interests, but instead out of ideological opposition to the U.S. military, is—to say the least—disturbing.

This occurred, incidentally, as Google was moving its artificial intelligence research arm into China. Undoubtedly, the move to China will help Google’s bottom line. After all, China is a massive untapped market and it is rapidly growing into the world’s most dynamic technology innovation hub. But everyone knows that China has a pernicious state capitalist system. Therefore, any American firm doing business in China will be required to share proprietary data with Chinese state-owned enterprises.

Even if Google desires to keep their artificial intelligence research confined to the civilian realm, they will be unable to keep it that way for long. Inevitably, Chinese entities will get their hands on Google’s research and reproduce it indigenously—and not merely for civilian consumption. In effect, the next generation of advanced Chinese weapons might be run by an artificial intelligence that Google helped to develop, even as they refused to do business with the U.S. military.

While this occurs, Google creates algorithms meant to stymie the free speech of conservative Americans. Many Google employees believe we Rightists are racists, fascists, bigots, war mongers, and homophobes. They hate those of us on the Right for the same reason they refuse to do business with the U.S. military (missing, apparently, the fact that today’s military is increasingly Left-leaning itself). We embody the America of their fathers and grandfathers; we symbolize the America they hate. It also happens to be the America that the Chinese Communist Party despises. So that’s two things they have in common.

Rightists should stop being outraged that their free speech is being infringed upon by a corporation that routinely collects and sells the personal data of its users to the highest bidder, refuses to work with the “warmongering” Pentagon, and gladly jumps into bed with the Chinese Communist Party. Instead, we should support calls to better regulate Google and other tech firms, so that they cannot act with as much impunity as they have done.

Meanwhile, conservatives should drop their obsession with Ayn Rand for a moment and recognize that the U.S. government needs more power to prevent American tech firms from doing business with China.

In that regard, the powers of the Committee on Foreign Investment in the United States (CFIUS) should be greatly expanded. This group is the best way to complicate Google’s (and other corporations’) attempts to sell us out to China. According to the United States Treasury Department, “CFIUS is an interagency committee authorized to review certain transactions involving foreign investment in the United States (‘covered transactions’), in order to determine the effect of such transactions on the national security of the United States.” If a foreign trade is determined to be a national security threat, then CFIUS can block that trade. This happened several years ago when Fairchild Semiconductor was forced to reject an acquisition offer from a Chinese firm. CFIUS blocked the deal out of fear that China would be able to corner the all-important semiconductor industry. CFIUS needs more robust powers, though, to fully defend against Chinese attempts to gain access to critical American technology through trade.

Also, the Pentagon should increase its understanding of the threat that unfettered free trade between U.S. tech companies and China poses to our country.

Few may realize it, but our leaders are woefully uninformed about the extent and nature of the threat that doing trade with China poses the United States, especially in the high-tech sector. This is partly because the private sector and public sector are both terrible about sharing information with each other. This is also because the incentives for American businesses to deal with China are fundamentally different from the incentives for America’s defense establishment to stunt trade with China.

The Defense Innovation Unit (DIU) was a great first step toward bridging this knowledge gap. Established in 2015 by the Department of Defense, the DIU is headquartered in Mountain View, California with offices in Boston and Austin (two other major tech corridors in the United States). Currently, the group is focused on providing funds to tech companies that assist the Department of Defense in resolving critical national security issues. It is staffed by a who’s-who compendium of tech sector notables, academics, military officials, and hedge fund types who specialize in funding technology firms.

Yet, it is not enough.

A greater synthesis between the national security sector, the business community, academia, and the political leadership of the United States is needed if we truly and effectively want to prevent American tech firms from building the weapons of tomorrow for China to use against us today. The goal should be to create a comprehensive capability that can protect vital intellectual property and punish corporations acting against America’s best interests. DIU would complement an expanded CFIUS—as well as a stricter regulatory policy for U.S. tech firms—by providing key insights and intelligence to policymakers charged with oversight of the tech sector.

The time for outrage over Google’s transgressions against the American people has long passed. We on the Right have an ally in the White House with a skeptical view both of the tech industry and China’s intentions. What’s more, President Trump is more willing than his predecessors to make corporations pay for their actions when they harm America.

Rightists everywhere would do well to use this to their advantage. The administration has an opportunity to rein in Google and other tech giants that, left to their own devices, would sell out this country, trample our God-given freedom of speech, and empower the Chinese Communist Party. Time is of the essence.

Photo credit: JOSH EDELSON/AFP/Getty Images

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America • China • Defense of the West • Donald Trump • Foreign Policy • Post • Trade • Trump White House

China vs. A Liberal World Order

For six decades after the defeat of Napoleon in 1815, Great Britain was able to underwrite a liberal world order based on freedom of navigation and free trade. The unification of Germany in the early 1870s threatened this system. Although Great Britain was willing to accommodate Germany, Germany did not wish to be accommodated. Instead, it followed a mercantilist trade policy and sought to challenge Great Britain at sea.

The resulting tensions arising from Germany’s trade policies and its decision to build a navy capable of challenging the Royal Navy set the world on the path to the Great War of 1914.

One must always be careful with historical analogies, but there are some striking similarities between the British-German relationship in the latter 19th century and the United States-Chinese relationship today.

Since the end of World War II, the United States, like Great Britain in the 19th century, has underwritten a liberal world order, seeking to accommodate any countries willing to follow the rules of international cooperation. For historical and cultural reasons, the Peoples’ Republic of China, like Germany before it, has rejected accommodation. Instead, China has used its Belt-Road Initiative to extend its economic and political influence over the Asian continent. Especially worrisome has been its attempt to dominate the South China Sea.

Read the rest at the Providence Journal.

America • China • Economy • Greatness Agenda • Infrastructure • military • Trade

Jones Act Ensures U.S. Military Dominance and Civilian Jobs

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America’s armed forces are the most powerful on earth. While other countries can boast significant ground forces and nuclear capabilities, the factor that separates the United States and places her at the top of the military food chain is the United States Navy.

With a total of 24 total aircraft carriers, 19 more than the next closest country (Italy), and as many as 15 more in the planning phases, a continued commitment to the conditions that fostered this extraordinary advantage in military mobility is crucial. That commitment begins with defending the Jones Act against the recent slew of off the mark critiques lobbed against it, especially in the wake of the devastating 2017 hurricane season and its effects on Puerto Rico.

Many on the Right, including noted columnist George Will, have attempted to marginalize the importance of the Jones Act. Will wrote in National Review that, “Spurious ‘national security’ concerns tend to descend into slapstick.”

On the contrary, the Jones Act is key to maintaining many economic and manufacturing advantages against an increasingly influential China. Just last year, China’s Tsingshan Group, the world’s largest steel manufacturer, struck a controversial deal with U.S.-based stainless-steel manufacturer Allegheny Technology Incorporated (ATI).

The deal came together quietly, with many American observers now looking for answers from Treasury Secretary Steven Mnuchin as to how and why a heavily subsidized Chinese company could receive such advantageous treatment. But to see China’s attempt to further deepen its influence and increase America’s dependence on its supply chain of raw materials should not come as a shock considering the massive trade imbalances and unchecked and repeated abuses in intellectual property theft, espionage, and cyber-crimes carried out by the Chinese against the United States in recent history.

At its core, the Jones Act mandates that all goods, including those needed to carry out military operations, must be transported by water between U.S. ports on U.S. flagged ships that are constructed in the United States and owned by U.S. citizens. They must also be manned by U.S. citizens or U.S. permanent residents.

That is a good thing for American workers in the shipbuilding, shipping, and general maritime industry as it protects their roles from the job-crushing outsourcing that exists in so many other industries.

The Jones Act also has positive effects elsewhere in the American economy. The Foundation of the U.S. Domestic Maritime Industry estimates the Jones Act contributes $100 billion to the economy, including $29 billion in annual wages as well as the creation of 500,000 jobs—one shipyard job is estimated to create four others across other corresponding industries in the economy.

It can be argued that in light of Tsingshan Group’s deal with ATI, perhaps some expansion of the Jones Act may be in order. If the worst-case scenario of a massive global conflict presents itself down the road, the United States faces a logistical nightmare should our opponent in any aggression be a country relied upon by the United States for the raw materials needed.

In other words, if China decides to “cut off” America in the case of total war, the United States would need to rely further on its domestic raw materials industry that saw an almost 5 percent spike in shipments in 2018 as a result of President Trump’s tariffs on steel and aluminum.

The issue of reliance on foreign production of raw materials should also receive increased scrutiny in light of last month’s cyber-attack against Norsk Hydro, a raw materials producer that boasts the 10th-largest output of aluminum in the world. The attack was carried out via ransomware known as LockerGoga.

Moreover, the importance of domestic raw materials production should also be highlighted as America eventually moves towards another round of major infrastructure spending. With the possibility of a $1 trillion bill materializing during the current legislative session, it would behoove the Trump Administration to keep the monies allocated for the raw materials needed to rebuild America actually in America.

Whether through ignorance or a lack of foresight, voices critical of the Jones Act have clearly missed the point.  Our national security needs are promoted by the Jones Act now more than ever.

Photo credit: Mark Ralston/AFP/Getty Images

America • Center for American Greatness • Donald Trump • Economy • Post • Trade

America Needs Big, Beautiful Tariffs

Jonah Goldberg writes that President Trump supports tariffs because he is “truly ignorant of some of the most basic” economic principles—or he is “deceiving the public” to push a hidden agenda.

Let’s not mince words: Goldberg’s implication is that Trump is either stupid or evil for promoting tariffs.

Goldberg is not alone. Economists like Steve Hanke routinely accuse Trump of economic illiteracy. Meanwhile, sophists such as Ben Shapiro assert that tariffs are fundamentally immoral—Shapiro once accused me of favoring “total state control of the economy” like the mass murderer/hair-care aficionado Joseph Stalin. For what crime? Wanting fair, reciprocal trade with China.

Since the “free trade brigade” tolerates charges of ignorance, let’s look at what is truly ignorant. Just how ignorant? Buckle up.

Worshipping Mephistopheles

Goldberg begins with the claim that trade deficits don’t matter. After all, “I have a trade deficit with my cigar shop, barbershop, supermarket, and liquor store. They get my money and I get goods and services in return.” Win-win.

The same is true of international trade: China gets our money, America gets their goods. Furthermore, the money we pay to China eventually returns to us, since American money must be spent on American stuff. In reality, there is no such thing as a deficit, just a balance of payments.

This analogy is duplicitous.

America does not run a trade deficit with just China. We run a global trade deficit. Returning to Goldberg’s analogy: this would be akin to having a deficit with the cigar shop, barber shop, supermarket, and liquor store, while at the same time being unemployed.

Now imagine this situation persisting for 60 years.

How would Goldberg pay for his cigars and liquor? He would either need to sell his prized collection of old National Review articles (assets) or max-out his shiny new credit cards (debt). In either case, Goldberg eventually would run out of money and need to reduce his consumption—or increase his income.

This is exactly what’s happening to America: we’re financing our trade deficit by selling assets and debt.

As for the assets: foreign investors, flush with American cash, now own 20 percent of all American equities. This is up from just 12 percent in 2007. Likewise, foreigners buy up more than $100 billion in American real estate every year—everything from New York penthouses to Oklahoma ranches. Essentially, we’re selling our country to China in exchange for robotic Ooga-Chaka Dancing Babies and other junk.

As for debt: China and friends loan us money so that we can buy their goods. This is reflected in America’s growing debt load. For example, foreigners now own 44 percent of America’s national public debt, worth over $6.3 trillion. They also own large amounts of our private debt, including 29 percent of all U.S. corporate bonds.

Needless to say, selling debt is an especially bad idea because we must repay both the principle and the interest. This will cost taxpayers trillions over the next few decades.

We are in the midst of history’s greatest consumption bubble. When it bursts—and it is a mathematical certainty that it will burst—the resulting economic collapse will shake the very foundations of our society.

We are selling our inheritance and shackling our children with debt to pay for our copious consumption. Trade deficits are economically illiterate and immoral. In other words, they are both stupid and evil.

Lessons from “The Brave Little Toaster”

Goldberg mocks Trump for suggesting “China and other trading partners pay tariffs instead of American consumers.” I believe this is because Goldberg doesn’t really know how tariffs work. Allow me to explain.

Most Americans assume that tariffs are just another sales tax. Thus, a 10 percent tariff on a product would increase the product’s price by 10 percent. Not so.

Tariffs are not applied to a product’s retail price, nor are they applied to the wholesale price. In fact, they’re often not even levied on the entire import price. Instead, tariffs are levied on the first sale price—the price paid to foreign vendors by American companies or their middlemen.

This method of calculation reduces the tax burden on American consumers, but preserves the tariff’s punitive effect on foreign producers.

For example, suppose President Trump imposes a 10 percent tariff on all Chinese toasters.

Black & Decker makes toasters in China. These toasters retail for $60 in American stores. Are tariffs imposed on retail prices? No. This means that the price of toasters will not rise by 10 percent—$66 toasters are a sophistic myth.

So just how much would this hypothetical tariff increase the price of toasters?

American stores buy their toasters from Chinese manufacturers. But because of China’s (intentionally) convoluted regulatory framework, our retailers often buy them via middlemen located in Hong Kong, Singapore, or Taiwan. These middlemen charge somewhere in the neighborhood of $14 per toaster.

And, of course, these middlemen don’t work for free: they buy the toasters directly from Chinese factories for $7 per toaster. This is the first sale price, and tariffs are calculated on this figure. Thus, the tariff charged on a Black & Decker toaster that retails for $60 works out to just 70 cents.

American consumers don’t pay 10 percent more for toasters—they pay just 1.15 percent more. And that’s assuming Black & Decker doesn’t simply source its toasters from one of China’s competitors, in which case consumers would not see any price increases at all.

This is the main purpose of Trump’s tariffs: to punish China without costing American consumers the kitchen sink.

All this being said, Goldberg should know that tariffs are a completely avoidable tax. Don’t want to pay? Buy American. It’s that simple. (Don’t you wish the same could be said of the income tax?)

Banana Republics Export . . . Bananas!

Goldberg’s next criticism is tied to the former: tariffs raise prices. How could it be otherwise? After all, “if the government taxes cheap washing machines from abroad, the price of washing machines will go up” almost as a matter of course. Conversely, free trade reduces prices by allowing countries to specialize their production.

Goldberg’s logic is clearly based upon David Ricardo’s theory of comparative advantage, which suggests that countries are enriched when they specialize their production in things they are relatively good at making, and trade the surplus for things they are relatively bad at making. Put simply, free trade enriches countries by allowing them to divide labor more efficiently.

The problem is that comparative advantage is domain-specific—it only works when certain preconditions are satisfied. For example, Ricardo himself writes that capital must be immobile for the theory to apply. But capital is highly mobile in today’s economy. Thus, only a fool or a charlatan would justify free trade with the theory of comparative advantage—which is exactly what Goldberg is doing.

Even if we assume that comparative advantage applies, the logic is still problematic. The theory suggests that the key to getting rich is to specialize in production, regardless of what you produce. That is, a country with a comparative advantage in pasteurizing milk should focus on pasteurizing more milk, while a country with a comparative advantage in manufacturing airplanes should focus on manufacturing more airplanes.

Basically, wealth is correlated with the degree of specialization, not the subject of specialization. This is objectively wrong.

For example, a 2006 paper titled “What You Export Matters” found that the sophistication of a nation’s exports is highly correlated with that nation’s wealth and growth potential. Essentially, countries exporting cars and computers were richer and grew faster, than countries exporting bananas and iron ore. Not all industries are created equal: some have high growth potential, others have very little.

Given this obvious fact, it makes sense to use tariffs to prevent high-value industries from relocating from America to cheaper countries, like China. In the end, the benefits of this long-term economic growth will greatly outweigh the immediate cost of our tariffs.

It’s clear that Jonah Goldberg—not President Trump—is “truly ignorant of some of the most basic” economic principles.  That, or he is “deceiving the public” to push a hidden agenda. Which is it, I wonder?

America • China • Economy • Libertarians • Post • Trade

Dear Libertarians: Trade Deficits Matter

Steve Hanke recently set out to prove “why President Trump’s trade message and protectionist policies are rubbish” in a Forbes article. Instead, the Johns Hopkins University economist exposed himself as a word-mincing, logic-twisting sophist—just like every other intellectual mercenary associated with the faux-libertarian propaganda mill that is the Cato Institute.

Hanke’s argument: trade deficits don’t exist, China is not screwing America, and President Trump (the village idiot) is jousting windmills. The real problem is lazy Americans who shop-til-they-drop and demand welfare “gimmies” from Uncle Sam.

Faust’s Bargain
Hanke begins his argument by explaining that trade deficits don’t really exist. Instead, the goods trade deficit is simply one half of the equation:

In economics, identities play an important role. These identities are obtained by equating two different breakdowns of a single aggregate. Identities are interesting, and usually important, by definition. In national income accounting, the following identity can be derived. It is the key to understanding the trade deficit.

(Imports – Exports ) ≡ (Investment – Savings) + (Government Spending – Taxes)

Given this identity, which must hold, the trade deficit is equal to the excess of private sector investment over savings, plus the excess of government spending over tax revenue. So, the counterpart of the trade deficit is the sum of the private sector deficit and the government deficit (federal + state and local). The U.S. trade deficit, therefore, is just the mirror image of what is happening in the U.S. domestic economy. If expenditures in the U.S. exceed the incomes produced in the U.S., which they do, the excess expenditures will be met by an excess of imports over exports (read: a trade deficit).

This is true. In his esoteric discussion of “identities,” however, Hanke neglects to mention the practical consequences of running a goods trade deficit. Although the books are balanced, reality shows us that it matters how they are balanced—there are two sides to every coin, but heads is not the same as tails.

I’ve explained previously how America sold its soul for Chinese trinkets. You should read the full article—it is my personal favorite. If you don’t have time, here’s a quick summary:

When a nation imports (buys) more than it exports (sells) it runs a trade deficit. America’s goods trade deficit was $796 billion in 2017. Sadly, there are no free lunches. To pay for these goods America sells more services than it buys (think banking and tourism). This helps, but still leaves us $566 billion in the red. To balance the books, America also sells assets and debt.

Assets include real estate, artifacts, shares in corporations—anything of value that was produced in the past. Selling assets is not always bad. For example, selling your mothballed Harley to buy a home gym might be wise. However, pawning your great-grandma’s wedding ring to buy groceries is not. Context matters.

On the whole, America’s asset sales resemble pawning great-grandma’s wedding ring. Consider that foreigners bought $153 billion worth of American real estate in the 2016-2017 fiscal year—everything from New York penthouses to Nebraskan ranches. This has the negative downstream effect of increasing housing prices and rents, in addition to the social problems associated with absentee landlords.

The United States also sells billions in equities (ownership of U.S. corporations and the associated profits). As of 2017, foreigners owned roughly 38 percent of American equities, when including foreign direct investments and foreign portfolio investments. This is up from just 12 percent in 2007, and the number is growing fast.

America pays for the rest of the deficit by selling debt. This is reflected in the endless growth of U.S. public and private debt levels. For example, foreign investors own over 44 percent of America’s national public debt, valued at more than $6.3 trillion. Hanke is good enough to mention this figure in his article, but erroneously reverses the causal sequence. Further, foreign investors own nearly 30 percent of all U.S. corporate bonds and a large percentage of America’s (monstrous) private debt.

America pays for foreign goods by selling our inheritance and mortgaging our future. In turn, we surrender control of our nation to foreign masters. Conversely, if America ran a trade surplus we would be purchasing foreign assets and debts—we’d be buying-up the world like Great Britain during the 19th century.

Who cares if the books are balanced? What matters is how they’re balanced.

Skyfall
Hanke’s second line of argumentation is that trade deficits—assuming they exist—aren’t a problem. After all, “the U.S. has run a trade deficit every year since 1976, and the U.S. has done relatively well since then.” Hanke needs to get out more. The sky isn’t just falling. It fell.

Not only is the trade deficit largely to blame for America’s ballooning debt and skyrocketing housing costs, it also costs Americans jobs and increases inequality.

Trade deficits destroy jobs. Consider that the North American Free Trade Agreement displaces a net 840,000 American manufacturing jobs. How? Offshoring led to trade deficits with Mexico. Before NAFTA, tariffs protected American industries from asymmetrical Mexican competition by normalizing price externalities. In other words, tariffs raised the cost of Mexican goods to account for the fact that American businesses were subject to higher labor, environmental, and quality standards. Essentially, tariffs penalized companies that moved abroad to avoid American laws. This resulted in balanced bilateral trade.

NAFTA eliminated many market barriers and forced American workers to compete directly with cheap Mexican labor. This created a powerful incentive to move American factories to Mexico—and move they did. Lori Wallach, director of Public Citizen’s Global Trade Watch, estimates that NAFTA redistributed a net 840,000 American manufacturing jobs to Mexico. Meanwhile, the Economic Policy Institute estimated in 2013 that NAFTA displaced a net 700,000 American workers. Finally, U.S. Trade Representative Robert Lighthizer also noted in a press release that NAFTA cost the United States 700,000 jobs. Remember, these are net figures: they include the jobs NAFTA created by boosting American exports.

NAFTA also displaces a large number of service jobs. This is because manufacturing is an anchor industry upon which predicate industries depend. For example, hairdressers and accountants move to towns with mines or factories—not vice versa. The Bureau of Economic Analysis estimates that each manufacturing job supports roughly 1.5 service jobs because of the multiplier effect. In short, NAFTA costs America a net 1.7 million jobs.

This problem is not to specific to NAFTA—the logic of market asymmetries means that whenever America (freely) trades with a poorer country, the inevitable trade deficit will destroy more (American) jobs than it creates because labor-intensive industries are the most-likely to offshore. After all, they have the most to gain from lower wages.

The trade deficit also hurts America by increasing economic—and therefore political and social—inequality. The driving force behind inequality is, once again, offshoring. Moving millions of manufacturing jobs abroad creates unemployment. It also results in more competition for the remaining blue collar jobs—therefore decreasing wages for everyone else. This is basic supply-and-demand in action. It is not a coincidence that wages have stagnated for the vast majority of Americans since our nation began running chronic trade deficits in the 1970s.

Inequality is not merely an economic problem—it’s a political and social problem. Why? Too much inequality destabilizes society. Aristotle recognized this in his Politics, and recommended that the state should be governed by a large, robust middle class. Likewise, the godfather of modern conservatism, Edmund Burke, noted that inequality was one of the primary reasons France succumbed to its bloody revolution. The main point here is that societies function best when everyone has something to lose should they collapse. Ipso facto, inequality matters.

A Dragon Fed
Hanke’s final point is “the trade deficit is not made by foreigners who engage in unfair trade practices.” Instead, it is a home-grown problem.

I suppose Professor Hanke has never heard of China before. China’s entire trade regime was designed to fleece American consumers. For example, when China opened its doors to American investment in 1985, it specifically focused on export-oriented industries. Companies that built factories in China with the express purpose of exporting the production were given generous subsidies and access to artificially cheap labor. From the beginning of its resurgence, China’s goal was to be the seller, not the buyer.

A BBC Radio program on which I was featured noted that China meticulously follows the dictates of the World Trade Organization (WTO) today. Although this point is often made by academics like Hanke, it’s not compelling. Who cares if China plays by the rules now? At this point they’ve already secured an insurmountable competitive advantage in manufacturing due to the law of increasing returns—the bigger the factory, the cheaper its production. The Chinese abused the rules when it was to their benefit, and now attempt to uphold them for their benefit. “International law” is meaningless to China. The Chinese only care about wealth.

One of the main reasons America runs a trade deficit with China is that China jealously guards its lucrative domestic market. By and large, Western companies cannot operate in China. Those granted the privilege are often forced into “partnerships” with Chinese companies, which siphon-off a portion of the profits and serve as important vectors for intellectual property theft—this costs America up to $600 billion annually. This practice allowed China to evolve an independent and hugely profitable economic ecosystem. Just look at China’s information technologies sector: by blocking Amazon, China preserved the market niche for a domestic competitor, Alibaba. Today, Alibaba is one of China’s most valuable companies, and is Amazon’s only viable global competitor.

Contrary to what Hanke claims, China is indeed ripping us off. That said, I am forced to agree with his conclusion: China isn’t causing the trade deficit. The shame rests solely with us. America is not a passive actor. We could rebuild our tariff walls to halt offshoring and eliminate the trade deficit. We simply choose not to.

Photo Credit: Mark Ralston/AFP/Getty Images

Administrative State • America • Center for American Greatness • Conservatives • Donald Trump • Economy • Post • Trade

Carlson’s Invisible Political Hand Riles Conservative Critics

In spite of policy differences on social issues—from gay rights to gun control to abortion—the steadying core of modern-day conservatism always has been the defense of the individual over the state. During the Reagan era, the movement witnessed in real time how the disassembling of statist economic policies could resuscitate a fossilized free-market system to the benefit of nearly all Americans.

Before Reagan’s election, libertarian economist Milton Friedman warned that our economic freedom is threatened constantly by the capriciousness and self-interest of politicians and their special interest benefactors—and that was not okay: “Both the fragmentation of power and the conflicting government policies are rooted in the political realities of a democratic system that operates by enacting detailed and specific legislation,” Friedman wrote in his 1980 book, Free to Choose. He continued:

Such a system tends to give undue political power to small groups that have highly concentrated interests, to give greater weight to obvious, direct, and immediate effects of government action than to possibly more important but concealed, indirect, and delayed effects, to set in motion a process that sacrifices the general interest to serve special interests, rather than the other way around. There is, as it were, an invisible hand in politics that operates in precisely the opposite direction to Adam Smith’s invisible hand. Individuals who intend only to promote the general interest are led by the invisible political hand to promote a special interest that they had no intention to promote.

Once upon a time, that wasn’t a radical way of thinking on the Right. It was mainstream—it recognized that a behemoth of bigwigs could, and would, easily crush the little guy. The invisible political hand is not the baker and the butcher and the brewer, but rather the banker and the bureaucrat and the Bloombergs. And as we’ve seen in just one highly publicized case, when the baker defies the bureaucrat—to say nothing of the Bloombergs!—who suffers most?

But now that those same sentiments have been expressed, not just by President Trump but by Fox News host Tucker Carlson, they are considered heresy by the anti-Trump Right.

In his passionate monologue on January 3, Carlson gutted Washington’s ruling class for its indifference to the plight of wide swaths of the American populace. Carlson argued that the health of a nation cannot just be measured in GDP—thinking so makes you “an idiot,” he declared—and that the disintegration of the family coupled with a rise in drug use, suicide rates and chronic unemployment in rural America is largely the result of not just antipathy but animus toward our working class brethren.

The greater good, Carlson pointed out, has been sacrificed at the expense of the many for the benefit of a few. The invisible political hand Friedman described nearly 40 years ago has yielded exactly the devastating consequences he warned it might. The “pathologies of modern rural America” are the same afflictions decimating our inner cities, Carlson observed, and for the same reasons that conservatives once acknowledged: Poor governance that trapped inner-city residents in a cycle of poverty and sought to replace the family unit consequently led to astronomical rates of unemployment, crime, drug use, and despair.

Carlson then asked a rhetorical question that conservative leaders have been asking for more than a generation: “What kind of country do you want to live in? A fair country? A decent country? And above all, a country where normal people with an average education who grew up in no place special can get married, and have happy kids, and repeat unto the generations? A country that actually cares about families, the building block of everything?”

Much of what Carlson said could have been uttered by Ronald Reagan or William F. Buckley, Jr. or any conservative leader, past or present. In fact, in his autobiography, Reagan said something very similar to what Carlson expressed: “An America that is militarily and economically strong is not enough. The world must see an America that is morally strong with a creed and a vision. For us, values count.”

Conservative Inc. Responds
Carlson’s monologue resonated with people across the country; the clip posted on Fox News already has more than one-quarter of a million views in four days, and that’s just one portal.

But writers at National Review and The Daily Wire were not impressed. (National Review has several articles and a podcast devoted to Carlson.) Further, they refused to take any responsibility on behalf of modern-day conservatism either for ignoring or facilitating the economic conditions that Carlson decried.

David French argued that populism and “The Angry White Man” are the real enemies of prosperity and happiness: “We must not create a victim class of angry citizens. We must not tell them falsehoods about the power of governments or banks or elites over their personal destinies,” French warned. “We must not make them feel helpless when they are not helpless. Instead, even as we work diligently to make government more helpful than hurtful (which, frankly, can often mean getting government out of the way), we must continue to tell Americans a liberating truth: This is still a land where you can determine your own success more than can any political party or group of nefarious elites.”

He attempted to refute Carlson’s claims about rising marijuana use and disappearing manufacturing jobs—but the links he cited actually undermined his own argument. The America that French conveniently portrays (at least the one he doesn’t accuse of being racist and populated with white supremacists because of Trump) is filled with strivers unimpeded by government interference and blessed with the full bounty of unbridled capitalism who only have themselves to blame for their station in life.

In other words, according to French, there’s nothing to see here, rubes. Government policies—from lousy trade pacts to tax-funded corporate subsidies to porous borders to public pension sweeteners to burdensome climate change policies—have no impact on the economic freedom and entrepreneurial pursuits of a GenXer in the Rust Belt.

In a podcast, French and his co-host Alexandra DeSanctis essentially called Carlson a liar. Describing parts of his statement as “insidious,” “tricky,” “false” and “nefarious,” the pair of NeverTrumpers mocked the Fox News host for presenting a “caricature of the elite, that this is an elite that doesn’t care.” Oddly, and without evidence, French and DeSanctis then claim Carlson was lumping them into the category of elitists. They also ridiculed Trump and Trump supporters for believing some of the president’s approaches might actually help. “If we could just keep the GM plant in Morristown open, suddenly no one would be addicted to opiods,” DeSanctis sneered. “This is not in any way a solution that Tucker has correctly identified.” (She also offered no solutions herself.)

Ben Shapiro, editor of The Daily Wire, took issue with Carlson’s comment that families are being crushed by market forces. While Shapiro correctly stated that capitalism has nothing to do with the decline of American families, he does have to accept the central point of Carlson’s commentary, which is how “governmental incentives [have] skewed incentives.”

Shapiro also presented an unrealistic if not fantastical depiction of the U.S. version of capitalism, objecting to Carlson’s use of the word “tool” to describe the economic system. “It is not a tool. It is a reality of free and voluntary interactions among human beings. It is an outgrowth of the unique value of each individual, and of each individual’s right to use his labor as he sees fit, and to alienate that labor in exchange for the labor of someone else. And markets don’t exist to ‘serve us.’ They exist to allow us to act in liberty.”

Ah, if only that were true. But any business owner, from a home-based hair stylist to a corporate CEO, knows that it is not true. Every consumer knows it is not true.

Free-Market Fantasy vs. Managed Reality
It’s not capitalism or free markets, per se, that have contributed to the decay in our inner cities and rural communities—it is the inexorable, government-sanctioned abandonment of capitalism that has resulted in shuttered plants, abandoned strip malls, crumbling infrastructure, failing public schools, and an influx of deadly drugs from China and Mexico. But here’s the rub: an up-from-your-bootstraps approach to life in Morristown will do little to overcome that treachery.

Do French, DeSanctis, Shapiro or anyone else on the Right truly think that this country now functions under a free-wheeling market-based economy? Or is it, rather, a managed one? And if the answer is that it is a managed one, who are the managers and who are the subordinates?

Who makes the rules and who lives with the consequences? Have the choices made at every level of government, from the Environmental Protection Agency down to the local school board, really had no impact on the economic choices made by millions of Americans? To believe so is either ignorance or arrogance.

We are not living in the America of conservative hopes and dreams. We are living in an adulterated version of America after more than a century of Progressive assaults on the original design.

Trump’s appeal to the folks injured by this isn’t rooted in promises of new welfare handouts or shiny new schools or government jobs. It’s not true that Trump doesn’t believe in capitalism—far from it. But Trump is a realist. He knows that there is no such thing as a free market anymore, just as he knows there’s no such thing as free trade. However wonderful it sounds in theory, it’s not our reality.

His appeal is rooted in his pledge to rollback the very policies that have wreaked havoc on rural communities across the land and to confront the ongoing political indifference to those woes. It’s worthwhile to note that few, if any, of the anti-Trump influencers on the Right have offered sound alternatives to Trump’s policy prescriptions for rural America.

So yes, as Friedman warned, there is an invisible political hand at work in America. Trump and Carlson know this. Just because anti-Trumpers on the Right refuse to see it—or, in many ways, are part of that hand and so refuse to admit it—doesn’t mean it doesn’t exist.

Content created by the Center for American Greatness, Inc. is available without charge to any eligible news publisher that can provide a significant audience. For licensing opportunities for our original content, please contact licensing@centerforamericangreatness.com.

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America • Big Media • China • Congress • Democrats • Donald Trump • Economy • Energy • Environment • Post • The Culture • The Media • Trade

Actually, 2018 Was a Pretty Good Year

The year 2018 will be deplored by pundits as a bad year of more unpredictable Donald Trump, headlined by wild stock market gyrations, the melodramas of the Robert Mueller investigation, and the musical-chair tenures of officials in the Trump Administration.

The government is still shut down. Talk of impeachment by the newly Democrat-controlled House of Representatives is in the air. Seemingly every day there are sensational breakthroughs, scandals, and bombshells that race through social media and the Internet—only to be forgotten by the next day.

In truth, aside from the Washington hysterias, 2018 was a most successful year for Americans.

In December, the United States reached a staggering level of oil production, pumping some 11.6 million barrels per day. For the first time since 1973, America is now the world’s largest oil producer

Since Trump took office, the United States has increased its oil production by nearly 3 million barrels per day, largely as the result of fewer regulations, more federal leasing, and the continuing brilliance of American frackers and horizontal drillers.

It appears that there is still far more oil beneath U.S. soil than has ever been taken out. American production could even soar higher in the months ahead.

In addition, the United States remains the largest producer of natural gas and the second-greatest producer of coal. The scary old energy-related phraseology of the last half-century—”energy crisis,” “peak oil,” “oil embargo”—no longer exists.

Near-total energy self-sufficiency means the United States is no longer strategically leveraged by the Middle East, forced to pay exorbitant political prices to guarantee access to imported oil, or threatened by gasoline prices of $4 to $5 a gallon.

The American economy grew by 4.2 percent in the second quarter of 2018, and by 3.4 percent in the third quarter. American GDP is nearly $1.7 trillion larger than in January 2017, and nearly $8 trillion larger than the GDP of China. For all the talk of the Chinese juggernaut, three Chinese workers produce about 60 percent of the goods and services produced by one American worker.

In 2018, unemployment fell to a near-record peacetime low of 3.7 percent. That’s the lowest U.S. unemployment rate since 1969. Black unemployment hit an all-time low in 2018. For the first time in memory, employers are seeking out entry-level workers rather than vice versa.

The poverty rate is also near a historic low, and household income increased. There are about 8 million fewer Americans living below the poverty line than there were eight years ago. Since January 2017, more than 3 million Americans have gone off so-called food stamps.

Abroad, lots of bad things that were supposed to happen simply did not.

After withdrawing from the Paris Climate Accord, the United States exceeded the annual percentage of carbon reductions of most countries that are part of the agreement.

North Korea and the United States did not go to war. Instead, North Korea has stopped its provocative nuclear testing and its launching of ballistic missiles over the territory of its neighbors.

Despite all the Trump bluster, NATO and NAFTA did not quite implode. Rather, allies and partners agreed to renegotiate past commitments and agreements on terms more favorable to the U.S.

The United States—and increasingly most of the world—is at last addressing the systematic commercial cheating, technological appropriation, overt espionage, intellectual-property theft, cyber intrusions, and mercantilism of the Chinese government.

The Middle East is still chaotic, but it is a mess that is now far less important to us for a variety of reasons. Energy-wise, America is not dependent on oil imports from corrupt Gulf monarchies or hostile Islamic states. Strategy-wise, the new fault lines are not Arab and Islamic cultures versus Israel or the United States. Instead, it is internecine strife within the Islamic world, mostly with Iran and its Shiite satellites opposing the Sunni Arab monarchies and more moderate Middle Eastern regimes.

For all the pro- and anti-Trump invective and media hysteria, the Brett Kavanaugh confirmation circus, and the bitter midterm elections, the United States was relatively calm in 2018 compared with the rest of the world. There was none of the mass rioting, demonstrations and street violence that occurred recently in France, and none of the existential and unsolvable divides over globalization and Brexit that we saw in Europe

Europe’s three most powerful leaders—Angela Merkel of Germany, Emmanuel Macron of France, and Theresa May of the United Kingdom—have worse approval ratings than the embattled Donald Trump.

In sum, the more media pundits claimed that America was on the brink of disaster in 2018, the more Americans became prosperous and secure.

(C) 2019 TRIBUNE CONTENT AGENCY, LLC.

Photo credit: Getty Images

Asia • China • Donald Trump • Foreign Policy • Post • Trade

Here’s Why the Huawei Arrest Helps Negotiations with China

Wall Street is worried that the arrest of Huawei Vice Chairman Meng Wanzhou will put President Trump’s ongoing trade negotiations with China on ice.

They fear that China may retreat from its G-20 promises, or perhaps even call off the negotiations altogether. Some have suggested that U.S. tech executives avoid traveling to China, fearing revenge arrests.

As someone who has followed elite politics in Communist China for 40 years, I disagree. In fact, I think that Meng’s arrest may actually help move the negotiations along.

China’s leaders see her arrest as a deliberate provocation, intended to provoke them into the kinds of overreactions that would blow up the trade negotiations.

They view it, in other words, as a strategic deception.

Anyone who has read their Sun-Tzu knows that deception is the primary category—the default position, if you will—of Chinese strategic thought. And the ancient strategist’s famous dictum, “All warfare is deception,” obviously applies to trade wars as well.

China knows that the president’s advisors are divided between the globalists, who hope for a win-win agreement on trade, and the nationalists, who want to disengage America’s economy from China’s. They fear that the nationalists have arranged the arrest of the Huawei executive precisely because they want to undermine the trade negotiations, and send China’s economy over a cliff.

The looming tariffs of 25 percent, scheduled to take effect on March 1 absent a deal, would cripple China’s export economy. It would drive supply chains to the tariff-free climes of India, Vietnam, and the Philippines. It would cause many Chinese companies to go bankrupt, and the Shanghai and Hong Kong exchanges to plummet. China might well be trapped in the middle-income, also-ran, economic no-man’s-land that it so desperately wants to avoid.

Official Washington has claimed that Meng was detained as a result of a longstanding investigation. The timing of her arrest at the precise moment of the Xi-Trump meeting was, we are told, mere coincidence. Whatever you think of that explanation, official Beijing is having none of it.

It is, indeed, harder to imagine a higher profile target than the vice chairman and heiress-apparent of Huawei, China’s leading hi-tech company and a key player in the “Made in China 2025” plan.

Not only is Meng the daughter of Huawei’s founder, she is the granddaughter of a senior party official, Meng Dongbo, who fought alongside Chairman Mao in the Chinese Civil War and later served as vice governor of Sichuan, China’s most populous province. In other words, she is a bona fide member of China’s Communist aristocracy, which is why the Chinese refer to her as “princess.”

The woman languishing in a Canadian jail cell is China’s Tim Cook and China’s Ivanka Trump all rolled into one.

The Chinese leadership has concluded from both from the timing and from the target that this was a setup.

Add to this the fact that the Chinese leadership has grown very wary of Donald J. Trump. They see him as tactical on trade—addressing an issue, extracting as many concessions as he can, and then moving on to the next issue.

But they also see him a strategic in a global sense, intent upon maintaining American dominance in the century that was supposed to be owned by China.

The state-run Global Times initially denounced the arrest as a violation of the spirit of the trade truce reached during the Xi-Trump dinner. But in the days since, the rhetoric has been ratcheted down, and Beijing is going out of its way to delink the two.

Sensing a trap, Communist leader Xi Jinping has not seized upon the arrest of Meng as a reason to derail the talks. Instead, he seems to have recommitted himself to working out a trade deal with the United States as the March 1 deadline looms ever closer.

Of course, deal or no deal, Beijing’s two-decades-long orgy of lawless and predatory behavior needs to come to an end.

In the meantime, neither Tim Cook nor Ivanka Trump need fear arrest if they travel to China.

Photo Credit: Omar Marques/SOPA Images/LightRocket via Getty Images

Conservatives • Economy • Elections • EU • Europe • Foreign Policy • Post • Trade

May Lives On

If there is one saving grace to pluck from the laughable wreckage that is British politics, it’s that Theresa May, still prime minister, has promised to stand down.

After surviving an attempt on her premiership this week, May clings on—her Brexit deal clutched firmly to her chest in spite of the fact that the risk of anyone wanting to relieve her of it is infinitesimally remote. Like a Doberman clamping a prized branch between its jaws, May keeps gnawing.

The drama ends with May safe in her job for 12 months; which is one year too long. But 117 of her own lawmakers voting no-confidence in her leadership wasn’t enough to make it otherwise. In any case, it was a number denuded by her promises to not fight the next election. The other 200 backed May.

And the reality hasn’t changed. May’s deal, in current form at least, has zero chance of passing through the House of Commons. Brexiteers detest it. Remainers don’t like it. After all, the threat of triple-digit defeat forced May to delay Tuesday’s vote.

May now heads back to Brussels, in the pointless hope that EU bosses will hand her a lifeline by exorcising their deal of the hated Irish backstop, which, if triggered, ties Britain to EU laws and regulations. Critics rightly fear this is Brexit in name only.

There’s little chance of the EU budging on that. May will probably return with less than she had when she arrived.

But there is a positive from all this. May has promised to not fight the next general election set for 2022. A promise in which anyone still unrecovered from her last disaster can take succor. She made the prankish socialist and Labour leader, Jeremy Corbyn, seem viable to almost 40 percent of the country.

Still, she hangs on. And she won’t be here in 12 months. She has accepted that Brexit is her hill to die on. Finally.

Hell, if she manages to finagle legal guarantees from the EU assuring of the hated backstop’s temporary and last-resort nature, she might just get her deal through Parliament.

Speaking to the BBC after the vote, arch-Euroskeptic Jacob Rees-Mogg, said he would be open to back the deal if such assurances were made. If Mogg can find compromise, then his 80-plus European Research Group lawmakers would likely join him.

That is significant. Rees-Mogg is the kind of Euroskeptic one would grow in a petri-dish.

The reality of a divided nation, and government, is congealing. The mood, according to a friend of mine and aide of a middle-ranking Brexiteer lawmaker, suggests the anti-EU faction wants to take a slice of the loaf now, and come back for more.

Both my friend and the lawmaker he works for are staunch Brexiteers, but they’re not stupid. After reassurances from the prime minister, that lawmaker voted in confidence of May. He’s no wilting flower.

Fewer than 60 lawmakers truly want a no-deal Brexit, the aide tells me. The expected shock, though already priced into markets, would give the likes of Tony Blair and the ultra-Remainers the despair they need for their real desire.

That’s a second referendum, which they quite laughably call a “People’s Vote.” We’ve already had one, of course, and I can attest that people—the most in our history, actually—were quite heavily involved. Perhaps we are the wrong kind, if Blair and his ilk could glance truthfully for a second.

So, as May will no doubt repeat incessantly as the March 29 deadline approaches: it’s her deal, or no Brexit at all.

Or Prime Minister Corbyn. Another notion once so laughable it prompted many Conservatives to pay £3 and ensure hapless Corbyn won the Labour leadership.

Though an avuncular and fluffy character, the real Jeremy Corbyn seeps through during interviews in which his host has the temerity to ask him a question. Prodded off his perch of piety, “Jeremy” dissolves into intemperate spite.

He campaigned as a common-sense social democrat, but anyone familiar with Corbyn’s history knows he rubs shoulders with some dreadful people. A barely concealed teenage angst is encased in his near-70 years.

That’s enough to scare Conservatives straight. But, like a great many Republicans in America, our Tories haven’t grasped the new reality in which we find ourselves.

A Brexit Britain would need a Brexit prime minister. And one capable of melding together a people rent down the middle.

Though the left-leaning media cannot admit it, Boris Johnson fits the bill and would be immensely popular. He’s already well-regarded as a two-time mayor of progressive London. Everyone knows Boris.

After we voted to leave the EU, Boris was a shoo-in for prime minister. But his characteristic (and usually endearing) loucheness led to key allies popping his bid before it got off the ground. It’s one thing to file your $300,000-a-year column with seconds to deadline, another to fudge the little details of leading a country of 62 million people.

Saying that, Boris, who visited my hometown a while back, is the only politician I’ve seen to command a long orderly queue of people lining up for a selfie. I don’t think Theresa May, bless her, knows what a selfie is.

But she does know how to muddle on through and grind out the little details. Which is why she is still prime minister, and perhaps why Boris is not.

Photo credit: Dan Kitwood/Getty Image

America • Asia • Center for American Greatness • China • Defense of the West • Economy • Foreign Policy • Post • Technology • The Media • Trade

Free the Kidnapped Canadians in Communist China

Last week, we discussed the national security threat to the United States and her siblings in the family of free nations that is posed by Communist China’s Huawei technology company—specifically, in the words of Eli Lake, “that China’s largest telecom company will allow the Chinese state to monitor the electronic communications of anyone using Huawei technology.”

Now, in light of the detention of Huawei’s Chief Financial Officer, Meng Wanzhou, by Canadian officials for potential extradition to the United States to face charges related to the Iranian Sanctions Act, the Beijing junta hamfistedly reaffirms our assessment’s prudential rectitude of both the company and the communist regime.

Per the BBC, not one, but two Canadian citizens—Michael Kovrig and Michael Spavor—living and working in communist China have “disappeared” or are being detained by the regime; and, despite the efforts of Canadian officials to raise the issue at the highest levels in Communist China’s regime, neither man has been released.

An employee of the International Crisis Group, which is gravely concerned about his welfare, Kovrig is believed to have been arrested by the Chinese regime “on suspicion of engaging in activities that harm China’s state security.”

Spavor, an entrepreneur with the “Paektu Cultural Exchange that organizes business, culture and tourism trips to North Korea,” had informed Canadian officials he was being questioned by the Communist government. Subsequently, he, too, is apparently being held on the suspicion of “engaging in activities that endanger China’s national security”; and, per Canadian officials, his whereabouts are difficult to determine.

What isn’t difficult to determine in this “delicate situation” is the wicked game being played by the Communist Chinese regime. Sure, using diplomatic parlance, Canadian officials state that there isn’t any “explicit indication” that the Communist Chinese have detained the two Canadian citizens. Yet, one doesn’t need to be have a degree in international relations—more useful would be watching “The Sopranos”—to understand this is doubtless a manifestation of one of the “unspecified threats” by the communist regime in the wake of Meng’s detention.

Bluntly, the Communist Chinese regime is less a government than a racket; and Canada must not allow itself to be intimidated by these socialist shakedown artists.

No, in dealing with these ideological fossils who still try to pass off Communism—a murderous screed of tyrannical butchers—as a rival and superseding model of governance to liberal democracy, Prime Minister Justin Trudeau must not capitulate to these global kidnappers’ ransom demands, namely the release of Weng. Ever imperious and never wanting to be seen losing face, Communist China is trying to coerce Canada into begging the United States to drop the charges against Meng to secure her release.

Just say “no,” Mr. Trudeau.

Rather, Trudeau should call President Trump and secure his commitment not to drop the U.S. charges against Meng; and, thus assured he will not be undercut by his friends to the south, he should commence raising tariffs and trade barriers and kicking Chinese diplomats out of Canada until his two kidnapped citizens are released unharmed.

Oh, and speaking of Huawei, remember that October letter from Senators Marco Rubio (R-Fla.) and Mark Warner (D-Va.) to Prime Minister Trudeau that warned of joint intelligence activities with the United States, the U.K., Australia, and New Zealand possibly being curbed if Canada allows Huawei to aid in the construction or maintain his nation’s 5G wireless network? Now would be good time for Trudeau to affirmatively respond: “Screw those Chi-com hosers, eh?”

It might not have the ring of “tear down this wall,” but it’s a damn fine sentiment and a damn good start.

Content created by the Center for American Greatness, Inc. is available without charge to any eligible news publisher that can provide a significant audience. For licensing opportunities for our original content, please contact licensing@centerforamericangreatness.com.

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China • Economy • Foreign Policy • Post • the Presidency • Trade

America: China’s Mercantile Resource Colony

China’s economy is now the largest on earth. Its industrial output is triple that of the United States. Its population, quadruple. To make matters worse, Chinese computing power is on par with ours and their scientific output is gaining fast.

This is no accident. Like Britain, China transitioned from an agrarian to an industrial economy by embracing mercantilism and piggybacking on America’s market.

America is becoming China’s economic colony. China’s slave. But it doesn’t have to be this way. As Britain did, China chose her fate. Now is the time for Americans to choose: do they want liberal free trade and “cheap” Chinese junk, or do they want conservative tariffs? Put another way, do they want an economic future?

President Donald Trump and Chinese President Xi Jinping agreed last week to a 90-day ceasefire in our ongoing trade war.

Trump will postpone the raising of tariff rates on some $200 billion worth of Chinese goods, which was scheduled to occur on January 1. In exchange, China agreed to buy “a very substantial amount of agricultural, energy, industrial, and other products from the United States to reduce the trade imbalance” according to a statement from Sarah Sanders.

China also agreed to aid Trump in denuclearizing the Korean Peninsula and to designate fentanyl as a controlled substance, which will many argue will help America quell its opioid crisis. This is welcome news.

This ceasefire buys both nations time to discuss a number of issues, including the rampant theft of American intellectual property—which costs America some $600 billion in lost profits annually—and China’s variety of non-monetary market barriers.

As of now it looks like President Trump’s tariffs are working as anticipated: tariffs provided the leverage necessary to bring China to the negotiating table. This is unsurprising. The simple fact that China runs a massive trade surplus with America means that China needs us far more than we need China.

Trump knows it. China knows it. And now the world knows it.

In a bolder, more patriotic age the mainstream media would be praising the president for having the fortitude to stay the course. Instead, the consensus view appears to be that Trump should sheepishly apologize to China and wave the white flag: drop all tariffs and let China continue to pillage our nation.

This is not an option.

China is turning America into its mercantile resource colony—just like the British did to the Thirteen Colonies in the decades before the Revolution. I do not say this for provocative rhetorical effect. The only real difference between the two situations is that King George bought our tobacco. China prefers our soybeans.

Snakes and Ladders
In 1776 “no taxation without representation” was not just a political slogan—it was call to arms.

Yet despite the mythology surrounding the American Revolution’s purported casus belli, the phrase was mostly hollow. In fact, the colonists were the most lightly taxed of all Britain’s subjects—those in Britain paid 25 times as much. Further, most of the burden of Britain’s increasingly “intolerable” taxes fell squarely upon the colonial elite. For example, the taxes imposed by the Stamp Act were primarily born by lawyers and other professionals, while the Sugar Act targeted corpulent elites and alcoholics with a taste for rum.

Most American colonists didn’t care about the “intolerable” taxes. They didn’t pay them. Instead, ordinary colonists were mostly concerned with the taxes that Britons imposed upon themselves—tariffs.

In 1721 Britain’s Prime Minister Robert Walpole coalesced the swirling ether that was Parliament’s economic policy into a coherent, nationalistic trade regime: Walpole adopted mercantilism.

Mercantilism is much-maligned and even more misunderstood, so let me clearly define the term: the mercantilist’s ultimate goal is not to hoard gold nor to give political goodies to his friends. Instead, he seeks to increase the size of his nation’s value-added industries by piggybacking on foreign (and colonial) markets. This is done by encouraging economic autarky (self-sufficiency) and export surpluses in value-added production, while limiting imports to raw or exotic materials.

To concentrate value-added industry in Britain, Walpole lowered or eliminated import duties on raw materials, abolished export duties on manufactured goods, boosted tariffs on manufacturing imports, subsidized new industries, and increased quality controls to guarantee that British goods were of high quality. While such government intervention may sound onerous, a policy must be measured according to its practical effects—not its ideological purity.

The only question worth considering is whether mercantilism made Britain rich. The answer is  yes—at colonial expense.

Between the decade 1721-1730 and the decade 1761-1770, Britain’s average annual trade surplus with the American colonies grew from £67,000 to £739,000. For context, the dreaded Sugar Act generated a mere £30,000 in annual revenue, while the Stamp Act was projected to generate some £60,000 before it was repealed. Britain made far more money exporting to the colonies than it did taxing them.

Not only did the value of British exports increase, but their composition changed. Between 1700 and 1773, raw materials as a percentage of overall exports declined from 13.2 to 8.8 percent. Likewise, the share of woolen textiles declined from 47.5 to 26.7 percent. These low-margin exports were replaced by manufactured products, the proportion of which rose from 8.4 percent to 27.4 percent. This includes things like glassware, tools, weapons, paper, hats, and nautical instruments—complex, value-added production.

Finally, Britain cut its imports of manufactured goods by half during the period (from 31.7 percent of total imports to 16.9 percent).

Summing up: Britain embraced mercantilism and imposed high tariffs on its value-added industries. This, combined with large export markets in America, clustered an otherwise impossibly large amount of industry in Britain. This boosted wages for Englishmen and multiplied the number of individuals working in “cutting-edge” industries like textile mills. Thus, tariffs—mercantilism—fertilized the soil in which the Industrial Revolution sprouted.

Of course, the opposite of this was true in America. The composition and sheer size of the trade deficit with Britain virtually guaranteed that the 13 colonies would remain economic backwaters, locked into exporting natural resources to Britain in exchange for manufacturing. The colonies were import-dependent—like modern-day Guatemala or Kenya. And America would have remained poor like Guatemala if the Founding Fathers had not copied Britain and imposed significant tariffs.

Being Benjamin Button
America is a curious case. Despite fighting a bloody revolution to free herself from her father’s shackles, she willingly—gleefully—now enslaves herself to a harsher master: China.

In the beginning, America’s economy benefited from its small, but burgeoning trade relationship with China. They sold us raw materials and low-value output while they bought expensive machinery. We were the mercantile motherland, they were our colony.

For example, according to data compiled by the Observatory of Economic Complexity (which provides fantastic, free data-visualization tools), in 1986 46 percent of our imports from China were garments while 6.2 percent was fabric. Fully 20 percent of our imports were raw materials (seafood, oil, minerals, exotic vegetables).

Meanwhile, 31 percent of our total exports to China was machinery, 13 percent electronics, and 11 percent aircraft. Less than 10 percent of our exports were raw materials (mostly timber).

Of course, the Chinese had no intention of being just another Indonesia or another Brazil. Import dependency was not in their future. Instead, China imposed significant tariffs and non-monetary market barriers on value-added imports, while also encouraging domestic industries with generous subsidies—exactly what Robert Walpole did in 1721.

Guess what? Mercantilism worked. Again.

By 2016, garments constituted just 14 percent of America’s imports from China. Textiles fell to an insignificant 0.49 percent. Raw materials, less than 2 percent. Meanwhile, high-value imports surged: electronics constituted 42 percent of our imports from China, while another 15 percent was machinery.

Conversely, the complexity of our exports to China decreased during this period. Electronics constituted just 11 percent of our exports, machinery 21 percent, and aircraft merely 0.27 percent. Meanwhile, over 25 percent of our exports were raw (or lightly-refined) materials like cereals and vegetable oils, petroleum, and minerals.

America’s economy is simplifying in response to Chinese demand—which will only impoverish us in the long run. The below visualization is worth a thousand words:

What will it be, America? More slavery—or freedom?

Photo Credit: STR/AFP/Getty Images

2016 Election • Donald Trump • Economy • GOPe • Government Reform • military • Political Parties • Post • Republicans • Trade

Reimagining Republicanism

For at least 25 years, the Republican Party has been promoting policies damaging both to its own political standing and to the middle class. In the face of the growing radicalism of the Democrats, and the need—more crucial now than ever—for the GOP to assemble a majority coalition of voters, it must reexamine those policies.

Broadly speaking, the areas in need of reconsideration are tax policy, trade policy, foreign affairs, and antitrust policy.

Tax Policy. Supply side economists argue persuasively that tax cuts benefiting corporations and the upper classes have a more profound impact on the economy overall than tax cuts for the middle class. But whatever the correct answer to this broad economic question may be, the political consequences, as shown in exit poll data from the midterm elections, have not been to the GOP’s advantage.

It is also worth considering whether the broad economic consequences of sound policies on tax cuts actually do much to benefit those most in need of relief, at least in the near term. Getting the economic calculus right is not the same thing as getting the political calculus correct.

More than this, one guesses that the public’s opinion of the extraordinarily rich—billionaires like Tom Steyer, George Soros, Michael Bloomberg, Jeff Bezos, Bill Gates, Warren Buffett, and the Koch brothers—has taken a hit in recent years as their political activities and immense wealth are seen as frightening and no longer on a human scale.

It has been reported that President Trump is considering a middle class tax cut. How about combining it with a tax increase, perhaps through a wealth tax on, say, individuals with net assets of $100 million or more? It wouldn’t require such people to switch from vichyssoise to gruel, but it would disarm the Democrats’ criticism of GOP tax policy as “favoring the rich” and be deeply popular with the middle class.

Antitrust Policy. The technology companies that are referred to by investors as FAANG (Facebook, Amazon, Apple, Netflix and Google), have grown to such a size they now have a market cap of some $3 trillion and account for 11 percent of the value of the S&P 500.

But it’s not just their size that is gargantuan, so too is their impact on other industries. Take Google and Facebook, for instance. These two companies have decimated the advertising revenue of newspapers and magazines, to the point that their continued survival is in doubt, while Netflix is doing the same thing to the motion picture studios and theaters. The point here is not to lionize the Hollywood studios or newspaper publishers per se. As I am about to make clear, neither are friends of the GOP. What’s important, however, is that the motion picture and newspaper industries remain viable.

In 2012, the FTC wrapped up a years-long investigation of the competitive practices of Google. Despite a (leaked) staff report that recommended legal action against Google for tactics that harmed internet users, the agency let Google off with a slap of the wrist in August of that year.

Though it was little remarked at the time, in March 2012, just five months before that FTC decision, it was announced that Google CEO Eric Schmidt was under consideration for a cabinet position within the Obama Administration. Google and its employees had contributed millions of dollars to Obama’s reelection campaign and to other Democrats. Of course, there’s no chance at all (wink, wink) that then-FTC Chairman Jon Leibowitz, another Obama appointee, was aware of Google’s political heft within the administration as he overruled his staff’s recommendation.

Part of the problem for Republicans in embracing strong antitrust positions has been that many quasi-libertarians in the party see antitrust as just another government intrusion in the marketplace. But as with the continued existence of the Libertarian Party, it’s something the GOP is just going to have to deal with and get over.

Tariffs and Free Trade. President Trump’s decision to go after countries, and earlier trade deals, that work against the interests of American companies and workers is the correct policy but it is not currently embraced with enough enthusiasm by Republican legislators.

Their diffidence is largely explained by the lobbying of S&P 500 companies, many of whom are thought of as “American” largely just because they are domiciled here. A recent report in USA Today indicated more than 44 percent of total sales of these companies came from abroad, not to mention the large number of S&P products being made overseas. In other words, these companies are more concerned about their sales and manufacturing abroad than they are about the impact on American companies and workers—past, present, and future.

The hollowing out of the manufacturing capability of so many American towns and cities is the legacy of these “free trade” policies, that, and the canard that America could get by just on service companies.

Foreign Affairs. Easily the most disastrous policies pursued by earlier Republican administrations and congressmen are those connected to military activity abroad, either as part of America’s role as the world’s policeman or in pursuit, as the neocons put it, of “nation building.” The mess that is the Middle East today speaks volumes about the folly of such policies.

But there’s another dimension to this problem: It is impossibly blinkered in that it implies that our nation has the resources and relative strength among nations to engage in these wars. But we don’t.

Indeed, until just the last two years, China’s economy was growing at a rate that was at least double our own, and China is also expanding its military at light speed. Even Russia, though not in the same league economically, is itself expanding its military and teaming up with China in military exercises.

Going forward, the GOP should wholeheartedly embrace, as Trump is advocating, “nationalism” rather than “globalism,” and Main Street rather than Wall Street. And GOP legislators should resist the lobbying of corporations that despise them, like the entertainment industry and the legacy media. It isn’t enough that such companies are “corporations” for the GOP, the party of business, to support their policy positions in Congress or with the regulatory agencies. The political damage these companies do to the GOP is orders of magnitude worse than whatever minuscule gifts they can bestow on compliant GOP legislators.

In sum, the politics of a generation ago needs updating, even as the principles that animated the party remain constant. It is not enough to recur to position papers of 30 years ago to understand what we need to do today. In order to maintain those principles of freedom and self-government that we all should care about, we have to adapt our policy positions in order to meet current political realities.

Photo Credit: Brooks Kraft LLC/Corbis via Getty Images

2016 Election • America • China • Democrats • Elections • Post • Trade

Rethinking Free Trade on the Campaign Trail

Eight hours before the first polls closed on November 8, 2016, the late Charles Krauthammer appeared on Fox News and made a prediction. Should Trump win, he said, it would “irreversibly” change the Republican Party.

“Particularly the most obvious issues will be immigration and trade,” Krauthammer explained.

Nearly two years into the Trump presidency, a look at debates from key Senate races may offer a hint at the party’s future on trade. The old guard is sticking with its free-trade roots.

“I am for freedom, free people and free markets, and I am not a fan of tariffs and never have been,” Tennessee Republican Marsha Blackburn said in her debate with Democrat Phil Bredesen. “But China has had a trade war on us for decades, and if we’re in a trade war, for goodness sakes let’s make sure we win this. Now, I hope that we get these tariffs over and done with because they are not good for Tennessee.”

Moments later Blackburn was asked to name one Trump policy she disagreed with.

“One is the tariffs . . . ”

On this the two candidates agreed. “The tariffs we have right now are hurting Tennessee badly,” Bredesen said.

The free trade question has sometimes offered a rare note of harmony for debating Republicans and Democrats who can’t agree on much else.

“I’m against tariffs. I’m against a trade war,” Senator Ted Cruz (R-Texas) said during his debate with Democratic Rep. Beto O’Rourke. “This is one of the few issues on which Congressman O’Rourke and I have some common ground in that we’ve both spoken out in favor of trade.”

Whether out of conviction or because of their reading of the electorate, the tone is often different from emerging GOP voices.

Martha McSally is the Republican Party establishment candidate in Arizona. She recently campaigned with unabashed free trader Mitt Romney.

Yet when the question came up in her October debate with Rep. Kyrsten Sinema, McSally said, “I believe in free and fair trade.”

McSally followed up the debate with a page on her website that cast her opponent as the unrestrained free trader: “Kyrsten Sinema continues to obstruct the President’s agenda to overturn unfair trade deals that harm American workers and put America first, even though a majority of Americans agree with his trade policies.

Republican candidates are now finding a way to put the word “fair” right up there in equal billing when discussing free trade.

“Yes, we need free but fair trade,” Michigan Republican John James said in his recent Senate debate. “You can no longer have predatory business deals where China takes advantage of the American worker and the American business.”

The shift in tone and substance hasn’t gone unnoticed by the media.

It has become trendy for pundits to point to Republican candidates lagging behind the Democrats in industrial states and claim Trump’s trade policies are proving too much to bear.

Except that in some cases it is the Democrat who is more in line with Trump’s trade policy.

In Ohio, incumbent Democratic Senator and longtime free-trade critic Sherrod Brown nearly did a “happy dance” on learning of Trump’s steel tariffs, according to one news report. Brown is currently running ahead of his Republican challenger and another recent headline read, “Sticking with Trump on trade boosts Ohio Democrat in Senate race.”

Contrast that contest with the one in Missouri, where Republican Josh Hawley is running against Senator Claire McCaskill, who has criticized Trump on tariffs and trade.

In their October debate, Hawley gave an articulate and forceful defense of Trump Administration trade practices.

Hawley said America is in a trade war that China started. Then he zeroed in on McCaskill’s opposition to Trump’s aid package to help offset losses to the agriculture industry as the administration works for a better deal. Specifically, Hawley took issue with the assertion that the aid package was intervening in the market to pick winners and losers.

“With all due respect, I wanna pick winners and losers,” Hawley said. “I wanna pick Missouri farmers as winners, and I wanna pick China as a loser.”

Conservatives have long opposed using the tax code and regulation to pick winners and losers among American businesses.

Hawley makes the case that we absolutely should look out for American workers and businesses when cutting deals with other countries. It is an important distinction.

Old mantras die hard, and the most hardline free traders can still find like minds among Republican Senate candidates.

But there is increasing support from Republican politicians for trade deals that put the interests of American workers and businesses first at the negotiating table.

In line with Krauthammer’s prediction, the free trade hold on the GOP appears to have loosened significantly since that pivotal November night. It’s about time.

Photo Credit: VCG/VCG via Gettty Images

America • China • Conservatives • Economy • Post • Trade

Dear Liberals: People Aren’t Commodities

Afraid his son would steal his throne, Dionysius I, Tyrant of Syracuse, locked the boy away in a tower. Never leaving his prison, the boy learned about the world from his teachers and books. War, rhetoric, politics—he mastered them all. The boy was Leonidas without soldiers, Pericles without words, Themistocles without followers.

Everything changed when Dionysius I died. The boy—now a man—ascended the throne. Yet for all his knowledge he lost battles, forgot speeches, and impoverished his people. Dionysius II even invited Plato to help him rule as a philosopher-king. But all Plato’s wisdom proved worthless. He was lucky to escape Syracuse with his life.

Although Dionysius II knew everything, he also knew nothing. Theory is not reality. Logic is not experience. Knowledge is not skill. Dionysius never realized that his knowledge was ignorance, and his ignorance, knowledge. He died in disgrace.

This lesson remains true today, particularly in the field of economics. For example, although international free trade looks like a good theory, it seldom works in reality. Why? Because underlying the theory are a number of false assumptions. Free trade’s logical foundation is quicksand and no matter how sturdy and elaborate the edifice becomes, the structure is forever fragile.

Killing Archie Bunker
The story of Dionysius brings me a recent article by Andy Kessler in the Wall Street Journal. Kessler argues that “duties and tariffs are a fool’s game” because they prevent America’s multinational corporations from offshoring their “low margin” production to developing countries. This prevents America from getting rich by moving “up the margin chain.”

Kessler notes, for example, when Japanese companies began dominating the dynamic random-access memory market, American producers were forced to specialize in designing higher-margin microprocessors. The reason they could do this is that they offshored their production to places like Taiwan, which freed up American talent for better things. Kessler lauds his paradigm:

We’ll design (high margin), and they’ll manufacture (low margin). We think, they sweat. It’s the “Designed by Apple in California. Assembled in China” label.

Kessler thinks free trade like this enriches America in the same way paralegals enrich lawyers. Just as lawyers delegate menial tasks to paralegals so that they can focus on billing clients, America offshores factories to China so that Americans can focus on designing new products and services. It’s all about margins, profits. If designing is more lucrative than manufacturing, then why shouldn’t America focus on designing? And let’s be honest: who would want to work a grungy blue-collar job like Archie Bunker when he could wear a slick suit to work like Harvey Specter?

Millions of Americans, that’s who.

Not everyone wants to be the next Steve Jobs—and even if everyone did, very few people possess the necessary intellectual and creative talents. Although this will come as a shock to libertarians and “progressives” alike, the truth is that not all men are created equal in their capacities and characteristics. Some are tall, others short. Some are brave, many are cowards. A lucky few are clever, and many more are not. In the end, everyone has different proclivities and personalities, tastes and talents, skills and experience. This observation cuts to the core of the free trade debate, and brings economists to their knees.

Smarter Than the Average Bear
Assume for a moment that America fully embraces free trade, and it works exactly as planned: we offshore all our low-margin production to developing countries, and this indeed frees-up our population to work in lucrative industries like product design, finance, management etc. While this may make America richer (in the short term), it will not necessarily make Americans richer. Why? Not everyone can be an engineer, investment banker, or lawyer—most people just aren’t smart enough, and many more don’t have the personality for it. It’s harsh, but true.

Charles Murray explains in his seminal book The Bell Curve that human intelligence, as measured by IQ, conforms to a normal distribution. That is, most people are of roughly average intelligence (68.2 percent fall within one standard deviation of the mean), while a minority are significantly more or less intelligent than average (15.9 percent are one or more standard deviations above or below the mean respectively). Importantly, half of all Americans are smarter than average—and half are, well, below the average. This has big economic consequences which Kessler ignores.

For example, America’s average IQ is 100, while the average IQ of engineers is about one standard deviation higher. This means that the average engineer is more intelligent than some 85 percent of the general population. Further, the data implies that an “IQ threshold” exists near 105 IQ points, below which the odds of someone becoming an engineer are infinitesimally small. This suggests that 62 percent of Americans are simply not bright enough to be engineers—no matter how hard they try. Biology limits us, whether we accept it or not.

People not only differ in cognitive ability, they also differ in personality. According to the five factor model, people’s personalities are rooted in five basic psychological predilections: openness to experience, conscientiousness, extraversion, agreeableness, and neuroticism. These personality foundations impact everything about us, and have important economic consequences.

Consider the trait “conscientiousness.” Conscientious people tend to be organized and dependable, disciplined: they show up for work on time, stay focused on their task, and rarely call in sick. In short, they’re model employees. For this reason, a conscientious personality is the best single predictor of an individual’s economic success in life (after their IQ score, that is). For our purposes, another important trait is openness: people who are open to new experiences and ideas are more creative on average.

But being open isn’t enough. Productive creativity is driven by people who are predisposed towards openness and conscientiousness—they not only have new ideas, but they are willing to put in the work. This combination is rare, and it partly explains why there are relatively few creative engineers (like Steve Jobs) and disciplined artists (like Michelangelo). In any case, my point here is that different people have different personalities, and that being an engineer or designer isn’t for everyone.

Les Déplorables
Kessler thinks free trade will enrich America by letting us “move up the margin chain”—offshoring “low-margin” manufacturing jobs to China will free-up Americans to work in “high-margin” design sector. They sweat, we think.

Of course, this makes perfect sense, and I have written copiously about America’s need to expand her technologically sophisticated industries. But unlike Kessler, I don’t think we can, nor do I think we should, expand them at the expense of “low margin” industries. People are not interchangeable parts, they have different intellectual abilities and personality predilections—not every factory worker can be, nor wants to be, an engineer.

In practice, this means manufacturing and design do not draw from the same labor pool, and shrinking one will not substantially grow the other. Kessler’s argument is a dud.

I cannot emphasize this enough: offshoring isn’t just a question of economics, it’s one of politics, morality, and basic human dignity. By trading with China and Mexico, free traders take the bread from their brothers’ mouths and give them nothing in return—“cheap goods” aren’t so cheap when you don’t have a job. They dispossess their fellow Americans for their own profit.

My question for Kessler: what do we do with the millions of Americans who’ve lost their jobs and cannot—through no fault of their own—simply “move up the margin chain” by becoming designers or engineers? Do we, like a new Ancien Régime, let them eat cake? It’s not only about income, it’s also about dignity. Do we engage in political iatrogenics, and merely assuage the symptoms by providing welfare or a universal basic income? Or, do we protect our industries from foreign competition, and guarantee that America remains the land of opportunity for all Americans?

I know where I stand.

Photo Credit: Spencer Platt/Getty Images