Wednesday, March 17, 2010

China: It's Not About Economics


Recently, I attended a meeting at the Westland AMVETS where Jack McHugh of the Mackinac Center for Public Policy was giving a presentation. Jack and I had not met before then although we communicated occasionally by email. I have great respect for Jack's work and opinions, but we have have one slight difference in our viewpoints: China. Jack even acknowledged that in a friendly, off-hand remark at the meeting.

Jack and I both believe in the benefits of free trade. Where we differ with regard to China is my opinion that trade with China is highly manipulated by China to the detriment of U.S. manufacturers and is done so because China's interests are strategic first and economic second.

Jack rightly points out that manufacturing has been a declining segment of the U.S. economy for decades as it regards employment. It is a function of production efficiency that fewer workers are required to produce more goods. Besides, no one wants to be a production worker... do they? In my mind, that is not the point entirely. Trading with China is unlike trade with Germany or India or Brazil.

China has a far-reaching goal in which trade is simply a tool to be used in any way that gains a strategic advantage.
The series of posts dealing with this strategic goal is summarized here, but this is the key graphic:

[click on picture to enlarge]

A few days ago, the British online paper Telegraph wrote:

U.S. President Obama shakes hands with Chinese ambassador to the  U.S. Zhou as U.S. ambassador to China Huntsman looks on during a tour of  the Great Wall of China in Badaling
US President Barack Obama shakes hands with Chinese ambassador to America Zhou Wenzhong on the Great Wall of China Photo: Reuters

China has succumbed to hubris. It has mistaken the soft diplomacy of Barack Obama for weakness, mistaken the US credit crisis for decline, and mistaken its own mercantilist bubble for ascendancy. There are echoes of Anglo-German spats before the First World War, when Wilhelmine Berlin so badly misjudged the strategic balance of power and over-played its hand.

Read full story....

China views trade as the hammer for its long-term strategic goals... and the U.S. is just another nail to be pounded. While others like Jack and the Telegraph view trade with China as primarily economic in nature, I continue to view it as a strategic struggle for power with the economic aspect as the "red herring."

Will China ultimately fail in its efforts because the "economics" of what they are doing are against them? I'm not holding my breath.

Jack's email response:

Good stuff.

I don't disagree that with China, "the economic is the geopolitical," but I certainly wouldn't characterize the economic competition as a "red herring," and here's why: It would be just as fair to say that with China "the geopolitical is the economic." IOW, one is not the second fiddle to the other; rather they are two faces of a single holistic entity, The Middle Kingdom.

In China's view it is only right and proper that the largest country with the oldest civilization - whose people are bloody smart and endowed with a Confucian work ethic that makes everyone else including us look like slackers - should become the preeminent world economic power. Naturally, with that position comes strategic geo-political concerns, just was the case with Britain in the 19th C, and the U.S. in the 20th. Like the U.S. in the 20th C, China doesn't have imperialistic territorial aspirations beyond its periphery, but that doesn't mean it has no interest in mucking around in distant places in furtherance of its interests.

As I said in an earlier exchange, in the 20th C China was stupid and poor, but it was unrealistic to think they would stay that way forever.

The Middle Kingdom is a tough, worthy competitor in both the economic and the geo-political realm. No they don't "play fair" according to conventional western conventions. In their pursuit of economic and geopolitical preeminence they aren't inhibited by the kind of moralistic considerations that often enliven foreign policy debates in this country. One might think of them as an Asian "France" in this regard.

We can't take our marbles and go home when they behave in ways we don't like. If we raise restrictive trade barriers, that will make us poorer and less capable of competing. If we whine and beg, "Can't we all just get along," that will be correctly interpreted as weakness and opportunity.

So what can we do? Get in the game, economically and geo-politically. Sharpen up our game on both fronts. How? Cato Institute and the Mackinac Center have the domestic economic agenda for that. Organizations like the Center for Strategic and International Studies have the program on the geo-political front.

I suspect that Bruce Hall and I have no fundamental disagreements on this part.

Jack McHugh



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SEARCH BLOG: FEDERAL RESERVE for full versions... or use the Blog Archive pulldown menu.

February 3, 2006
Go back to 1999-2000 and see what the Fed did. They are following the same pattern for 2005-06. If it ain't broke, the Fed will fix it... and good!
August 29, 2006 The Federal Reserve always acts on old information... and is the only cause of U.S. recessions.
December 5, 2006 Last spring I wrote about what I saw to be a sharp downturn in the economy in the "rustbelt" states, particularly Michigan.
March 28, 2007
The Federal Reserve sees no need to cut interest rates in the light of adverse recent economic data, Ben Bernanke said on Wednesday.
The Fed chairman said ”to date, the incoming data have supported the view that the current stance of policy is likely to foster sustainable economic growth and a gradual ebbing in core inflation”.

July 21, 2007 My guess is that if there is an interest rate change, a cut is more likely than an increase. The key variables to be watching at this point are real estate prices and the inventory of unsold homes.
August 11, 2007 I suspect that within 6 months the Federal Reserve will be forced to lower interest rates before housing becomes a black hole.
September 11, 2007 It only means that the overall process has flaws guaranteeing it will be slow in responding to changes in the economy... and tend to over-react as a result.
September 18, 2007 I think a 4% rate is really what is needed to turn the economy back on the right course. The rate may not get there, but more cuts will be needed with employment rates down and foreclosure rates up.
October 25, 2007 How long will it be before I will be able to write: "The Federal Reserve lowered its lending rate to 4% in response to the collapse of the U.S. housing market and massive numbers of foreclosures that threaten the banking and mortgage sectors."
"Should the elevated turbulence persist, it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Uncertainties about the economic outlook are unusually high right now," he said. "These uncertainties require flexible and pragmatic policymaking -- nimble is the adjective I used a few weeks ago."

December 11, 2007 Somehow the Fed misses the obvious.
[Image from:]
December 13, 2007 [from The Christian Science Monitor]
"The odds of a recession are now above 50 percent," says Mark Zandi, chief economist at Moody's "We are right on the edge of a recession in part because of the Fed's reluctance to reduce interest rates more aggressively." [see my comments of September 11]
January 7, 2008 The real problem now is that consumers can't rescue the economy and manufacturing, which is already weakening, will continue to weaken. We've gutted the forces that could avoid a downturn. The question is not whether there will be a recession, but can it be dampened sufficiently so that it is very short.
January 11, 2008 This is death by a thousand cuts.
January 13, 2008 [N.Y. Times]
“The question is not whether we will have a recession, but how deep and prolonged it will be,” said David Rosenberg, the chief North American economist at Merrill Lynch. “Even if the Fed’s moves are going to work, it will not show up until the later part of 2008 or 2009.
January 17, 2008 A few days ago, Anna Schwartz, nonagenarian economist, implicated the Federal Reserve as the cause of the present lending crisis [from the Telegraph - UK]:
The high priestess of US monetarism - a revered figure at the Fed - says the central bank is itself the chief cause of the credit bubble, and now seems stunned as the consequences of its own actions engulf the financial system. "The new group at the Fed is not equal to the problem that faces it," she says, daring to utter a thought that fellow critics mostly utter sotto voce.
January 22, 2008 The cut has become infected and a limb is in danger. Ben Bernanke is panicking and the Fed has its emergency triage team cutting rates... this time by 3/4%. ...

What should the Federal Reserve do now? Step back... and don't be so anxious to raise rates at the first sign of economic improvement.
Individuals and businesses need stability in their financial cost structures so that they can plan effectively and keep their ships afloat. Wildly fluctuating rates... regardless of what the absolute levels are... create problems. Either too much spending or too much fear. It's just not that difficult to comprehend. Why has it been so difficult for the Fed?

About Me

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Michigan, United States
Air Force (SAC) captain 1968-72. Retired after 35 years of business and logistical planning, including running a small business. Two sons with advanced degrees; one with a business and pre-law degree. Beautiful wife who has put up with me for 4 decades. Education: B.A. (Sociology major; minors in philosopy, English literature, and German) M.S. Operations Management (like a mixture of an MBA with logistical planning)