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Global free traders have some explaining to do

Five consecutive years of record trade deficits. There are very few rationalizations for supporting unilateral global free trade, but in the spirit of David Letterman, here’s my top ten.

Starting with:
10 We need to prove how bad our laws are. If it destroys every small business in the land, then we’ll do it.
9 Hey, I’m getting cheap clothing, cookware, luggage … Why should anything change?
8 We’ve got a war to pay for. The economy can wait.
7 It’s about the time the US got their nails clipped.
6 Give it time, things are only getting better.
5 Trade deficits are meaningless. It’s only paper.
4 Well, it’s going to crash sooner or later. Let’s ride the tiger as long as we can.
3 Don’t you see? It’s dollars! We can print them!
2 These (lending) countries won’t let us fail. Who would they sell to?

And, the number one rationalization of unilateral free trade, drum roll please:
Consequences nonsequences! I have good intentions!

Seriously, It should be apparent to anyone that true free trade can only exist between equally free people. Free trade between subjects of different laws appears impossible. In actual fact, international free trade can only be approximated where the international and domestic policies of the two countries closely correspond. When you buy your microwave oven from a foreign factory, you are dealing through the many tiered intrigues of two intervening governments, so it is not even remotely free trade. It is heavily regulated and politically manipulated trade. Comparing the US and China, in the US trade and domestic policies are manipulated for and by domestic politics. And in China, … ?

I agree with the great majority of the opinions expressed at Samizdata. I avoid echo chambers and this open and challenging character is a big part of what attracted me here. Every claim or position is open to debate. This is how we strengthen and clarify our positions, and for those who are activists among us, our strategy and tactics. When I hear sacred, unchallengeable mantras being recited, I challenge them.

Liberty advocates can not understand why we have so little general support when what we want to do is ultimately so good and beneficial for everyone. In the case of free trade, there are many powerful reasons that it is not. We have had contributions and comments on this blog about cultural misuse or misunderstanding of words; for example, ‘liberal’. ‘Free trade’ is a term that appears to be misunderstood by many or most of those who use it.

Free trade does not equal free market. Free trade is merely the absence of one level of restraint on the movement of a particular category of valuable between regions under differing regulatory environments. Unilateral free trade is restraint in only one direction. Think of unilateral free trade as a diode. International trade is manipulated by more than tariffs and barriers. It is also manipulated through monetary policy, domestic labor taxes and subsidies, labor laws, wage laws and environmental regulations. Truly free trade is impossible between different regulatory environments. This reality must be addressed in all international relations. Between ideologically opposed nations, trade barriers are the last things that should fall, not the first.

Many people make claims that free trade of any degree helps both countries. They generally support this by pointing to lower prices in the consuming country and higher incomes in the producing country. These advocates seldom address the trade deficits that are the inevitable result of either unilateral free trade in any environment, or of bilateral free trade between nations with significantly different domestic regulatory environments. Producers of goods who’s production is heavily regulated in their own country, are having their businesses and investments destroyed by competition from goods made in less regulated countries. Libertarians pronounce this a good thing, ‘survival of the fittest’ and all that, but then can not understand why these domestic business owners and their employees don’t support the libertarians’ ‘you first’ battle plan against the regulations. Duh!

And that is only one of the flaws in the survival of the fittest interpretations. There has also been an optimistic but generally false claim that free trade between differing regulatory environments causes the stricter nation to loosen up its internal controls. And yet, this is clearly not the case looking at 15 years with our biggest controversial trading partner, China. Far from their regulatory environment becoming freer, the farther along our free trade progresses, the more they are adjusting their regulations to match ours. Or even worse! Meanwhile, in the same frame of time, little if any liberalization has occurred here. ‘But these nations have become more liberal since they have begun trading with us‘ is the usual claim. And yet historically, where highly controlled internal environments have existed, the absence of trade has served to weaken the nation and ultimately forced it to loosen internal controls or collapse. And free marketers do understand this. Their opposition to trade sanctions is always on the grounds of enforceability; nobody doubts their theoretical efficacy. One could better argue that instead of encouraging governments to alter their domestic behavior, open trade rather more encourages the formation of trading blocks made up of of nations with similar regulatory structures and cartels for exports to non-allied nations. What free trade advocates ignore is that international trade is manipulated by governments, not individuals. Few governments find incentive in potential benefits to individuals. They manipulate for purposes of gaining regional or greater hegemony. When we are dealing with governments whose purposes are at odds with ours, we must treat trade as both a vulnerability and a potential weapon.

Tight borders and trade control strengthen whichever side has the best internal structure. Likewise, they weaken the side that has the worst internal structure. Extreme cases are readily available whether they be Cuba, Mao’s China, or North Korea. Open borders sustain the weak while draining the strong. Does anybody for a second propose that we would even remember the names of Saudi Arabia, Iran, or any number of other oil nations if it were not for the consequences of trading with them? What purpose does our trade deficit with these nations achieve beyond financing attacks against us, the source of their wealth? Many people are quick to proclaim the apparent benefits of cheap oil to our economies. And yet, what have we done but borrowed our future and put it on the international credit card? Anybody can create the illusion of wealth by spending more than they take in. And what would those oil dollars have been used for if they had stayed in free market (and energy hungry) nations? I personally suspect fusion would be yesterday’s news by now.

And how is our staggering trade deficit with China any less the symptom of our addiction to another nation’s manufacturing capacity than our trade deficit with Saudi Arabia is a symptom of our addiction to other countries’ reserves? I make no challenge that our trade with China is to their best interest. But instead of being compelled to use our technological expertise to automate or otherwise improve our own production capacity, we are exporting production capacity to China in exchange for debt. There is no way that this can be interpreted as any thing more than a very short acting anesthetic to our very real problems. People lauding the long term benefits of this arrangement ignore not only the harm to our capacity, they are ignoring the unpleasant fact that many of our largest trading partners are not ideologically or even militarily our allies.

Other people in order to make their case, conflate ineffectually applied government controls with liberal government. Wrong. This is a mistake of deadly consequence. Not articulating the difference between fascist ‘capitalism’ and free enterprise capitalism is either negligently or wilfully misleading. These governments are seeking improvements not in the direction of liberty, but in the direction of more effective, less destructive control. Fascist nations historically have been capable of great accomplishments and what matters more than how well they presently enforce market controls, is what their philosophical intentions and inclinations are. Is it possible that China’s past and present world market success is the consequence of ineffective, and not liberal government? Is it also possible that their ultimate goal is somewhat closer to national socialism?

As much as we would like to see more and better examples, it is our countries that are the freest in the world. What few exceptions that may have more freedom are undeniably under our protection. We face so much political opposition internally because, in our insistence on free trade with nations who would at the very least see us deposed, we are advocating our own societies’ destruction. There are among us those who would risk the destruction of the freest nations in the world in order to make them freer. To them I say, demonstrate you theory with something less valuable. Show me where policies leading to ever higher record trade deficits have done anything but destroy the debtors. Voters who understand nothing else about individualist/libertarian ideals, are smart enough to reject plans that export our strength, wealth, and self reliance to nations that are not only not our friends but, as a matter of public statement, oppose us and our continued success.

In summary, free trade is a worse than meaningless term. It is a deceptive one that slanders the word ‘free’ for other uses. Trade between non-allied nations will always be manipulated through trade, monetary and labor policy. To deny a free market nation the ability to defend itself from attacks by the aggressor nation’s market machinations is to deny it a very important form of self defense. I support free trade with nations that have fundamentally similar philosophies of individual liberty. This includes most of the Anglosphere, Japan, South Korea, and many nations of the commonwealth. But trade with nations that do not accept, or are even antagonistic to our pursuit of individual liberty, must be carefully qualified and used as a tool for the expansion of freedom, not the destruction of it.

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42 comments to Global free traders have some explaining to do

  • ResidentAlien

    Remember that the US is a huge offender against the ideal of free trade with massive agricultural subsidies and subsidies to exporting companies.

    Trade deficits don’t worry me. The figures are largely meaningless. If the figures were accurate then you would be able to add up all of the national surpluses and deficits and get a figure of zero. In fact, you get a negative number.

    Also, I just cannot see it as an act of agression when a foreign country has lower labor costs. Nobody can manipulate the global economy in this way on a sustainable basis. Defending yourself against that agression amounts to denying your citizens the right to save money.

  • The idea of a ‘trade deficit’ is so utterly ridiculous I don’t get how serious people can believe it actually exists.

    To believe there is a trade deficit, one has to believe there are people out there who are giving us goods and services and not getting anything of value in return.

    And what’s more, we’re not only expected to believe that the rest of the world is populated by altruists who have devoted their lives to giving Americans free stuff, but that we desperately need to stop them from doing so.

  • Trade, as I think I remember being taught, is the aspect of human society that allows economic improvement (and hence better standard of living and quality of life) by the efficiency inherent in specialisation of labour (and sometimes helped by other things, like co-location with natural resources useful for particular economic activity).

    Now, if you don’t like trade, you implicitly support inefficiency (through protectionism or otherwise). This is for whatever grouping of people do the protectionism or otherwise: trade unions, countries, etc. As we in the UK know only too well, long-term protectionism is an economic disaster for everyone, including most particularly those involved in the protected labour at the instant it all unwinds.

    How about the USA concentrating more on its own specialisations, and complaining less. That would be to do what the USA is (or was) good at: doing new hi-tech things first and making them widely available in a cost-effective way.

    If that is no longer sufficient edge over working in a factory for a lower wage than in the USA, find something new or see your standard of living go on increasing in absolute terms, but dropping in terms relative to other countries.

    Best regards

  • The US record trade deficits are most likely to be based on government profligacy rather than structural differences with trading partners. On the Chinese side, an undervalued currency does its bit of course, but this is unlikely to be the only reason. For a start, this is strongly suggested by trade statistics. The last figures I have got handy are for 2004. According to this China has huge bilateral trade surpluses with Hong Kong and the USA, a smaller one with the EU and a small deficit with Australia. There is a substantial trade deficit with other south East Asian trading partners—this is to be expected if outward processing trade is of major relevance.
    For the external position of the US, things are really quite simple. Open any introductory economics textbook, look up the discussion of the circular flow of income and you will soon find an injections withdrawals equilibrium condition looking something like this:

    (1) S+M+T=I+X+G

    where S is savings, M imports, T taxation, I investment, X exports and G government spending. Now re-arrange them to get:

    (2) S-I+T-G=X-M

    Now S-I is the excess of savings over investment, T-G the inverse of the budget deficit and X-M net exports. Let’s start from a position where the government budget position is in surplus and there is a trade deficit matched by an inflow of investment. This is close to where the US were in the late 1990s.
    Now assume that government spending rises dramatically as it has done in the US post 2001. The LHS of (2) will now become negative. Without a tax rise this increase in government spending could be financed in a number of ways: 1. domestic investment could fall, 2. savings could rise through a fall in consumption (savings after all are S=Y-C, i.e. income left after consumption), or 3. real income could rise, though that unfortunately does not normally happen in response to a rise in government spending –not outside the world of Keynesian modelling anyway.
    If none of this happens in the domestic economy, the nation starts living beyond its means, i.e. it will have to import more to satisfy total demand. In that case someone else will have to fund this, and this someone else could be (and to a large extent is) the Chinese authorities acquiring US government bonds.
    This seems to be, by and large, what happened in the US: look here(Link) for the evolution of the budget deficit and here(Link) for a non-libertarian source arguing that the government budget deficit is the problem. China’s currency peg is part of the problem but this –and China’s labour costs—do not comprehensively explain the record trade deficit, looking at government profligacy could go a long way towards doing so.

  • Jacob

    Mid,
    Excuse my impolite remark – but I think you should go and seek employment with Pat Buchanan.

    Free trade is free trade.

    Free trade is my freedom to buy anything without Government preventing me from doing it. Free trade is as basic a personal freedom as any there is.

    Maybe perfect free trade (as perfect competition) are idealized and abstract terms, in the sense that what we have in the real world is never absolutely free trade (lamentably). A lot of limitations are imposed on free trade by governments of both sides (the seller and the buyer) as you state. But this should never be used as justification for imposing MORE barriers.

    The freer the trade, the less the barriers – the better.

    Cheap oil definitely gives us a higher standard of living. When cheap oil runs out we’ll lower our living standards and/or find substitutes. No need to get poorer arbitrarily becuase YOU think that dependence on oil is somehow “bad”.
    You are free to chose your life styles, free to refrain from using oil, or free to produce alternative energy and sell it, but don’t impose you preferences upon all by gov. edict.

    Cheap clothes and shoe inports from China enable our people to work in high-tech industries in fields were they are more productive. Let the Chinese toil away at clothing us. They’re welcome.

    Trade deficits don’t matter. We buy things as long as people are willing to sell us. You should look at total babance of payments, not at trade balance. If the Chinese preffer to hold Dollar securities and deposits, it’s ok with me, it’s their problem.

    Ok, (temporary) end of rant.

  • Jacob

    About trade deficit:
    The problem is not trade deficit but Government spending deficit. Gov. deficit will have to be paid by taxing the people in the future. Gov. deficit adds to trade deficit.

    If you’re worried about deficits stop government spending, don’t stop trade. Stopping trade will make you poorer, and less able to cope with deficits in the future.

  • nic

    “Cheap clothes and shoe inports from China enable our people to work in high-tech industries in fields were they are more productive. Let the Chinese toil away at clothing us. They’re welcome.”

    But isn’t that the problem? If the Chinese were indeed toiling away, working hard in a free market then everything would be fine. But they are not: they are in a corrupt, authoritarian state where there rights to freedom of expression is curtailed and whether they personally get the opportunity to better themselves has much more to do with whether they are or have friends in a Communist party hierarchy. Which then deliberately reduces the value of the individuals’ labour by undervalueing the currency they work for.

    In a situation such as this, it seems naive to bang on about free trade. Because part of the trade is not free at all. And while it is not necessarily the governments of Western nations that have to DO SOMETHING about it (because they would be pretty incompetent if they tried) it remains something for individuals that otherwise want to trade to worry about from a political and moral perspective.

  • Nick M

    nic,
    I really don’t quite get that. How precisely does the fact that China is authoritarian and S Korea presumably isn’t impact on my decision to buy Lenovo or get a Samsung instead?

    Jacob,
    Too right. Dubya has been spending money like it’s going out of fashion.

    In general,
    The whole idea of a western trade deficit with China is a little more complicated because these new Chinese industrialists eventually have to stash the cash somewhere. Given that the Chinese banking sector is spectacularly corrupt a lot of this money flows into the coffers of the likes of HSBC whereupon it is lent to people in the UK (and elsewhere) at rather low interest rates and then goes back to China where it pays for the whole panoply of crap we seem to buy these days. This is my take on the current state of the globalized economy. I have zilch background in economics and I have no idea if this system is stable. Part of me thinks the wheel is going to come off this whole system because I suspect that housing equity (which is what people are largely borrowing against for all the marvellous stuff the Chinese make) can only rise so far above wages before people decide they’re bloody well not going to pay 250 grand for a three bed semi in Manchester. I would like to hear what take the wiser heads here have on this.

    Or in short, should the wife and I give up any attempt at getting on the “property ladder” and just spend our cash on having fun?

  • Midwesterner

    Apparently nobody got my point that this is a defense issue. (Completely above and beyond the political tactical defeats it causes us domestically.)

    The ranting kraut did a good job of explaining where the trade deficit comes from, but nobody seems to acknowledge what it is.

    I will try to put it in simpler terms. Imagine a big Monopoly game. The world plays in dollars. One of the players has the power to print money for its own use. It does. And it uses this money to feather its own bed and make sure it stays a player. (See “in the US trade and domestic policies are manipulated for and by domestic politics” in the first paragraph.) Nobody doubts the primary cause of the foreign trade is US government prolifigacy. This article is not about cause. It’s about consequence.

    What we have is the equivalent of a bunch of spectators on the deck of a sinking ship saying “The captain is an idiot. He’s going to drown.”

    This is why I say start on a less critical nation when proving your theories. New Zealand does not have to worry about hostile nations. They know that if missiles fly and ships are in the harbor, the US and what’s left of the free world’s defense will be there as fast as we can mobilize.

    Again, this article is not about economic policy, it is about defense policy.

    The elephant in the room that nobody wants to talk about is that foreign nations now hold over a trillion dollars. (Not counting Japan, which I consider an ally.) In world war two we were so concerned about what would become of dollars in the hands of enemies, that we printed special dollars for use in Hawaii in case Japan occupied it. We did this to make sure that a hostile nation could not use dollars against us. Now there are over a trillion dollars in the hands of a government (not the citizens I don’t think) that is most definately not our friend.

  • Brendan Halfweeg

    If the Chinese were indeed toiling away, working hard in a free market then everything would be fine. But they are not: they are in a corrupt, authoritarian state where there rights to freedom of expression is curtailed and whether they personally get the opportunity to better themselves has much more to do with whether they are or have friends in a Communist party hierarchy. Which then deliberately reduces the value of the individuals’ labour by undervalueing the currency they work for.

    Don’t buy Chinese products if you are morally opposed to their regime, but again this is not an argument associated with asking for your government to protect you from unfair practices of other people selling cheap.

  • Jacob

    Mid,
    I don’t get your point about defence, and how the “enemy” (Chine, Saudi Arabia) can hurt the US with their dollars.

    In the worst case – the US gov. tells them: “sorry, no money, you can pave your backyard with the paper you hold, or come and collect if you can”.
    I see how it’s a BIG problem for them, but not for the US.
    We’ve been hearing all this rhetoric about Japan beating the US economy after losing the war. It’s all crap, was then (about Japan) and is now, about the scare du jour – China. A prosperous economy (in China)is an ally not an enemy.

    You want to produce more and reduce the trade deficit ? Dismantle all the nonesense regulations and subsidies in the US. Don’t stop trade.

  • Midwesterner

    I’ve been betting with myself who will state the unmentionable first.

    “sorry, no money, you can pave your backyard with the paper you hold, or come and collect if you can”

    Jacob wins.

    When the debt becomes unserviceable, we stiff them.

    Bad ‘plan’.

  • Brendan Halfweeg

    When the debt becomes unserviceable, we stiff them.

    Trade is not the same as debt.

    I wouldn’t advocate a regime of purposely defaulting on loans anyway. But this is not a free trade issue either.

    If Americans buy Chinese goods with US dollars, the Chinese must currency trader to accept US dollars for Yuan in order to pay their workers and suppliers. The trader with the US dollars must get the Yuan they traded it for from somewhere, so they sell the US dollars for Yuan. The people or firms with the US dollars now either trade with or invest in America, and so the US dollars are returned.

    If they choose not to trade or invest, that is bad for their economy, not America’s, they are the ones sitting on a mattress full of dollars. Would you work for money and not spend or invest it? How long do you think your personal economy would last if you didn’t trade your labour for the goods you need, with currency merely an intermediary? Trade between nations is no different.

  • Midwesterner

    So, Brendan, $1,000,000,000,000. Lopsided. If they dare come into our economy and spend it, we have economic collapse and they own whatever they can buy with it as the economy is collapsing.

    We are counting on them not doing this because they share our values. And by our values, that would be a stupid tactic. What if they don’t share our values? What if they (any nation that wants to see us brought down from the pinacle) are content to forfeit the aboved mentioned purchasing power in exchange for something else? Like seeing us knocked-off? I hope they don’t. But the 20C had a bad track record of us assessing the ulterior intentions of other nations. Do we really want to go there again so blithely?

  • Sandy P

    It’s their tribute to us to to protect them so they won’t have to.

    The Chicoms know there’s nowhere else to go.

    I recently read posting I think at Rantburg. 1 Chicom muckymuck admitted they don’t know how to do markets, the Anglo-Saxons had figure it out and another said Chinese take the long view, in 50 years China and America will still be here.

    They make our trinkets. We can get by w/o their trinkets, there’s other fish in the sea.

    Besides, the drug dealers prefer those big-bill euros for biz and I recall reading that the European Central Bank won’t be able to control as much as they wish.

  • Brendan Halfweeg

    So, Brendan, $1,000,000,000,000. Lopsided.

    Where does this figure come from? Does it include Chinese re-investment in the US? If the Chinese are holding onto what amounts to 10% of their GDP in paper money earning no interest, then that is a big problem for the Chinese, not the Americans. I don’t think they’re doing that.

    If they dare come into our economy and spend it, we have economic collapse and they own whatever they can buy with it as the economy is collapsing.

    That has got to be one of the strangest assertions I’ve ever heard. When one citizen or firm from another country invests or buys product from citizens or firms in your nation, you both grow richer.

    What exactly are they buying in this hypothetically collapsing economy? If the US economy stops producing goods and services, holders of US currency lose.

    If the US can survive an idealogy that had nukes to throw around, it can certainly survive one that has extra dollars to throw around and spend in America.

    I understand your concern about a hostile nation holding a debtor nation to ransome, but I just can’t see the Chinese doing anything other than trying to make wealth. The Chinese state benefits from this because means they can confiscate the earnings of the Chinese and waste them trying to match the US in the prestige stakes of military and space, but these cross state financial links decrease the risk of war because people have too much to lose.

  • MW: I have to admit I had trouble understanding the defence angle. To be honest –and without wanting to sound dismissive—I found it often hard to understand what you are getting at. Maybe a better structured and more concise text could have improved things.
    I don’t see China’s US$ reserves as a defence issue either. In a conflict amounting to open warfare, honouring those debts would at the very least be suspended. Ultimately, the US could take the extreme step of defaulting on this debt rather than accepting economic collapse. (Official currency reserves are, as far as I know, usually held in government bonds, so the US government would have direct control here.) I am also not too sure how bond holdings could be used destructively in this case, but this may just be my lack of imagination.
    In a conflict not amounting to open warfare, I don’t see the possibility for a financial assault (assuming this is what you had in mind) simply because a pure fiat currency is nothing but a stake in the issuing economy, so that in anything other than a war like conflict I don’t see what interest the Chinese should have in using those reserves against the US.
    I can see how their massive reserve holdings could give them some clout in bilateral negotiations where they might aim at gaining influence rather than destroying the US.
    I can also see why they would want to sit on their US$ reserves though. They are still running a pegged exchange rate, and episodes like the 1998 Asian Crisis tell us that a large amount of reserves can be needed very quickly if such a policy goes wrong.
    Finally, as for the Budget Deficit being merely the cause of the trade deficit: I think it also points to the solution. The budget deficit should be largely under government control, and reducing it should make a sustainable trade deficit easier to achieve.

  • Midwesterner

    Brendan, I’m refering specifically to foreign exchange reserves held in US dollars. It’s only a big problem for nations that hold the same ambitions we do.

    When one citizen or firm from another country invests or buys product from citizens or firms in your nation, you both grow richer.

    When representatives of one nation come into anther one and begin spending $1trillion that was previously held in reserve, inflation goes nuts. And that is irrespective of the fact that a potentially hostile nation now controls those assets (unless we decide to selectively deny them the same level of control we let other investors have).

    I think the dollars verses nukes comparison breaks down because it was our dollars that paid for our defense. Our entire nation is built (unfortunately) on the dollar.

    The Chinese state benefits from this because means they can confiscate the earnings of the Chinese and waste them trying to match the US in the prestige stakes of military and space, but these cross state financial links decrease the risk of war because people have too much to lose.

    I wish I could share your confidence that they see it that way. You are making a pretty dangerous assumption when you assume they are seeking only prestige.

  • Midwesterner

    rantingkraut,

    You are the second person to mention the ‘D’ word, default. If China were to force the issue, we would almost certainly have to resort to that measure as you and Jacob point out.

    Over night, the dollar ceases to be the world currency. If it happened now, I assume the Euro word rather inadequately take its place. I think it more likely that China would wait until they thought the Yuan more likely to take a substantial share of the world currency market.

    We rely on xenodollars not coming back home. but they are now very great quantities in hands of potentially unfriendly nations. Certainly nations that would be happy to see us (US), removed from our place as the banker to the world.

  • Jacob

    When the debt becomes unserviceable, we stiff them.

    Yes. It’s not a matter of choice. If it’s not possible to pay you default. It happened to many countries, the last example being Argentina – the gov defaulted on it’s exterior debt, and also on the interior debt – promising to pay back only 33% of it.

    It does not matter whether government owes the Chinese, the Japanese or it’s own citizens, or all of the above. Those who hold the debt suffer a loss.

    The US budget deficit is a problem, no doubt about it. But how do you mitigate it’s effect by imposing trade barriers ?

    Suppose you block imports from China. Would you also prevent them from buying US securities (gov bonds) ?
    How ? Securities can be bought on the open market.

    Besides – blocking imports amounts to blocking exports. Those that cannot sell you goods have no dollars to buy goods from you. You are both poorer because of it.

  • Midwesterner

    Jacob,

    Good questions, all. Actually, I do think it makes a difference whether we owe the Chinese, Japanese or New Zealanders and Australians.

    As far as what roles trade plays in defense, I don’t know. I do believe it is a very important component. To the direct extent we share a future and values with a country, we should displace our trade to them if it is our intention to use free trade to force domestic change.

    We should try to remove as much of our vulnerability as possible from nations who seek our displacement (or even, in the case of some Islamic states, our destruction).

    These are the right sort of questions you are asking. I don’t know the answers, but I want to see these and similar questions asked.

    We are headed down a suicidal path and the fact that we (here on Samizdata) know the principle cause, does not make us immune to the consequences.

    To use a metaphor, we are lost and have come out to the edge of a cliff. We see the road and our car parked down at the bottom. It’s one thing to say “we should be down there”, and another thing entirely to take the direct route.

  • MW;

    Your scenario still doesn’t make sense. The Chinese don’t literally have $1T in cash, they have it various financial instruments, primarily government bonds. In the event of a conflict, the USA could sieze those accounts holding those bonds or the bonds themselves. In effect, China keeps its national treasury in the USA. You think that’s to China’s advantage in the event of conflict?

    A secondary issue from the holding of bonds is that in order to spend that money here to do some vague, nefarious thing, China would have to sell the bonds to get cash. So to spend th $1T, they would have to remove $1T cash (of the people who buy the bonds), leaving a net wash for the USA. Moreover, such a massive selling would drive down bond prices, destroying much of the value the Chinese had accumulated. It’s not clear to me that the USA would actually suffer seriously from the event, much less suffer more than the Chinese who would have to endure a major loss of capital.

  • Midwesterner

    AOG, I dont’ think you see the ‘game’.

    In the event of a conflict, the USA could sieze those accounts holding those bonds or the bonds themselves. In effect, China keeps its national treasury in the USA. You think that’s to China’s advantage in the event of conflict?

    Precisely. Yes and there is a reason for that.

    to spend that money here to do some vague, nefarious thing

    Not hardly. You don’t do vague nefarious things with $1trillion. You do spectacular things for spectacular results.

    This is an interesting essay that I’ve only just read. I wish he would have made a bigger point of how Britain came out of it and how the US will come out of it.

    One big difference, in the Great Depression the US needed to act carefully in a domestic political dance. I doubt China’s history suggest a very strong need to do anything but pursue their ulterior goals, letting the population suffer to whatever extent without concern. I have no doubt that China will suffer when the game plays out. I also have little doubt they will endure their suffering to better effect than we will endure ours.

  • James of England

    My sense is that your view is that that the part of a “trade deficit” that might cause concern is the government debt, from the government deficit.

    My sense is that you are not in the John Edwards camp of protectionism and believe that trade does make the trader wealthier.

    I imagine, then, that you have been heartened by news of the deficit halving over the last year.

    I’d like to think that you’d share my view that this was partly because, while Bush may have made other decisions of less merit, his tax cuts and trade liberalisation have greatly boosted the economy.

    Somewhere along this train of thought, though, I’m guessing we part, because if we’re together all the way then the obvious conclusion is that to prevent harmful deficit we want more trade liberalisation.

    Allow me to put myself forward as part of the group too ignorant to exist, in that I don’t believe that sanctions have been terribly effective at liberalising Cuba, or Burma, or Iraq, or North Korea, or Israel (from an Arab perspective). In South Africa they may have been, but I see no compelling evidence that De Klerk would have been much slower to have reformed if we’d traded. Certainly, he thinks he would have been faster. Sanctions can have a powerful effect if they are not expected and prepared for, but all that they do beyond that is impose protectionist countries that are often comfortable with protectionism anyway.

    When we trade freely, we don’t just make other countries wealthier, we particularly enhance the wealth and power of people who can operate effectively alongside us. We promote the importance of the ideologically and culturally western outside our society. The market naturally creates power structures that perpetuate the system, as Marx noted. If you prefer, turn instead to public choice economics for the same lesson. In particular, with the spread of the internet, we promote small businesses with relatively weak ties to their governments. Nothing promotes long term security as much as modern trade. We’re not mercantilists any more.

  • Jacob

    To the direct extent we share a future and values with a country, we should displace our trade to them if it is our intention to use free trade to force domestic change.

    I’m not sure I understand this sentence. Do you propose that government should impose trade limitations – i.e. – restrict the freedom of individuals and companies to trade – based on some officially, government determined, scale of values ?

  • Midwesterner

    My sense is that your view is that that the part of a “trade deficit” that might cause concern is the government debt, from the government deficit.

    There are at least two separate but interwoven issues here. I think that is part of what helps to hide the reality. One is trade with someone who wants to take our place as the leader of the free world. Somebody on another thread just blew off that consequences as being a good thing. Glad to see someone finally put it on the record, I’m sure there were Brits saying the same thing before the Empire went super-nova. We must draw a line between nations on the side of personal freedom and those not. Which brings me to issue number two, we now have a total debt (not just the financial reserves) of money owed from the US economy to both of the above categories of GT $10,000,000,000,000. Lest you think the UK can backstop us, your total economic debt to other nations is GT $8,000,000,000,000. This figures are based on the World Fact Book numbers summerized on wikipedia.

    My sense is that you are not in the John Edwards camp of protectionism and believe that trade does make the trader wealthier.

    Trade is a good thing. Debt is a bad thing. Debt for the purpose of avoiding reality is always a very bad thing. When trade is dedicated to this avoidence, then it is as bad as a car in the hands of a drunk.

    I imagine, then, that you have been heartened by news of the deficit halving over the last year.

    Well, it’s a bit like having your doctor say “Good news! You really have three more months to live.”

    I’d like to think that you’d share my view that this was partly because, while Bush may have made other decisions of less merit, his tax cuts and trade liberalisation have greatly boosted the economy.

    I can tell you James, from close observation, it is easy to boost the household economy with a credit card. For a while. Curse him or bless him, this is what’s called greatly boosting the economy.

    Somewhere along this train of thought, though, I’m guessing we part, because if we’re together all the way then the obvious conclusion is that to prevent harmful deficit we want more trade liberalisation.

    I don’t know, I’m interesting in your follow up comments.

    Now these comments go to my first topic of security:

    I don’t believe that sanctions have been terribly effective at liberalising Cuba, or Burma, or Iraq, or North Korea, or Israel (from an Arab perspective).

    Trade sanctions, no make that trade in general, is not at all effective in freeing up nations that are not already on course to be freedom. All they can do is weaken nations that would shift the center of balance in the other direction. With the exception of Iraq, who had oil and was able to defeat the biggest part of the sanctions, trade sanctions drive down the economy of the most screwed up country. I think there is little doubt the Arab/Israeli trade sanctions hurt the most screwed up nations (Arab) while probably doing little if any harm to Israel who trades with the rest of the world.

    Nothing promotes long term security as much as modern trade.

    Certainly in the case of nations that are deeply messed up.

  • Midwesterner

    Jacob, yes in the same way we make any other defense policy decisions. We should alter our trade filters according to what the nation we are trading with wants to do with the world.

    Free trade with free nations is good. Free trade with nations who are enemies of freedom is bad. I want to expand the concept of our borders to include freedom, not just geography. But we do still need borders from anti-free states and peoples.

    My comment above to James of England covers a lot of this and can save me repeating it. But if that doesn’t explain enough, ask more, please.

  • Jacob

    “We should alter our trade filters according to what the nation we are trading with wants to do with the world”

    There are several separate issues you touched upon.

    In the main thread you were speaking about protecting American businesses from foreign low cost imports (because they don’t have same standards of taxation, of wages, of living, of environment regulation etc.). That is a purely economic issue. On this basis you would oppose trade with, say, Vietnam or Malaysia.

    Then there is the defense issue. On this basis you would oppose trade with China because it is (so you think) not friendly, and dangerous. (But not with Vietnam which doesn’t pose a security risk).

    The third issue is deficit and debt. You are afraid of the xxxT$ the Chinese hold (but not afraid of debt held by Japan or Taiwan).

    In my opinion – while the security issue may have some merit, the others don’t. But I don’t think China poses a threat to the US. Even if, some decades from now, it’s economy will be bigger that the US economy.

    A remark about the xxx$ Chinese cash stack, and the trade balance. The cash stack is caused in great part by China maintaining a fix exchange rate for their currency. The Chinese gov is forced to buy and hoard dollars, to keep the exchange rate low. The low value of the renimbi boosts Chinese exports and trade imbalance. It’s ok for the US diplomats to nag the Chinese about that exchange rate, but I don’t think that trade limitations are needed.

  • Midwesterner

    There are indeed several separate issues I touched upon. They are all interwoven. I don’t communicate well and tend to focus on parts without explaning their place in the whole.

    Free trade is beneficial to messed up countries. If a nation is progressing in a good direction, domestic liberty wise, then trading with them is an accelerant. Likewise, if they are progressing in a bad direction, free trade is an accelerant. We can name dozens of nations on both sides of this. From mideast oil states, to southeast Asian free enterprize states, whatever course they are on, they gain speed. Not recognizing this in international affairs is dangerous.

    Trade within a circle of people who share values is good. I think our trade deficit with allies is bad in that it cripples the US economically, but not in itself a danger. I don’t expect Japan to have another go at Pearl Harbor unless it is by platoons of realtors (uk = housing agents?). I think our present economic situation (trade reserves) with Japan, Korea and Taiwan may actually be a good thing as they share our values and have for several generations. While getting financially deeply indebted to them through bad domestic policy upsets me, (our present market regulations should upset anyone) I do not believe that particular part of our debt is a security danger. It may even be an advantage in that they really are invested in us.

    I think China is a special case purely because of the consequences of everything they do. They are well and truly on a track to global hegemony. If they were Taiwan, Japan or even Hong Kong it would not mean the same thing. It is not US hegemony per se that I support, it is hegemony by a nation or nations that seek and defend freedom as it is understood in the anglosphere.

    Japan is the only candidate for that role right now, and I am not that confident in them yet. And I don’t think they are or will be able to be a significant moderating influence on actions by a nation as powerful as China.

    India would be an interesting choice, and has many (more) generations of anglo values, though not as strongly held. But their economics are just not even on the horizon yet. Where China has that really big $ amount of cash, India only has about a fifth or sixth as much. No shelter in that port.

    I encourage you to read this and do a thorough fisking on it. I really would like to be reassured. But when I read that article, he said with much better communication, the future I see in my mind.

    Just for reference, I think geometrically. I see trade and debt and direction of freedom and all of these other factors as shapes and qualities. This makes it very easy to see things that can get overlooked in a serial method of analysis, but it also makes communication difficult. Thank you (all) for your patience.

  • Jacob

    Mid,
    Take from your linked article this sentence :

    Today, the American Empire is in decline, is militarily overextended, and is financing her overextended empire with the “tried-and-true” methods of currency debasement and never-ending foreign trade and budget deficits.

    Plain wrong, almost all of it:
    1. America isn’t an empire.
    2. Isn’t overextended.
    3. The “overextended empire” (i.e. overseas military involvement) isn’t the cause of its deficits – out of control inner social spending and welfare are the cause of the deficits.
    4. What’s got foreign trade to do with “financing the empire” ? How is it doing it ?
    5. Why mention foreign trade and deficits as if they were the same thing? They are not.

  • Jacob

    Then the closing sentence:

    Whatever the trigger of the bust in China, there is little doubt that this will provide the onset of a worldwide depression. Just like the U.S. emerged from the Great Depression as the unrivalled superpower of the world, so it is likely that China will emerge as the next.

    Predicting busts is a safe thing – they always happen. The problem is – predicting their timing…. The Chinese have their problems (like banking…) and a recession is probable, though I don’t know if a mild one or a deep one.
    The Western economies also have problems – mainly deficits, runaway welfare spending and low productivity, unfunded pension plans, etc.. These problems are unrelated to China’s.

    Just like the U.S. emerged from the Great Depression as the unrivalled superpower of the world, so it is likely that China will emerge as the next.

    Bull.
    The US emerged the Great Power from WW2, not from the Depression. The US status as great power has nothing to do with the Great Depression. It wasn’t the Depression that destroyed the European powers, it was their suicidal inner wars.

    Will China emerge as the next superpower ? I don’t know, nobody knows, these are just idle speculations.
    And if she will – is that bad ? I don’t think so. And if it’s bad – what can we do about it ? Nothing.
    So, this whole article doesn’t hold water.

  • Midwesterner

    1. America isn’t an empire.

    It has many if not all of the economic characteristics of any empire. If any imperial characteristics are missing, they are legal and sovereignty, not economic ones.

    2. Isn’t overextended.

    An utterly astonishing statement. We are so overextended on National Guard deployments, and we are rejecting terms of service and redrafting people who are at the end of their duty … This statement is incredible.

    3. The “overextended empire” (i.e. overseas military involvement) isn’t the cause of its deficits – out of control inner social spending and welfare are the cause of the deficits.

    Well, under Bill and under W we had approximately the same everything except military spending. Your statement is one of personal opinion and priorities, not of the actual change of spending patterns.

    4. What’s got foreign trade to do with “financing the empire” ? How is it doing it?

    We are borrowing gazillions from other nations. Without it we would (and will) collapse.

    5. Why mention foreign trade and deficits as if they were the same thing? They are not.

    I don’t think I’ve said that they were. I have said that unilateral free trade causes deficits. That is one point of many that I am making.

  • Midwesterner

    Bull. The US emerged the Great Power from WW2, not from the Depression. The US status as great power has nothing to do with the Great Depression. It wasn’t the Depression that destroyed the European powers, it was their suicidal inner wars.

    We merged from the Great Depression into WWII. It was the depression and our trade surplus and Britain’s trade deficit that allowed us to take their place. Militarily, we still compared quite well. It was the consequences of our respective economic situations that brought about the symptomatic changes in the military capacities of our nations.

    Will China emerge as the next superpower ? I don’t know, nobody knows, these are just idle speculations.
    And if she will – is that bad ? I don’t think so. And if it’s bad – what can we do about it ? Nothing.

    I believe that’s called ‘whistling past the cemetary’.

    So, this whole article doesn’t hold water.

    I’m afraid you’ve given me more, not less confidence in it.

  • RAB

    I used to lie on my back when I was six or so, in what I have described before to posters here as my Garden of Eden. Looking at the sky and trying to envisage German Bombers overhead trying to kill me.
    Which was exactly the scenario that my parent’s had to endure.
    Why then and not now? I thought, in my infant mind. Why am I safe now, and my parents at risk then?
    We are at peace, are training Germans in Tank manouvres in Pembrokeshire. We have full employment. The world is on the up. How can this change? And least of all, why would anyone want it to?
    Erm because I was six, and because it does, and logic and economics just doesn’t come into it.
    I read something about the rise of Nazi Germany. Which pared down, amounts to-
    Germany borrowed so much money that they could never ever pay back in the 1930s, the only option was to start a war that they could win and pay back in booty the cash borrowed or go bankrupt.
    If they could defeat the countries they had borrowed the money off in the first place, so much the better.
    Well we know how that turned out.
    Believe me, even as a child of six I knew that logic and economics has nothing to do with world history and trends of thinking.
    I dont believe it now either .
    There is always the last roll of the dice for a chancing madman, Be it Ny Bevan or Adolf Hitler
    And the outcome is usually craps!

  • Jacob

    I believe that’s called ‘whistling past the cemetary’.

    You’ll have to explain that (if you wish).
    Why do you think that China’s ascendancy is bad ? Would you rather have them stay poor, and unstable, and ruled by mad chairmen (Mao) ? Would that be better for the US security ?

    And how can you keep them poor ? How can the US influence IN ANY WAY China’s destiny ? By trade limits ? That is ridiculous.
    You feel alarmed about China ? Too bad. Because you can’t stop it. This is plain and simple. ‘whistling past the cemetary’ – is what your rant ammounts to.

    Isn’t overextended.

    Is the US overextended ? By what criteria ? Comparing to WW2 (when the US had half the current population) – how many troops did it deploy abroad then ? (10 million ? I haven’t looked it up).
    No, the US isn’t overextended at all, judging by it’s potential.

    inner social spending and welfare are the cause of the deficits.

    Defense spending is huge, but welfare spending is huger, and getting bigger all the time.
    Out of the defense spending – most of it is for strategic superiority and will always be needed – the world will never be devoid of threats. Only a tiny part of the defense budget is spent on military deployments abroad. America’s military deployments abroad aren’t an important component of the overall deficit ( that is – compared to welfare spending). These are the numbers – what you are talking is feelings.

  • Midwesterner

    ‘Whistling past the cemetary’ is used to describe doing something to reassure yourself when you find yourself in great need of reassurance. The give away was your last line, “And if it’s bad – what can we do about it ? Nothing.”

    I want China prosper. I want them to become entrepreneurial individualists. It is not now in their history (ever) or their present culture to recognize individuals as anything other than something to be subsumed by the family, the state, the Emperor, or the ethnicity. What I wish for them is a next fifty years that matches Japan’s last fifty years. Two generations of constitutionally successful individualism. A time to reset their cultural meta-context completely and unreturnably. A time of learning but without military power and with strictly enforced rule by constitution, not democracy, oligarchy, or dictator. I do believe that the world would suffer badly under their hegemony either by neglect or mistake. If the US and the UK can mess things up as badly as we often have, what can we possibly hope for from an anti individual culture? That is what there past culture is at root. It is a family culture in many ways similar to mid east familiy culture. Individualism is a bad thing, not a good thing in pre western Asian cultures.

    There is a reason Rumsfeld was compelled to attempt Iraq on the cheap. We are over extended financially (like we weren’t in WWII). We are over extended politically with our allies (like we weren’t in WWII). We are over extended emotionally, (like we weren’t in WWII). We are unable to raise an adequate army on the money we are compelled to. We are counting on loyalty and nationalism for our recruitment and we are burning out. We are unable to fund a real military effort without making undeniably painful cuts in programs that we haven’t the will to cut. If any other way was possible, we would be doing it. We are overextended by virtually every imaginable measure.

    You say it is social spending that put us into debt. Social programs have not changed significantly since Clinton. Whatever you think of the merits of social programs, the new kid in the budget is military. Their role in the size of the budget does not change the fact that they are the part of it that is the last straw on the camel’s back. Like you, I would far rather see more on military and less on handouts (a lot less!) But we added the military spending on top, not in place of social programs.

  • Jacob

    I want China prosper.

    Good. No need for trade barriers for that.

    It is a family culture in many ways similar to mid east familiy culture.

    I don’t know enough about Chinese culture to comment on that, but I don’t see how you, or the whole US – can change Chinese culture (or mideast culture…). Certainly not by imposing trade barriers.
    Why you translate your worry (justified or not) about China into an anti globalization rant is not clear.

    We are over extended emotionally.

    I’ll grant you that. That’s the key.
    You aren’t over extended in no other (tangible) sense. The US army is small because you are indifferent or irresponsible, and don’t take defense seriously enough, and chose to have it small. The same, to a much greater degree happens in Europe, but they rely on the US for defense. (And stab her in the back when they feel like it).

  • RAB

    I think the “change” that Mid is worried about Jacob,
    (me too) is what may be imposed on US by less laisse Faire types on the Chinese side than your complacent self.
    I repeat, Man doth not live by bread alone.
    Sometimes you need to pack some heat.
    Fiscal and real.

  • Jacob

    I

    think the “change” that Mid is worried about Jacob,
    (me too) is what may be imposed on US by less laisse Faire types on the Chinese side than your complacent self.

    I do not understand what you mean.

    You want to say that China could become strong and then harm the US in some way or other ? Is that your worry ?

    It could happen. Definitely. But:
    1. It is not certain that China will want to harm the US in some bad way in the future. She might, but she might also not. If you wish to worry, ok, but
    2. There is nothing you can do about it. (beside keeping a strong defensive force).

  • RAB

    I do not understand what you mean.

    Yes I’d rather gathered that from your previous comments.
    The easiest thing you can do is not owe them money.
    Endebtedness comes with stings.
    Do you want to be the puppet or the puppeteer?

  • Jacob

    The easiest thing you can do is not owe them money.

    Oh, fine. Then go and balance your budget, and retire (pay back) your gov. debt. Good luck.

    You can’t chose who holds your treasury notes as they are sold on the open market.

  • Joey

    The idea of a ‘trade deficit’ is so utterly ridiculous I don’t get how serious people can believe it actually exists.

    To believe there is a trade deficit, one has to believe there are people out there who are giving us goods and services and not getting anything of value in return.

    And what’s more, we’re not only expected to believe that the rest of the world is populated by altruists who have devoted their lives to giving Americans free stuff, but that we desperately need to stop them from doing so.

    Well, it’s not such a stretch of the imagination. the World’s not actually giving away stuff to America. They’re selling stuff to America in exchange for cash. The problem is that rather than producing that cash, America’s borrowing it. And the creditors who are happily giving us that cash are eventually gonna want it back.

    But it doesn’t matter. With the devaluation of the dollar that trade deficit will disappear in a few years, and then we’ll be fine.

    And in response to the original post, I say that high wages in poor countries are enough reason to open our borders to trade. The World is desperately poor, and we in the West have stuffed our collective pockets at the expense of the Third World by means of closed borders, trade barriers and Keynesian policies. It must stop. We must end all trade barriers, and I don’t see how anyone with a conscience could advocate the alternative.