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Trade war with China? No!

October 6, 2010

The rising chorus for a trade war with China seems misguided and will likely do nothing but hurt the average American.  It will probably reduce real wages through higher domestic prices while providing few if any additional jobs.  It’s a negative mercantilist idea that will needlessly increase global tensions.  I’ve made a case in the past that the free trade regime is not helping the average developed country worker who is forced to compete against low foreign wages and recommended we should essentially penalize imports to account for wage differentials.  I admit I’m modifying my position here, in true dialectical form, as I believe there’s a far better solution to this dilemma.  Simply adding tariffs or pushing for currency adjustments no longer seems a useful direction to take.

The entire price structure in the US economy is now based on manufactured goods coming from China and other low wage countries.   Proponents of a trade war believe higher prices of Chinese goods will stimulate new investment in the US and therefore create jobs.  But this is dubious.  It’s not reasonable to think the massive infrastructure investments in China will suddenly be vacated and relocated to the US, especially given the many other low cost centers which are available.  Are we then to have a trade war with Mexico, Vietnam, or India?

What’s a better solution?  We need to look at root causes and see that the key problem isn’t trade, it’s the circulation of purchasing power.  Most would agree the world has sufficient technology in place today to provide excellent living standards for everyone.  We have the technology; the problem is a lack of purchasing power (or ‘demand’ using the inappropriate idiom of economics).  Each of us are part of a greater whole – almost everyone is a specialist in today’s world and there are very few self sufficient individuals.  The carpenter’s well being is dependent on the well being of the baker who in turn is dependent on the well being of the builder, ad infinitum in one great circle.  All depend on the circulation of purchasing power.

There are many problems with capitalism but we’re dealing here with just one – that of circulation.  The logic of the system permits the private accumulation of extraordinary sums of purchasing power – less than 5% of the population own most productive resources.  Unless these fortunes are regularly spent, the cycle of circulation will fail and living standards will become depressed.  Those with great wealth cannot possibly spend enough on consumption as their accumulations are too vast.  They will either ‘invest’ in projects that can return a profit or they will hoard their sums in non-circulative activities (low risk liquid assets, gold, etc.).  The global problem, and it’s far from a new one, is that there’s an insufficient number of projects to safely invest in.  There is therefore insufficient circulation.  The only times the great majority have been reasonably secure were during brief bubbles or wars when there were massive expansions of money through credit.  History is clear – sufficient purchasing power is only created during massive credit expansions.  This fact shows that the problem is not just in circulation of existing money but in a circulation of an expanded money supply which historically has come about through credit.

Our whole public discourse on the economy is centered on how to encourage growth industries, new technologies, educational improvements, etc. but this discourse rarely has anything to do with actual societal desires for the new technologies or industries.  It just reflects a desperate struggle to spur circulation – to “create jobs”.  It’s not the new technologies or industries we care about, they’re just the means to the end which is the stimulation of purchasing power.  And the problem can only worsen as advancing technology results in an ever lessening need for labor.  This of course should be seen as a good thing in that we won’t need to work as hard; but it’s a disaster when the fruits of the technology are owned by just a few.  The result can only be rising unemployment and depressed living standards.

Once we recognize the problem as being circulation, the door opens to an incredibly straight forward solution.  In fact, it’s so straight forward it’s often wrongly rejected without further thought as being too simple.  The solution arises from the fact that we as society have control of purchasing power since the dollar is a fiat currency, unbacked by any commodity.  We can produce it at will without cost.  Purchasing power can therefore be created to meet our needs.  If private spending is insufficient, then society must inject sufficient purchasing power into the system. There’s absolutely no valid reason to perpetually put up with inadequate circulation.  We need some grand “outside the box” thinking here.  Why not commit to a program in which we eliminate poverty and insecurity, promote personal development, and concentrate on developing infrastructures that add to our quality of life.  This is fully within our power and we diminish ourselves by not setting such a high goal.  Forget about China and let’s concentrate on building our own society.

Wouldn’t this be inflationary?  Why would it be so when we have vast unused resources?  How about budget deficits?  We have no need to borrow dollars since we can create them directly.  There are other ways to control the money supply.  How about the trade deficit?  It’s really not a big thing.  If China chooses to accumulate dollars rather than spend them, then that’s their decision.  We don’t need China to lend us dollars since we can produce them at will.  One can construct an endless series of possible disaster scenarios – like what if everything was produced in China, what then?  But this is a straw man.  At some point, currency adjustments or import restrictions could be required if China or some other country took advantage of the system and refused to build up their own economy.  But why would they do so if the opportunity opened up to develop internally without relying on exports?   My point is that we shouldn’t be thinking of trade restrictions right now; we should just focus on re-building our own society.  (I’ve discussed this basic viewpoint in more depth in several posts that can be found under the monetary / fiscal tab.)

Isn’t it way past time we reject the tired, depressing discourse of austerity, trade sanctions, currency wars, and endless competition and commit to moving toward a truly different better world?

From → Dynamics, Suppression

  1. Wieland von Behrens permalink

    I’ve looked at several of yourt articles but miss the context of referenced classics on the same topic – e.g. Keynes, Galbraith etc. Hence your insights seem like voices from a wilderness desert.

  2. My original posts on the issue of monetary creation cited early Keynesians and especially Abba Lerner and his concept of Functional Finance and more recently L. Randall Wray.

    Obviously, none of my views are original – they are strongly influenced by the greats of the past – Keynes, Marx, Galbraith, Veblen, etc. I think you make a good point that my presentation could be enhanced by referencing these past thinkers more often.

  3. Bill Gilwood permalink

    The trade situation with China was created by and is maintained by western multinationals, particularly US firms, who decided to offshore as much production as possible to China and other at least as cheap locales, and profit off this arrangement. The Chinese were and are only too happy to oblige. It now looks as if this policy is clearly starting to backfire (as I predicted it would), with China now asserting its growing military and economic strength (thanks to our corporations’ technology and production transfer) to counter western firms all over the world, while systematically excluding them from the Chinese market which was and is used as bait. Yet those running the corporations are still making huge profits from the nearly free manufacturing, so they’ll the pressure (bribe) the US government to continue current trade policy.

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