This excellent little book is well researched and well written. It makes the case for why a continuing trade deficit is destroying our economy and offers some viable solutions to restore balanced trade.
The classical economists who were in favor of free trade assumed that it would be balanced trade. They believed, further, that if trade got out of balance, market forces would automatically bring about a correction.
China has figured out how to take advantage of our noble intentions to circumvent these market forces to their benefit. Many of our economists have been slow to pick up on this cheating by China, and cling bitterly to their mantra of “free trade.”
China is using mercantilism to cheat on our naïve “free trade” agreement. They are investing their surplus dollars to buy our assets, such as Smithfield Foods, thus taking our jobs, our customers and our technology.
The great British economist John Maynard Keynes pointed out how destructive chronic trade deficits were to the deficit country. Unfortunately, our politicians only heard his comments in favor of deficit spending, which they found much easier to implement.
One of our own great economists, Ralph Gomery, has warned that “Long term trade deficits are the road to economic suicide.”
In recent decades, economists were pushing the “wonderfulness” and the inevitability of globalization. They saw little need to save manufacturing. Thomas Friedman of the New York Times was pushing the idea that we could export “innovation” instead of manufactured goods. This overlooked the fact that innovation is largely tied to manufacturing.
Two groups benefited from the free trade agreements with China: 1. Multinational corporations who built plants in China to capitalize on their cheap labor. 2. The financial institutions that financed these investments. Both of our political parties are beholden to these two groups for campaign funding.
“Neither major political party today offers anything approximating a sound position on international trade.” Richman, p57. Democrats are split between those who support labor unions and the “progressives” who are cheering for Communist China. They pretend to be moving on currency manipulation. The House would pass a “currency manipulation” bill, then the Senate would table it. Then the Senate would pass a bill, knowing that the House would table it.
Republicans are stuck on “free trade” as a way to advance capitalism. Also, Republicans are beholden to the multinational corporations for campaign funding.
China’s “market capitalism,” controlled by the Chinese Communist Party (CCP) is NOT lifting all boats. They are allowing about 20% of the people to become middle class, and a few entrepreneurs to become very wealthy. Many, if not most, of these entrepreneurs are members of the CCP.
The Federal Reserve, which could have and should have helped to reduce our trade deficit, has been either ineffective or harmful to the situation. This is explained in detail in the book.
Under “Solutions,” the Richmans explain the benefits of balanced trade and the difficulties of restoring it.
They explain the Buffett model of import certificates to restore balanced trade as a viable plan, with some advantages and some disadvantages.
They explain the pros and cons of various tariffs and taxes, including the Value Added Tax; outright restrictions on imports, and currency interventions.
Finally, the Richmans offer their own new solution – a scaled tariff – and build a convincing case for that approach.
Their best analogy is that “Trying to stimulate an economy with large trade deficits is like ‘trying to pump up a flat tire without first fixing the leak.” (p112)
Their work is well supported with end notes and eight pages of references.
Overall, they have done an excellent job of advancing the need for and ways to bring about balanced trade. As they point out, balanced free trade should benefit both trading partners, and can “grow forever,” benefiting both partners forever.
There are some implications that were not addressed by the book. If balanced trade were to actually be adopted by Congress as an issue to address, the following problems would immediately surface:
1. The scaled tariff (or any of the other solutions) would cause higher prices, which many Americans would scream about. The jobs brought home would show up much later and would not be visible to the majority of Americans.
2. Politicians would exploit these higher prices, screaming “corporate welfare.”
3. Because China has a huge surplus of cheap labor, they could easily absorb (the proposed) 35% tariff. Few, if any, U.S. manufacturing firms would be able to compete with the cheap labor in China unless the tariff was much higher.
4. To make matters worse, our manufacturing infrastructure and our knowledge base are mostly gone. Our equipment is rusted and obsolete and our factories are falling down. If there are manufacturing sectors that could easily ramp up production, these should be identified so that planning can begin.
5. Whereas the Chinese government has been supportive of manufacturing, our government has played an adversarial role toward manufacturing for decades. The continued ramping up of regulations helped to drive manufacturing OUT of this country. That would have to change dramatically before U.S. companies would risk getting back into manufacturing here.
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