China Trade War Could Lead to Next Depression

Jeff  Carter
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Posted: Oct 06, 2011 12:01 AM

As we look back at Depression era history it’s easy to note the mistakes. The Federal Reserve at the time tightened monetary policy. This was a fatal mistake because it decreased the money supply in a time where we needed to be increasing the money supply.

The second mistake that happened was an increase in taxes. This slowed economic growth, and pulled even more money out of the private sector and threw it into inefficient government.

However, the nail in the coffin was probably the infamous Smoot-Hawley Act. The US decided to raise duties and tariffs on imported goods to protect home grown industries. This raised prices for consumers. You might forgive the legislators for making this mistake. After all, most of the government funding in the mid to late 1800's came from import fees.

Today, there is a juicy donut sitting on the table that many candidates want to reach out and take a huge bite of. China. One thing about donuts, they taste good when you eat one but you know they are really bad for your health.

Mitt Romney has vocally criticized China on the stump and in debates. Faux Presidential candidate Donald Trump has pilloried China. Democrats are not immune from scarfing a few China donuts down either. Senator Chuck Shumer conveniently lobs a few shells across the Chinese bow whenever he gets the chance. Currently, there is legislation in the Senate that seeks to punish China for their currency manipulation. This is wrong.

China is manipulating the value of its currency. No doubt, it’s artificially low. Lower value makes Chinese goods cheaper than they would otherwise be. It also makes our goods more expensive to buy within China. The US can’t control that. By trying to, we will touch off a trade war at the very worst time. Currency manipulation might work for short periods of time, but it’s not a policy for long term growth.

There are other macro effects within China that are allowing them to have rapid growth that are unrelated to currency valuation.

Misguided populism can be a dangerous phenomena. If you went out on the street right now and asked a hundred people about China my guess is most of their answers would be negative in some way. “We are exporting jobs.” “They are manipulating currency.” “They own too much of our debt.” “They are godless commies.” I think that’s some of what you’d hear.

To be frank, commoditized manufacturing jobs are going overseas. It’s not because of free trade. It’s because they are so low skilled that we can build machines to do them. Currently, it’s cheaper to export them than build the machine.

We can’t control China’s manipulation of their own currency, and I don’t care how much of our debt they buy. But we can make them pay in other ways.

How? By getting our own house in order. If we enact legislation that gets rid of all the subsidies (read, special interests) and arcane taxes, fees and regulations that screw the economics up in our home economy, we will be much more competitive with China. By passing free trade agreements that are truly free trade. Obama and the Democrats held up three free trade agreements for over two years because they wanted to protect Big Unionized Labor. “Protectionism” of anything isn’t a part of free trade. Free trade is about competing.

If we grow our own economy like I know we can, things will be a lot different. Currently, we are driving a souped up Corvette down the street with a 20MPH governor on it. This has to change, and soon.

It’s time to stop reaching for the Chinese donut. It tastes good going down, but it simply adds weight and inches to your waistline.


 

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