Blame the Chinese?

It seems that both the leading Presidential candidates want to play tough with the Chinese since they are stealing American technology and cheapening their currency. However, this doesn’t mean that the U.S. should retaliate by implementing protectionist measures. If America goes down this road, matters will be much worse due to trade and/or currency wars. Leaders of both parties need to realize that they need to introduce business friendly measures to provide opportunities for our manufacturing base.

The number one complaint from progressives and even from some conservatives is that the Chinese are manipulating their currency. Mitt Romney states that he wants to label the Chinese as currency manipulators. It’s interesting that Romney turns the other way when it comes toward the Fed’s role in “manipulating” our dollar via quantitative easing. The Fed has also printed over 20 trillion dollars since the crash of 08, and Romney says nothing about that.

Let’s say that Romney does end up labeling the Chinese a currency manipulator and also places tariffs on Chinese imports. The Chinese may not like that kind of action and will be encouraged to dump even more treasuries and place more tariffs on U.S goods. They may end up buying gold, and this could set up the yuan as the world’s reserve currency in the future. It’s also scary that Japan faces financial hurdles due to the Fukishima earthquake. Eventually, the Japanese will be forced to liquidate their holdings of treasuries due to their debt and trade deficit problems. With the Japanese and the Chinese on the verge of dumping the greenback, the US should be worried about who will finance our debt. Our leaders should think twice before implementing protectionist policies.

Instead of blaming the Chinese for our manufacturing woes, we should look at our detrimental trade policies. This began with the passage of NAFTA and the WTO. Many conservatives tout this legislation as free trade, but in reality, this barely represents free trade. NAFTA and the WTO are managed trade agreements since there are over 20,000 pages of rules and regulations. Big corporations benefit since they have the economies of scales to deal with bloated and sophisticated pieces of legislation. They also have the ability to send higher paying jobs overseas, which has decimated our middle class. Our country needs to regain our sovereignty and pull out of these organizations. We need to introduce free trade agreements by reducing the role of a central body that writes and enforces draconian regulations.

America needs to figure out ways to be competitive in a global market. The best way to promote pro-growth measures would be to replicate the model of the 1800′s. The only taxes were tariffs and a consumption based tax. Just imagine if firms are able to keep their profits and reinvest this cash in production. We would reclaim the title of the manufacturing powerhouse of the world. This tax system would promote people to save and invest. Our economy is based on a phony Keynesian economic system that relies on consumption. A consumption tax should be introduced to prevent individuals from buying useless trinkets, which would force people to live within their means. These savings could be used to create industries and high paying jobs to revitalize our manufacturing base.

Our country has the potential of becoming the most successful manufacturing empire once again. Both political parties must stop blaming Asians for our taking our jobs, but rather take a look at our anti-business policies. If America follows a protectionist path, then she shall face severe repercussions. We must analyze the unintended consequences of Smoot-Hawley in the 1930s. This legislation placed tariffs on imports, which led to a trade war. It is true that imports consisted around 5% of the economy at the time, but it made matters worse. This time the consequences are much dire. China has the upper hand since they own over $1.1 trillion of our debt. Putting up a fight with your banker could lead to retaliation by the Chinese dumping a huge chunk of treasuries. Once that happens, the U.S. dollar has the potential to turn into confetti.

About Rahul

Rahul is a blogger at Altinvestors.com and a contributor to Wallstformainst.com. He is a proponent of the Austrian Business School and free markets. What's unique about Rahul is that he didn't go to one of the Ivy Leagues nor did he work on Wall Street. This is probably one of the reasons that allows him to think outside of the box.
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