Trade War-Superpower War

By former U.S. Senator Ernest F. Hollings

Bloomberg Businesweek’s Excellent Election Issue continues to ignore the Trade and Superpower Wars.  China and the United States are not only engaged in a Trade War but in a contest to become the world’s superpower.  In the Trade War we act like there isn’t one but might cause one if we compete in globalization.  In the Superpower War we think our military already makes us the world’s superpower.  In a nuclear world there is no military superpower.  In globalization, there could be an economic superpower.  Military wars are determined by manpower and technology.  China obviously has the manpower superiority and any war with China would go nuclear – destroying both nations.  China realizes this and is determined to become the world’s economic superpower as the United States neglects its economy.

The United States was born in a Trade War – the Boston Tea Party.  After trying states’ rights government with the Articles of Confederation, the Founding Fathers opted for national government — not for the rich or middle class but for all the people  –  “the general welfare”.   The Forefathers began fighting the Trade War with protectionism by adopting the Tariff Act of 1787.  They rejected David Ricardo’s Free Trade Doctrine of Comparative Advantage in agriculture to develop a strong economy in manufacture.  Protectionism worked so well that Edmund Morris writes in Theodore Rex that within a hundred years the Colony was “$25 billion richer” than the Mother Country.  Protectionism continued but after World War II, and the Marshall Plan, Presidents anxious for democracy to take hold and for free trade to open markets vetoed efforts to enforce our trade laws.   In 1968 we got sixty eight votes for my textile trade bill in the United States Senate only to be blocked in the House by Wilbur Mills “deep sixing” the bill in the Ways and Means Committee.  Later my textile bill passed both Houses only to be vetoed: one by President Carter, two by President Reagan and one by President George H. W. Bush.  President Clinton joined the opposition in the Trade War by passing NAFTA with Mexico; giving permanent normal trade relations status to China; and supporting China’s entry into the World Trade Organization.  U.S. manufacture was thrown open to the world’s cheapest production.  Presidents Bush and Obama turned a blind eye to predatory practices.  Offshoring hemorrhaged.  Between 2000 and 2010 the United States lost one third of its manufacture.   Today South Carolina has the skills to make the “ultimate driving machine “for BMW and the Globemaster for Boeing.  But South Carolina has 9.6% unemployment.  South Carolina’s textile industry has been decimated.

After World War II, Japan closed its market; subsidized its manufacture; sold its manufacture at cost making up the profit in the closed market.  This put General Motors into bankruptcy with Toyota number one.  Now China controls capitalism: to sell in China you must produce in China; to produce in China you must surrender your technology to China.  China uses every trick in the book to develop a strong economy.  We respond by offshoring our research, technology, production, jobs and payrolls to China.  We must fight like the Founding Fathers.  We can’t prohibit offshoring but we must attract enough investment to maintain a strong economy.  Stop the fussing that the government is too big.  Force Washington to make it profitable for Corporate America to invest and produce in the United States.  Tax cuts and federal aid for policemen, firemen and teachers don’t build a strong economy.  It takes private investment.   Small business doesn’t build an economy.  It takes big business.   No Governor gives tax breaks to get a hardware or a furniture store.  We gave $900 million in tax breaks to get Boeing to South Carolina.  Stop bashing China.  Bash Congress to penalize China’s predatory practices.  If the Defense Production Act of 1950 had been enforced, we wouldn’t be begging Russia for helicopters for Afghanistan.  If Presidents Bush and Obama protected steel, motor vehicles, computers and machine tools like President Reagan, millions of jobs would have been created.

150 countries compete in globalization with a Value Added tax that’s rebated on exports.  The Corporate Tax is not rebated.  A U.S. manufacturer exporting to China pays the 35% Corporate Tax and a 17% VAT when its exports reach Shanghai.  A China manufacturer exports tax free to the U.S.   This 52% difference is killing manufacture in the United States.  This can be corrected by replacing the 35% Corporate Tax with a 7% VAT.  Last year’s corporate tax produced $181.1 billion in revenues.  A 7% VAT for 2011 would have produced $872 billion dollars.  This produces billions to stop the borrowing.  With spending cuts the budget can be balanced in two years.  This tax cut releases $1 trillion in offshore profits for Corporate America to invest and create millions of jobs.

Wall Street, the big banks and Corporate America want to keep the China profits flowing so they act like nothing can be done in globalization.  Globalization is a fancy word for a trade war with production looking for a country cheaper to produce.  Necessarily Corporate America will produce in a country where it can make the greatest profit.  But the duty of the President and Congress is to build, maintain and protect the economy.  Wall Street, the big banks and Corporate America contribute to the President and Congress to do nothing - and they do nothing.

In 2006 the Princeton Economist Alan Blinder estimated that in ten years the U.S. would offshore 30-40 million jobs or an average of 3-4 million jobs a year.  We lose 4 million jobs a year due to our deficit in the balance of trade.  David Wessel reports in the Wall Street Journal (4/18/12): “Between 2007 and 2010 (U.S. Firms) added 200,000 U.S. jobs and 600,000 outside the U.S — ”.   BusinessWeek headlined (10/14/12) “despite profits near records highs many executives are planning to trim their payrolls.”  We are offshoring more jobs than we are creating.  The charade of “The Great Recession” should be dispelled.  The 2008 recession has been over for three years.  It’s not the worst recession but the worst recovery because the President and Congress refuse to compete in globalization.

I have suggested the VAT tax cut to every Senator in the U.S. Senate but I can’t get it introduced.   They always give me the excuse of filibustering.  Filibustering would let the people know something can be done.  Every Senator is for tax cuts, tax reform, cutting the size of government, limiting offshoring, creating jobs and paying down the debt.  The VAT tax cut would do all of these things.  The Huffington Post and the Post and Courier report on the VAT tax cut but most of the press and political pundits go along with the charade that nothing can be done.   David Leonhardt in the NY Times (9/30/12) writes: “What the Administration could have done to help a weak recovery”.  He fails to mention offshoring the economy or the VAT tax cut.  I’ve suggested the VAT tax cut to the political pundits, but mum’s the word.

In 1989 after Tiananmen Square the United States obtained a resolution in the United Nations to investigate human rights in China.  China went to its friends in Africa and the Pacific and there has never been a hearing on the resolution.  Two years ago Japan seized China’s ship captain.  China cut off rare earth supplies vital to Japan’s computer production and Japan quietly returned the ship captain.  Knowing how economic power works, China purchases strategic properties in Brazil, the United States, Canada and Europe.  It prepares its gold backed Yuan to become the global currency.  China is determined to take over the world economically.

We keep proving Bin Laden’s case of a Second Crusade against the Muslim world by starting wars and stationing troops in Iraq, Saudi Arabia, Kuwait, Bahrain, Qatar, the Sinai, Turkey, and the Persian Gulf.  We drone kill in Pakistan, Yemen and Somalia; making more enemies than we are eliminating.  We act like we could win a war with China by stationing 2500 Marines in Australia.  With 196,000 GI’s stationed around the world we puff and blow with our military spreading terrorism.

The consternation globally is twofold: the clash of private controlled capitalism with government controlled capitalism; and the clash of seeking peace by making wars.  The best of private controlled capitalism – Corporate America rushes to government controlled capitalism in China.  It’s obvious the U.S. economy can’t survive this so mindsets will have to change.  Corporate Americ must let the government take control of the economy and the Trilateral Commission and Council on Foreign Relations must stop spreading terrorism and let the government return to its Good Neighbor Policy.