The usual suspects are racing to debunk Donald Trump’s foray into the most serious protectionism—a 25% tariff on China—proposed by a major presidential candidate since Patrick Buchanan ran in 1992.

They know this is big.  Our long-delayed national trade debate has begun.

I have expressed reservations about getting obsessed with just China before.  But broadly speaking, Trump is right on the money here. Nothing less than an actual tariff or the equivalent is ever going to get Beijing to stop gaming the international trading system to America’s disadvantage.

This matters, big-time.  Because until we sort out America’s trade mess—which must start by zeroing out, or close to it, our $600 billion-a-year trade deficit—our economy will never truly be healthy again.

Jobs are the aspect of this everyone understands.  But what a lot of people miss is that the current budget fight, and the angst over our mounting national debt, are also intimately connected to trade.

So Trump is onto something even bigger than people realize.

The budget fight ultimately comes down to the fact that we don’t have an economy large enough to generate tax revenue commensurate with the spending we have voted for. But why isn’t our economy big enough? Start with the fact that, as economist William Bahr has estimated, America’s accumulated trade deficits since 1991 alone have caused our economy to be 13 percent smaller than it otherwise would be.  The trade deficit costs us about one percent in GDP growth every year, and that compounds over time.

As for our national debt, or, more properly, our bloating public and private indebtedness? As I explained at length in another article, borrowing money (and selling off existing wealth, which has the same net effect) is a mathematically inevitable result of running trade deficits. The only way this can not happen is if a) the aforementioned $600 billion isn’t real money, or b) America is trading with Santa’s elves.

So, Mr. Trump… How do we rebalance America’s trade, starting with China?

Forget about doing it by playing nice. China will only give up one-way free trade (free for America, protectionist for them) when they are coerced into doing so. They are making far too much money to ever give up this sweet racket voluntarily.

We are constantly warned that imposing a tariff on China would trigger a trade war. But the curious thing about the concept of trade war is that, unlike actual shooting war, it has no actual historical precedent. In fact, the reality is that there has never been a significant trade war.

Anyone who knows otherwise, please name one.

The usual example free traders give is America’s Smoot-Hawley tariff of 1930, which supposedly either caused the Great Depression or caused it to spread around the world. But this canard does not survive serious examination, and has actually been denied by almost every economist who has actually researched the question in depth—including many free traders and ranging from Paul Krugman on the left to Milton Friedman on the right. (I debunked this myth at length in this article.)

There is, in fact, a basic unresolved paradox at the bottom of the very concept of trade war. If, as free traders insist, free trade is beneficial whether or not one’s trading partners reciprocate, then why would any rational nation start one, no matter how provoked? Wouldn’t they just keep lapping up the benefits of one-way free trade, if it’s so good for them?

Furthermore, if the moneymen in Beijing, Tokyo, Berlin, and the other nations currently running trade surpluses against the U.S. start to ponder exaggerated retaliation against the U.S., they will soon discover the advantage is with us, not them. Because they are the ones with the trade surpluses to lose, not us.  What exactly does the U.S. have to lose in a trade war? The only way a deficit nation can “lose” a trade war is by having its trade balance get even worse. Given that the U.S. trade balance is already outlandish, it is hard to see how this could happen.

Supposedly, China could suddenly stop buying our Treasury Debt.

Indeed they could, but this would immediately reduce the value of the $1.15 trillion or so they already hold.  Furthermore, this would depress the value of the dollar—exactly the opposite of their currency manipulation strategy.

Then there is the awkward problem of what China would do with all the money it would get by selling off its dollars. There just aren’t that many good alternatives for parking that much money. Japan doesn’t want its currency used as an international reserve currency, and the Euro has huge problems. Assets like gold and minor currencies are volatile or in limited supply. Others, like real estate or corporate stocks, are still denominated in those pesky dollars and euros.

We are still a nuclear power, so at the end of the day, China cannot force us to do anything that we don’t want to. We could—a grossly irresponsible but not impossible hypothetical—repudiate our debt to them (or stop paying the interest) as the ultimate countermove.

More plausibly, we might simply restore the tax on the interest on foreign-held bonds that was repealed in 1984 thanks to Treasury Secretary Donald Regan.  We have lots of little cards like that up our sleeve.

So an understanding will, most likely, be reached.  A deal (one of Mr. Trump’s favorite words!) will be struck. I think Mr. Trump understands this better than anyone else.  That’s one of the things I like about him.

The reality is that the United States is already in a trade war with China. Kowtowing to China today is economic appeasement, with the same result as political appeasement in the 1930s: a few more years of relative quiet with a bigger explosion at the end.

At some point, America’s ability to run gigantic deficits must end, due to a prolonged slide or sudden crash in the value of the dollar.  The longer we wait, the greater the likelihood that it will come as a sudden and destabilizing shock, rather than a managed, more gradual adjustment.

This issue is bigger than China alone. How America deals with China will set the precedent, and establish or destroy America’s credibility, for dealing with a long list of other nations.

Believe me, they’re watching Trump now in Tokyo, Berlin, and Brussels.

The following is a book review written by Dr. Alec Feinberg that appeared at EconomyInCrisis.org here. Dr. Feinberg is the founder of Citizens for Equal Trade and a member of the Coalition for a Prosperous America.

Free Trade Under Fire written by Douglas Irwin, Prof. of Economics at Dartmouth College, is in my humble opinion, an irresponsible biased work and a deterrent to responsible balanced trade reform. First and foremost, the title is incorrect; it is not Free Trade that is under fire by trade reformists [1, 9], rather its fundamental failure mode, the Trade Deficit and its consequences. Douglas, a supposedly leading expert on his subject matter, knows that you cannot have Free Trade without a Trade Deficit in the U.S. Therefore, as a reader, I was disappointed that Douglas skirts the issue of how large yearly trade deficits could impact the U.S. economy’s reliability over time. I would think that as a professor teaching Economics 101 he of course understands that no country can long sustain large yearly trade deficits without putting its economy at risk [2].

I am baffled as to why Douglas, a leading economists on Trade Policy, disregards key facts such as 1) these large trade deficits have now substantially increased the national debt due to constant tax losses primarily from job losses, outsourcing, and offshoring [3, 4, 5]. Such constant tax losses add to the U.S. debt burdening our citizens. This is a huge U.S. reverse tariff [4]. Yet Douglas opposes any tariffs. So left unanswered is this fact that, not only do we have massive job losses, but ordinary citizens are forced to subsidize free trade’s failures paying for these layoffs through the huge tax losses! 2) He also overlooks the fact that foreigners now own between 15 and 20% of all U.S. businesses but only employ about 3.5% of the workforce [2]. 3) This is the result of the enormous cumulative U.S. trade deficit where foreigners now own $7.85 trillion [3] more of us than we do of them, another key fact he chooses not to discuss. 4) Foreign business in the U.S. also end up paying less tax [2,4] which he does not divulge. 5) We also note that contrary to his original unemployment thesis, statistical data now available shows that countries with higher trade deficits tend to have higher unemployment [6]. 6) Overlooked is the unreliability of Free Trade. Citizens have only one life to live; they do not wish to constantly have to start over with their education process. 7) As well, unemployment government sponsored education programs add to the national debt that he fails to mention. 8) Finally, he displays total disregard for real root cause analysis, which is basic to Reliability Economics [5].

As a trade reformist and a Reliability Economist [5], I have sent emails to Dr. Douglas on many of these facts and have received no response. I have spoken to him recently on the radio [7] about the trade deficit and he suggests that Americans should save more. This in my modest opinion is akin to no answer to what America’s number one problem is [2] and what his book should be about.

The key difference between Irwin Douglas and his admired Adam Smith and David Ricardo, free trade originators, is that Dr. Douglas now has mounds of modern data that I think he is too biased to study and see more clearly how these large cumulative U.S. trade deficits are taking their toll on the reliability of the U.S. economy. Like a piece of metal that is bent back and forth, the cumulative damage will eventually show up and cause the metal to break. The economy is interrelated; Dr. Douglas disregard these long term trade deficit consequences such as increases in the national debt, greater separation of wealth, foreign ownership, America for sale, mortgage delinquencies related to outsourced job losses, etc.. All these issues he leaves behind [2] apparently choosing ideology over data.

It is a mystery why, he misleads the reader on Smoot-Hawley’s 1930 tariff failure which he does not point out was implemented at a time when the U.S. had a trade surplus even though he has now apparently written possibly a misguided book on the subject, entitled Peddling Protectionism: Smoot-Hawley and the Great Depression [8]! Tariffs are known to be most effective to balance trade when a country has some clout as a valued customer. He also feels that Smoot-Hawley Act was somewhat of a contributor to the Great Depression even though he knows most economists claim this is a myth [9]. Eager to persuade the reader, this and other comments are not put into proper perspective; rather he chooses to bias his arguments against protectionism. Still, if we agree, it does not answer the question … how to get rid of these enormous yearly trade deficits.

And what protects Americans now against cheating. WTO safeguards are not as effective as he suggests. Free trade policy actually encourages foreigners to cheat as every country wants to export America to death. Honestly, contrary to free trade theory, America is at a “Comparative Disadvantage”. Well known is unethical trade deficit problems [10] related to: Currency Manipulation, Excessive Job Outsourcing, Foreign Product Subsidies, Non tariff Trade Barriers, Lack of Intellectual Property Rights Protection, and Product Counterfeiting. Douglas knows this but seems to perpetuate the WTO as the best we can do rather than own up to the failure of “Comparative Advantage”. In my modest opinion, a good trade policy should protect American citizens. I was disappointed that he did not step outside the box and even consider the benefits of something like a balance trade policy [11], which Douglas quickly dismisses with an 18th century old Adam Smith’s ideological comment rather than look at today’s cumulative trade deficit failure data and how it is depressing our entire economy. From my point of view, Balance Trade would of course eliminate the trade deficit, not violate WTO policy, and would discourage cheating.

In my humble opinion, Dr. Douglas misses the boat on exploring the full cumulative reliability effects of the now $7.85 trillion U.S trade deficit. I doubt that even Adam Smith or David Ricardo ever really intended their theories would properly apply in the extreme case of today’s U.S. massive trade deficits, (with 59% now going to communist China in 2009). Douglas an obviously expert on Free Trade and a leading economists, should know all these facts but has chosen to write a bias ideological work wittingly misleading the public and irresponsibly perpetuating America’s destructive trade policy path.

1. Trade Reform Organizations all fighting to reduce the trade deficit: www.CitizensForEqualTrade.org, http://www.americaneconomicalert.com, http://www.prosperousamerica.org/, www.citizenstrade.org
2. Biggest Threat to America’s Future -The U.S. Trade Deficit http://economyincrisis.org/content/biggest-threat-americas-future-us-fre…
3. Trade Deficit’s Reverse Tariff Increased the U.S. National Debt – an 84% Correlation! http://economyincrisis.org/content/trade-deficit%E2%80%99s-reverse-tarif…
4. Reverse Tariff - Economic Crisis Due to Free Trade’s Flaw http://economyincrisis.org/content/reverse-tariff-economic-crisis-due-fr…
5. Feinberg, Alec. The Truth of the Modern Recession, Root Causes and Reliable Solutions, Introducing Reliability Economics. WE-Economy Press, 2009
6. Trade Deficit Countries Have Higher Unemployment-Balanced Trade is Needed

http://economyincrisis.org/content/trade-deficit-countries-have-higher-unemployment-rates–balanced-trade-needed

7. Irwin Douglas, Guest Speaker on Bob Brinker, Money Talk, 2010.
8. Douglas, Irwin, “Peddling Protectionism: Smoot-Hawley and the Great Depression”
Princeton University Press, 2011
9. Fletcher, Ian. “Free Trade Doesn’t Work”, 2010
10. Trade Deficit is Illegal, Unconstitutional, Unethical, and Violates the WTO

http://www.economyincrisis.org/content/trade-deficit-illegal-unconstitut…

11. Proposed Balance of Trade Restoration Act 2006, http://en.wikipedia.org/wiki/Balanced_trade