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Stumo Commentary: Whose Trade War Is It Anyway?

July 11, 2018

by Michael Stumo, CEO of CPA

I was asked, after the US Trade Representative announced tariffs on another $200 billion of Chinese goods, whether I would admit that we are now in a trade war. Members of the CPA board asked me to share my response more widely.  Here it is.

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Dear Bob:

China started the trade war in 1994 with currency devaluation and state-directed capitalism. Then got better at it. 16% growth per year.  10% growth per year.  We believed that they wanted to be like us. That they wanted to be democratic… capitalistic… an open society. We believed their accession to the WTO would ensure that process. That belief was catastrophically wrong.

Old beliefs die hard.  Even when faced with persistent contrary facts.  US leaders believed it. For years.

We are now responding to China's 24 year old trade war. Read the USTR 301 report.  Read the US China Economic and Security Review Commission reports. Rebut them if you can. We started nothing. We need to get good at trade wars... or trade conflicts... or better yet "strategic trade".

Free trade is a myth. A pink unicorn which many talk and write about but none have seen. Low tariffs do not equal free trade. "Free trade" has been blind to… and an enabler of… disruptive imbalances and increased inequality and the shift of power from labor to capital. The “international rule of law” has been pointed in the wrong direction. Globalists have been enablers of  illiberal governance systems. Democrats paid lip service to their social values in global agreements … while those same values slipped away at home. 

Republicans have tried to spread free markets, free trade and freedom through global agreements… and failed… while enabling crony capitalism at home.

The strategic trade countries always won the global game. Overproducing, undersconsuming, achieving full employment, transmitting their overcapacity and unemployment to open economies like the US.

This is a global competition for good jobs and industries using more than tariff tools. Consumption suppression, exchange rates, fiscal strategies, industrial policies, savings gluts, 3 billion new workers who don’t consume… all of this is more important than tariffs. 

Strategic trade and industrial strategy are the global norm. It is the law of gravity. 

The American System… the Hamiltonian system… Frederich List… Asian economic strategy… these are the methods used to develop countries from poverty to wealth.  Not free trade.  Never free trade. Ever. 

We are living through a potential epic shift of global dominance and power from the US to China which will be clearer, if it happens, to all in hindsight.  If we are ok being the generation that allowed China to be the new global superpower and the new global policeman, then let’s do nothing. The US has made mistakes as the global leader, but I would not want someone else doing it. Would not want dystopian China doing it.  If Europe (Germany), Canada and our “allies” are ok with dystopian China (and their “ying pai” or nationalist hawks) being their new protector, then they should continue obstructing solutions rather than finding them. 

Our grandkids and great grandkids may very well read textbooks about our generation being the one that slept through the passing of the geopolitical baton as we clung to our old religion. They may read that the "Greatest Generation" begat the "Catastrophically Negligent and Distracted Generation That Gave It All Away".

Otherwise, we best get focused. 

Sincerely, 
Michael Stumo


Showing 2 reactions

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  • Mark Sanguinetti
    One of the things that is being ignored in the USA is other nations use a Value Added Tax System. Not just tariffs. Perhaps every other industrialized nation uses this system. As one of the examples Germany has a 19% V.A.T. which they call G.S.T. In addition, Mexico , Canada, England, etc. use this system of taxation. Instead the U.S.A. has a sales tax system which is not taxed between states and not taxed with foreign countries. In contrast other nations have this tax within their entire nation and also the same tax with foreign nations. If the U.S.A. followed this or a similar tax system that perhaps all other nations use then would this be a trade war? Only if the U.S.A. turned into a Dumb nation.

    Another example of this additional tax system that is being ignored in the U.S. is when U.S. goods are exported to other nations they are also charged with Value Added Tax (V.A.T.). This is a tax on the amount by which the value of a product has been increased at each stage of its production or distribution. When foreign nations like China charge V.A.T. taxes to their companies, if the goods are later exported, for example to the U.S., the company can get a full V.A.T. tax refund from their government.
  • Bruce Bishop
    Well said. We have been in a one-sided “trade war” with China for decades. China has been cheating us by practicing mercantilism, while we opened our markets to “free trade.” We have been “turning the other cheek” as China steals our technology, our intellectual property, our jobs, and our wealth. It’s time for us to turn the third cheek — and Trump is just the man to do that.