Redstate

!. Please explain how a US President can pass legislation to allow a monopoly in MEXICO when he has a Democrat majority congress.

2. Please provide proof that Carlos Slim "Paid for GWB's Texas govenor race. I suspect if you can find it, you may get your hearts desire to impeach Bush. Give it to Nancy and you're all set.

Socialism doesn't work. It looks nice on paper, but it's been tried and it's failed miserably every time (usually accompanied by widespread death and suffering).
Proud member of the V.R.W.C.

Slim's telephone monopoly was written into NAFTA, negotiated during Bush I, granting Slim a decade without foreign competition.

...allow me to blow Bush I a very big wet kiss.

;-)

international trade, so I did some checking....

1. There was an exemption for some of NAFTA's provisions for some industries. Telcom was one of those industries. This is not the same as "creating a monopoly" but I assume this is the section that was twisted into that view.

2. The US trade agencies have filed and won several suits against TELMEX in recent years. Hardly seems like the action Bush's administration would take against a company that bought it's election for it.

3. Use a little sense and do some checking before you blindly repeat accusations of corruption. Especially when they are as absurd as your claims.

Socialism doesn't work. It looks nice on paper, but it's been tried and it's failed miserably every time (usually accompanied by widespread death and suffering).
Proud member of the V.R.W.C.

I strongly suspect it's based more on what her position needs to be to win the nomination at the moment more than on what she actually thinks is the right thing to do. The same goes for most (all?) of the rest of her positions.
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Underlying most arguments against the free market is a lack of belief in freedom itself. - Milton Friedman

But I suspect she has ideological motivations too. Whether this is something she is sincere about, I wouldn't know. Would rather not find out, either.

Quentin Langley
Editor of http://www.quentinlangley.net

International Editor of

It's not a trick question, I'd really like to know what you think. I know I'm taking this a step beyond your point, which was simply to question whether it's "free trade."

Side point regarding Hank Paulson: don't forget that he's not just an ex i-banker. He's also a future i-banker. He has a lot to gain by playing good-cop to the Chinese.

On the fixed income side, as you can probably appreciate, I have mixed feelings. Do we continue to engage, while voicing our objections? I believe the answer is yes, however, I would like the stick to be whacked a bit harder.

I fully understand the economic arguments around engagement, but frankly am suspicious of both China's motives and potential to deliver the bounty. At this point, they have clearly taken advantage of our trade situation and yield significant leverage. They bank on a continued demand for low price goods via their labor, while stealing our technology and intellectual property. They are also delving into sectors such as food, a mainstay of American economy. Tell me, why would we want to import often sub-standard food, with our food production capability? That is a dangerous game to play and someone needs to rationalize it.

At what point is this self defeating and dangerous for our economy? Given the current trade deficit, many would say that point is already reached and I tend to agree with very few exceptions. Unless we somehow temper their actions, our exchange will ultimately have some very bad effects. Frankly, I do not see the reason for holding back; where else will they find such a large consumer market?

"Dulce et decorum est pro patria mori"
Contributor to The Minority Report

...unless you're using code words I'm too dense to catch (which is possible). This is a very familiar and oft-voiced set of points, which is not to say they're not compelling or deserving of a response.

Except for your very first point about mixed feelings in the bond market, which I didn't understand.

You don't say what the endpoint is. Are you looking for full-blown protectionism? Should we close consumer markets to the Chinese? The potential for unintended consequences in even a partial step in this direction is immense. For one thing, everyone will find out just how dependent the US is on our own export markets, which will start slamming shut all around the world. (And since Barry Obama is Boeing's senator, you can bet he'll have something to say about this plan too.)

But you raise an exceptionally good point, which is that the US is the world's source of final demand. What would happen if that were to go away? Well, the obvious result would be to displace a very large amount of consumption in the US. (The exact amount depends on how much you think the renminbi is undervalued, I guess.) All of sudden, everyone in America would feel an awful lot poorer. Not because we'd have less money, but because we'd have fewer things to buy.

The good thing about a systemic irritant (like massive protectionism) is that it makes dynamic people get stronger and more creative, even as it makes weak people get weaker. My biggest fear is that China would emerge far stronger than we would if we chose to protect against them, because they have the dynamism, and we have maturity, wealth, perspective, and a lot of other things that are not conducive to economic activity.

Am I giving up? No. Remember, I choose my words carefully, and what I just expressed is a fear. America's greatest growth industry these days appears to be healthcare, and specifically the low-margin, low-productivity service sectors of that industry. We've pretty much outsourced everything else.

Now the doctrinaire free-trader's answer to all this is the Ricardo answer: letting China and others do our manufacturing for us should free us up to do things only we can do. In other words, it's supposed to be a good thing, just as hiring a nanny allows you to get back to your high-powered partner track.

What I fear is that in America, we haven't really found something that we can do better than the rest of the world. (Or maybe we have, and no one has figured out how to package it into government economic statistics and news stories yet.) If there's any real reason to be worried, that's it. Home healthcare for aging Bill Clinton voters doesn't feel like the answer to me.

One thing I can tell you is that whatever it turns out to be, it will be reliant on extremely low levels of capital, compared to the industrial development of the last century. I say this for about half-a-dozen different reasons, but one of them is that large amounts of capital are no longer going to be available to the US. Not as long as places like China are growing at 10% a year.

Blackhedd...I have a question about the outflow of capital from the U.S. I worried that we are sending too much capital overseas because the financial sector makes higher profits in emerging countries. However, I was told that we are compensated by foreigners sending their capital to the U.S. Do we have a balance of capital going and coming?

Buffett has said that declines in domestic capital have caused industries to leave the U.S., and our domestic industrial base loses a billion dollars in value per day. Is he right?

I keep hearing that we can have ecconomic development and growth through the technology and service sectors. In the computer age, what can we do cheaper and better than anybody else?

although Buffet is a notorious pessimist and scold. But one of the problems we have is that every one shouts free trade, but what we have in not really free trade.

The European Union keeps out our subsidized agriculture so that it won't compete with their subsidized agriculture. They also make countless rules and regulations to keep our products out of their markets, like for instance the cosmetic industry which has had to remake all their formulas to get into Europe.

Other nations do the same things, Japan is still one of the worse. And China is the worst of all. Not only do they keep USA products out of China, they steal our intellectual property and bootleg everything.

I used to be a Milton Friedman, Cato Institute Free trade true believer, but I really cannot buy into the extremism anymore.
There are many material benefits to free trade. But there are also costs. They have to be looked at without ideological blinders on.

"Nothing works like freedom, Nothing succeeds like liberty"
Kyle

The Chinese want to sell us cheap autos (10K). If they send the car from China to sell through Chrysler, our government charges only 2.5 percent in tariffs. The Chinese charge 25 percent in tariffs if we want to sell a U.S. car in China. This is "free trade?"

The Chinese are studying a joint Chinese-Mexican vehicle manufacturing venture working on the idea of importing some vehicles to the U.S., by assembling them in Mexico, so they can take advantage of NAFTA.

The "free traders" are not disturbed because they think the availability of a $10,000 new car helps the American consumer.

The "free traders" are not disturbed because they think the availability of a $10,000 new car helps the American consumer.

They could call it the Wal*Car? It might hurt elsewhere, but I don't get why it would hurt the American consumer though?

___________________________________
The CIA has better politicians than it has spies - Fred Thompson

destroying yet another American manufacturing sector will have repercussions. The whole free trade thing is a bit of slight of hand, it has mainly meant "free entry into US Markets" while the USA has to fight tooth and nail to get our products into other nations without serious tariffs or restrictions.

The first thing I would do with any Chinese car is inspect the hell out of it for safety. Given the unsafe nature of some of their other imports. Then I would stick a high tariff that would decline if and when the Chinese government starts getting serious about their own trade violations and theft.

Then I would hit them hard rhetorically at every chance on their awful record of pollution and environmental degradation.

"Nothing works like freedom, Nothing succeeds like liberty"
Kyle

... (I forget the name, some company in Jersey, right?) ever make it into the US market, exactly which American manufacturing capacity do you think they will displace?

The real issue is that no one is building modern, world-class manufacturing capacity in the US, because it makes no economic sense to do so. There is no American-made competitor in the sub-$10,000 class where the putative Chinese cars will play, so they won't be taking any jobs away from Americans. If anyone, it's the Japanese who should worry about China entering the US car market.

I completely understand the argument that if things continue, at some future point there won't be any high-value-added jobs for Americans. But exactly what are you going to do about that?

That's the question we need to ask. The best answers coming out of people who aren't doctrinaire free-traders or doctrinaire socialists are things like "invest more money in education." Bzzzzzzt! Wrong. Education in this country is already almost a complete waste of money.

the foremost answers are all pretty undoable.
1) massive tax reform,
2) massive reform of our social security/retirement system
3) massive reform of our medical system to decouple it from employment.
4) yes some education reform, But real reforms not something concocted by Ted Kennedy.
5) immigration reform that gave us more educated people and less uneducated people.

Not any of these things are likely,

"Nothing works like freedom, Nothing succeeds like liberty"
Kyle

...and I agree, there's nothing good to be hoped for from public policy.

What can we do in the private sector? We need to come up with some new industries. Or alternatively, we may just decide as a nation that we already have more than enough food, clothing, shelter, and occasional luxuries, and we don't need to bust hump getting more.

If the latter happens, then it'll automatically put a crimp in China's growth, you can bet on that.

LBJ had a plan to send every high school graduate to college at the taxpayers' expense. We could have the most highly educated society in the world. That's a typical politician's answer to "investing more education."

What kind of jobs are we educating for? The Dept. of Labor said the top job opportunity was computer engineers, with tens of thousands of openings. But, my son's company refuses to hire Americans!

They are insourcing/outsourcing all of their computer engineers from India. They will even hire Indians on temporary visas and fly them back and forth every three months to get their passports re-stamped. It is much cheaper.

I am not sure how many professional positions are safe from insourcing/outsourcing. There's lots of smart, hard-working, and ambitious persons in Eastern Europe, waiting for their chance too.

Institutional investors work for you, me, and everyone who has an insurance policy or a retirement-savings account. They're just doing their job, when they deploy capital abroad in search of higher returns. You'd be d*mned upset if they stopped doing that.

And it wouldn't be rational anyway. From where I sit, the only thing you'd accomplish by (somehow) keeping capital home is inflation.

Also keep in mind that capital is global (because money is nothing but computer blips anyway), so it's not ultimately too meaningful to speak about a "capital balance."

What do other countries get for their trouble when they sell us their crap manufactured goods? They get a fistful of US dollars. And the only reason a US dollar has value is because the US Treasury has enough credibility to form a huge monetary base with their debt.

So the real value of a pile of dollar-denominated foreign-exchange reserves (like China's $1.2 trillion) is related ultimately to the size of the US economy plus certain global commodities (like crude oil) that are priced in dollars, and not to any absolute amount of value. That's perhaps a subtle point, so give it a moment's thought before you disagree. That's one of the reasons why I don't worry that we're shipping our dollars all over the world.

The problem the Chinese face is that they have nothing good to do with their dollars. They have a massive domestic inflation problem right now, and I think it's vastly worse than they've managed to let on.

One issue with America is that, for many people, the kinds of fulfillment they're looking for in life have nothing to do with the things that economic growth can produce. But go to China and India, and you'll find a few hundred million people whose greatest dream is to own a car. That desire will drive enormous growth in those countries for decades to come.

I totally agree with Buffett that our industrial base loses huge value on a daily basis. That's almost axiomatic, though, because of standard accounting rules.

Your last question is the one I ask myself on a daily basis. If you know the answer, let me know so I can invest in it.

So I suppose we could monumentally increase the size of this thread by discussing the very complex relationship between US and Chinese economy's. However in deference to this threads subject that would be a hijack. Now since Pejman appears to rarely read down on these :-), a few liberties may be tolerated.

I suspect several comments made in an attempt at brevity require clarification. Now, I have assumed a certain knowledge level and guess you are not dense, but perhaps purposely dopey or coy:-)

So as a refutation and clarification when speaking about fixed income, I was referring to China’s status as our second largest holder of treasuries (I believe its north of $ 400. billion now and argumentatively if you add HK it’s another $50-60 billion). Combine this with debt related to US FI’s impacted by Chinese investment, phenomena such as CCB offering US Bond funds investments and other related liquidity/investment development issues to numerous to list here and I think you get the point. Keeping these in mind combined with an understanding of the underlying reasons for their existence, further relating it to my comment that we should “whack” them a little harder and it becomes fairly obvious that doing so may cause some pain. Admittedly that’s a parochial point of view related purely to the financial aspects.

Now the secondary point here is that China makes its goods much cheaper by manipulating their currency, in some cases using “slave” labor and often increasing production of certain goods using dangerous processes or treatments long ago outlawed here. Up front, under most circumstances their labor is obviously cheaper and that is undoubtedly a factor. However, the combined impact of those factors is artificial decreases in the price of Chinese goods, which is unquestionably unfair (and this is only what we can glean and really don’t know for certain- a point the Chinese play to their advantage). Further take into account the state is industry under Communist China and that creates an incredibly uncompetitive and unfair environment the likes of which no other country would get away with.

So, in further elucidation, why would we import Chinese wheat? Can the cost of their production be that low they can grow it, ship it to the US and it still effectively compete with our wheat grown right in the US? Frankly, that leads me to question their entire manufacturing and financial chain, not our cost of production. More importantly it makes me curious what their end game is? Are they now closet capitalists? Are the motives purely financial and what will be the impact to our industry, especially with respect to future US dependency? Furthermore, what will be the impact on our foreign policy when the economic stakes becomes so high we yield or try to adroitly address situations in order to not upset markets? Frankly, I think argument can be made it is happening already and that my friend is a dangerous precedent; especially when people start to play semantics with the meaning of :freedom".

Overall, I am not an advocate of protectionism, just true free trade which was my original point. The barriers to entry should be higher and the punishment for trade non compliance and financial manipulation should be costly and actually enforced (sheesh, it’s starting to sound like immigration). The Chinese count on our desire to enter their markets further as an offset to actionable trade enforcement and response to uncompetitive developments. Therefore at some point we need to restrict the Chinese ability to further expand in our market as a means of keeping them off balance, reinforcing our level of awareness, emphasizing our relationship is symbiotic and displaying the significant leverage we still hold.

"Dulce et decorum est pro patria mori"
Contributor to The Minority Report

You're saying that if we can't get really free trade with the Chinese, we need to punish them. (To be fair to you, I'll avoid the loaded word "protectionism," although "protecting our markets" seems to be a reasonable term for what you want to see.) But what are your precise numerical targets in the various markets? Exactly what mechanisms would you use to "whack" back at the Chinese? That's what I want to know. That way we can get this whole discussion past the grad-school-seminar phase and into some concrete action items.

In regard to China's holdings of long-dated Treasury debt: thanks for clarifying, but I have an observation and a question. First, I don't know that China really has any good choices for investing their foreign-exchange reserves. I can't think of a single asset class outside of US Treasuries that's deep enough to swallow $400 billion without getting (or giving) indigestion. And since all that capital just comes back into the United States, the practical effect of the China trade has been that they've given us all of their manufactured goods essentially for free.

Your response of course will be that it's not free because China owns the debt. True, but Chairman Bernanke has already said that he's ready to monetize (and presumably sterilize) much of China's Treasury holdings in case they decide to bail. I found that an exceptionally revealing thing for him to say. (This was earlier in the year when the bond market was at cyclical highs. Remember when China's central-banking girls were floating the idea of diversifying into higher-yielding assets? That's a whole different story, too, by the way.) It was revealing because it shows that massive monetary inflation is not a real fear for the Federal Reserve, contrary to what many people believe. (They of course still seem to care very deeply about inflation caused by supply constraints.)

But still you're not connecting dots. You use the word "whack" to describe what we might do to the Chinese in respect of their US debt holdings. Details, please. Exactly what mechanisms do you propose, what are the precise goals, and how will you numerically measure success or failure?

No, I am not. What has been stated is we should enforce current agreements which includes penalties. That means we deny new access until "good faith" is achieved or place restrictions on related exports. We also provide clarity in terms of not allowing further movement into new markets. You can call it protectionism if you like; I call it balanced, fair and free trade based on equity and enforceable agreement. You appear to advocate that using your muscle to abrogate obligations once access is received is an acceptable tactic; but that actually enforcing agreements and restricting additional access based on a proven inability to abide by current access agreements is… protectionism?

Since I can’t make this a life long endeavor, how about we keep it simple and undertake action such as fully enforcing China’s obligations under current agreements exempli gratia WTO? Specifically, the recent TRIPS complaint is a step in the right direction. However, my sense is we have been dragged into that only due to the underlying US industries legal muscle and even those undertaking the process feel it is futile (WTO Resolution). Accordingly, we should selectively restrict further market access or place quotas until we get more regulatory transparency from agenciess like MOFCOM and elimination of government subsidies (goods such as semiconductors represent another excellent example)-(pick any number, estimate fair market value-I really don’t care, just directly cut off access in the impacted industries). Surely you can agree that government subsidization of industries and constant “dumping” do not represent balanced trade and are a sagacious reason for restricting access? Intellectually, it’s not hard to envision such practices create artificial competition that destroys our industries.

My point with treasuries and other debt was the possible impact with respect to any action we might undertake. It would take some divination to determine exactly what the effect would be, but I suspect there is potential negativity in holdings and activity (either purposely or resulting from decreased trade activity). By the way, while I thought Bernanke could have been more direct, I cheered when the monetization idea was floated. I also don’t necessarily disagree Chinese treasuries holding have an overall positive effect for us (or they have many other choices).

So overall, the ultimate goal is to pursue trade with China while insuring bilateral, balanced enforcement (Measured by current agreement compliance) and fair entry into new markets (measured by a lack of government subsidization, monetary accountability, labor accountability). It is also to insure that artificial prices, propagated by their governmental and monetary intervention do not destroy our industries based on aforementioned factors.

I am confident in our countries ability to compete on a fair cost basis; I only hope we do not lose sight of what that means in a quest for profit and low prices from Wal-Mart.

"Dulce et decorum est pro patria mori"
Contributor to The Minority Report

...in the late Seventies, they have made it a condition that they will not do business with anyone who doesn't transfer technology and other IP to them. The earliest example I can recall is Boeing, who were required to teach the Chinese how to build fuselages for airliners. (They managed to hold out on wing technology, where there is a lot of secret sauce, for a while at least.) I would have to check this to be sure, but I believe that the airliners China buys from us have a very large local content.

You have to admit, the Chinese have gone about this whole process in quite a sophisticated way. They will always cheat, and they will always be corrupt, but that's life in the big city, and you can't just abandon the game because you don't like the rules.

I've been looking for a very simple, top-line way of describing this whole problem that can be exposed to the political process, and avoid all the economic and financial gobbledygook that people like me tend to throw around.

And I keep coming back to jobs. But we're at full employment now, so where is the political urgency? There isn't any.

What I keep coming back to is this, in my ideal world: we're a developed nation in a developing world. The global economy might conceivably double in size or more in the next few decades, with our share dropping from 25% or so to maybe 15%. (I can share the thinking behind that if anyone really cares.)

We want to achieve two things: first, compete as hard as we can against the euro to prevent it from becoming the world's reserve currency. Those who read my posts know that I take the opposite of the conventional view toward Europe. Economically, Europe is strengthening fast. The euro is starting to work.

Second, we ought to try to displace some of China's more valuable manufacturing capacity, and also some of Japan's tooling capacity. We need to get out there and compete in some traditional businesses that we used to be worldbeaters in. We have a natural place at the table in the global market for value-added products, including manufactured ones, as we clearly do in commodities.

To achieve the latter would indeed require some public policy intervention. The government needs to relax a wide range of workplace and environmental restrictions so we can take the gloves off. We also need to make bloody sure that Hillary Clinton never gets within spitting distance of the White House.

Some future Republican candidate needs to adopt this slogan: Make America a global economic competitor! Instead of all the Democrat-lite garbage we get from them now.

Final note: someone really needs to do something about Africa. One of the most salient, but little-remarked themes in investing this year has been metals and other commodity resources. As the developing world develops, these already red-hot markets will get hotter and stay hot for years and years to come. Someone needs to colonize Africa, just as in the Nineteenth Century. (Most of Africa has abundantly proven that liberty and national self-determination just doesn't work for them.)

If we don't do it, the Chinese and Europeans will. Mark my words, and you heard it here first.

I know its been going on for some time but it doesn't make it beneficial or strategic for American business to give away intellectual property. Businesses spend billions on R&D and IP protection but ship it overseas for free in exchange for low cost manufacturing.

You are right about Boeing. My cousin is a top exec there. They are holding on to their wings. Boeing doesn't do much manufacturing, mainly assembly. I toured their assembly plant when picking up a new aircraft and it was very very quiet. A big fuselage slowly rolling through a warehouse. While I was there a middle eastern sheik was there picking up his 3 custom jumbo jets. One for him, one for his wife and her shopping trips and one for transporting his horses around the world.

I am not an international biz expert or economist but especially these days China is not the only game in town. There are other countries with fairly competitive labor rates that would allow businesses to piece out manufacturing so no one country/company has the complete IP. Obviously it doesn't make sense for simple products but it does for higher value products. I just don't want to see the same businesses that give away their IP crying to government for help now when it starts coming back to bite them. It's like people signing up for an interest only variable mortgage then claiming mortgage fraud when they are being foreclosed on.

I believe Israel has sustained its economy through R&D service work and I imagine they go to lengths to protect it and monetize it.

I traveled in Africa a couple years ago and that country does need major help. Especially since aids is nailing up to 50% of the workforce. I was told that figure from Botswana officials and that country has a good diamond trade. There can be some great opportunity there but the infrastructure is so weak and governments so corrupt they cannot do it on their own as you have stated.

Our solution is to out innovate the world by creating optimal conditions for business to thrive. Create new and higher value products/services. Anything less is a band aid or knee jerk reaction.

Ask not what you can do for your country, ask what your country can do for you. Washington Elected Elite