Greg Autry

Fighting for space, not over it.

Huntsman Continues his Old Job of Passing on Chinese Threats – Romney Rocks

When John Huntsman’s turned on his fellow GOP candidate, Mitt  Romney in order to flaunt his Mandarin in Saturday night’s debate, he accused the former Mass Governor of not understanding the situation in regards to China’s currency manipulation scheme.

Actually what was clear from the exchange and from Mr. Huntsman’s actions as kowtowing ambassador to the world’s largest police state that it is Huntsman who just doesn’t get it.

Huntsman didn’t bother to either deny of defend the charges of currency manipulation, trade cheating, and IP theft. All he wanted to do, was his familiar job of delivering imperious Chinese threats.

This time he was the mouthpiece for the tired old assertion that holding China up to international norms and the trade agreements it has signed up to would result in a “trade war.”

Romney promptly and properly pointed out that in a trade war the country that is benefiting from the trade is the one that has the most to fear. In the US-China relationship it’s very apparent who this trade is profiting and who this trade is hurting. If the China trade vanished today and the US got back its domestic markets the main thing that would happen is a 2% increase in our GDP and huge drop in our unemployment.

Sure we’d lose that plant in Georgia selling chopsticks to China, but in exchange could be making iPads in California. Nothing could be more representative of the raw deal America gets from working with China.

Further, the key point is that there is a huge moral hazard in letting your friend cheat you out of the fear that they might not play with you anymore. Trading partners, like anyone else learn from your previous behavior and I’ll continue doing what works. In China’s case that’s lying, cheating, stealing, and occasionally threatening.

The American public does not want a President who channels Hu Jintao and threatens the American people in Chinese.

 

Please Don’t Feed the Dragon

The Pentagon has released its annual report to Congress on the “People’s Republic” of China’s rapidly growing military menace and once again, we are presented with a frightening armory designed to rain death on America and her allies. This time around the PLA’s toy list includes a new stealth fighter and aircraft carrier as well as improved ICBMs and nuclear warheads. Of particular interest is the DF-21D missile specifically designed to destroy U.S. Navy carriers at sea.

Let’s just be honest, China is working overtime to assemble the force required to eject America from her role as peacekeeper of the Pacific so that it can have its way with its Asian neighbors. The Vietnamese know it, that’s why they are buying submarines from Russia as fast as they can get them. Taiwan knows it, which is why they are nearly in a panic for higher tech U.S. weapons. Even ancient enemies Korea and Japan are coming together over their mutal fear of Chinese hegemony.

Meanwhile, President Obama says, “I absolutely believe that China’s peaceful rise is good for the world and it’s good for America.” Well, Mr. President, this DOD report details the most expensive “peaceful rise” since Hitler’s, as everyone’s favorite communist dictatorship has once again increased military spending by double digits to a whopping $160 billion. In fact, China has been growing its military budgets even faster than its phenomenal GDP for the last decade.

While China invests, builds and trains, the U.S. military is wearing out its people and its equipment in fruitless desert conflicts and faces a future of painful budget cuts. You don’t need Excel to understand where those two trajectories lead. The question is what can we do about it? Rather than dwell on the obvious fact that we cannot afford another Cold War build up, let’s ask ourselves just how is China funding theirs? Any ideas Wal-Mart shoppers?

It turns out that America’s trade deficit with China – on track to easily break last year’s record $273 Billion– covers the whole thing with room to spare. Imagine if American businesses and consumers had been funding the Soviet Union’s military machine; Doctor Strangelove would have a seizure. Yet, here we are and so we must ask this question:

Why does America do business with a nation that is preparing to attack our allies and threatens our own families with nuclear death?

Further, if the fact they are preparing to kill your kids isn’t enough to send you screaming from the shelves at Target then consider that China also:

1. Delivers a hugely disproportionate percentage of defective and dangerous products, while effectively avoiding liability and burdening U.S. taxpayers with the regulatory costs.

2. Regularly hacks the computers of our businesses, government offices, military, and humanitarian groups.

3. Cheats on nearly every World Trade Organization rule.

4. Maintains a record on human rights, censorship, women’s rights, and religious tolerance that is on par with Syria and Iran – two countries China regularly provides weapons to.

5. Represses the rights of its own workers in order to gain economic advantage.

6. Terribly pollutes its own and the world’s environment for financial gain.

8. Steals our intellectual property and counterfeits our products.

9. Is taking nearly a million jobs per year out of our economy via the reduction in U.S. GDP caused by the trade deficit.

We could write an entire book detailing the personal tragedies and national costs behind each of these criminal acts (and we did). Suffice it to say most Americans accept that these charges are accurate, but have failed to grasp that together they detail a threat much larger than the sum of the parts. China’s dictators love America’s inability to think strategically about the costs of our fruitless China policy. While they are running a carefully integrated game of economic-military-geopolitical dominance America’s diplomats stick with a flailing, tactical plan of “divide and be conquered” from the last century.

Mr. Kissinger’s policy of “engagement” with China was necessary right up to the day the Soviet Union was driven bankrupt fighting a double-ended cold war. Since then it has been little more than a giant subsidy for the expansion of another communist threat and it is America that will soon face default or obliteration.

While U.S. shoppers may think they are saving money and large multinationals reap short-term profits on this trade, it is clearly not in the long-term interest of America to continue business as usual with the Boys from Beijing. If we must, there are a plethora of countries where we can find cheap labor for Wal-Mart without funding a repugnant regime that views us as its enemy.

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Greg Autry is the co-author of Death by China. He teaches Macro Economics at the Merage School of Business, UC Irvine. He writes and speaks on China, space, economics, investing, and business strategy. Please follow us on Facebook at http://www.facebook.com/DeathByChina

 

Romney Moves on China!

Mitt Romney calls out China

 

 

I’ll clamp down on the cheaters, and China is the worst example of that.

-Mitt Romney

 

 

 

Our congrats to GOP Presidential contender, Mitt Romney has found the courage to stand up to China, joining Buddy Roemer. CNN Money reports that he has promised to brand the communist state a currency manipulator after a decade of Presidents and Treasury Secrataries dancing around that most obvious fact. He added:  “If they cheat, there is a price to pay,” and  “I don’t want a trade war, but I don’t want a trade surrender either.

Of course others, including the ever changing Mr. Obama have promised the same on the campaign trail to get votes from America’s hard pressed workers. Let’s hope Mr. Romney does NOT cave in to the multinationals and their stable of pet intellectuals who twist the logic economic freedom into unqualified support for funding the rise of a militant, totalitarian state.

Go Mitt!

 

Obama was Wrong, Congress was Wrong and Together they are Still Wrong. Growth and China are our Problem, Stupids!

 

 

I absolutely believe China’s peaceful rise is good for the world, and it’s good for America.

– President Barak Obama

 

Watching America’s leaders wrestle each other over how to cure the nations budget deficit while the specter of default loomed was all the more frightening when one realized that neither the congressional Republicans nor President Obama and the Senate Democrats have a clue as to how we got into this mess, much less how to get us out of it. They have limited their thinking to the disastrous and false choices of cutting spending or raising taxes. Last week’s frighteningly anemic GDP growth figures show that we are for all intents and purposes still mired in the middle of our longest post war recession. Following either party’s path to debt reduction would be economic suicide and there is an obvious third choice.

The Tea Party spending cuts would have been a great idea eight years ago, back when GW Bush and his old school GOP congress were busy digging our fiscal hole.  We fully agree that no nation finds its way to prosperity by growing its government and that we MUST commit to cut long term spending and limit future entitlements by a much greater amount in the future. However, threatening to cut services the middle of a recession, dumping even questionable federal workers into a crowded job market, and possibly paying these workers extended unemployment benefits for a couple of years was unfortunately flirting with disaster.

On the other side, the President’s best idea seems to be aimed at crushing the spirit of America’s entrepreneurs by burdening the successful few who are still holding our economy up with higher taxes. In 2010, the top 5% of income earners paid more than 60% of America’s income taxes and yet Mr. Obama can simply never pass up an opportunity to suggest that America’s wealthy are “not paying their fair share.” What young American is going to risk everything and work long hours in hopes of being labeled a deadbeat and getting taxed right back into poverty?

What is clear is that none of this would be so bad if we weren’t stuck with 1% GDP growth! Why do our leaders fail to see the much more attractive third option of growing America’s economy and hence revenues while holding both spending and taxes in check? If we want to start making money rather than piling up debt, we must start running this country like it was a business. That is what China is doing and they are cleaning our clock.

Let’s ask ourselves what would a savvy CEO, who actually values all his stakeholders do if he found his firm was unprofitable and his corporate overhead unsustainable? Would he slash investment, fire long-term employees, and punish his best performers? No, he’d refocus expenditures on projects that generate income and he’d grow sales. America must grow its way out of fiscal disaster with the same strategy or face chaos.

The first part of this plan – focusing expenditures for ROI – is easy enough: move spending from entitlements to infrastructure projects, scientific research, and education programs focused on engineering and business. Not surprisingly, this is the simple formula that drove America during her 20th century heyday and it is exactly the plan that China (and just about every other successful economy) has been following for years.

The second part of the strategy – growing our national sales – seems to elude almost everybody in American politics, because they’ve forgotten how wealth is created. Let’s make it really simple: Dispensing with a lot of impressive economic voodoo, real national income growth – and hence higher standards of living – comes from two sources:

  1. Adding value to our domestic resources via innovation and manufacturing.
  2. Producing more value in tradable products and services than we consume.

It’s really that simple and before you try to hit me with your dusty old Keynesian or neo-classical econ text please show me the nation that improved its lot by borrowing money to buy foreign goods and fund entitlements.

As to income source A, our returns from innovation are crushed when we do not defend our intellectual property rights from an unscrupulous competitor, namely China; and the main thing preventing us from manufacturing our own innovations at home and selling them to US consumers is that we’ve laid our market bare to the so called “China Price.”

As long as most of our Republican tax rebates go to buy TVs and smart phones made in Shenzhen and our Democratic shovel-ready projects go to buy bridges made in Shanghai, the only economy we are going to stimulate is a Chinese one. Now, there are a lot economists and clever pundits who will obfuscate this very obvious fact with twisted Ricardian puzzles, but ample empirical evidence has rendered the truth painfully clear to anyone with a drop of common sense. In most other sciences, when the model continually fails to describe the reality we observe, we are forced to reject the model and re-evaluate its foundations, not to enshrine it as an unchallengeable gospel.

For income source B the goal is simply to be able to sell abroad what we make at home. Again, the primary thing blocking that is China, with its web of unfair trade practices. We could write an entire book about the many ways China cheats America – actually we did – but just consider this example:

When a firm like General Motors goes to China to make cars for the “enormous” Chinese market the Chinese government forces the US copy into a minority joint partnership with a Chinese – usually state owned – firm. It may say “Buick” on the car and GM on the building but it’s 51% owned and controlled by minions of the Chinese Communist Party. When this factory needs parts, the Chinese government mandates “domestic content” standards that force it to source most of it subcomponents from Chinese firms, cutting the traditional American suppliers out of the running and nurturing a new generation of global competitors.

Further, if the American firm recognizes any profits both, the Chinese government and US tax policy make it difficult to repatriate those profits to the US. Rather, the once proud US firm will find itself pressured into demonstrating that it is a “friend of China” by reinvesting these profits into new R&D centers and factories in China, not Peoria.

In the not to distant future, when GM and its “partner” (read boss) Shanghai Automotive Industry Corporation (上海汽车工业(集团)总公司) export cars to the US they will be subject to about a tiny 2.5% tariff since the US has given China permanent Most Favored Nation (MFN) status. MFN means that we are required to treat products from China’s brutal regime the same as those from civilized nations like Taiwan or Canada. However, since China doesn’t “favor” any foreign barbarian nation, a car made by Americans sold into China gets whacked with a 25% tariff – 10 times as much.

If you haven’t already had enough of that version of “Free Trade” just throw on a 40% price advantage created by China’s blatant currency manipulation, a host of illegal export subsidies and the huge advantage of unenforced environmental, product quality, and labor regulations.

Our trade deficit with China is costing the US nearly $1Billion a day and is close to shaving a full point off our already tepid GDP growth. This deficit is destroying nearly a million new jobs each year, far more (and far better) jobs than even the most optimistic advocates of stimulus spending have claimed to create. Is it any wonder that this former factory for the world is stuck with 10% unemployment and has had to contemplate default? What is amazing is that the word “China” is off the table in almost every discussion of our national economic nightmare. It’s the economic elephant in our national living room, but apparently we’d rather choose between laying-off even more Americans and raising our own taxes before we’d even contemplate threatening the cheating, protectionist thugs in Beijing with a fair tariff.

Peter Navarro is a business professor at the Merage School of Business, UC Irvine. He is a gifted public speaker, a CNBC contributor, and the author of several best selling books on economics and investments,

Greg Autry is the co-author of Death by China. He teaches Macro Economics at the Merage School of Business, UC Irvine. He writes and speaks on China, space, economics, investing, and business strategy.

 

 

China’s Silent Spring is an Economic Weapon

 

 

Communize costs and privatize profits-but don’t tell anyone. This has been a formula for success for centuries.

– Garret Hardin[1]

 

 

 

 

 

Of all the myriad sins committed by the Chinese Communist Party, its wholesale rape of China’s natural environment and complete toxification of its urban landscape is often the most puzzling to Westerners who focus on economic gains. Why, on Earth should anyone care – except those left-wingnut tree huggers – what happens to the Yangtze river dolphin or to the kids in Beijing? Well, let me offer an explanation that even the most free-range capitalist can put his arms around.

First, a couple of facts:

The health costs of China’s rampant pollution binge amount to 4.8% of China’s GDP and the total costs are 5.8% of GDP according to a report from the World Bank.[1]

700,000 Chinese die each year from polluted air and water according to a report from the World Health Organization.[2]

Lee Liu, of the University of Central Missouri documenting China’s infamous “Cancer Villages” reports that, “China appears to have produced more cancer clusters in a few decades than the rest of the world ever had.” [3]

We could go on about species loss, desertification, and more but the question is why would anyone allow this sort of damage to their economy and their people if it weren’t a necessary choice? The answer to this question, like so many others in China, is: it keeps the Communist Party in power. The World Bank and WHO reports have been suppressed in China to prevent “Civil Unrest” (the PRC scare words for revolt against the party).

What Westerners cannot put their heads around is the topsy-turvy relationship between economics and politics in Communist China. We are used to a system where the goal of politics should be the bettering of life for the citizens. In China, the bettering the life of citizens is simply a political tool – along with censorship, labor camps, and torture – for maintaining order. GDP growth is a goal ONLY because it can be used to justify the continued rule of the Boys from Beijing; not because of any benefit it offers actual Chinese.

So just how does a country with an inefficient and astoundingly corrupt, centrally planned economy manage 10% year over year growth? By cheating of course! There are several ways to cheat on todays GDP and most involve pushing costs – notably negative economic externalities – off the national P&L, usually by moving them to the future.[4] China uses a variety of cheats not the least or which is virtually enslaving a large portion of its rural poor in the plantation like factories that enable Wal-Mart’s price matching strategy. When you drill down, the environmental issue is actually no different.

For instance, if China can’t make steel as efficiently as America – the fact is that it cannot – and if its low labor cost isn’t an advantage – the total labor per ton is less than the shipping per ton – how about just using a lot of the world’s dirtiest coal and dumping all your mill waste right into the Yangtze river – birds, people, and dolphins be damned! Might as well rename the province from 四川 to 死川![5]

I’m not just passing on the hysterical reporting of some NGO, anybody who has breathed the air in Beijing and come home sick (I have more than once) knows what’s going down and anyone who travels out of the cities and opens their eyes will see it there too. Consider this series of photos I shot on a 2007 Yangtze cruise:

The first picture shows some coal bins along the river that are used to load the thousands of barges

 

 

 

 

 

 

 

 

 

 

that service the endless power plants and mills (second photo) which pump God knows what into the oddly green and sterile waters of China’s formerly great river.

 

 

 

 

 

 

 

This third photo shows where one of these bins collapsed and dumped its load into the river.

 

 

 

 

 

 

 

The forth shows the “Repair Job” – honest to God – in progress. I can hardly wait to see the “environmental remediation plan!”

 

 

 

 

 

 

 

Alas, some poor woman downstream trying to earn her keep fishing in the cesspool that was once the majestic Three Gorges.

 

Obviously, all interspecies ethics aside, if you destroy your fishing grounds and plunder your agricultural and urban water supply you are going to incur real, hard economic losses in the future. But, hey cancer takes a while and you can still sell whatever fish you can raise in this florescent green ooze to the Americans for a few more short-term GDP points.

 

 

 

 

Those all-important GDP points make party bosses happy because they keep Chinese busy and restless Chinese have a tendency to toss out their rulers – a fact which keeps Wen Jiabao up at night. If citizens die in the future or become extremely ill, at least they aren’t protesting and besides the Chinese government doesn’t really provide healthcare for anyone outside the government.[6]

Running this game is not only destroying China’s once beautiful landscape, but it also creates competitive pressures that are leading the world in yet another Chinese race to the bottom. China directly exports their Dickensian environmental ethic in the extraction of African and Latin American resources acquired by their SOEs and indirectly by driving out of business American and other Western firms that are required to compete without killing their neighbors. While using this invisible hand of communist coercion against defenseless Chinese and others (for instance by gutting Tibet or damming of the Mekong river that feeds Vietnam) the Boys from Beijing are still able to cloak themselves in a mantle of “free trade” while actually communizing all the costs of their fraudulent and unsustainable economic “boom.”

A perfect example of this is the business of rare earth elements. Just a decade ago, about 80% of rare earths came from the US, specifically Molycorp’s Mountain Pass mine in California. Now, California might rightly be called the home of excessive environmental regulation, but Molycorp was supplying the world without poisoning its neighbors. The central planners in Beijing decided to corner the market in rare earths, because among other things they are critical to most high tech military hardware. China embarked on a scorched Earth policy in Sichuan province and its captive state of Mongolia using a massively destructive acid leaching process to extract things like Yttrium from the clay. Thousands of acres of pristine forest and farmland have been rendered unrecoverably toxic, while China rapidly cornered 97% of world production – shutting down Mountain Pass in the process. Upon doing so, China promptly claimed monopoly-pricing power and implemented illegal (violation of the WTO rules they signed on to) export restrictions to raise world prices on these metals up to 1000% in just two-years![7] So what if several thousand farmers go belly up or die in places nobody ever looks at? How’s that for “free trade?”

Now, if China’s pollution victims had any say in the choices being made it might be a different story, but until that day the multinational firms extracting cost savings through China’s coercion of its population are not simply “choosing to exercise their best economic option in a free market” anymore than is the businessman who “chooses” to develop a relationship with the local mob to clear out his competitors and intimidate his employees. The manufacturers and big retailers are simply co-conspirators in denial and it is no wonder they and their captive pundits run screaming “save free trade!” whenever criticism of their fascist friends comes to the fore. That too is unsustainable as more Chinese are beginning to bravely push back on their oppressors and average Americans are starting to notice that under this so-called “free trade” regime, they may be saving money but they sure as hell are not living better.

– Greg Autry teaches Macroeconomics at the Merage School of Business, UC Irvine and is co-author (with Peter Navarro) of the new book “Death by China” www.gregautry.us


[4] For instance, the US borrows money from China it can probably never repay to keep its anemic economy on its last legs (a looming diaster that Beijing happily accommodates for obvious reasons to be discussed in a future posting).

[5] A little Chinese pun here.  Si-chaun (四川) means “4 rivers” while substituting 死 for the first character (Sǐ) makes it “death river” with a very similar pronunciation.

[6] Although, of course they falsly claim to insure a significant portion of the population. A topic for a future posting.

[7] They’ve also demonstrated the ability to extort policy changes from other nations with this monopoly when they halted shipment of rare earths to Japan until that nation relented in a maritime dispute.

 



 

Schrödinger’s Mice

Whether a cat is black or white makes no difference. As long as it catches mice, it is a good cat.”

– Deng Xiaopeng

 

Deng’s famous quote has long been used to support the assertion that modern China is really an aspiring capitalist state in socialist clothing. The assumption of course, has been that the nature of the mice catching in question is to capture a higher standard of living to China’s people.

China’s Western apologists routinely paint us a rosy picture of a nation maintaining its communist name and symbolism merely to save historical face, but inevitably progressing toward our model of liberal, capitalist democracy.  If we just continue our clever policy of “engagement” China will turn out like a nice, big Sweden.

However, Deng’s clarifying statements such as “socialism is not poverty” don’t spell democracy or capitalism just competitiveness and Hu’s and Jiabao’s continued talk of “stability” and “socialism” do not naturally lead to any assumption of real economic or political reform in the Western style. So, more honest Westerners are happy to admit that the Dragon is actually a militant, totalitarian regime with a command economy while openly admiring its power to deliver the goods in a tough global economy. These folks will even question the value and future of democracy; much like Herr Hitler’s American and British fan-boys from the 30s.

Routine visitors to the carefully groomed “China for Foreigners” branded theme parks that they think are actually Shanghai and Beijing get interact with a tiny subset of the population – tour guides and successful business people eager to please the Yángguǐzi – and they come back supporting this vision of progress. They will tell you: “It’s a great place”, “I had these wonderful meals,” “Everybody is so nice,” and “The economy is so dynamic.” All true enough – within their very limited context.

Heck, I love those sumptuous free meals with the big Lazy Susan too, but I also know that much of China is still pushing a plow behind the ass end of an Ox and sleeping in a mud brick hut, artist and peace advocates are being tortured in jail, and the police bug my phone and read my emails.

The broad, empirical evidence is clear: the actions of Deng in crushing political reformers (both within and outside of government) in 1989 and the heavy hands of those that have followed him leave no doubt about the real nature of his cat in the box. The continued domination of the Chinese economy by State Owned Enterprises (about half of GDP and assets) and the absolute control of all the most critical business sectors (resources, finance, heavy industry, technology) by the government do not offer a story of progress; unless, of course the goal of that progress is the destruction of jobs in America and Europe.

The whole matter of trying to figure out exactly what Deng’s cat is supposed to do – exterminate the capitalist mice with their own weapon or feed the Chinese masses – reminds me of physicists Karl Schrödinger’s famous thought experiment with a cat locked inside a box. The state of any given particle – or cat – that can’t be observed is merely a statistical probability until the box is opened and the truth comes out. The difference in this case is that the viewers outside the box, rather than the cat, that may end up dead based on a process they can’t observe.

Inside China’s opaque box of government we must assume somebody has a plan – not the publicly paraded five year variety with its lofty political statements and lists of lofty goals and technical minutia – but an actual national strategy. Are they striving to join the community of free nations or simply exploiting them? Outside the box, we are give the choice of inferring what is really going on via the statements of those who fear free speech or by observing their actions. With those two things in conflict, any rational person would conclude that capitalist mice should be very shy around Mr. Deng’s cat. To do otherwise would be to be as trusting as the students packed into Tiananmen Square on June 3, 1989.

–       Greg Autry teaches Macroeconomics at the Merage School of Business, UC Irvine and is co-author (with Peter Navarro) of the new book “Death by China” www.gregautry.us