Trade policies, stimulus, and tax cuts

Both parties promise ‘economic growth’ in this debate as the way out of our troubles for unemployment and federal deficits. Left out of the discussion currently is the way to actually accomplish this growth in a way that delivers more specifically to voters other than some vague notion of trickle down from a ‘global free market’.

Andrea Hayley writes: Chinese State-Controlled Market Policies Increasingly Unfavorable to the U.S. in The Epoch Times

Deeply concerned about an unsustainable trade deficit with China, the chair and commissioner of the U.S.-China Economic and Security Review Commission (USCC) say that in order to compete with China’s state-controlled economic policies, the U.S. government needs to significantly shift its current market-based approach.

“A lot of our major competitors have game plans. The United States doesn’t have a game plan, and our people are suffering,” said Patrick A. Mulloy last Friday at the Center for National Policy.

Mulloy, a USCC commissioner, and Daniel Slane, chairman of the commission, were keynote speakers of a talk, “Competing with China: How the U.S. Can Create Jobs in the 21st Century.”

The commissioners both said the U.S. free market system is at a disadvantage in our trading relationship with China, and that the government needs to take action to protect American interests at home and abroad.

Over the last nine years since China ascended to the World Trade Organization (WTO), it has amassed a $1.76 trillion trade surplus with the United States. The most common reason cited for the imbalance is China’s undervaluation of their currency, the RMB (yuan).

The House acted this September to pass a resolution raising the threat of import tariffs should China fail to raise the value of its currency to an appropriate level.

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While the currency issue is important, Mulloy said he doesn’t think it is the silver bullet. “I think the problem is a little deeper than that,” he said.

Mulloy is more concerned about the cumulative result of Chinese policies that require U.S. companies to exchange technology and know-how in exchange for access to their markets.

China’s industrial policies lure foreign companies to outsource production with offers of incentives, subsidies, and lower labor costs, and in order to take advantage of these lucrative offers, U.S. companies are required to transfer technology and know-how to the Chinese. This has been going on for years.

But recently, China has started asserting its economic muscle, and its companies are increasingly directly competing with U.S. companies, with China’s government policies granting domestic manufacturers the upper hand.

For example, China has started manufacturing commercial airplanes.

“China is going to make its own aircraft, and China is going to buy its own aircraft,” said Mulloy.

Recently, China’s indigenous policy has changed the playing field. Referred to in the USCC report as a “profound change,” the policy explicitly favors domestic companies over foreign firms for government procurement contracts.

One of the positive effects of China’s ascendance to the WTO, the ability of U.S. companies to make profits selling to China’s rising middle class, is not likely to pan out.

Slane sees current U.S. trade policy as a recipe for disaster. He recommends changes, such as replacing corporate income tax with a value added tax (VAT), an increase in research and development funding, and stronger patent protections with the goal of supporting U.S. manufacturing to balance the trade deficit.

Slane acknowledges that such changes would be “deeply disruptive to global commerce,” and lead to higher costs on goods purchased in the United States, but maintains it is a price Americans should be willing to pay.

“If we want to bring back manufacturing our government must acknowledge it is a new day in which other governments are practicing state-controlled capitalism, while we practice free market capitalism. It should be obvious that this is not a level playing field,” said Slane.

(hat tip Stormy)