Russia: How should we fight back?

Russia’s attack on Ukraine has rightly outraged most of us. Leaving aside the history that brought us to this present conflict, Russia’s attack is totally unjustified. Our natural instincts are to help Ukraine resist its aggressor. As we watch the destruction of lives and property, it is natural to want to send in our boys or planes to help. Surely, we can stop this by using the might of our military and advanced weapons. Wars tend to look like that in the beginning. Vietnam, Afghanistan, Iraq (I still can’t sort out what Bush/Cheney thought was America’s interest in attacking Iraq) looked like slam dunks going in. The realities were invariably very different by the end. How should we help Ukraine?

The U.S. and Ukraine’s NATO neighbors have been supplying Ukraine with weapons but left them to fight on their own. This was my assessment a month ago: “Ukraine-Russia-NATO”  As much as it strains against our impulse to help, President Biden is absolutely correct in ruling out our joining the war. For most of us, war, and the incredible pain it inflicts on those directly involved, is fought elsewhere by others. It is far too easy to say “sure, lets go to war.” “Ukraine-how should we help?”

But wars can be fought economically as well as militarily. Much of the West (the designation seems relevant again) has joined together to impose severe economic sanctions on Russia. But the objectives of these sanctions are not clear. They are too late to deter Russia from its invasion of Ukraine, though perhaps they provide an example of the potential cost to China if it decides to invade Taiwan. Are they meant to pressure Russia to come to the negotiating table? But it takes two to tango–Zelensky must be there as well. I have heard no statement of what Russia must do for the sanctions to be lifted.

The sanctions seem designed to cripple the Russian economy. Sadly, the pain will fall mainly on the Russia people rather than its government. Considerable pain will also fall on those imposing the sanctions. “The war in Ukraine and globalization”

Supply chains and financial channels will be disrupted for many years. But like military wars, the collateral damage an economic war is hard to predict. China and Russia and maybe India and much of Africa are being driven together to establish new trading relationships and non-dollar payment channels that don’t seem to serve American interests. If they are not explicitly linked to accelerating a negotiated peace, what are the sanctions for?  I don’t necessarily believe that our military industrial complex deliberately promotes the perpetuation of war, but as an economist I can’t ignore the fact that they have an economic incentive to do so.  

Missing from all of this seems to be the skillful deployment of diplomacy. The first priority, of course, is to end the fighting in Ukraine. But any peace agreement must look beyond the immediate war to the conditions that will promote peace and prosperity for Ukraine, Russia, Europe, and the world well into the future. As is often the case Chas Freeman says it best: https://www.youtube.com/watch?v=0vxufUeqnuc

American policy on Taiwan

Following President Richard Nixon’s famous visit to China in 1979 the so called One-China policy was first stated in the Shanghai Communiqué of 1972: “the United States acknowledges that Chinese on either side of the Taiwan Strait maintain there is but one China and that Taiwan is a part of China. The United States does not challenge that position.” “One China policy – U.S. policy”  However, in the Taiwan Relations Act (April 10, 1979), the U.S. stressed its opposition to any effort by the People’s Republic of China (PRC) to change conditions in Taiwan by force. Just how that opposition might be expressed has remained ambiguous ever since.

The United States has no treaty obligation to help defend the Republic of China (ROC–Taiwan) against a military attack by the PRC. It is doubtful that the U.S., located thousands of miles from Taiwan, could win an encounter with the PRC only 100 miles away. In recent simulated war games with China the U.S. has lost. “As the US and China continue to posture the key will be Taiwan” A military intervention by the U.S. would create a significant risk of escalation into nuclear war. 

China experts such as Chas Freeman have argued that since Washington long ago agreed that ‘there is only one China and that Taiwan is part of it,’ any mainland invasion would simply be a civil war in which America has no right to intervene.” Moreover, risking nuclear war to defend Taiwan would not be in America’s or anyone else’s interest.

Until quite recently, Taiwan’s efforts to build its capacity to defend itself from a mainland attack rested heavily on the presumption that its defense would come from the U.S. “Taiwan’s military has closely mirrored its U.S. counterpart in miniature for years…. The problem with copying the American approach to warfare is that the U.S. military’s doctrine is to project power over great distances and to maximize mobility and networks to take the fight to the enemy with overwhelming superiority. Taiwan, on the other hand, needs the opposite: short-range and defensive systems that can survive an initial bombardment from a larger adversary and that are suitable for deployment close to home in defense of the island should it come under blockade or attack.” “Winning the fight Taiwan cannot afford to lose”

Taiwan’s almost $17 billion-dollar annual defense expenditures keep American weapon’s companies happy but didn’t contribute seriously to Taiwan’s defense. “Taiwanese military analysts have criticized the island for spending too little on defense, and for spending money on eye-catching purchases such as F-16 fighter jets rather than less-flashy weapons systems that would better enable Taiwan to wage asymmetric warfare against the PLA’s superior strength.” “Concerns about Taiwan put focus on islands defensive weakness” This has begun to change in the last few years toward weapons more appropriate to defending Taiwan against a ground assault.

While it is in America’s interest for Taiwan, as well as every other country in the world, to be peaceful, democratic, and prosperous, that interest is not sufficient to risk going to war–not even close. We should hope that the relations between Taiwan and the Peoples Republic of China remain peaceful and consensual whatever form they ultimately take. But should China attempt to “change conditions in Taiwan by force,” how should the U.S. express its opposition.  It is a very sad commentary on the state of American international policy that so many American policy makers routinely conceive of expressing American opposition militarily. We have done so too often to the detriment of American interests.

On the other hand, a Chinese military attack on Taiwan would be a violation of its commitment not “to change conditions in Taiwan by force.” In such an event the U.S. should oppose such actions vigorously with coordinated diplomatic measures. A U.S. China war would certainly stop all trade with China. This would badly hurt both of us. But even without war, if a total trade embargo by the U.S. were joined by the EU, Australia, Japan, Korea, Canada, UK, and most other UN members it would be devastating to China. China could be expelled from all the international organizations it has so proudly joined in recent years. Its global ambitions would be destroyed. Such prospects would surely be as powerful a deterrent to China’s invasion of Taiwan as would the prospect of U.S. military intervention in defense of Taiwan.

American interests are better served by being the best that we can be, i.e., by strengthening our own economy and political system (which is in a dangerous mess at the moment). It would also be helpful if Ted Cruz would stop blocking President Biden’s State Department appointments so that we can strengthening our use of diplomacy and return our military from its foreign adventures to the defense of our homeland.

See Jon Schwarz’s interesting review:  WE’VE ALL PRETENDED ABOUT TAIWAN FOR 72 YEARS. IT MAY NOT WORK ANY LONGER   “Taiwan, China, nuclear weapons”

Chinese and U.S. Models

Many aspects of our respective societies and governments follow different rules and approaches to organizing our communities. We presumably prefer (most of) our choices over theirs and vice versa. In explaining why we prefer ours, we might freely criticize theirs. But we generally have no right to demand that they abandon their approach and adopt ours.

Consider China’s Social Credit System.  In the U.S. we are “well accustomed to credit checks: data brokers such as Experian trace the timely manner in which we pay our debts, giving us a score that’s used by lenders and mortgage providers. We also have social-style scores, and anyone who has shopped online with eBay has a rating on shipping times and communication, while Uber drivers and passengers both rate each other; if your score falls too far, you’re out of luck.

“China’s social credit system expands that idea to all aspects of life, judging citizens’ behaviour and trustworthiness. Caught jaywalking, don’t pay a court bill, play your music too loud on the train — you could lose certain rights, such as booking a flight or train ticket.”  “China social credit system explained”

A good Social Credit score will ease access to loans and other good things. Compared to our approach to collecting information on our likely credit worthiness, the more comprehensive and centrally organized rating is more efficient and comprehensive. But we are very aware of the Chinese Communist Party’s sensitivity to criticism and its potential (if not certainty) for abusing such extensive access to information on our personal behavior. So, we would never allow such a system.

But what about the U.S.’s strong support (and push) for AML/CFT (Anti-Money Laundering and Combating the Financing of Terrorism) laws and procedures?  How do we (how can we) justify that? The U.S. requires that all financial firms collect information about their customers (KYC–Know Your Customer) that facilitates the government’s tracing payments of potentially illegally gained money and it has forced this requirement on all countries using U.S. dollars. The cost of these requirements is enormous. But why follow allegedly illegally gained money when the government can’t prove that it was illegally gained in the first place? If it could, the government should attack the illegal activity at its source. Thus, it claims, but cannot prove, that the money was illegally earned. Not only are AML requirements very expensive but the benefits (identifying criminals) are negligible and morally indefensible. “Operation Choke Point”

The issue of whether to require a so-called vaccination passport to document that the bearer has been vaccinated in order to enter facilities that require such proof, provides another example of a clash between efficiency and convenience and privacy. The pros and cons of such documentation are currently being debated in the U.S.  “vaccine passports”

My point is that each country has its own models for organizing and sharing information and for enforcing its laws.  We have every right, and should, carefully evaluate our own practices. What China chooses to do, is China’s business. Fortunately, we live here.

China and the United States

“Biden describes the China challenge as a global, ideological struggle between democracies and autocracies…. Any event from the pandemic to the Olympics will occasion commentary, particularly in the United States, of who “won,” China or America, and what it means for the epic struggle for global supremacy.” “There is no unified front against China”

I am not sure what it is that we want to win. We don’t seem to mind selling planes and bombs to other autocracies (Saudi Arabia, Qatar, etc.). Anything to keep the defense industry’s profits flowing short of yet another war seems a (relatively) good deal. And why might “global supremacy” matter?

Winning things sounds to me like rooting for our own basketball team and cheering when it wins the championship. How do we go about striving to have the best basketball team? First, we recruit the best basketball players we can find and hire the best coach to train them. Everyone must play by the agreed rules, and we win by playing the best game. In short, our efforts go into being the best team possible, not into poisoning the drinking water of the other teams.

But sporting contests are zero sum. One side wins and the other losses. Global cooperation and trade is win–win. The goods we produce and sell (for example) to China, with which to pay for the goods we buy from China make us and China both richer. The citizens of both countries benefit from this exchange. Win–win. Sharing information on the source, nature, and potential cure of a virus (which knows no borders) benefits all of us. Win–win.

The world’s output is maximized when our productive assets (labor and capital) are allocated to their most productive uses globally. That requires that market prices reflect the true productivity and value of each activity. Thus, the world as a whole benefits from rules governing government interferences in market prices and allocations. The World Trade Organization is the forum for agreeing on these rules of fair trade and enforcing them. “Econ 101- Trade in very simple terms”

The airplanes built by Boeing and Airbus benefit from government support of one sort or another. For years they have fought one another over whether this support conformed to fair trade rules. A settlement has finally been reached. “Boeing – Airbus settlement”

Trade restriction in the name of national security, while potentially legitimate, can easily cross the line into wealth reducing protectionism. Does the use of Huawei 5G equipment really threaten U.S. national security or U.S. business interests (protectionism). Some of these cases are hard to call but we must look carefully at narrow business interests in protecting their markets to the detriment of the rest of us. “Huawei ban could crush US aid efforts”

Global supremacy suggests that we would set these rules. To be successful the rules of international trade must be very broadly followed. Thus, their formulation must be a collective undertaking. It is fine for the U.S. to exert influence in setting these rules, but unfortunately, we have a poor record of even following them. We have caused the demise of the WTO dispute resolution body. We have strangely and counterproductively withdrawn from the Trans-Pacific Partnership (TPP), which was then replaced by the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). These set high standards for more open trade that China will hopefully have to meet to join. The self-image of supremacy has corrupted U.S. behavior. Former President Trump’s protectionist tariffs on trade with China, EU, Canada, etc., which President Biden has so far failed to remove, have further reduced U.S. and world income. “Trade protection and corruption”

So, what should our policy be toward China? China has no intention or interest in attacking the United States. They care about their own economies and their own neighborhoods. We should keep our nose and military home to look after our own neighborhood. We should work with China (and Russia and others) to formulate win-win rules for international interactions and behavior. We should apply the mechanisms of the WTO and other international bodies, and diplomacy more generally, to hold China (and others) to the agreed rules. But we must abide by them as well. The rule of law is not just for others.

We should fix the problems in our own economy. We should work to make our domestic rules of commerce fair and efficient so that our economy will be the best in the world. We should work with other countries, including China, to maximize the productivity of their resources because we and everyone else will benefit (win-win).

The United States was founded on principles that have served us well providing a model that the rest of the world would do well to follow. The idea that we should (or can) impose our principles on others rather than provide an example like “a shining city on a hill,” is a violation of those very principles. We have repeatedly failed to uphold those principles, but we keep trying. We must continue trying and must try harder.

Econ 101: Tony Judt on Trade

I just finished listening to the Audible version of Thinking the Twentieth Century, a discussion between Tony Judt and Timothy Snyder, recorded just before Judt died in 2010. Judt was a British-American historian, essayist and university professor who specialized in European history. Snyder is an American author and historian specializing in the history of  Central and Eastern Europe and the Holocaust.

I found Judt to be a very insightful in his area of political and social history expertise but generally off base on economic issues, which is not his field. I fear that his misunderstanding of trade is widely shared so I will set out some important basics as a contribution to better public understanding. “Science” doesn’t dictate policy, but a correct understanding of the economics of trade is essential if one’s value preferences are to lead to policies that produce your desired result.

Judt describes the increase in American wages for manufacturing workers along with their health and pension benefits over the past several decades leading manufacturing firms to outsource their production to the cheaper labor in (for example) China and thus hollowing out American manufacturing.  Almost everything about this description is wrong.

For starters manufacturing output in the U.S. is at an all-time high (prior to Covid shutdowns). Off shorting some of it has not hollowed out U.S. manufacturing.  Because manufacturing output has grown more slowly than the economy overall (the upper line below), its share of GDP has fallen (the lower line). Moreover, because of increased labor productivity in manufacturing, fewer workers are needed to produce this increased output (second chart) thus freeing labor to work in other areas and increasing our overall standard of living.

U.S. manufacturing output

Billions of US $ and Percent of GDP

Data Source: World Bank
MLA Citation: <a href=’https://www.macrotrends.net/countries/USA/united-states/manufacturing-output’>U.S. Manufacturing Output 1997-2021</a>. http://www.macrotrends.net. Retrieved 2021-08-16.

But let’s take a closer look at Judt’s statement. If the U.S. shifts some manufacturing offshore, it must pay for it. Instead of paying American workers it must pay Chinese workers, and firms and shipping companies. Fundamentally, a country’s imports must be paid for by its exports (or by capital inflows from the exporting country). Let’s look carefully at each possibility. To simplify, let’s initially assume that there are no capital flows (cross border investments from one country in another) so that trade in goods and services must balance (i.e., pay for each other).

For starters whether labor is cheaper in China than in the U.S. cannot be determined without considering the exchange rate of the dollar for the Chinese Yuan. If exchange rates (not mentioned by Judt) are flexible (determined freely in the market) the fact of an increase in U.S. imports from China (i.e., the offshoring of U.S. manufacturing to China) will depreciate the dollar/Yuan exchange rate. As U.S. manufacturers sell dollars to buy Yuan with which to pay for the goods they now want to buy from China, Yuan will become more expensive (a depreciation of the exchange value of the dollar). The dollar’s depreciation will have two effects. It increases the cost of Chinese labor to U.S. companies and thus will reduce the cost advantage of Chinese labor and reduce the demand for it by U.S. firms. And it will lower the cost of U.S. exports thus making them more attractive in China. While the adjustments will take time, the dollar depreciation will continue until American exports increase and its imports from China moderate until trade balances–our increased exports pay for our increased imports.

If the exchange rates are fixed, as they were in gold standard days, the adjustment in the real effective exchange rate needed to balance trade takes a different form.  The initial increase in the demand for Chinese products (outsourcing to Chinese workers) are paid for with dollars. But to preserve the fixed exchange rate, the PBRC (Chinese central bank) must buy these dollars with newly created Chinese currency. This increase in the Chinese money supply will lift prices in China making Chinese exports more expensive in the U.S. and U.S. goods cheaper in China. In short, the real exchange rate adjustment needed to balance imports and exports in this case results from a higher inflation rate in China than in the U.S. while in the first case of flexible exchange rates it results from adjustments in the nominal exchanges rates themselves.

A third possibility is for China to take the extra dollars being spent in China and invest them in the U.S. (or elsewhere) This is the capital flow case in which trade itself does not balance.  This was the policy followed by China in the 2000s through 2014. The PBRC would buy the dollars being spent for outsourced Chinese labor (U.S. manufacturers payments to Chinese workers rather than to American ones for the goods they needed) and would invest them in the U.S. If the increase in the Chinese money supply resulting from those dollar purchases was more than was consistent with stable prices in China, the excess money would be sterilized–so called sterilized foreign exchange intervention (the PBRC would create Yuan to buy dollars and would repurchase some of those Yuan back with domestic Chinese securities owned by the PBRC).

To some extent this foreign exchange market intervention by the PBRC was the result of its desire to build up its FX reserves (a kind of insurance policy for exchange rate shocks). However, much of it was to prevent an appreciation of the Yuan that would reduce its exports (it was following an export led development strategy). This policy was much criticized abroad as currency manipulation and ended in 2013-4.  Thus, China has financed a significant part of the U.S. governments fiscal debt. https://nationalinterest.org/feature/who-pays-uncle-sams-deficits-26417

Thus, when someone says that something is cheaper to make in China, remember that it must also be that from China’s perspective, something must be cheaper to make in the U.S. in order to pay for what China sends to us. Both sides benefit and the world grows richer.

National Defense

American military strength (an important aspect of our national security) depends on the size, training, and equipment (weapons) of our military, which is very much dependent on the size and efficiency of our economy, which pays for it.  Devoting more of our productive capacity to the military reduces our economic capacity. Getting the balance right between military and nonmilitary uses of our resources is very important.  Knowing what military capacity we need to insure our defense requires assessing the sources of threats to our national security and what motivates their deployment.

The cold war was a confrontation with international communism, most heavily concentrated in the Soviet Union. This was an ideological enemy of free market, capitalist countries, whose goal was to spread its ideology to the entire world. There is no such ideological enemy today. The Chinese government wants to be strong and prosperous and doesn’t care whether anyone else follows their model or not. They do want the rules for global trade and interactions to permit their own domestic model. We need to engage China fairly in establishing international rules that serve everone.

Historically wars were generally about territory and political control, usually about moving boarders a bit this way or that.  The Mogul, Roman, Persian, British, Ottoman and other empires existed largely to extract economic gain from the territories they ruled, something more peacefully enjoyed today via free (or freer) trade.  The mere threat of war and the creation and maintenance of potential enemies is also a useful device for rallying countries around their leaders and for keeping the money flowing to their “defense” industries–think of Mr. Putin, Xi Jinping and the U.S. military/industrial complex.

American defense today requires military strength sufficient to deter any country from successfully attacking the United States. It does not require the 800 military bases that we maintain around the world.  It did not require and was not enhanced by our many wars that followed the infamous and very damaging Viet Nam war (Lebanon 1982-4, Grenada 1983, Panama 1989-90, Gulf War 1990-91, Somali 1992-5, Bosnia 1992-5, Haiti 1994-5, Kosovo 1998-9, Afghanistan 2001-date, Iraq 2003-11, 2014-date, Somali 2007-21, Libya 2011, 2015-20, Syria 2014-date, War on Terror in various places). War with China would be quite a different matter. “The delusions of high tech warfare”

Fareed Zakaria unloaded on our war industry last month: “Defense Secretary Lloyd Austin outlined his key concern. ‘China is our pacing threat,’ he said. He explained that for the past 20 years, the United States had been focused on the Middle East while China had been modernizing its military. ‘We still maintain the edge,’ he noted, ‘and we’re going to increase the edge going forward.’ Welcome to the new age of bloated Pentagon budgets, all to be justified by the great Chinese threat.

“What Austin calls America’s ‘edge’ over China is more like a chasm. The United States has about 20 times the number of nuclear warheads as China. It has twice the tonnage of warships at sea, including 11 nuclear-powered aircraft carriers compared with China’s two carriers (which are much less advanced). Washington has more than 2,000 modern fighter jets compared with Beijing’s roughly 600, according to national security analyst Sebastien Roblin. And the United States deploys this power using a vast network of some 800 overseas bases. China has three. China spends around $250 billion on its military, a third as much as the United States.”  “The Pentagon is using China as an excuse for huge new budgets”  As noted above, over-investing in the military results in a smaller economy overall.

The latest debate is whether we should make our commitment to go to war with China to defend the independence of Taiwan explicit or leave it implied and ambiguous. In 1979 the U.S. recognized the People’s Republic of China as the sole legal Government of China and acknowledged that Taiwan was part of China (slightly fuzzy diplomatic language). So would American national security be enhanced by an explicit credible commitment to go to war with China, if necessary, to preserve the independence of Taiwan? China is a nuclear power. Going to war with China (World War III if we could get anyone else to join us) would inflect enormous damage on the U.S. whether it became nuclear or not, even if we won. In my opinion it would be simply insane to take such risks.

Would the U.S. deter China by being tough enough?  As Doug Bandow put it: “America’s antagonists saw something very different than weakness…. Stupidity and arrogance. Poor judgment. Refusal to admit mistakes. An almost demented willingness to sacrifice America’s future in a desperate attempt to redeem the nation’s tragic past. A better way not to show weakness would be to stop doing ‘stupid shit,’ as Obama suggested.

“China’s Xi Jinping and his colleagues in Zhongnanhai likely have a far more objective and practical take on U.S. policy: Endless wars by Washington are good for Beijing. The Chinese would love to see the US pour trillions more dollars and thousands more lives into new conflicts. Invade Iran? Please! Maybe occupy Syria too? Lebanon also needs fixing. Don’t forget the need to redeem Afghanistan. Then there is the problem of Russia in Ukraine, Syria, and elsewhere: go for it!”  https://original.antiwar.com/doug-bandow/2021/03/23/the-failure-of-huff-and-puff-foreign-policy/

But China (and Russia in Ukraine) has been behaving badly–claiming this little island in the China Sea and that one as its own, not to mention the ever-present risk of invading Taiwan. Even if the forced takeover of Taiwan by the PRC would not threaten our national defense, shouldn’t we care? Shouldn’t we care about the abhorrent genocide by the Chinese government against its Uighur Muslim minority in its western province of Xinjiang? Of course, we should, but we should reject the presumption of our neocon friends and the military/industrial complex we keep fat and rich that these and other interests can only be addressed militarily. See my experiences in Iraq and Afghanistan: “My Travels to Baghdad”

The creation of the United Nations and Bretton Woods institutions and other international cooperative agreements and institutions after World War II were meant to provide dispute resolution mechanisms other than wars. President Biden is committed to rebuilding these neglected institutions and strengthening and reenergizing our diplomatic institutions and initiatives. We can confront China more effectively and more realistically together with most of the rest of the world using the tools of diplomacy rather than of war. If the people of Taiwan chose to integrate their governance more fully with that of the PRC, that is their choice and their business. But if China invades Taiwan or otherwise forces such an integration, China should know the economic and political price they would pay. In my opinion, such a declaration would be far more effective in deterring such behavior by China than a fuzzy uncertain threat of war. It is encouraging that Congress seems on the verge of reclaiming its War Powers provided by the Constitution.

It is worth remembering the words of Dr. Martin Luther King, Jr. against our war in Vietnam delivered April 4, 1967. https://kingandbreakingsilence.org/