Taking on China in this Cold War: An 11 Step Plan

With President Trump recognizing the 75th anniversary of D-Day in Europe this week, I found myself wondering how the historic giant of that era, Winston Churchill, would view the present day, particularly the West’s relationship with China. Churchill not once, but twice, was early to see the threats oppressive, domination-seeking regimes posed to freedom loving people everywhere. While the political intelligentsia called for appeasement toward Hitler’s Nazi Germany, Churchill called for strength and resolve, nearly destroying his political career. Similarly, as World War II was nearing its conclusion, he saw the threat posed by Stalin’s Soviet Union, minimized by President Roosevelt and others. Indeed, the Soviets wouldn’t cede any of the Eastern European territory they had taken back from the Nazis, descending an “Iron Curtain” across Europe. Churchill was right both times; the establishment wrong.

As we engage with an increasingly powerful, emboldened, and repressive China, we should remember the painful lessons of history. I suspect Churchill would applaud Trump’s trade actions, lock arms with him, and call for more aggressive global action until China agrees to follow international law and join the ranks of civilized nations. Let’s make no mistake: China is an extraordinarily repressive regime. Political dissent is not tolerated, the government uses technology to track its citizenry’s every move, Taiwan lives under the threat of invasion if not for American support, Chinese Christians face constant persecution, and at least one million Muslims have been locked away in literal concentration camps for “re-education.”

Rather than confront China for these horrendous abuses, the Western elites have gone the route of appeasement, this time economically, to disastrous results. The Clinton and Bush Administrations bet that economic prosperity would lead to political liberalization. As such, they let China into the WTO, let it keep preferential developing nation status, let it depress its currency and subsidize its manufacturers, thereby stealing our industrial base, functionally raping and pillaging the Rust Belt, and costing at least one million manufacturing jobs. To this day, China continues to take Western technology and steal IP, and if a Western company complains, it loses any access to their market. When China hacked into Anthem or OPM, amassing data on millions of Americans, there wasn’t any outcry from our elites who instead remain obsessed with Russia.

This strategy of economic appeasement has instead been one of economic surrender with disastrous consequences. We have succeeded in making China incredibly wealthy, rebuilding its country and military, while giving them over $3 trillion in foreign currency reserves. Yet, the Chinese Communist Party has used this track record of economic success to further entrench itself, growing ever more oppressive and totalitarian. Economic appeasement toward China has only succeeded in making a dangerous, totalitarian regime more powerful with greater economic resources with which to challenge the West. Abject failure.

Fortunately, this soft on China approach, an unmitigated disaster, has come to an end with President Trump working to defend America’s industrial base. This is a generational opportunity to fix the US-China relationship. Postponing the inevitable battle only helps China, which has grown stronger every year. Often, it is only clear you’ve entered a “Cold War” well after it has begun. Well, it has begun; China’s been waging economic war on America for years, but our leaders are only now waking up to it. China is hell-bent on supplanting America as the world’s most powerful nation, leveraging its export-driven economy to move further up the value chain, entangle itself permanently in world supply chains, and build out its military might. Its imperial island building in the South China Sea leaves no doubt as to its ultimate intentions. After all, it is only natural for authoritarian leaders who oppress people inside their borders to seek to oppress those outside their borders as well.

Just ask yourself: how would the Cuban Missile Crisis have gone if the Soviet Union supplied America with most of its consumer goods, or rare earth metals, or medical ingredients, or worse all of the above? I suspect it would not have gone as well as quickly. We must be clear-eyed; relying on China economically poses a clear national security threat. We must disentangle our supply chain today so that China cannot use economics to leverage better military or geopolitical outcomes. Ultimately, economic security is national security.

Thus far, Trump has levied 25% tariffs on $250 billion of Chinese imports. Unsurprisingly in trade deal negotiations, China has backtracked, in keeping with their history of never living up to promises. Fortunately, rather than accept a bad deal, Trump had his team say “no,” raise the tariff rate to 25%, and contemplate further tariffs. However, this is not enough. Until and unless China faces real economic pain, they will never agree to follow the international rules and make real concessions. Recognizing that this trade conflict is but one front in an ongoing economic Cold War, we must enhance the pressure. The President must publicly and forcefully, perhaps with a detailed address to the nation prior to the G-20 summit, explain the threat China poses and call for a national, coordinated response.

Currently, China is coordinating policy, imposing tariffs, but also cutting taxes, and easing monetary policy to support growth. Ultimately, America has far more leverage and tools if our government’s institutions can unite and coordinate behind a central mission: to grow the economy, repair our industrial base, and enhance domestic economic security and sufficiency. Wars are when a nation is united and policy is coordinated. Now is the time for such a national effort. To do so, I would humbly suggest the President announce the following action plan as he prepares for the G-20.

 

  1. Trump should announce we will not re-open negotiations with China. Ultimately, these talks have increased business uncertainty, and consequently, some businesses have been slow to readjust supply chains or launch new investments domestically in case talks lead to a deal. Make it clear to executives they should assume the tariffs are the permanent “new-normal,” and uncertainty will diminish, and growth will pick-up as they invest in boosting domestic capacity.
  2. For America to re-engage with China on trade talks, China will have to, as the only pre-condition, actually stop the flow of fentanyl into America. While recently they have increased regulations on fentanyl, they must enforce these laws. Chinese fentanyl, which President Xi lets come to America, has poisoned our streets and killed at least 45,000 Americans. Xi and the Chinese government is at the least complicit in this mass murder of our citizens. They should be held to account for this. They must commit to paying the US government $45 billion ($1 million per American dead due to China) as a show of good faith to merit a reopening of the trade dialogue. Until they publicly commit to the $45 billion, which we can use to end the opioid epidemic, there will be no trade discussions. I suspect this means no trade talks for some time.
  3. Trump should announce tariffs on the remaining $300 billion of Chinese imports by July 1. As these are more consumer facing (ie iPhones), the tariff rate should begin at 10% on September 1, rising to 25% on January 1, 2020. By staggering the tariffs as such, corporations will have ample time to begin moving supply chains and reshoring jobs to minimize product disruptions and price changes. An orderly implementation of tariffs will calm consumers and markets, ultimately making them more productive
  4. Trump should, effective no later than year end, ban and embargo Huawei, ZTE, and any other Chinese-linked entity from core technology infrastructure susceptible to espionage. Any foreign network using Chinese equipment would also be banned from having secure communications with the US.
  5. As seen by China’s threats on rare earth metals, they cannot be relied on as a stable supplier, yet we rely on them for most of our medical ingredients, which is unacceptable. Any product where China accounts for more than 33% of the supply would be protected by additional national security tariffs to take effect January 1 to promote more domestic production and self-sufficiency.
  6. Chinese state-owned entities would be barred from issuing either stock or borrowing money in US dollars to limit China’s ability to finance its economic war upon us.
  7. No Chinese individuals planning to return to China can receive student visas. We will no longer educate the global competition. Our schools will educate Americans first and foremost.
  8. America works best when it works together, so recognizing this, and to ensure calm in financial markets, the Federal Reserve should announce it will coordinate monetary policy with fiscal policy. It’s time for the Fed to stand with Trump and not with China, which needs to see our economy slow. Namely, in conjunction with these actions on trade, the Fed should announce an immediate 1% interest rate cut to 1.38% and end to balance sheet normalization. Moreover, the Fed should pledge to increase the supply of dollars with an unlimited QE program whenever the trade-weighted dollar passes $125 (it is nearing a record of $130) to defend against foreign currency manipulations and protect American exporters. These policies will boost growth and minimize any disruptions to markets.
  9. Until and unless Democrats agree to immediately use the tariff revenue (at least $90 billion in year 1) to fund new infrastructure projects via a new “China Rebuilds America Fund,” which would make the tariff policy clearly pro-growth, Trump should order the Treasury to dividend all China tariff revenue to each state government on a per capita basis (ie a state with twice the population gets twice the revenue), ensuring fair and equitable distribution. With the influx of cash, each state government can recycle the tariff revenue into their economy as they see fit (lower taxes, infrastructure, or more school spending) with no strings attached.
  10. Trump should direct every regulatory body to streamline permitting and regulatory processes and hasten coordination with private sector bodies and companies to increase apprenticeships and job training to increase US domestic manufacturing capacity as quickly as safely possible.
  11. Finally, the Administration should begin “break-glass” preparations to freeze and seize China’s US Treasury holdings in the event the Chinese government tries to sell to disrupt financial markets. The treasuries could be placed in the Medicare and Social Security trust funds to improve their financial health. Such a move would cripple China financially but should only be taken if China retaliates in a particularly destructive fashion.

 

This policy playbook, combined with already announced policy actions, would show that the Administration is taking the China threat seriously. Increased tariffs and sanctions would put tremendous pressure on the Chinese economy while coordinated policy-making from the executive branch, Federal Reserve, and congress or state governments can ensure the domestic economy continues to run hot. Policy coordination is absolutely critical.

As we stare down China, history will remember this moment as a generational opportunity to protect our industrial base and a free world. It is a time for choosing; will we be a nation of Churchills or Chamberlains?

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Use China Tariffs to Fund New US Infrastructure Spending

Last week as the Chinese negotiations backslid, President Trump decided to raise tariffs on $200 billion of Chinese imports to 25% and potentially implement tariffs another $325 billion of goods rather than accept a weak deal. Given the underlying strength of the American economy, which is maintaining 3% growth as unemployment plumbs 50-year lows, Trump is right to hold out for a real deal to protect America’s industrial base and intellectual property from Chinese theft. Strong underlying momentum will help insulate our economy from trade-related volatility while higher tariffs, over time, will incentive businesses to onshore production.

In the near term, the President should grab the opportunity to score a major bipartisan win and accelerate economic gains by pushing a China-tariff funded infrastructure bill. After the White House meeting, Speaker Nancy Pelosi and Senate Minority Leader Chuck Schumer signaled an interest in spending upwards of $2 trillion on new infrastructure, asking the President to find a way to pay for it.

Well, the 25% tariffs on $250 billion of Chinese imports will generate about $62.5 billion of tax revenue per annum while implementing 10% tariffs on remaining Chinese imports will generate another $~33 billion, for about $95 billion in annual revenue. And so, Trump should propose the creation of the “China Rebuilds America” fund where all of this revenue is deposited to spend on new infrastructure projects in what will be a clear win for the American economy.

New construction related spending and employment will offset any near-term trade disruptions to keep growth humming while also expanding the long-term capacity of the economy thanks to new productivity enhancing infrastructure. By requiring state and local governments to match federal funding, annual incremental infrastructure spending could reach $190 billion, the pace needed for a new $2 trillion infrastructure effort.

Additionally, by getting Democrats on board with this plan, Trump would show a unified front to China, which only further enhances our bargaining power to strike a new trade agreement. Plus by strengthening the economy further, there is less need for us to accept a quick deal, ensuring we get a better one. A resilient economy will also calm US financial markets, an indictor the President clearly cares about.  There will now be a clear benchmark for China in our trade negotiations: until they are willing to offer enough concessions to outweigh tariff revenue funding major infrastructure improvements, we have no reason to say “yes” and remove the tariffs. America would clearly have the leverage in trade talks.

By joining these two policies, Trump has the potential to deliver on campaign promises and reshape America’s economic trajectory headed into the 2020 election. Pressing harder on tariffs until China capitulates in negotiations will help rebuild America’s beleaguered industrial base while also supplying the funds to modernize America’s aging infrastructure. Striking a major bipartisan agreement on infrastructure will also help solidify Trump as the consummate negotiator and dealmaker to swing voters.

For the past two decades, America has built China into a global superpower thanks to chronic, massive trade deficits that have exceeded $4.5 trillion cumulatively. It is long past time we make China rebuild America, not only to help our near term economic prospects but also to ensure we have the capacity to maintain the advantage in our long-term strategic conflict with China, who is quickly becoming our most potent rival.

It’s time we rebuild America’s roads, bridges, airports, and rail, and with Trump’s tough trade stance, we can have China pay for them. If Democrats can’t find a way to “yes” on more infrastructure spending, they will show themselves as putting politics before the national interest. But President Trump must take the initiative, by holding firm against China, raising tariffs and publicly offering to put all tariff revenue into the “China Rebuilds America” infrastructure fund, which would exemplify Trump’s pledge to put America First.

 

 

 

Facing the Truth on Immigration and DACA

In recent days, the debate over immigration policies have raced ahead amid charges of racism, amnesty, an impending government funding deadline, and the March 5 expiration of DACA (Deferred Action for Childhood Arrivals), even grinding government to a halt. Remarkably, a group of republican Senators, led by Lindsey Graham, wish to capitulate to democrat demands, granting a path to citizenship for 3 million illegal immigrants, give their parents work permits, and in exchange, republicans would merely get $2.7 billion for border security, a pittance, and only modest changes to our legal immigration system.

Such a policy will give millions amnesty without taking actions to ensure we don’t face a flood of illegal immigrants again in 25 years, repeating Ronald Reagan’s 1986 immigration mistake, granting amnesty now for border security that never materializes. If Americans wanted blanket amnesty, we had ample opportunity with the candidacies of Jeb Bush, Marco Rubio, and Hillary Clinton. Donald Trump staked out the only law-enforcement, citizen-minded immigration policies, and he won. To capitulate now is to ignore the message voters sent in 2016. DACA is the only bargaining chip Trump and republicans have; they must use it to reform a legal immigration system that has hurt working American citizens.

Since 1999, real median household income is up less than 1% to about $59,000. Working people have suffered two lost decades even as the rich get richer. A major reason why is the surge in immigration. America is now home to over 45 million immigrants, compared to less than 20 million in 1990. Over 13% of our population is foreign born, the highest level since before World War I. It has been steadily increasing since hitting 5% in 1970.

            Historically, our immigration intake has been cyclical, which is to say we take in a large number of immigrants, and then slow down the intake as we assimilate them into our culture. As that process ends, we let immigration levels rise again, a process that has worked well. That pattern played out in the 1900s with high immigration levels through World War I, which we then slowed through 1970 (a period where coincidentally the modern American middle class was built), and which subsequently have been rising. With immigrant levels at a century high, we have to decide whether to let this uptrend continue or slow immigration as the RAISE Act would do.

Just from an economic perspective, the data argues for slower immigration. During the immigrant boom of the past twenty years, the middle class hasn’t enjoyed any real wage gains. We recognize the laws of supply and demand in almost everything but immigration. When supply goes up, prices go down. Immigration increases the supply of labor, driving the price lower. This is great for business owners who employ laborers (hence why the corporatist GOP establishment favors ever more immigration), but bad for wage-earners. If America had a sustained labor shortage, that would call for more immigration, but if anything, we’ve suffered from an excess of labor.

Over the past 20 years, the unemployment rate has averaged 5.9%. The Federal Reserve estimates the unemployment rate consistent with a full labor market is 4.6%. In other words, for the past two decades, America has had a structurally loose jobs market with 1.8 million Americans unnecessarily unemployed on average. During this time, the flow of immigrants has continued unabated. It’s no wonder wages have barely budged. We are doing a bad job getting the people already here employed; there’s no need to keep bringing in a record number of new people too.

            Even today with the unemployment rate at 4.1% and talk of a tight labor market, fewer Americans under the age of 55 are working than in 2000, even though the population of 25 to 54 year olds has grown over 5 million. While the labor force participation rate among prime working age adults is at or near highs in nations like Germany and Japan, ours is well below last decade’s level. Not to mention after years of loose jobs markets that benefited employers, America’s workers will benefit from a prolonged period of tight employment where businesses are competing for workers, forced to raise wages. In a tight labor market, businesses would have to train American citizens, improving their potential earnings, rather than import skilled labor and let American citizens form an underclass. Considering their lower median earnings and higher unemployment rates, African-American and Hispanic-Americans would disproportionately benefit from a tight labor market policy, making the charges of racism from immigration expansionists all the more laughable.

            After two lost decades for America’s working people, now is the time to slow immigration and let citizen wages rise. If Republicans and Trump truly want to listen to their base and help the forgotten men and women, they can’t capitulate to amnesty for millions of “dreamers,” and must negotiate lower legal immigration levels to make the dreams of America’s citizens more attainable. If they can’t hold this line, what was the point of the 2016 election?

Time to Unite Behind Trump

While the media focuses exclusively on deepening divides within the Republican Party, we need to take a step back and remember the stakes of this election. A certain Senator this evening exhorted voters to “vote their conscience.” Yes, his non-endorsement of Donald Trump was clear, but let’s consider what our conscience actually demands of us.

Does your conscience consider the fact 3,400 Americans, many of them children, have been killed in the past 8 years in the city of Chicago acceptable? How about the fact the unemployment rate for African-American teenagers has risen in 2016 to 31%? Or that economic growth, the ultimate engine for lifting people out of poverty and into the middle class, is running at the slowest pace in a peace-time recovery since World War II? Are you comfortable with the fact that after years of decline, the violent crime rate has been rising since early 2015? Can your conscience tolerate the fact that Radical Islam is on the march, poisoning the minds of millions, seeping into Europe and even this country, while stripping millions of Muslim women and gays in the Middle East of basic human rights and dignity?

Are we willing to accept that this is the best that America can be? If your conscience says, “yes, the status quo is acceptable,” then perhaps you should vote for Hillary Clinton. After all, she is not an agent of change. Rather, she is beholden to an entrenched donor and political class that will continue the policies of President Barack Obama. Moreover, this status quo will persist beyond her 4 year term as she appoints judges, regulators, commissioners, and civil servants who could serve decades beyond her final day in office. A Hillary Clinton Presidency will cement our current trajectory for a generation. However, even if you are comfortable with the status quo, does your conscience permit you to vote for a woman of Hillary Clinton’s character? Obama’s own FBI Director noted Clinton’s “extreme carelessness” as she attempted to keep her emails secret from voters while exposing our nation’s secrets to our enemies. She even told the mother of an American killed in Benghazi that a video was the cause of the attack while telling her own daughter and a foreign diplomat otherwise. If Hillary Clinton can’t be trusted to tell a grieving mother the truth, can she be trusted in the event of a national crisis?

True to the American spirit of perpetually seeking national betterment, perhaps your conscience says the status quo isn’t good enough, that we can do better. That we can turn a safety net that merely makes poverty more palatable into a safety trampoline which makes poverty less prevalent. That we should give all parents choice where their children go to school to end the vicious circle of entrenched poverty. That we can accelerate growth by returning power and freedom to the most innovate citizenry the world has ever known. That we have a leader who is unafraid to call out evil in the world by its true name and work to eradicate it, instead of merely downplaying it.

Doing better requires doing something else. It requires voting not for an all-talk-no-action entrenched DC elite but for an outsider who is a doer not a talker. Doesn’t our conscience demand a vote for Donald Trump? We need a President who will cease to accept the decline into mediocrity that is our present course. Would we not rather have Paul Ryan as a governing partner with a Republican White House than as a leader of the opposition against yet another Democrat President who is simply presenting the same old ideas in new packaging?

If we believe conservative principles will make American lives better, we have a moral imperative to vote for the candidate most likely to institute them. Without a doubt, that candidate is Donald Trump, helped by his fantastic running mate, Mike Pence, and a partner in Congress in Speaker Ryan. I will vote my conscience, and it demands a vote for Donald Trump.

He offers change. She offer more of the same. He will return power to ordinary people and to the markets to free up the economy, boost working Americans, and improve social mobility. She will continue the same top-heavy policies that have seen weakened growth and ever-rising inequality. He will restore strength around the world after a President who has let American power recede by backing off red lines, downplaying Radical Islamic terror, and letting China expand in the South China Sea. Her foreign policy? Well, let’s put it this way: if global warming is such a major problem, perhaps the fact Secretary of State Hillary Clinton left a world on fire shares some of the blame.

Let’s unite and win in 2016.