With the inheritance of deep recession and the new Obama Administration evaluating how to grapple with it and rising unemployment, there has been growing Shakespearean-like debate of late in the mainstream media regarding “to protect or not to protect” (ionism), particularly as respects China. Indeed an intriguing question, exacerbated by the current global financial and economic crisis. And one with an answer and a plan, which this article provides.
Note: The article too provides an alternative stimulus plan (Plan B) and a few critical suggestions for Treasury Secretary Geithner. The Author too applauds President Obama and his speech last evening.
Even China is sensing the burgeoning call to arms. As noted in the Feb. 1, 2009 CNN.com article, Chinese Premier Wen Jiabao warned about a "dangerous trend" towards protectionism as countries around the world struggle to respond to the impact of the global credit crisis. Further evidencing its sensitivity, on Sunday, 15 February, the Chinese government blasted the “Buy American” theme of the stimulus plan.
The G7 members echoed this concern at their recent Rome meeting. High unemployment rates have led to protests in countries as varied as Latvia, Chile, Greece and Iceland and to strikes in Britain and France. In fact, they all will be embracing stimulus plans in one form or another. The Chinese having formally announced and begun their own massive $600BB stimulus designed to stimulate the Chinese domestic economy and domestic Chinese jobs, not unlike the intent of the U.S. plan toward its own work force. On that point alone, the Chinese position is hypocritical.
The author notes that this fear by China may not necessarily be a bad thing (as their acknowledgement of the threat exposes a soft underbelly to be exploited), but must be seized upon and leveraged in an environment which only first acknowledges China’s already existing and entrenched protectionist trade practices (e.g. export subsidies, currency control/manipulation (fixing), etc.), rather than this (“reaction” by the West) being viewed as unprovoked protectionist saber-rattling by the West.
Unfortunately, as is the case when conducting comprehensive political analysis (usually not), the MSM does not holistically assess this issue either, myopically looking at protectionism with a narrow minded view reminiscent of 1930’s isolationists. Even the watered down “Buy American” theme in the $787BB stimulus package is being misinterpreted and taken out of context.
Note: On that count, and what most don’t get, the stimulus is not a trade policy/practice measure. Rather, it is a domestic economy, short term “(U.S.) jobs creation initiative”. Therefore linking the stimulus with “protectionism” is all wrong. In the context of the stimulus’ “purported purpose” to create (U.S.) jobs, then a “Buy American” theme is aligned with that “non-trade policy” measure and makes perfect sense to embed in it, and should be feared by no country.
However, given the rampant global sensitivity (inflammation) to the issue of protectionism, and the fact that the stimulus package will function no differently with or without the “Buy American” tag, sensibility would suggest it not be included. Essentially one should have asked “why piss off the world for no reason?”.
In fact, this article is designed to prudently help guide and steer the Obama Administration in the opposite direction – fair trade, not clinical protectionism. It offers an innovative new comprehensive plan for consideration by the Obama Administration to thwart the economic onslaught of “COMMULISM” (COMMUnism fueled by CapitaLISM), and the knee jerk urge of unsophisticated and damaging pure protectionism in response. This plan conceptually also addresses the related NAFTA inequalities/inefficiencies.
The Author encourages you to send this “ECONALISM Plan” to your Congressional and Senate representatives and the Administration as your access allows.
While what many in the MSM characterize, if not indeed hope, as momentum towards protectionism, it most certainly is not an accurate characterization. Far from it. Rather, consider it counter-intuitively, “counter-protectionism” (say that three times fast) or better yet as the Analyst will coin and The Obama Administration should adopt - “ECONomic SurvivALISM – or ECONALISM”. In fact, protectionism already exists in a very big way, and directed not by, but rather “at” the U.S. by its major trading “partner?”, China. Indeed, an underpinning of Chinese Commulism.
Wikipedia defines “protectionism” as the economic policy of restraining trade between nations, through methods such as tariffs on imported goods, restrictive quotas, a variety of restrictive government regulations designed to discourage imports, and anti-dumping laws in an attempt to protect domestic industries in a particular nation from foreign take-over or competition.
Ironically, the situation here is that China is pursuing aggressive protectionist practices even though without such measures, it is already (easily) the more competitive player; its products pricing well below market as a function of cheap(er) labor costs, artificially undervalued Yuan and questionable quality (based on recent news reports).
Call China’s strategy then “enhanced protectionism”. In other words, China is fundamentally the more competitive player and therefore should sensibly have absolutely no need for protectionist practices. However, the fact China doesn’t need to employ these (yet), but aggressively does corroborates the point that China is being overtly exploitive and abusive in leveraging protectionism to not only beat, but totally crush all competition, with or without the current global economic crisis. I fact, China better prepared to deal with it and emerge sooner.
This is not to say at all that China is immune to inflationary pressures as its economy overheats and productivity improvements decelerate. In fact it is as vulnerable as is any economic player and beginning to substantively experience those effects now.
In his Sept. 12, 2007 International Herald Tribune article titled China's Money, Phillip Bowring makes the point “China has turned decisively from being a deflationary to an inflationary factor in the world economy. Just as the falling cost of manufactured goods driven by China enabled the industrialized world to enjoy nearly stable consumer prices despite very loose monetary policies, so now the reverse is beginning to happen. Loose money has taken a grip on China and its effects will feed back to the West.”
Problem is that when some semblance of parity arrives at some distant future point, China will already have achieved its objective. That is optimally exploiting its pricing advantage for a long as it could for as much as it can secure in foreign exchange reserves, in fact a treasure trove, an economic war chest. That war chest in the form of its exploding foreign exchange reserves, now nearing $2.0 trillion and growing at $1-2 billion “per day”.
As a point of reference to understand the scope of this cash infusion, consider for example daily global oil revenues at 85 million barrels per day demand and $50 per barrel, are approximately $4-4.5 billion.
And for those who may argue that the booming trade surplus numbers reported by the Chinese government are nothing but smoke and mirrors, being solely a function of mis-invoicing and transfer pricing, then this Analyst would argue those naysayers seek corroboration of the data from China’s own trading “clients”.
Note the author’s use of “client” rather than “partner” reference. “Partner” constitutes a collaborative two way exchange, which is probably not the case here. These “clients” (e.g. the U.S.) can and do verify the data as accurate. For example, note repeated references to U.S. Census Bureau data throughout this piece which validates the Chinese assessment. If the U.S. government data sources mesh with the Chinese data, one can reasonably assume the Chinese numbers are real and accurate.
Those inflationary effects however are only now just beginning to emerge and only slowly creeping into China’s export pricing structure, but still not yet anyway, of the significance to derail or impede at least in the short to intermediate term, the velocity of trade imbalance inflows created by that differential. This pricing differential will certainly continue to deteriorate over time but for the immediate future, China will certainly optimize and exploit its controlled, undervalued currency and trade balance competitive advantage/leverage differential to maximize growth in its foreign exchange reserves.
Note: As China begins (already) to succumb and grapple with “some” labor market inflation, it too interestingly is beginning to offshore some manufacturing to countries with even cheaper labor costs like Vietnam for example. Vietnam, an emerging Commulist power, at a development stage now akin to where China was 15 years ago.
Therefore in both leveraging its pricing differential advantage AND employing protectionist practices, China not only maintains but further exacerbates/accelerates growth (in the short to intermediate term) in its already bloated and ever bulging trade surplus; its dual “price (low cost) plus protectionism” global export/import trade competition model being effectively a run away freight train money maker. That robust machine cranks out obscene wealth for China, that wealth fueling the Commulist global economic domination agenda.
It’s also worth noting that that trade surplus grows in the aggregate from all its trading partners at mind boggling rate of approximately $1-2 billion per day.
With that said, the 3 choices then to respond to the Chinese protectionism factor: a) Do nothing, b) Complain, or c) Counter it. The first two leave the U.S. in the same status quo non-competitive, perpetual losing situation. Counter-protectionism (i.e. ECONALISM), however does not. It becomes an unfortunate but necessary reactionary response to market irregularities created by China's aggressive pursuit and fostering (unnecessary) protectionist policies/practices. China is acting as a de facto economic bully, and as is the case with any bully (situation), will continue to do so until it is aggressively (counter) challenged and pushed back upon.
If there is a historic precedent to consider in evaluating geo-political bullyism as a practice and proxy for China’s own geo-economic bullyism, one need only look back at Neville Chamberlain’s valiant but disastrous attempt in 1938 to appease Germany. The lesson he and the rest of the free world learned, and much to late, is that you cannot appease a dictator, no matter what derivative form, including economic, they assume.
Free trade is a wonderful concept. In fact, the antithesis of protectionism. But it must be fair trade too. And that is the key message to the Obama Administration. It should pursue a policy of “fair trade” (ECONALISM), not Protectionism.
Only when all parties play fair and on a level playing field do we have true and fair competition. Until the Chinese (and other U.S. trading partners, particularly NAFTA) are willing to support that “fair free” trade philosophy in both words AND more importantly actions, and cease their overtly unnecessary and therefore exploitive use of protectionism, the U.S. has no choice but to remedy with ECONALISM (counter-protectionism).
Bottom line, without ECONALISM, the economic bleeding and hemorrhaging will only worsen for the U.S., while Commulism, China and its allies parasitically (vis-à-vis aggressive unfair protectionist practices) prosper and grow into a bigger threat by the day…and unnecessary, inappropriate and increasing cries for protectionism will echo across the U.S. economic landscape.
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As for “The Stimulus”:
The $787BB “Stimulus Plan” is unfortunately to wrong (in make-up) and to late. It does not even pass the “Botox test”. Botox at least provides a brief, artificial and superficial improvement, which quickly disappears as if it never happened. Indeed, the stimulus plan is akin to costly “no benefit” indulgement. The passage has not even inspired a fraction of a tick up in consumer and investor confidence, perhaps its principal objectives.
Why is it not right?
“The Stimulus”, won’t even provide immediate superficial improvement, given it really doesn’t even take hold until 2010 (some 85% of the package monies not even allocated until 2010 and beyond) taking, compounded by the questionable factor whether it’s really job creation or spending. For example, even straight talker and straight shooter Bill Maher on a recent Larry King spot, said the government should not be supporting the National Endowment for the Arts, which “The Stimulus” aggressively does. In effect, a “spending” example. That kind of representative spending in this package is better served through the appropriations process, rather than an emergency one time shot in the arm stimulus package.
It is hard to find an economist who doesn’t think the U.S. economy will begin to turn upward in the second half of the year given the massive monetary injection already provided by the Fed and related Treasury fiscal policy. Again auguring the question why this package, when it doesn’t save existing and create mass new jobs “now” (Q2/Q3), and really takes root (effect) only in 2010, when the economy through its own cyclical nature would do so nevertheless, is necessary as written.
And that is the fundamental question as to whether this is sound policy or not. If the goal and objective is to both “immediately” stem massive unemployment (inherited from policies by the prior Administration) and create massive numbers of new jobs “now”, then why does the plan substantively only really kick in 10-12 months from “now”? Rather than providing the bridge to normal cyclical economy/job growth recovery as it should, it merely piggybacks on nature, as it the economy takes its cyclical course.
In the opinion of this author, if “immediate massive job creation” is the goal, the $787BB stimulus is to wrong and won’t deliver. It will only add to the deficit and future inflation, causing its own future economic problems.
As one alternative to better stimulate “immediate job creation”, the author would suggest for consideration (to late now of course with the bill’s passage) that with the $787BB equating to about one year worth of government tax revenues (public and corporate), why not use it better as outlined below in the Author’s Plan B:
Stimulus Plan B:
a) Put a complete one year moratorium on all personal income taxes for people making $250K or less, 50% for people making $250-500K, and no tax break for people making $500K or more (the latter in tandem with new TARP CEO pay threshold protocols), and
b) Put a complete one year moratorium on all business income taxes for all small to medium businesses with less than 100 employees. For all businesses with 100 to 1000 employees, a 50% tax break moratorium.
c) Apply the rest (equivalent tax revenues from the wealthy and big corporations), approximately $400BB, to infrastructure (roads, bridges, tunnels, schools, electric grid, etc) repair, rebuild and replace.
This would represent a huge direct cash infusion windfall to both the average consumer and small/medium business, and the multiplier effect a major re/construction effort will create, spurring consumption and therefore business expansion – resulting in “immediate and significant” job creation and growth.
Note:
The mandatory first step however, BEFORE any stimulus will work is to fix the credit securitization market (and conduct “temporary nationalization” – see discussion earlier).
Right now, that market is plugged up like a toilet, and all Congress continues to do since last September is keep flushing and overflowing the bowl, and making an even bigger mess. The same effect for the stimulus until Treasury Secretary Tim Geithner fixes that core credit securitization problem…and finally opens the credit pipe.
A Note to Treasury Secretary Geithner on a Banking Fix:
Your choice on a banking crisis solution seems quite clear. Since the Treasury, both under Paulson and yourself, seems reluctant if not resistant to use TARP for its intended purpose – remove toxic assets off the banks balance sheets, you have only two other options/alternatives. It’s either the Japan model or Sweden model.
While no one wants nationalization, perpetuating zombie banks as Japan did, proved a total disaster with a decade long disastrous recession and deflation. On the other hand, Sweden (albeit truly and fundamentally socialized) took the bold surgical step at “temporary nationalization” and was successful in a banking fix.
This author recommends the Obama Administration immediately bite the bullet and do a “Sweden derivative” and “temporarily nationalize” Citibank, Bank of America and AIG (already technically but not pronounced nationalized) at a minimum, separate the good and toxic assets and then resell the new healthy entity (good assets only) to the public.
Final Comment to Treasury Secretary Geithner:
Waiting for you to act “substantively and decisively” is becoming akin to waiting for Gadot. You have been conspicuously absent in presence and policy. Confidence is fading - fast. On the heels of President Obama’s speech last night, it’s time for you to step up and drive the bus. People need to get to work.
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Here then is the Author’s proposed 4 Part “Obama ECONALISM” Plan/Framework:
Note: In reviewing this proposed Obama ECONALISM Plan in the aggregate, the bottom line being the incurred “prudency cost”, associated with these multiple, yet complex and disciplined mitigation actions being but a mere pittance when compared to doing nothing different and the associated predictability of enormous future economic hostage concessions and/or nationalization of U.S. and WEAST (West and EAST U.S. allies) corporate assets.
A) Counters - Investment/Debt De-Linkage (i.e. Financial Disengagement/Decoupling)
Re-think and transform U.S. and WEAST’s China economic investment immersion and debt selling strategy:
1) Paring Down/Disengagement:
Begin thoughtful and disciplined paring down, disengagement and/or de-linkage from both investment (manufacturing/corporate/supply chain) in China and Treasury selling U.S. debt to China, even if it incurs additional and painful near-term cost. The challenge here even more severe given the recent collapse of the global economy and the need for the U.S. to perhaps have to finance $2-3 trillion in combined stimulus and financial sector bad asset recovery.
In other words, a revolutionary diversification effort is required on all these fronts. This also includes beginning to treat the export of investment, banking and economic et al expertise in all respects with the same sensitivity and “need to know” security access that might analogously be afforded key military information.
Analyst Note: Specifically, a brief yet targeted thought to provoke debate on mitigating the debt situation. In addition to both paring down its exposure vis-à-vis accelerated purchase back at slight premium if necessary, and the Treasury more aggressively seeking other customer countries with different intent (investment versus control) for future debt selling, another action is recommended. As a defensive measure when China begins its inevitable bullying “concession demanding mode”, the U.S. might in advance consider (creating) an innovative “sale/leaseback” (or other derivative) approach. If (when) triggered (conditions/terms TBD), shifts the debt to a 99 year lease like arrangement, removing the short term China leveraging opportunity. Link this conditionally to NTR (Normal trade Relations) status. More on NTR below.
On de-linkage of supply chain (risk), the Analyst uses Wal-Mart as case in point. In fact consider it a proxy for all U.S./WEAST strategically significant supply chain risk. One need only go (and the Analyst challenges each reader of this article to do so), to any Wal-Mart (or Target et al) as this Analyst went to several, and indiscriminately look at 20 different categorical items in each different store. The Analyst did just that, noting in each case, “at least” 17-18 or more of them noting on the label, “Made in China”, arguably then 80-90% plus of inventory. The good news however, at least Titleist golf balls are still “Made in U.S.A”. The question though - for how much longer?
Questions to address: What that all says is that U.S. and WEAST consumer product “demand” is satisfied for all intents and purposes almost exclusively with China “supply”. Imagine if China decided to leverage that stranglehold at some future point. How would the typical consumer handle going into a Wal-Mart and finding the shelves bare or prices skyrocketing overnight? What contingency plans exist now to address this huge vulnerability/exposure? What actions to address and counter the relentless off-shoring of the U.S. manufacturing base?
2) Create a (real) Exon-Florio “country involvement” condition and more stringent evaluation parameters. See Author’s “Commulism Series” Part 10, for a more detailed discussion of the fundamentally flawed yet national security sensitive Exon-Florio provision and Author’s detailed recommendations to fix.
This condition should be triggered whenever there is activity by the Chinese (and/or Russian) government(s). Given the significance of China’s underlying global economic agenda and the associated national security risks posed to the U.S. economy, the U.S. government should promptly be made aware anytime the Chinese (or any other Commulist) government in any way vis-à-vis use of one of its in house agency (state owned) companies (tentacles) attempts to partly own or invest, purchase or joint venture with any U.S. company or entity. CFIUS will immediately make this a priority review and employ standards more stringent than non-state owned entity involved transactions. The standards should be of a nature that more often than not will negate the transaction in the interests of direct or derivative national/economic security.
3) Create a joint and integrated (collusionary) U.S./WEAST “Advanced Monetary Policy (AMP)”. Alternatively call it the “Counter-Commulism Monetary Policy (CCMP)”.
The key here is that in the emerging Cold War II, the U.S. and WEAST will have much more defensive (and offensive) leverage working collectively in tandem together, rather than each acting on their own. Commulism would prefer the latter in sympathy with the benefits it derives from its adversarial “divide and conquer” approach.
CCMP Policy Making Board - The mechanism to create that coordinated, actionable monetary policy will be a policy making committee structured not unlike the UN Security Council with the CCMP governing board initially comprising senior policy making officials from the Big 4 - Federal Reserve, European Central Bank (ECB), Bank of England (BOE) and the Japanese Central Bank. Then build out the rest of the committee (council) infrastructure with remaining WEAST constituents.
In effect, CCMP becomes the next evolution of G7 (G8 ex Russia), as G7 moves from 7 individual entities to one integrated one, at least as respects monetary policy.
This effort will require rethinking and new ways of conducting business by all parties. It will be based on an understanding that the way to succeed against Commulist economic policies is to focus on the collective inflation and growth aspects/effects of the “group” (U.S. and WEAST collectively), rather than country by country’s “individual” situation. This is based on the principle that when it comes to competing with Commulism “in the long run”, what’s good for the whole is better for the individual parts (countries). See coming NATO article.
A quick comment specifically as respects the U.S. contribution to CCMP. The longstanding separation between “church and state” (i.e. the Fed and Treasury) no longer makes sense. They must each change behavior and work collaboratively together against a common external threat which undermines both growth and inflation. There have been signs of this thawing in 2008 (e,g. TARP, investment bank bailouts, etc.), but it needs to expand a great deal more. This broader CCMP blueprint will adapt and align the policies of all U.S. agencies as well as it would do the same for WEAST government agencies, using China and the “Commulist” Block as the new threat basis, just as the military will do with its “to be developed” Fusion Warfare integrated Cold War II doctrine, reflecting both superpower v superpower and superpower v terror sub-doctrines.
Note: This broader global discipline and approach to monetary policy has the added benefit of obviating the temptation for future Greenspanian-like rate pendulum swings, which lead to unhealthy boom and bust economic volatility. That new stability will produce fewer economic vulnerabilities (e.g. housing and credit crisis) and in doing so create a better and more stable economic counter-balance to Commulism over the long haul.
Bottom line: Unlike the first Cold War where the military threat was the Soviet Union and the economic threat was U.S. and WEAST’s own potential bungling of the economy, there now exists an environment where the military and economic threat is the same, Commulism, and those two policies (monetary/economic and military) should accordingly be jointly aligned.
B) Fix Trade Imbalance:
Level the trade playing field - Employ a “Counter-Protectionist” Strategy: Adjust the huge cost/pricing imbalance to U.S. goods sold in China and Chinese goods sold in the U.S., thereby reducing the U.S. trade deficit and its China dependency.
A 4 part, integrated effort is required:
1) Substantively Increase Safety and Quality Control/Assurance (QC/QA) Requirements/Standards (demands and penalties) of all imported Chinese products, thereby raising Chinese per unit costs and export pricing (and U.S. consumer safety/satisfaction).
Objective: Enact a “Proximate Fault & Pay” (PFP) or “They Stray, You Pay” Law/Bill & Related Government Oversight Agency (Analyst Proposes creating the “Foreign Product Regulatory Commission” - FPRC) vis-à-vis Congressional hearings with the CPSC and FTC (outlined below).
Chinese per unit cost increases as QC/QA requirements/demands/penalties increase. The result being raising their per unit cost, thus making Chinese imports less competitive with domestic goods.
How to do this?
Perhaps counter-intuitively, NOT by (directly) going after the Chinese entity. This would be a total waste of time and resources. That challenge made even more difficult now with the Chinese attitude that their manufacturing, production facilities and operations are state of the art, world class. That belief being helpfully further buttressed by Mr. Warren Buffett’s recent glowing praise of but one factory. The Chinese can leverage (exploit) that single statement as one which exemplifies the way the country in its entirety conducts itself, and use it as a crutch to avoid investing further in product quality and safety control, and thereby continuing to (artificially) minimize production cost.
Therefore, the “push to improve” product safety and quality, and in doing so raise Chinese production cost, rests solely and squarely through (leveraging) the U.S. contracting party, not “hoping” the Chinese get the message. So instead of going directly after China, create a protocol called “Proximate Fault & Pay”, which targets and burdens the U.S. entity as the mechanism to achieve desired safety/quality/pricing behavior change from China.
Essentially, the only way to attack the combo quality/pricing problem and in doing so, driving up Chinese cost is to put the quality control/quality assurance burden solely and squarely on both U.S. based companies that contract manufacturing services in China, as well as on U.S. distributors who import goods (e.g. canned seafood, etc.) directly from Chinese companies for distribution in the U.S. Those two entity groupings are the only pressure points available to upgrade the quality and safety of Chinese exports, and ironically as a major byproduct benefit in forcing those production/manufacturing upgrades, squeeze Chinese manufacturers/producers with adding cost.
The mechanism to do this will be a new regulation or law built upon a theme of “Mutual Wrong, One Pay” or better yet “They (China) Stray, You (U.S. Company) Pay”.
Call it the “Proximate Fault & Pay” (PFP) Law/Bill (or the “They Stray, You Pay” Law/Bill).
Meaning if there is a quality control or safety issue with any imported Chinese product, both the U.S. contracting firm and the respective Chinese manufacturer or Chinese company and its U.S. distributor are considered complicit in the loss, yet only the U.S. entity is directly (and severely) penalized. The U.S. company’s neglectful lack of “direct oversight” in both contract set-up and actual Chinese manufacturing operations, is then considered the reason for the loss, hence the “Proximate Fault”. As such, that party will “Pay” the penalty.
The burden then is placed squarely on the contracting U.S. company to do whatever necessary to avoid and prevent such a product safety/quality breakdown. Specifics of the proposed PFP (or PF&P) Framework include:
a) Establish New Government PFP Oversight/Enforcement Agency - To be created and named the “Foreign Product Regulatory Commission (FPRC)”. This is assuming the Consumer Product Safety Commission (CPSC) and Federal Trade Commission (FTC) are deemed during Congressional hearings (see below) to neither have the culture (pro-active versus reactive) nor infrastructure necessary to undertake this massive new additional role/responsibility. However, FPRC still would work closely in necessary hand/glove fashion with the CPSC and FTC.
Alternatively, for cost/efficiency purposes, weave the CPSC and FTC, in whole or in part, into an even broader and more robust FPRC, with FPRC now taking the overall leadership role.
b) Oversight/Enforcement Model: Parallel Path – Government and Corporate, both derivatively modeled after the NRC:
Government (FPRC):
The FPRC is modeled after the Nuclear Regulatory Commission (NRC). The NRC provides experienced staff (safety) inspector personnel (2 per reactor), permanently assigned at and to each of the 104 licensed operating nuclear power reactors in the U.S. The NRC also provides inspection oversight at all qualified non-power generating nuclear facilities.
Envisioned will be the FPRC doing two things: 1) Creating the specific PFP oversight/execution criteria/protocols and inspection personal/staffing infrastructure “by industry”, with each “FPRC industry team” pro-actively enforcing the PFP on companies within the respective industry group, and 2) Creating and imposing the PFP “Penalty feature” (see below).
Note: On FPRC staffing/infrastructure model, that includes both the domestic and international components. The international piece will create (within China)a region/industry staff to be the (NRC-like) check and balance on the U.S. companies MRE teams (see below). The FPRC teams will be allowed “no-notice” inspections into any Chinese facility contracted by a U.S. company. This access is a State Department “to do” to secure with the Chinese government.
U.S. Companies: Create an FPRC-like organization, the MRE organization, staffed to support a permanent safety and quality monitoring team at all major foreign contracted manufacturing firms manufacturing/production facilities, that that U.S. company engages. The head of this new MRE corporate function/group is a C-Suite position and directly links into FPRC.
c) New Manufacturing/Production Contract Language – The FPRC will develop specific contract language for incorporation into all China et al manufacturing/production contracts, thematically including:
- The Chinese manufacturing/production company/facility will permit a respective U.S. company’s PFP “Monitoring and Regulatory Enforcement” team (i.e. coin it the XYZ Company’s “MRE” Team” – of course not to be confused with Army MRE’s – “Meals Ready to Eat”) 24/7 unfettered access in their manufacturing and production facilities.
- The U.S. company will in advance, include that MRE cost to the Chinese who will factor it into their proposed production/contract cost.- The Chinese will immediately respond and correct any safety/quality violations identified by the MRE Team. The local (in China) MRE team will immediately report to the XYZ Company corporate MRE leadership in the U.S., any resistance or problems in real time.
- The Chinese company will pay 50% of any PFP penalties assessed the U.S. company by the FPRC.
- The FPRC will create a list of bad actors, those Chinese companies who either do not cooperate or consistently violate PFP standards. A “three strike you’re out” bad actors list, meaning after three willful events/violations, that Chinese company goes on the bad actor list and U.S. companies are no longer legally allowed to conduct business with that Chinese entity. That is until if and when it gets removed by FPRC at some later date when the FPRC is convinced the company has satisfactorily changed its ways. That review is triggered only when the Chinese company makes a formal appeal to the FPRC.
Note: If the Chinese company under contract consideration refuses the regulatory language, the U.S. company must do two things: 1) notify FPRC, and 2) seek an alternative manufacturer who will accept the language, either within China or globally elsewhere.
d) Reporting – Any company conducting business in China must file a quarterly report (parameters TBD) to FPRC regarding PFP violations and action taken and any relevant issues the FPRC should be aware of.
e) Penalties: To encourage rigorous safety and quality standards compliance and enforcement by U.S. companies, the FPRC will create a (severe) TBD penalty system to be solely imposed on the U.S. company, thematically involving:
- Failure to include the new regulatory language in the signed Chinese contract. This is deemed an “intentional act to violate the law”.
Penalty – Treble damages (3x’s the 50% net annual profits from products received from that Chinese factory/company).
- Failure by XYZ's China based MRE team to aggressively enforce contracted FPRC MRE Team standards at the Chinese facility. This will likely first be caught by the FPRC inspector review and/or further downstream CPSC/FTC generated complaint.
Penalty - 50% net annual profits from products received from that Chinese factory/company.
- FPRC “No-Notice” Inspections at U.S. company contracted Chinese facilities.
Penalty - A TBD penalty menu by FPRC, based on specific violations noted, that should have been picked up and addressed by the respective XYZ Company MRE team, but were not, but should have been.
- Others - TBD
Analyst Note on PFP/FPRC Section:
Probably to no surprise, the CPSC and FTC are “reactive organizations”. Meaning they do not pro-actively on a broad and granular basis seek out problems. Instead they are “complaint based”, relying on the “honor concept” that companies will regulate product safety/quality themselves. A challenge to ensure even in domestic manufacturing. An impossible guarantee with regards to contracted foreign based manufacturing. These are safety and quality complaints coming over the transom from consumers and/or businesses and/or other government agencies.
Case in point this Q/A from the CPSC website:
| Q. | Does CPSC test or certify products for safety before they can be sold to consumers? |
| A. | No. CPSC doesn't have the legal authority to do that. However, responsible companies test their products before putting them on the market. |
With the object of this part of the Commulism Response Framework to increase Chinese product safety and quality (and therefore Chinese cost), the Analyst notes the CPSC defers “quality” to the FTC. Interestingly, the FTC attempts to address this by ensuring competitive marketplaces, meaning breaking up monopolies and ensuring an anti-trust business environment. In reviewing the FTC website, the theme comes across that if competition exists, then so to must quality. In fact, this Analyst would argue quite the opposite. Competitive marketplaces seek to ensure competitive price, NOT necessarily quality. Quality, unless regulated will often be at the expense of low price to many/most (not all consumers).
Bottom line, the combo of “complaint based” and “wishful thinking (i.e. competition drives quality)”, suggest the CPSC and FTC leave a gaping hole in the oversight chain and need a lot of help. And why the new FPRC and PFP Law collectively fill the void to protect the consumer and businesses. And in doing so, raising China’s cost and improving the trade (Im)Balance.
Analyst Recommendation:
The mechanism to make the “PFP et al” come to fruition is a Congressional Hearing on the China et al foreign product safety/quality (& related trade imbalance aspect) control matter with the CPSC and FTC.
Congress should promptly convene joint CPSC and FTC hearings with Acting CPSC Chairwoman Nancy A. Nord and FTC Chairman William E. Kovacic to conduct a comprehensive joint safety/quality “Gap Analysis” (with China as the focus) to identify what is in place and what is missing to ensure across the board that all U.S. safety and quality standards are being met, with confidence. Not the case now on either front.
This Analyst will pre-empt the result of those hearings with a prediction that the Congressional Committee decision will be to create the PFP Law and FPRC (if CPSC and FTC deemed not able to take on the added oversight/intervention responsibility). The FPRC then becomes the proactive problem identifier and problem feeder to the CPSC and FTC to address the violations. With the FPRC and its pro-active problem finding, the in-flow of violations to CPSC and FTC will be substantial if not explode, and likely require significant but necessary staffing upgrades.
Of course, with the initial barrage of violations and new penalties imposed per PFP, over time and quickly the U.S. companies and Chinese manufacturing behaviors will improve, as will the Chinese being less competitive - i.e. improving the trade imbalance.
Will U.S. consumers be less than thrilled that actions by the U.S. will drive up costs of products previously purchased at a reduced price? The answer is most definitely yes, for those that don’t see the forest through the trees. Therefore, the majority. But again, this is a big picture decision when national security outweighs myopic public sentiment.
And for those that will cry this to be protectionism too, just like the tax/tariff recommendation earlier, it certainly is not. It’s counter-protectionism. No choice but to. All’s fair in an adversary created non-competitive environment.
2) Tariff and/or tax Chinese goods, as the Chinese do U.S. and WEAST goods.
A quid pro quo approach. For those that will cry this to be protectionism, it certainly is not. It’s counter-protectionism. No choice but to. All’s fair in an adversary created non-competitive environment.
3) Re-visit and Re-engineer or (preferably) Cancel all Free Trade Agreements
Even though none exist with China, the ones that do exist elsewhere (grossly) negatively impact U.S. global trade competitiveness and therefore indirectly seriously weaken the U.S. positioning against Commulism.
4) Rescind Most Favorite Nation (MFN) status, (renamed Normal Trade Relations (NTR)) for both China and Russia, and any other designated Commulism countries (Vietnam?).
Additionally, demand quid pro quo country equivalent NTR status from all Commulist regimes for U.S. products.
On rescinding NTR, the U.S. will hear loud complaints and threats from China for doing this but if steadfast in fending off the bully response, this is a prudent (i.e. anti-Commulism/thwarting) action in the long run. It restores significant (huge) lost leverage for the future. If China (or Russia) wants anything (and they desperately want NTR status), that should tell the U.S. something. In effect do the opposite – don’t give it to them. Unless of course there is a quid pro quo more heavily in favor of the U.S.. It’s analogous to a game of major league hardball. Unfortunately, the U.S. has so far played the game as if it were grammar school softball.
Going forward, the U.S. and WEAST must take the “quid pro quo - plus” deal making approach called WIIFM (wiff-um) –“What’s In It For Me”, with Commulist countries. The historical approach has been to give China what it wants in return for really nothing more than political goodwill. The recognition needs to be immediately made that Commulism doesn’t substantively reward but rather ravenously devours political goodwill, leaving absolutely nothing in its place. Instead of goodwill, something equally or more significant and tangible has to be awarded U.S./WEAST in any tradeoffs whatsoever with China (and other Commulist countries).
That said, here’s an integrated, yet radical WIFFM idea (recommendation), provided if nothing more than to provoke the necessary debate, that the U.S. (WEAST) is in fact being taken to the cleaners and needs to receive much more than it historically and going forward gives:
Initial (Radical - to provoke debate) WIIFM Recommendation (based on the fact that the U.S./WEAST want the Yuan to freely float (to get stronger) and China wants NTR status):
Upon rescinding NTR status above to get China (and Russia’s) attention, then offer NTR status back to China but ONLY if a) removes all trade restrictions/protections, and b) removes all fixed constraints (”currency manipulation”) on the Yuan and allows it to float freely. Add in the debt factor “sales leaseback” provision to the discussion too.
C) Counter-Leveraging:
“Counter-Currency” Leverage Plan - U.S. (and WEAST) Treasury(s) create a “Gaithner Plan et al” to aggressively purchase the Yuan.
Doing so achieves three objectives:
1) Drives the (grossly) undervalued Yuan valuation versus dollar up over the longer term, thereby enhancing competitiveness of U.S. exports and diminishing competitiveness of Chinese imports to U.S. and WEAST.
Important notes:
- The Yuan as noted above is currently an absolute value bargain (arguably a steal) and getting cheaper by the day, relative to China’s current and projected growing future economic strength. Compounded by the fact that Chinese currently do not let it float against other currencies, means it’s therefore likely to remain artificially low in the short term. The U.S. and WEAST should therefore consider it a fire-sale and be purchasing every Yuan they can, non-stop.
- Authors David Hale, Economist and Chair of Hale Advisors and Lyric Hughes, founding publisher of Chinaonline.com make a gross conceptual error as respects Yuan valuation. In their January/February 2008 Foreign Affairs article titled "Reconsidering Revaluation", they suggest the answer is not strengthening the Yuan but rather integrating China into the global economy.
The Analyst argues this theme is fundamentally flawed from the simple premise that China does not want to be integrated into the global economy. Rather it wants the global economy integrated into its own. Under the latter realization, and to prevent that from occurring, strengthening of the Yuan is an absolute must, and becomes one of the key counter-Commulism objectives.
2) Provides huge investment return opportunity. The artificially undervalued Yuan versus China’s current and future economic leverage, creates huge investment upside potential.
3) Offsets the “dollar hostage” leverage effect the Chinese government has with its $1+ trillion (part of $1.8-2.0 trillion) dollar denominated foreign exchange reserves. At some point, and in this analyst’s view - now, that counter-leverage (i.e. buying the Yuan) will be mandatory.
D) Ensure Economic and Country Sovereignty:
1) Create Counter-CIC (and SAFE) Strategy/Plan
With the goal of maintaining “economic sovereignty”, the U.S. and WEAST should establish a comprehensive “authority driven” study group with “actionable output” (unlike the Iraq Study Group for example where there was none); its objective to develop a mandated strategy/protocol to aggressively counter China’s newly created Sovereign Wealth Fund, China Investment Corp (CIC), and its sourcing point - China’s State Administration of Foreign Exchange ("SAFE").
CIC (SAFE) is part and parcel the Chinese government, and it’s the principal and lead vehicle to externally execute the main phase of the Commulism game plan. That is, optimally leveraging its nearly unlimited foreign exchange resources to secure critical control and chokepoints in the global economy. If CIC (or SAFE) is anywhere (regardless of degrees of separation – all strategically important deals should assume it is and be scrutinized in that fashion; i.e. guilty until proven innocent) linked in a potential deal or investment regardless of degrees of (strategic) separation to the potential transaction, CFIUS (see Exon-Florio) and WEAST equivalents should intervene promptly and very aggressively with a broad and aggressive set of counter parameters.
Analyst Note: In general, U.S. companies and the U.S. government need to quickly recognize and understand that Sovereign Wealth Funds, regardless of country origin, are not the capital sourcing panacea the investment community currently views them to be. Some are more benign and transparent than others. Then there is CIC (and Russia) which is not - at all.
The previous Bush Administration interest in establishing an “International Code of Conduct” for Sovereign Wealth Funds is a complete and utter pipedream, and deserves not the light of day (the Analyst puts this idea in the same heap as the 2008 Economic Stimulus Plan - useless).
The SWF countries that are already generally transparent in their intent and operations (e.g. Norway), will continue so. The ones that currently are most certainly not (e.g. China and Russia), will continue not to be, regardless of any and all “gentlemen protocols” put in place. As respects “threat SWF’s” like China and Russia, as opposed to “friendly SWF’s” like Norway, the ONLY defense is a “dramatically upgraded” FINSA 2007. FINSA 2007, while an improvement to Exon-Florio, still has a gaping loophole (or two or three).
In fact, SWF’s in general, opportunistically and parasitically prey upon U.S. dollar weakness and associated asset devaluation and balance sheet erosion from credit losses to “buy the U.S.”. While it may be a welcomed near term euphoric shot in the arm, this is analogous to looking down the road at the high cost (pain factor) to pay/endure as there is analogously from withdrawal from any addictive drug. In some cases as above with CIC, more akin to letting the fox in the hen house.
Weave in a (real) upgraded Exon-Florio Provision.
Note: FINSA (E-F “Upgrade?”) is fundamentally flawed – see why and how to fix in Part 10 of the Author’s “Commulism Series”.
2) Mitigate (dollar cheap) U.S. Asset Sales/Loss to foreign investors vis-à-vis a (real) upgraded Exon-Florio Provision.
The Jan. 20, 2008 New York Times notes the lower dollar creating disturbingly unique buying opportunities of U.S. assets for all foreign entities, whether it be China or any other. Unfortunately, the absolute need for a low dollar now creates this vulnerability, which must be accepted as a price or cost for the last decade or two of gross “trade et al negligence” with China.
That is, allowing the U.S. to become so totally trade/debt dependent on China, that it finds itself in the vulnerable situation it does now. The cost or price for such negligent policies and behavior then may be the sale of certain valued assets and real estate to foreign entities similar in nature to the Rockefeller Center type deals of the 1980’s to the Japanese, but this time on a much grander and more granular scale. However, this does not mean completely give away the store. In fact, the only thing that can be done to “minimize” this historical “trade policy negligence cost” or “loss of America” is to put a greatly upgraded Exon-Florio provision in place to ensure any and all deals of strategic size and/or technological significance are more fully vetted, scrutinized and denied if they present any link whatsoever to Commulism.
3) Defend NATO-east:
To ensure continued “country sovereignty” vis-vis sovereign economic security, create a protocol to counter the Russian approach of “buying off/buying back” the former (now NATO) Soviet Union Republics and too Warsaw Pact entities. On that note, see coming NATO Article noted earlier. In that article, the Analyst addresses the flaws of NATO Treaty article V, and provides a draft re-rewrite reflecting the new Commulism threat.
4) Economic Stimulus Package: See why it’s wrong in makeup and a Plan B offered instead by the Author above
