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 Richmans' Trade and Taxes Blog

Half way through - Obama's first 5-year plan is a failure
Howard Richman, 1/27/2013

In March 1, 2010, Ambassador Ron Kirk, United States Trade Representative, disclosed “The President's 2010 Trade Policy Agenda,” the Obama administration's first 5-year plan. September 2012 was the half way point and the statistics are all in. How is Obama's plan doing at the half way point?

Obama's trade agenda announced that President Obama had set a goal “of doubling U.S. exports in the next five years” to create 2 million jobs. Half way through the goal, in September 2012, exports had risen by 25%, but imports had risen even faster. The number of manufacturing jobs had gone up by 481,000 to 11,958,000, but that was still 601,000 less than the number of manufacturing jobs when Obama took office.

So, why did Obama’s plan fail? The answer is simple, he didn’t do anything about Chinese mercantilism. He created a new bureaucracy called the Export Promotion Cabinet. It joined hundred of federal agencies designed to do-good but which end up doing-nothing. Just how are we going to increase our exports when the world’s fastest growing markets exclude our goods?

Alan Tonelsen of American Economic Alert paired a revealing set of quotes in a May 10, 2010, blog posting (Obama Administration's China Trade Brain-Locke):

"We believe increasing our exports to China - not limiting our imports from China - is the best way to address the trade deficit.”–Secretary of Commerce Gary Locke, May 4, 2010

The United States is concerned "about China's increasing use of industrial policies that may restrict market access and discriminate against foreign goods and services”–Secretary of Commerce Gary Locke, May 4, 2010

Obama's trade agenda states that the Obama administration has succeeded in getting China to further open its market to “American wind energy products,” even though wind energy products were almost all flowing in the other direction. According to the Investigative Reporting Workshop, 80% of the first $1 billion of Obama’s Recovery Act’s stimulus money spent on wind energy went to foreign producers.

Terry Miller, criticizing Obama's trade agenda on the Heritage Foundation's website (Obama's Mercantilist Approach to Trade), argued that President Obama was a mercantilist since his trade agenda talked about balancing trade. Miller was making two fundamental mistakes: (1) he mistook talk for action, and (2) he equated self-defense with mercantilism. Here is the passage in which he mistakes talk for action:

We first heard Obama’s mercantilist approach in the State of the Union address. He called for greater exports, a “doubling” over five years. He proposed a National Export Initiative “to help farmers and small businesses increase their exports.” That’s policy code for export subsidies. He called for greater enforcement of trade agreements. That’s policy code for protectionism....

And here's the passage in which he equated self-defense against mercantilism with mercantilism:

[Obama's] 2010 Trade Agenda is a recipe for economic failure and stagnation. Much of the focus is on enforcing rules to restrict other countries’ access to the U.S. market. It’s a begger-thy-neighbor approach in which we would sell more to other countries while restricting their ability to sell to us. Such a model is unsustainable internationally: not every country can run a trade surplus....

Miller was ignoring the fact that the United States had a huge trade deficit, not a trade surplus! Mercantilists try to achieve trade surpluses, not move trade toward balanced. We are the victim of beggar-thy-neighbor mercantilism, not the perpetuators.

But Miller did have one good point. President Obama was betting upon his administration’s ability to pick winners and losers. The Obama administration thought that the winners would be those companies producing wind turbines, solar panels, and electric cars. He was heavily promoting the chosen winners. His strategy might have worked, but China picked the same industries.

On November 21, 2011, U.S. Secretary of Commerce John Bryson told reporters at the U.S.-China Joint Commission on Commerce and Trade (JCCT) that China planned to expand its subsidies to what it considered to be the "strategic sectors," which included vehicles, alternative energy, biotechnology and advanced equipment manufacturing.

Under WTO rules, developing countries are allowed to declare certain sectors of their economy to be "strategic sectors" and are allowed to charge high tariffs (about 25%) on imports into these sectors. Many developing countries have designated their auto industries as strategic sectors under WTO-rules, but China's definition of "strategic sectors" keeps expanding.

As a result of both the U.S. government and the Chinese government financing solar producers, there was a massive glut of solar panels worldwide. The Obama administration desperately tried to protect its investment as one after another U.S. solar panel producer started to go bankrupt. Congressional Quarterly reported on May 17:

The Commerce Department on Thursday made a preliminary determination to impose tariffs of more than 31 percent on Chinese manufactured solar cells. The ruling came in response to U.S. solar manufacturers who claimed that China was "dumping" solar panels in the U.S.

The tariffs on two companies, Suntech Power and Trina Solar were lower than the 100 percent tariffs sought by SolarWorld USA and six other companies that filed a complaint with the U.S. government about low-priced Chinese imports. The new tariffs were in addition to tariffs of 2.9 percent and 4.73 percent that Commerce imposed on Chinese makers of photovoltaic cells and panels in March.

Commerce also announced a China-wide tariff of 250 percent for all other Chinese solar companies and granted critical circumstances, which means that the tariffs will be applied 90 days retroactively.

The larger problem was that the Obama administration’s investment choices were stupid. Solar energy is only cost effective if given massive government subsidies, and the governments in Europe and North America soon had to face up to the reality that their funds were limited. Meanwhile, some of the American companies that were surviving were moving their production to China.

Similarly, the Obama administration’s investment in electric cars came decades before electric cars would make sense. And, like the solar technologies, the electric car technologies were soon transferred to China, due to China's 25% tariff on American vehicles.

On September 16, 2011, the Wall Street Journal reported (Road Gets Bumpy for GM in China) that GM was trying to access the Chinese electric-car market without giving up its state-of-the-art electric-car technology. Here's a selection:

GM would like to bring its Volt electric car into China. But Chief Executive Dan Akerson said he refuses to share electric-car technology in exchange for hefty consumer rebates from the Chinese government that would juice sales of the vehicle.

Just one week later, on September 22, the NY Times reported (GM to develop electric cars with Chinese automaker) that GM had caved to the Chinese government demand:

HONG KONG: General Motors said Tuesday that it would develop electric cars in China through a joint venture with a Chinese automaker [SAIC], and would transfer battery and other electric car technology to the venture.

President Obama thought that he could beat China at its own game. He failed. The United States need not pick winners and losers to combat mercantilism. It need not convert itself from a free-market state to a crony-capitalist  state. All it need do is require balanced trade.

So what can be expected from the rest of Obama's second term. Governor Palin, former Republican vice presidential candidate, summed it up in an exclusive interview with Breitbart that was published on January 26:

Before the November election I wrote that we all know what Obama’s second term will look like because we’ve seen his first. I said: “We know what we will get from a second Obama term. We will get the same failed policies. We will get Obamacare locked into law. We will get a debt crisis. We will get more inflation and higher gas prices. We will get tax increases. We will get fewer jobs. We will get more small businesses collapsing under the weight of higher taxes and unfair regulation. We will get more corruption and crony capitalism favoring the Obama administration’s friends. We will get less domestic energy development and increased dependence on terrorist sponsoring foreign regimes for our energy needs. We will get a 'blame America first' foreign policy that bows to our enemies and snubs our friends like Israel and leaves America and the world less safe. We will get less opportunity and security for ourselves and for our children.”

Predicting the future has never been easier because here we are! Already we see higher taxes, a stagnant economy, the same inflationary monetary policies, Obamacare looming like a dark cloud over small businesses, yet another demand for “debt ceiling” increases, continued stonewalling about the tragic Benghazi attacks, a Secretary of Defense nominee who has a history of being antagonistic to our ally Israel, and the attack on our Second Amendment rights by an administration that has no respect for the Constitution or the separation of powers.

Governor Palin has long been an opponent of "crony capitalism," whether perpetuated by politicians of the Republican or Democratic stripe. During her brief testing of the waters for the 2012 Republican presidential nomination, she came out with the planks that would get America moving:

  1. Balanced Budgets
  2. Balanced Monetary Growth
  3. Balanced Trade Agreements
  4. Eliminate the Corporate Income Tax
  5. Reduce Regulation on Business
  6. Exploit American Energy

There is no need for America to adopt state-capitalism.

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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

    Journal of Economic Literature:

  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

    Atlantic Economic Journal:

  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]