Bull in a China shop

China is the big new bogeyman. How do we deal with China? How did we deal with Japan? Japan was going to buy up the United States. Japanese manufacturing was invincible. The Japanese worker was an incredible perfectionist machine. You could not compete with that kind of perfection. So we learnt Kaizen, JIT and a whole lot of other BS. But in the end, Japan just fizzled out. No world domination.

Why is China different? China is a communist machine. China does not play fair. The Chinese use state funding and cheap slave labor to over produce goods and flood world markets (mostly American markets). Well whose fault is that? Do we actually need to wake up at 4am and stampede over living people to get that Tom Tom GPS for an additional fifty bucks off ? Just pay the additional fifty bucks. Or better still just use the Rand Mcnally Atlas. It is a lot more fun than the GPS.

But regardless of the people’s incorrect priorities, we do have two opposite economic models selling goods in the same market. We have a Capitalist consumer that is supposed to consume the maximum amount of output (irrespective of whether they need all this junk) versus a Communist model of production where the goal is to simply produce goods without regard to profitability. The Communist machine has no shareholder Accountability, no cost of research, no payroll taxes. Nothing. All it needs to do is over produce everything and run all other competition out of business.

It is the same as letting hedge funds play in the same market as Mutual funds. One group has no rules and no restrictions and the other has so many restrictions that they can barely move. So one wins and the other loses, as the game is not fair.

So the answer we need is to level the playing field. We can continue to cry about the currency manipulation. That is not going to help, because we do not control the currency markets. So the answer is to raise tariffs on Chinese goods. Use the tariffs to subsidize our manufacturing and over produce goods to offset the drop in supply from China. Use regulation to force companies like Walmart to buy at least fifty percent of their goods from US manufacturing. This will be a temporary fix but it will give the Chinese a clear message that the US is serious about fixing the asymmetrical trade equation. Also, we can use technology to become more efficient low cost producers.

The other option is to leave things as is and wait for a natural change in Chinese consumers. As the Chinese become richer, they will consume more. This is already evident in the over-heated real estate market in Shanghai and other places. There is absolutely nothing to indicate that the Chinese consumer is any more sensible in their consumption than the US consumer. As consumption increases in China, the pro democratic and other social movements will weaken the Communist machine. So there maybe a natural end to this bogeyman. Do not panic just yet.