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

June 10, 2019

Excerpt. “We must disentangle our supply chain today so that China cannot use economics to leverage better military or geopolitical outcomes."

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.

[Scott Ruesterholz | June 6, 2019 | Scott's Perspective]

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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