Monday, August 13, 2007

A proposal to foster free markets and what to do with China.

Folks who know me have been hearing me talking about this for at least three years.. So now, it is finally taking shape.

China dumping their Treasury bond holdings in response to our requests for tariffs.
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The important thing ignored by this article is that the US Treasury bonds held by China , represent about 1/4 of China's budget surplus. If China dumped a small portion, say one eight of the position, it would send the dollar into the $2-$3 per Euro range, yet this amount is minuscule to China. It would reduce our ability to buy from China, force the vlaue of the Yuan to increase, and reduce the value of China's dollar currency reserves.

While some argue that a $2.50 -$3 Euro is coming in the next 24 months, and if introduced over that period of time, it could be an advantage to level our trade imbalance, people also ignore another factor, what exactly do we export these days besides know-how and services? The old model of devaluing our currency can't be nearly as effective as it once was, when we had the commanding heights of the economy running strongly, when our exported goods and our own commodities were in high demand and were not produced elsewhere; when the world believed that our way was mostly the right way, versus the Soviets. This is NOT the case in today's free markets.

Another factor, the imbalanced labor laws, environmental controls, and democratic processes in China all incentivize our own business leaders to ride this Rickshaw wagon til the wheels fall off. We have had a few US CEO's already indicted for lobbying against labor in reforms in China. China, if they are tired of buying oil, can simply put the entire country onto bicycles in a matter of days, at the point of a gun. They have, if you combine N. Korea, 3.4 million troops, not engaged in an active war, and possess long range nuclear capabilities. China does have its own viable space aeronautics program.

We are no position to dilly dally with tariffs. However, there is another solution.

In the current free trade environment, there are two losers. The less obvious losers are those from developed economies who have the most restrictive laws. The obvious losers are the 3rd world poor who have no access to the free markets. The poor in developing nations have no access to the markets because they have few if any instruments of legal trust such as title rights to property, credit instruments, or savings security. Meanwhile, the 1st world nations must buy from nations like China who undersell our own labor and production lines owing to our highly evolved regulatory laws and the fact that China and countries like them can all but ignore these rules to benefit their bottom line. China can use conscripted slave labor to produce questionable products with methods which foul the planet's ecology, all at a bargain rate so that average consumers can't afford NOT to buy the goods. Sure, they will execute a government official that is so negligent that the entire world complains about the products, but beyond that public outcry, there is little oversight beyond what cash the communist government can rake in off our dependencies.

WHAT IF... we try another approach. It is in the business leaders' and government's best interest to alleviate a growing poor population's pains, and not through the misguided altruism of aid packages, but rather let's allow the "poor" full access to the capital markets for their own betterment. Given them the chance to improve their own status. It is also in our business leaders best interest to maintain a strong working middle class in developed nations.

In order to do we should pursue two courses of action:

In developing nations, we should provide clear means for the establishment of titles to property, credit access, and other basic laws that enable a trust based free market to occur.

In developed nations, instead of using misguided and poorly designed tariffs, we could instead target the companies in those countries. Any company selling into our own markets, for example, would have to demonstrate they make good faith attempts to match our own domestic legal standards. Since they are able to benefit by the lax regulatory environment in the countries in which they operate, and since the governments are unable or unwilling to change legislation so that the laws governing business and production reach a level in parity with developed nations, why not start a program modeled loosely after what Wal-Mart does with it's vendors? Wal-Mart has the power to compel it's vendors to make expensive and radical changes just to sell into the stores.

Is the USA less powerful than Wal-Mart? The US and the EU are the most lucrative consumer markets on the planet. The developed nations are the most lucrative markets for these goods, offering the highest retail prices. Anyone should be so honored as to be able to sell on these shelves. We should no longer maintain laws which allow for our own laws to be circumvented by outsourcing and imports. Our middle class is at risk. Our way of life is dying. Democracy will fade when the markets are not balanced and stable.

In order to be allowed access to these top end markets, a company would have to agree to a pre-determined code of corporate standards whereby they agree to end several practices that allow the disequilibrium to exist. These could range from putting a halt to child labor, installing smokestack scrubbers, or other similar policies that a business in the other country would have had to obey. Market's will correct themselves, either financially, or through wars, famine, and other negative social means.

The goals is to convince these companies to act in parity with the laws of the markets they are selling into. These measures can be introduced over a period of time, say 5 to 7 years. At the end of each year, the company would offer a report on it's website as to the progress achieved to reach these goals. At the end of the transitional period, if the goal is not achieved, then the company can not sell into the market without accomplishing the transition to parity. Given that their own government may at times prevent the company from achieving these goals, there would be the opportunity to appeal for one-two years provided Good Faith efforts are clearly demonstrable. In any event, these efforts would easily discernible by any auditor or investor, much less a regulatory official with a shiny badge.

These two courses of action would have two effects. The poor could participate. They would be enabled to actually sell among themselves and translate that value into the wider markets at their discretion. The countries that undercutting developed nations through what amounts to shirking the law in the other country, these countries would eventually find traction and direction for the legislative process to move towards a parity of basic set of interchangeable laws that the trading community agree must be in place to preserve stability of the trading markets.

In the absence of another economic policy solution, such as Socialism, Capitalism is the only remaining system available to the world. The question is not whether we are going to be capitalists, it is whether or not we want to ignite the remaining 80% of humanity with access to the markets. Be forewarned if we do not, those left out will find myriad ways to ruin the market system such as what we have been seeing these past 15 years. Without stability, the disenfranchised will find a locus of power to leverage to make their point known. When they do, the markets will be at risk.

A great resource I found is "The Commanding Heights- the Fight for the Global Economy", an amazing comprehensive view of the history of modern economics as it has evolved into the current era of free market initiatives. Everyone is in the series. Finance Ministers, Presidents, economists, protest leaders, union leaders, and whoever else has been battling on either side of the efforts. It is a must for anyone living in the global economy, which means all of us.

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