The Art of Trade War

The battlefields of global trade often explode igniting extreme situations demanding exceptional responses. The concept of the world joyfully marching towards American liberal trade doctrine is as dim-witted as believing we can solve our perilous trade deficit without taking tough action against those that abuse our openness. At its core, trade is war.

Chinese General Sun Tzu’s military treatise, Art of War, written during the 6th century B.C. has been studied in military schools around the world for ages. It is treasured for its simple yet ingenious strategies to ensure victory before stepping onto the battlefield. Diverse leaders such as Mao Zedong, Vo Nguyen Giap and General Douglas MacArthur have quoted from it.The analogy between international business and war is not a novel one. The struggle for market domination monopolizes policy making in many world capitals. To prepare for battle, Art of War, is required reading for senior diplomats and trade negotiators of the Ministry of Commerce of the People’s Republic of China, Ministry of International Trade and Industry of Japan and the Ministry of Foreign Affairs and Trade of the Republic of Korea.

To know our trade adversaries we must understand Art of War.

According to the opening statement of Sun Tzu’s work:

“The art of war is of vital importance to the State. It is a matter of life and death, a road to either safety or ruin. Hence it is a subject of inquiry which can on no account be neglected.”

It is no accident Chinese exports vs. imports with the United States are at a ratio of 6:1. China exports six times more to the United States than it imports (image left). Likewise; Japan’s staggering trade surpluses with the United States over the past thirty years is the result of relentless planning and execution by Japan’s omnipresent bureaucracy in close association with its kireitsu (Japanese business conglomerates).

The absence of imported cars on South Korean streets is not because foreign automakers have no interest in the world’s tenth largest market. Until recently, anyone who owned an American car automatically was subjected to an intensive income tax audit as a matter of government policy.

China, Japan and South Korea which account for over 60% of the U.S. merchandise trade deficit, fanatically pursue large, favorable imbalances as spoils of war.  With them come jobs, wealth and strength, the life-blood of a nation.  These surpluses are proof-positive of fulfilling Sun Tzu’s fundamental objective: “To defeat the enemy and become stronger.”

Before falling into the trap of believing our rhetoric about the righteousness of free trade as if it was one of the Ten Commandments, we must restrain ourselves and repeat three times Sun Tzu’s immortal line: “All warfare is based on deception.”

He goes on to counsel: “Thus I say that victory can be created. For even if the enemy has a larger force, I can prevent him from engaging me.” When Japan swept into dominance in consumer electronics in the 1980’s, the American government acted smug and unalarmed. If Japan was willing to subsidize their exports, American consumers ought to welcome them as gifts. This same shortsighted argument has been dusted off and used today with China. History has shown the “termite strategy” of the Japanese worked brilliantly by decimating then eliminating entire American industries.

The need to win profitably is at the heart of Sun Tzu’s teachings: “Wars should be won with maximum gains and minimum costs.” East Asia has relied on American and European companies to underwrite the huge investments required in research and development. This has saved them billions of dollars which has been channeled into predatory pricing. An extension of this strategy is overt piracy and intellectual property theft that is estimated to cost American manufacturers $100 billion in sales annually equating to 750,000 lost jobs.

Sun Tzu prefers strategies that rarely require all-out war to win. Spies, diplomats, deception and a correctly organized internal structure were his main tools. East Asia goes to great lengths to avoid outright confrontation. Carefully crafted concessions that look impressive but rarely amount to anything are offered up in great deference. Once the threat passes, they go back to quietly conquering while we drift in oblivion.

The United States once upon a time possessed a major weapon to deploy. Section 301 of the Trade Act of 1974, as amended, is the principal statutory authority under which the United States may impose trade sanctions against foreign countries that maintain barriers, policies and practices that violate, or deny U.S. benefits under trade agreements or restrict, burden or discriminate against U.S. commerce. Super 301 went further and required in 1989 and 1990 the USTR (U.S. Trade Representative) to publicly identify “priority foreign countries” and unfair “priority practices” that were major impediments to U.S. exports. If the offending country was not forthcoming in scrapping their designated barriers, it provided the President authority to retaliate. As a result of Super 301 several quantifiable market opening initiatives with Japan were successful. President Reagan deftly used the threat of Section 301 to revalue the Japanese yen. Immediately after the Plaza Agreement in September of 1985 the yen appreciated against the U.S. dollar by over 50% playing a crucial role in increasing American exports.

Contrast this today with Beijing’s refusal to allow the RMB (Chinese currency), under-valued by 40%, to reflect its true value. The threat of Section 301 has all but disappeared. China has been gifted an important victory without taking the battlefield. They manipulate their currency with impunity gaining an enormous advantage for their exporters. This is a beautiful example of Sun Tzu’s instruction: “To win a hundred victories in a hundred battles is not the hallmark of skill. The acme of skill is to subdue the enemy without even fighting.”

The reason they can get away with this may shock you. We have surrendered our trade sovereignty to the World Trade Organization (WTO). The United States is no longer allowed to directly apply Section 301 to pressure trading partners into eliminating barriers to U.S. exports and other unfair practices. U.S. trade enforcement is now in the hands of the WTO’s Dispute Settlement Body (DS which essentially takes the U.S. government out of deciding its trade interests. This is tantamount to handing over national security to our feeble friends at the United Nations.

Throughout Sun Tzu’s writing he emphasizes the importance of detailed planning. One such example: “With careful and detailed planning, one can win; with careless and less detailed planning, one can not win. How much more certain is defeat if one does not plan at all!” There must be a complete overhaul of the American global trade infrastructure. We are incapable of fighting the war we are in. Article I of the U.S. Constitution grants Congress sole power “to regulate commerce with foreign nations”. The Constitution grants the president no trade specific authority whatsoever. Congress reins supreme on trade unless and until it decides otherwise. Congress is a decentralized institution of 535 individuals, particularly vulnerable to pressure from special interest groups and lobbyists. It is unimaginable any sort of sophisticated trade strategy can be developed while its members pander to their constituents. Congress therefore does what comes naturally once the politics of benefit-seeking spins out of control, it delegates responsibility.

Trade Promotion Authority (TPA) is granted by Congress to the President for the purpose of managing trade and negotiating agreements with foreign countries. This authority is only given for predetermined periods of time. It often lapses for years eliminating the command structure leaving no one in charge.

Sun Tzu is rolling over in his grave: “The enlightened ruler lays his plans well ahead; the good general cultivates his resources.”

We have no ruler. Back at headquarters our generals are off on conflicting missions.

The Secretary of State stresses the importance of trade to alliances; however the State Department is directly responsible for the destruction of numerous American industries bargained away in pursuit of countless foreign policy boondoggles.

The Secretary of Defense is concerned about the transfer of technology for military purposes; unfortunately the Department of Defense often pushes for meaningless trade sanctions on military and non-military goods alike that cost each year America $70 billion in lost sales and 600,000 jobs. European and Japanese manufacturers’ trip over themselves to fulfill orders we foolishly turn away. Sun Tzu has some good advice on the futility of sanctions: “Do not move unless there are definite advantages to be gained… Engage only when it is in the interest of the State. Cease when it is to its detriment.”

The Secretary of Agriculture is sensitive to farm welfare and prices; sadly the Department of Agriculture is responsible for $20 billion of taxpayer money being wasted on agricultural subsidies that prevent far-reaching trade agreements to be concluded, essential to America’s export success.
Sun Tzu is clear an army can not win: “When the general is weak and without authority; when his orders are not clear and distinct.”

Our command crisis is condemned further by the split authority between the USTR and Department of Commerce that provides the USTR responsibility for “policy”, “coordination” and “negotiations” and the Secretary of Commerce “nonagricultural operational trade responsibility.”

Here’s the solution.

We must replace the USTR-Department of Commerce two headed monster with a Department of Global Trade. The Secretary of Commerce will become the Secretary of Global Trade with real power over a portfolio that offers opportunity for important policy leadership, unlike today. He or she must have complete authority over all facets of trade including strategy, negotiations and enforcement. At the same time Congress creates the Department of Global Trade they must make the President’s Trade Promotion Authority permanent. Congress would retain the right to approve trade agreements in a simple up or down vote within 90 days of being submitted for ratification. This would give our trade partners confidence to seriously negotiate knowing special interests will not be able to insert deal altering amendments.

We would never allow our foreign, defense, or monetary policies to be developed in public for the world to see our next move. They are shrouded in secrecy for very good reason. So must the planning and implementation of our trade policy. Let’s listen carefully to Sun Tzu: “O divine art of subtlety and secrecy! Through you we learn to be invisible, through you inaudible; and hence we can hold the enemy’s fate in our hands.”

We must bring back Section 301 and Super 301. The Global Trade secretary must have the weapons he needs to fight and be allowed to deploy them. The economic destiny of America can not be in the hands of foreign bureaucrats at the WTO.

“If you know the enemy and yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.”

Sun Tzu understood more than two-thousand-five-hundred years ago defeat was inevitable with an army in disorder. The only question now is, what are we going to do about it?

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