The Economics of War

As the world watches with increasing apprehension the stand-off between North Korea and the US, wondering if it might be the new Cuban Missile Crisis, it is important to note that at the heart of most wars are economic forces. Recently Trump met President Xi of China and reportedly told him that he would be open to fashioning a trade deal that was more favorable to China, (and presumably less favorable to the US), if he would help us with his client, North Korea.

This negotiation was the exact opposite of what Trump promised in his campaign.  He was going to bring the Chinese currency manipulator to heel. Now, given the North Korean crisis, everything has changed. Trump may have to even forget about his reduction of corporate tax rates, from 35% to 15%.  Why?  Because this will not only cause American manufacturers but also Chinese manufactures to leave China for the low-tax shores of the US. Chinese windshield maker, Fuyao Glass, last October opened a $600 million factory in Dayton Ohio and plans to open others in Illinois and Michigan, creating 4,500 jobs.

If Trump is able to reduce America’s highest-in-the-Western-world’s tax rate from 35% to 15%, it threatens to touch off “tax war” with China.  It cannot afford to see vast amounts of its financial and human capital flow out to the US. China’s tax rate on corporate profits is 25%.  The Communist dictatorship imposes a 17% value added tax and an unknown yet surely hefty cost of bribes paid to Communist officials. In an utter rebuke to American Democratic officials who deny recent American economic history, eighteen months ago President Xi launched his “supply-side reform” aimed at cutting taxation and regulation…exactly what Kennedy, Reagan and Trump proposed.

Yet the problem of North Korea setting off a nuclear war weighs heavily on this new President’s shoulders. Can he thread the needle? Can he, the penultimate deal maker, find a way to convince China that it is in its interests to remove the fat North Korean dictator for a new one that will be more compliant to China and much less belligerent toward its Western trading partners?  This would be the deal of the millennium, millions will live not die if he can do it.

But at the same time, Trump must also do the deal knowing, as Walter Russell Mead has recently written, “Peoria is more important than Davos. It was American power and will that built the present world order.  A divided society with an eviscerated middle class cannot provide the stable, coherent world leadership that is required.”

By | 2017-05-04T06:25:08-07:00 May 4th, 2017|blogroll, News From the Front, United States of America, US Financial Policies|Comments Off on The Economics of War

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