Trading is a human trait ever since humans formed societies from the Stone Age, through the agricultural eras then to the industrialization centuries. Human civilization advanced by creating and embraing technologies which ever more enhanced the necessities of trading. Trading is a bilateral act consummated by negotiation under a mutually agreed trading system involving transportation and distribution logistics and financing and payment mechanisms. When negotiation is abandoned, history showed us, trading war begins harming human societies to a pain level that a military war may occur. The two past world wars were clear evidence of that. Today, our world is witnessing a serious trading war launched by President Trump of the U.S. Why does a self proclaimed great negotiator want to abandon negotiation and initiate a trading war? This is a puzzling question we need to find an answer.

For the benefit of doubt, since the trading war is just launched, we may speculate that Trump’s trading war is really a part of his negotiation tactics. Then why does Trump have to resort to trading war to adjust trading pattern and to correct trading results?  Trump’s tariff on aluminum and steel not only punishes China but also impacts Canada, India, Mexico, and Several EU countries. The 25% tariff on 34 billion Chinese goods has triggered China’s retaliating reaction but Trump has added 10% tariff on $200 billion Chinese goods which are still being tabulated by the commerce department. This type of rash behavior can hardly be imagined as the action of a rational government practicing a deliberated thought process to develop trade policies. Of course, no one has enough information nor any psychic power to read into President Trump’s mind to know the answers to the why questions.  As a citizen one has the right to analyze the trade issue at hand based on common sense and voice one’s opinion whether the government’s current trade policy hurts the U.S. or not. 

President Trump seems to feel that the U.S. has been taken advantage of by the world for too long in trading (“allowed by the previous administrations”) that it is difficult for the U.S.(for him as the President) to correct the ills without taking extreme measures; in his view, the extreme measure can include denying all previous trade agreements and starting from fresh using trade war as a tool to pressure the trading partners since the U.S. has a large market. However, trade agreements and trade practices were accepted willingly by trading partners through negotiations. It is hard to believe that the American people involved in the past trading negotiations were all dummies who would give away the store for not getting anything in return. Looking back we see that the U.S. has always held a strong trading position with her abundant agricultural produce and energy resources, despite of an oil cartel and many countries desire to have self sufficiency in food suppy. The U.S. conscientiously lets her low-tech labor intensive manufacturing industry to disappear and deliberately maintains her hi-tech capital intensive industries to flourish and lead the world. The U.S. also created and excelled in a sophisticated financial industry attracting capitals to the U.S. eitherfor investing in our risky hi-tech development or for financing American debts.

There is nothing wrong with the above strategy except one must realize that every developing country in the world is trying to move up in the technology ladder to take advantage of productivity gain from technology rather than being satisfied with maintaining low-tech industries to produce cheap goods for the developed nations. The above U.S. strategy has been working for decades in favor of the U.S. so long as the advancement and innovations in her hi-tech industries can keep ahead of the competitive followers. When competitors caught up then the U.S. may lose. For example, the American auto-industry used to dominate the world until competitors crushed them. American airplane industry can export one plane worth more than million pairs of shoes or pants imported if no competitor is behind. With smart marketing and trademark protection, some vast amount of low-tech products imported into the US marketis creating huge profits for American companies. For example, a pair of Adidas sneakers is typically sold at prices of multiple times than their import value making a huge profit for Adidas and its stock holders but no benefit for American workers who lost their Adidas jobs. The no brand imports, of course, do contribute to trade imbalance, but their low prices (say shoes and pants) actually benefit lower income Americans who can only afford the cheap imports.

The issue of trade imbalance between the U.S. and China, therefore, is not as simple as the import and export figures indicate nor as “American jobs stolen by China” as retorted by Trump in his campaign. Labor intensive industries face the challenge of labor cost thus they migrate from developed countries to developing countries as a natural economic movement. Any government protection scheme including tariffs can only slow down their migration a bit but eventually fails. This phenomenon existed for many decades and the only sensible solution is to create new industries based on hi-technology components to maintain a competitive edge or gain higher productivity. However, hi-tech industries may create new jobs but they may also eliminate existing jobs especially labor jobs. Apparently, China has learned from others’ experiences, she is launching a technology and innovation drive (“China Manufacturing 2025”) to upgrade their industries to higher value chain but with a focus on achieving a net job increase not job loss. This is nothing new; Germany has her German Industry 4.0. In U.S., the government neglected the manufacturing industry for years in favor of financial industry resulting in today’s dilemma: The U.S. highly depends on manufacturing imports and financial product exports. The imports are more physical necessity products and the exports depended more on a debt ridden society (like the U.S. highly depended on debt refinancing to get by). 

So Trump’s attempt to use trade war to stop China Manufacturing 2025 and forc her to open up financial markets is not a logical policy; not only China will not accept it, it also does not necessarily help the U.S. The sensible solution is to accelerate technology innovation and sell (rather than restrict) high-tech sales to China. China recognizes the value of her market size able to attract technology companies to come and manufacture and sell products. Technologies are protected by patents but patents are just a piece of paper without markets to accept their applications. The U.S. should exploit the huge market in China to sell her technology products to make profit and sustain her technology development to maintain her leadership position. For example, GM makes 10 million cars; 4 million are manufactured and sold in China. The question is whether GM is plowing back its profit to develop advanced technology to maintain a technology lead or simply to distribute its profit as dividends. Tesla with its technology lead in electric vehicle is setting up manufacturing factory and research and development center in China. Obviously, Tesla is valuing China’s market thus ignoring President Trump’s plead to keep manufacturing in the U.S.

The above discussion is just common sense analysis not deep economic theory, but it is sufficient to tell us that Trump’s trade war policy does not solve the US trade problem nor help her industry revitalization. The U.S. needs to understand China’s market value and the scope of China’s 2025 manufacturing industry upgrade to come up with her industry policy to leverage her lead in many technologies and to take advantage of China’s market to accelerate technology products manufacturing, develop and sell products for Chinese markets and sustain her lead in technologies.
 



​

​
The most challenging problem in economics is not in the understanding of the theory or the model of economic development which is evidenced by the fact that many nations’ GDPs have been steadily increasing as various economic development models are applied. The real challenge lies in the finding of a solution to limit the wealth gap created by the economic development. The wealth gap in a society is invariably the consequence of economic growth. All economic development models based on the principle of getting uniform return across all the society members seem to be fruitless. A few as practiced by the communist countries have proven to be a failure when compared with other economic development models based on capitalism. 

There seem to be two fundamental factors producing the above outcome. First, capital is a necessary ingredient for economic development and it must be applied strategically, selectively and timely to development projects to yield optimum return. Second, Human Resources are necessary for economic development but they must be selected based on human intelligence and talents, trained with right skills and knowledge and motivated by a driving force to devote energy and time in economic development projects. The above first condition also depends on talented humans to manage the capital under a management system ranging from a totally free capital system to a totally government controlled capital system with varying degree of man-made regulations. The second condition usually can be met by a competitive education system and a talent selection scheme.  The motivation, however, is rooted in human nature, that is human’s desire for material or asset possession and a self-defined life style, which ultimately leads to wealth accumulation. We might term this model as ‘capital-talent’ model for later reference. Under this model, wealth has become the most effective and consequential motivation factor for talented humans to engage in productive economic projects. Even in the charity organizations and religious institutions, this materialistic motivation factor cannot be ignored. That is why successful charity organizations pay their executives millions of dollars in salary and all successful churches pay their pastors with full range of amenities including housing, cars, phones, salaries above average parishioners’ income and cushy retirement benefits.

There are ample successful examples of nations as well as private corporations applying the capital-talent economic development model. Just following post WW II world economic development, the U.S., Germany, Japan, and the four little dragons in Asia all can offer solid ‘case’ examples to support the above conclusions. China, after switching from an unsuccessful socialistic economic model to a ‘capital-talent’ model, albeit knowing the wealth gap issue and willingly letting a small group of smart people to drive their economy and getting rich, has shown us an non-debatable success story of economic development. So did many other nations and global corporations succeed in building their enterprises under the above principle. China’s rapid rise in economy or her GDP growth is accomplished with the consequence of the above capital and human driven economic development model producing the wealth gap phenomenon, a small number of people possess a large portion of the national wealth.

The U. S. is the wealthiest nation on earth as far as her national GDP and total assets is concerned. The U.S. is a capitalist country and is a beacon for the world coming to pursuing capitalistic economic development. However, the wealth gap problem in the U.S. is likely the most severe case. The wealth gap of course is produced and compounded yearly by income inequality (income gap). In 2015, the bottom 90% of people in the U.S. had an average income of $34K and the top 10% had an average income of $312K, nearly ten-fold difference. What is more shocking is that the top 1% average income was $1.36M and top 0.1% was $6.75M, 200 times greater than the average income of 90% of population. It is clear that income inequality will produce a larger wealth gap, since the majority of U.S. citizens are not making enough money to save or build assets.  Based on the data from Internal Revenue Service and Congressional Budget Office, since 1979, the before-tax incomes of the top 1% of America’s households have increased four times more than the bottom 20% population’s income.  The after-tax incomes of top 1% has increased on average 192.2% since 1979 to 2013 whereas the corresponding before-tax income of top 1% has increased on average 186.8%. This shows that the tax system does not cure the income inequality problem and its consequential wealth gap issue. The U.S. has used welfare program to boost the income of the bottom 0-40% of the population, but the above data indicates that so long as the economic development operates under the ‘capital-talent’ model and its principles derived from human nature, the income inequality and wealth gap will persist. Even in the top income population, the same problem exists; the highest 0.1% income earners have seen their income rise much faster than the rest of top 1%. (The top 400 earners doubled their earning from 1992 to 2002) The seriousness of the wealth gap can be illustrated by the following statistics: In 2013, the top 10% of family holdings held 76% of the national wealth whereas the bottom 50% of the families held 1%, a rapid worsening from 1989 to 2013.
China has adopted the ‘capital-talent’ model thus naturally we expect the same consequence - creation of wealth gap in the nation, although no detailed statistics on household income and household holdings over the past five decades are available. China currently is applying a harsh anti-corruption measure to breakdown illegally created wealth but that is not the same wealth accumulated through the ‘capital-talent’ model. China has seen an amazing progress of economic development. The speed of economic development is naturally correlated with the amount of capital and talented Human Resources available. China’s GDP was less than $100 billion in 1971 to $12.8 trillion in 2017, an increase of 129X signifying a rapid rise. From available data (1952-2017 six and half decades), China’s GDP was $30.55B to $113.69B(1952-1972), an increase of 3.72X for two decades, $113.69B to $493.14B(1972-1992), an increase of 4.34X, and $493.14B to $12840.39B(1992-2017), an increase of 26X. These data support the ‘capital-talent’ model; from 1992 to 2017, China has the fastest growth of capital, educated talents and the impetus of Internet revolution making China the manufacturer of the world. Unfortunately, the higher the speed of economic growth is, the bigger the wealth gap will occur. Big wealth gap will produce social instability in any governance system. Something must be done to reduce the wealth gap, otherwise social unrest will take place. The tax system and welfare program (including minimum wage) practiced in the U.S. can not cure the income inequality and wealth gap problem without destroying people’s incentive to take on productive work. Perhaps, one suggestion to redistribute wealth is to encourage wealthy people to make large tax deductible donations to (1) Public infrastructure funds, funds for constructing roads from city to rural regions, airports, train stations, ports, bridges, museums, parks, and public transportation and utilities allowing donors names to be put on them and (2) Innovation funds, funds for supporting science and technology research benefitting the public and the nation. Government can establish these funds with low yields to let wealthy people to invest their wealth but benefit the less wealthy more.


​

​ 
Thomas Loren Friedman, three times Pulitzer Prize winner and a columnist and author, once wrote an article ( NY Times, Opinion, 3-20-2010), “America’s Real Dream Team”, attributing the success of America to her brilliant immigrants. A well known Chinese historian and political analyst, Ms Zi (資中筠 88），has referenced Friedman’s article recently to answer her own query article, what is the reason making America so great? (4-27-2018, Knowledge Search 知識探索）She said that American talents made America great and China’s education did not produce talents for China but sent them to the U.S. becoming their talents. She pointed out that the U.S. has been able to attract bright students from all over the world and many of them become America’s talents. China must create a condition conducive to attracting talents to come to China (not just offering money) to stay in education and work place. These two articles all shared a view, that it is people or talents that make a nation great.
 
It is puzzling though while pondering on the above two scholars’ profound articles I repeatedly heard the American President saying that China has stolen the jobs away from America (hence making the US economy and export trade weak?) President Trump won his presidency on the slogan, ‘To Make America Great Again’. Indeed, since his inauguration, he has been focusing on his campaign promises. Trump has been tough on illegal immigrant issue even affected the legal immigration process. He blames China for US domestic problems such as losing manufacturing industry and companies moving abroad. But are we really dealing with a situation that the U.S. has talents but lost jobs Or more seriously the U.S. has lost both jobs and talents or there is a serious mismatch of skills and jobs? Are these problems really caused by China while record number of Chinese students coming to the U.S. to study? A rising unfortunate sentiment, which was fanned by the media, was charging all Chinese Americans as potential industrial or military spies for China and suggesting restriction on Chinese students and faculties engaged in their engagement of hi-tech research in the U.S.  Recalling Friedman’s above article, this type of sentiment is not only unfair and discriminating but is also harmful to the core value of immigrants making this country great. This is the reason the title subject must be discussed in this column.
 
History show us, China as a principally agricultural nation had a strong economy leading the world for many centuries. The industrial revolution brought machine and energy systems to human society that made the Britain the world’s strongest nation deserving her name, Great Britain. While the industry revolution brought the invention of automobile, but a short-sighted British Law to limit automobile speed to be comparable to horse carriage to protect the coach and buggy drivers’ jobs essentially gave the auto industry away to Americans and later also to Germans. The engines played a significant role in Second World War. The victory of allies in WW II made the U.S. militarily strong, but it is the computer revolution and its resulting automation really made the U.S. the number one economy in the world, not only made Americans rich but also sustained her military superiority. China on the other hand was a victim of foreign aggression throughout most of the nineteen and the twentieth century thus barely could provide food for her citizens.
 
Post WW II, the U.S. almost led in every field of agriculture, manufacturing, science and technology. While many Western countries including the defeated Germany and Japan were helped by the U.S. recovering from the war damage, China was artificially divided into two parts across the Taiwan Strait thus having a slower recovery. It was not until the U.S. recognized Mainland China for the purpose of rivaling the Soviet Union, only then China systematically embraced capitalism under a Chinese defined communist system to accelerate her economic development. Like Japan and many other fast developing countries who took the coattail of the U.S. in industrialization and computerization copying and overtaking the U.S. from low tech to mid-tech, while the U.S. was able to keep up with the innovation and advances in hi-tech industries, China was trailing behind them in a low-key but methodical manner. What amazed the world was China’s rapid speed in development, a double digit growth in economy and a fast-forward in embracing technology and innovation.
 
We are living in a very competitive world. The advance of information technology and Internet made the world a fairer playing field. Countries with large population backed with easy access of education like India and China can exert their competitive power. It was never easy for any country to maintain at the No. one spot forever. Seventy years ago, the size of US economy was 40% of the world economy and today she is less than 20%. Taiwan at one time had a GDP comparable to Mainland China’s but now at 5% or less. No matter what political system a country has, it needs great leaders to make the country great. President Trump is a very unusual leader. He recognizes the problems of the U.S. and is trying to figure out how to fix them fast. Rhetoric, bluffing and threats are always part of the international politics, but at the end of the day, great leaders must make intelligent decisions based on facts learned.
 
Japan, Europe and China did not steal American jobs. The U.S. had chosen or let her economic development to shift away from labor intensive and/or low profit industries to brain intensive businesses, partly because of computer/automation advances which striped away many physical jobs and partly because of the ease of making a fortune in financial industries with Information technologies. Even the government became more and more dependent on creating and selling financial instruments to pay for its operation. The US education was the envy of the world but the U.S failed to recognize and match the rapid change of job/skill requirements in the industry and marketplace. Creative minds need to know where creativity is required. Only physical hands-on experience can give one the immediate clue to apply one’s creativity. Americans cannot get more jobs because of skill obsolescence and failure to engage life learning to anticipate job changes and new skill requirements. Most US colleges were too liberal allowing majority of faculty and students pursuing teaching/learning with no career planning in mind. The foreign students usually came with career in mind and they cherry pick the best schools, the best course and the best faculty to study under. If they chose to stay that would be advantage to the U.S. If they chose to go back that would be US loss.
 
Many scholars, economists and educators do understand the above scenario, but education reforms and life philosophy changes take time. Life-long learning takes generations to form into a professional habit. Rapid rises in China and India swept Americans off their feet but the U.S. is a big and strong nation. There is no doubt that she can compete in this world by making fundamental changes in education system, life philosophy and learning habits. One must realize that in 21st century by throwing one’s military weight around or bullying can only hurt each other. Judging from the rapid changes of pace in the US-China trade negotiation from hostility/confrontation to discussion/compromise, hopefully, our leader President Trump and his good friend President Xi have understood the real challenges and will lead the two great nations onto the right path for mutual prosperity and world peace.