The South China Sea Is Not Worth the Risk of War

Contrasting Chinese and American perspectives were on display at the recent Shangri-La Dialogue, during which Defense Secretary Ashton Carter challenged Beijing over its island expansion program. Privately the possibility of war has emerged as a serious topic in Washington. Both nations should draw back from their increasingly dangerous game of chicken.

China’s territorial claims involve a complex mix of control, historical practice, international law, and treaty. In the view of most observers, Beijing’s claims are extravagant. Yet they are not unprecedented.

The early American republic made aggressive claims against both Canada and Mexico. The United States won its claims in the first case through conquest and in the second instance through negotiation. Great Britain’s decision to accommodate the United States yielded long-term peace and future friendship.

As territory most of the islands are worthless rocks. However, they carry with them control over surrounding waters and underlying resources.

While Washington lays claim to no land, it insists on free transit in surrounding waters. Equally important, with China expanding many Americans want the United States to contain Beijing.

Indeed, there is increasing comment among the chattering classes about the importance of making China “pay a price” for its aggressive behavior. The administration is more vigorously advancing claims than the claimants themselves. The United States created particular controversy flying over islands claimed by China, courting a corresponding challenge from the latter.

The problem is not asserting American navigational freedoms, but doing so in a way seemingly designed to provoke a response. In 2001 similar military gamesmanship resulted in an aerial collision which killed a Chinese pilot and brought down an American spy plane, leading to an extended bilateral stand-off.

Since then both nations have become even more concerned over credibility and reputation, which means neither will readily back down when challenged. This creates a real danger of a military confrontation.

Rather than working to prevent such an eventuality, however, a number of officials, pundits, and analysts appear to view it as almost inevitable. I recently attended a gathering which mixed policy and non-political professionals. Without a neoconservative at the table there was broad agreement that Beijing had tossed down the gauntlet, so to speak, and had to be confronted.

Most sobering was the acknowledgement that an aggressive reaction could trigger a Chinese response in kind and a confrontation such as a ship collision or plane shoot-down. The consensus was that Washington would have to act immediately and firmly by, for instance, sinking a vessel or destroying a runway.

As I point out on China-US Focus: “The unspoken presumption was that the confrontation would end there, with Beijing duly chastened. But the obvious question is what if the Chinese made a similar calculation and escalated in turn? Some “damn fool thing” in the Asia-Pacific just might trigger war between the two nations.”

Washington enjoys military superiority but must disperse its forces around the globe. More important, the PRC views its interests in nearby waters as important if not vital. In contrast, American domination is not necessary for America’s defense. Beijing knows that and will risk much more than the United States in handling nearby territorial issues.

The possibility of miscalculation and misjudgment makes it even more important that all participants step back from confrontation. The fuse to war may be long, but no one should risk lighting it.

All parties should look for creative solutions to the plethora of territorial disputes. Countries could set aside deciding on sovereignty while jointly developing resources. Neighbors could share sovereignty and resources. Beijing could pledge to maintain navigational freedoms irrespective of the islands’ ultimate disposition. 

The disputed territory is important, but not worth war. Yet a dangerous dynamic appears to have taken hold. Instead of sleepwalking into a shooting war while assuming the other party will bend, both America and China should renew their determination to defuse territorial controversies peacefully.

America’s Greek Fiscal Future

Last September, I wrote about some very disturbing 10-year projections that showed a rising burden of government spending.

Those numbers were rather depressing, but a recently released long-term forecast from the Congressional Budget Office make the 10-year numbers look benign by comparison.

The new report is overly focused on the symptom of deficits and debt rather than the underlying disease of excessive government. But if you dig into the details, you can find the numbers that really matter. Here’s some of what CBO reported about government spending in its forecast.

The long-term outlook for the federal budget has worsened dramatically over the past several years, in the wake of the 2007–2009 recession and slow recovery. …If current law remained generally unchanged…, federal spending rises from 20.5 percent of GDP this year to 25.3 percent of GDP by 2040.

And why is the burden of spending going up?

Fear of Chinese Economic Hegemony

In the context of discussing the Trans Pacific Partnership (TPP), and the U.S. role in the Asia-Pacific region, Robert Kagan of Brookings raises the specter of competition with China and says this:

Economically, China would like to turn Asia into a region of Chinese hegemony, where every key trade relationship is with Beijing.

Along the same lines, law professor Noah Feldman says:

China is using its close economic relationship with its neighbors as leverage to build its geopolitical position. Its ultimate goal is to displace the U.S. as the regional hegemon.

I’m puzzled by statements like these.  What do Kagan and Feldman think Chinese economic “hegemony” in Asia would look like?  What exactly do they fear?

I don’t know the answer to what’s going on in their minds, but I have tried to look at what China is actually doing.  One thing it is doing is signing trade agreements with other countries in the region.  So are these trade agreements part of a scheme to dominate its neighbors?  Well, the text of the agreement China signed with Australia was just released, so let’s take a look at some of what it says.  As described by the Australian government, China would liberalize a lot of its trade with Australia, including the following:

  • Health and aged care services: China will permit Australian service suppliers to establish profit-making aged care institutions throughout China, and wholly Australian-owned hospitals in certain provinces. This will greatly expand the Australian private health sector’s offering of medical services through East Asia.

So Australia is touting the agreement as a way to build hospitals in China, and more generally to sell products there. (Australia also notes that 92.9 per cent of China’s imports of resources, energy, and manufactured products from Australia will enter duty free right away, with most remaining tariffs removed within four years.) This makes the whole idea of China’s “economic hegemony” sounds a lot less scary. Rather than setting up a system to compete with the United States, China seems to be participating in the same rules-based, liberalizing trading system that the United States and just about everyone else is in.

I wrote more about this issue in a recent Free Trade Bulletin.

The Mercantilists Are Marching onto War

Senator Lindsey Graham likes to march onto war, and off into economic swamps, as well. Recently, Senator Graham mounted a counter attack on fellow Republicans who opposed the reauthorization of the Export-Import Bank. Indeed, the Senator said “…I’m not going to unilaterally disarm.” Yes, it is clear that the senator has mounted a surge.

The Export-Import Bank (Ex-Im) provides financing and loan guarantees at below-market rates to foreign purchasers looking to buy products from American exporters. For example, if Emirates Air wants to buy planes from Boeing, Ex-Im can provide a loan guarantee, reducing the interest rate Emirates will pay, and thus incentivizing Emirates to buy from Boeing rather than Airbus.

Ex-Im’s supporters claim that these subsidies create jobs and finance domestic economic growth. But, they fail to consider the ensuing downstream effects. As Cato scholar Daniel Ikenson makes clear, every dollar Ex-Im provides to subsidize foreign purchasers of U.S.-produced products discriminates against U.S. consumers of the same products. For example, when Emirates receives a subsidy for planes because it is a foreign company, Emirates gets a leg up on Delta.

An edifying account of how this system works was presented many years ago by the late Prof. Yale Brozen in his foreword to Prof. Leland Yeager’s classic Proposals for Government Credit Allocation (1977):

Whom you know and with whom you have influence becomes more important in obtaining capital than how productively you can use it. Capital is diverted from more productive uses to politically determined applications […]. The national income pie shrinks as an increasing proportion of our capital is allocated by the political process – not only because of its diversion from more productive uses but also because more and more of our resources are devoted to winning political influence, as that becomes the road to access to available capital and subsidies.

For the record, Ex-Im isn’t small potatoes. In FY 2015, Ex-Im’s loans and loan guarantees will total $30.9 billion, or 6.7% of all non-housing federal credit programs. The Ex-Im’s total cumulative loans and guarantees outstanding (read: credit exposure) currently sits at $112 billion. Because the loans are granted at below-market rates, the Ex-Im does not receive fair compensation for the $112 billion of risk it takes on.

Instead of adopting a policy that makes a few U.S. exporters winners at the expense of many losers, there is a way to make all U.S. firms more competitive: just lower the grueling corporate tax rate. Yes, according to the Organization for Economic Co-operation and Development (OECD), the U.S. has the highest corporate tax rate of the 34 OECD member countries.

There is clearly a better way to unburden U.S. corporations and make them more competitive internationally than to sponsor a “bank” in which politicians and bureaucrats, not capital markets, choose winners and losers. It is time to move away from a mercantilist view of trade towards one that puts the market back in control.

Spin Cycle: Free Markets, Poverty and the Environment

The Spin Cycle is a reoccurring feature based upon just how much the latest weather or climate story, policy pronouncement, or simply poo-bah blather spins the truth. Statements are given a rating between 1-5 spin cycles, with less cycles meaning less spin. For a more in-depth description, visit the inaugural edition.


The Papal encyclical Laudato Si’ is so rife with messages spun to fit the Pope’s liking that we hardly know where to begin.

The general theme of the encyclical is that in much of the world, a devotion to free market capitalism (i.e., profits) has disturbingly replaced a devotion to Mother Nature and such misplaced adoration is leading the world to deviate from God’s will and into poverty and ruin.

In doing so, the Pope downplays the myriad and remarkable technological achievements that have arisen in the developed world and have led to an improved standard of living, abundant food, greater well-being, longer lifespans, and a protected and healthier environment. It is from these existing and future technologies—largely made possible by free market conditions—that the solutions to poverty and accompanying environmental degradation will be rooted.

Going forward, we should not seek to rejoin with Nature (as the Pope urges), but rather decouple from it. This concept has been described recently in the Ecomodernist Manifesto. While we think this manifesto needs a bit of tweaking (e.g., less reliance on government actions), it seems decidedly on the right track (and one in nearly opposite direction of current state of environmentalism—which the Pope seems to be an adherent). For more on the Ecomodernists’ take on the papal encyclical, this collection of tweets from Michael Schellenberger of The Breakthrough Institute is especially enlightening.

When it comes to human poverty, there is a mountain of research dedicated to the topic. The role played by human-caused climate change (the particular focus of the encyclical) is virtually unidentifiable, much less quantifiable. Thus, an encyclical stressing a centrally coordinated (and compelled) international response to climate change—focused on eliminating the cheapest, abundant, and most reliable form of energy—as a solution to global poverty can only serve as a distraction from the issue.

There are lots of directed actions that can be effective at helping those around the world who live in poverty, but attempting to alter the course of the global climate isn’t among them. Bjorn Lomberg offers a few suggestions (and there are surely countless others):

These policies — ensuring freer trade, greater access to family planning, and nutritional interventions — cost a fraction of expensive, inefficient climate policies. When helping the world’s poorest is the goal, these are the investments that would truly make the biggest difference.

Instead of empowering, the policies being forwarded by the Vatican will lead to a worsening of the very social and environmental problems it seeks to address.

For this reason, we assign Pope Francis’ encyclical our highest rating—Permanent Press—“purposefully misleading commentary on science which will hinder actual scientific debate and credibility for generations to come, especially those with negative policy outcomes”—and award it five spin cycles.

House Budget Committee Testimony on Debt

I testified to the House Budget Committee yesterday on the history of federal debt and reasons to balance the budget. John Taylor, Jared Bernstein, and Ryan Silvey also testified.

The ratio of federal debt to the size of the economy has never been anywhere near as high during peacetime as it is today. Federal debt has often spiked during wars, but has always been reduced afterwards.

Before the 1930s, policymakers believed that high debt was immoral and bad for the economy. Those beliefs restrained the basic political instinct to spend more than the available revenue. Unfortunately, in recent decades, Keynesian theory has informed policymakers that deficit spending is beneficial. That has led to the “modern era of profligacy,” noted economist James Buchanan.

Federal borrowing imposes an unfair and damaging burden on future generations, and it should be avoided except during major crises such as wars. Paul Krugman and Steve Landsburg are completely mistaken when they urge people not to worry about government debt because we “owe it to ourselves.”

Cutting spending to balance the budget would reduce the damage from future taxes, increase macroeconomic stability, and potentially increase capital formation. Requiring the government to balance its budget would also curtail spending on lower-valued activities, create incentives to prune waste, and thus spur greater economic growth. 

The video and written testimony is here.

Supreme Court Allows Texas to Offend the First Amendment

Today a narrow and unusual Supreme Court majority ruled that the DMV – of all government agencies! – is allowed to censor speech it considers to be “offensive.” To wit, the four “liberal” justices and Justice Clarence Thomas somehow found that the specialty license plates Texas drivers can choose to have on their vehicles actually constitute state speech – and of course the state can control its own messages, including rejecting a plate proposed by the Texas branch of the Sons of Confederate Veterans. This is so even though the specialty-license-plate program encourages Texans to come up with their own designs and slogans, which has resulted in around 400 plates that express support for a plethora of nonprofit organizations, commercial entities, affinity groups, and myriad other causes.

By this logic, Texas has long been endorsing Dr. Pepper, ReMax, and an assortment of burger and taco joints. Indeed, both Longhorns (UT-Austin) and Aggies (Texas A&M) will be dismayed to learn that the Lone Star State cheers for the Sooners (University of Oklahoma) and Cowboys (Oklahoma State). Surely at least one person is “offended” by each of the above examples, yet the DMV has refused to act in the face of such (macro)aggression. As the dissenting justices point out, it’s even more bizarre that, under the majority’s reading, “rather be golfing” is official state policy. It’s a wonder that the state has become America’s engine of economic growth!

To add hypocrisy to insult, the author of today’s decision, Justice Stephen Breyer, contradicted his own writing in the key recent precedent, a case regarding monuments in a city park. In the 2009 case of Pleasant Grove City v. Summum, Breyer concurred in the Court’s opinion “on the understanding that the ‘government speech’ doctrine is a rule of thumb, not a rigid category. Were the City to discriminate in the selection of permanent monuments on grounds unrelated to the display’s theme, say solely on political grounds, its action might well violate the First Amendment.”

Indeed. The ruling in Walker v. Texas Division represents a fundamental misunderstanding of what’s going on here. Texas doesn’t have to have specialty license plates, but if it creates this money-making program, it can’t then censor speech it simply doesn’t like.

As Cato wrote in our amicus brief, one man’s offensive speech is another’s exercise of social commentary or personal expression. And unlike, say, child pornography and “fighting words,” “offensive” speech is protected by the First Amendment.

It’s the Supreme Court that has offended the freedom of speech today. And now we know that the First Amendment is one thing that’s smaller in Texas.