China is a country pursuing it's own interests. We need to do the same. The first problem is not how to appease China, or how to appease Wall Street. The first problem is what are the most critical American interests?
We have allowed the corporatist and financial powers to offshore American productive capacity, because they made hundreds of billions off the global labor arbitrage, and damn the American worker.
Free-trade as a positive-sum game doesn't actually work if you are running a big and expanding current account deficit. We are losing our tradeables sector.
See http://interfluidity.powerblogs.com/posts/1163620201.shtml
(Steve Waldman):
I've done no study, but here's a conjecture: The countries where protectionism is becoming popular are those with both growing current account deficits and shrinking tradables sectors. A shrinking tradables sector is not the same as a declining industry. Declining industries are normal and good. Even the near extinction of manufactures as a whole is okay. But a shrinking tradables sector is not. A shrinking tradables sector means a decline in nation's capacity to produce goods or services of any sort that citizens of other countries want to buy, at competitive prices...
Ricardo is dead, and we live in a brave new world where, at least for a while, some countries are willing to trade persistently for debt not backed by expanding (if adjusting) tradables capacity on the part of the debtor. This is not a Ricardian paradise. This is economic terra incognito, and citizens are right to be spooked.
I think only aggressive posturing, threats, and a willingness to follow through will get anywhere with China. They need to stop mercantilist currency manipulation. If they don't, USA needs protectionism.
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