Two headlines caught my attention in the Oct. 12 Washington Post. One read, in the print version, "Exports faring better than indicators hint", and just below it the other proclaimed, "Summers urges extension of payroll tax cut."

Ever since the U.S. trade balance turned consistently and increasingly negative in the early 1970s after nearly a century of surpluses, the leading U.S. media have tended to downplay the trend by arguing either that it is about to reverse as a result of international agreements to rebalance and of rising American competitiveness in key export markets. The Post's story last Friday is just the latest example of this bent. Although the latest figures from the Department of Commerce show the U.S. trade deficit for August widening from July's $42.5 billion to $44 billion, the Post said they mask more promising signs.

Among those cited by the Post are that America exports a wide range of goods and services from soybeans and aircraft to banking services and Disneyland vacations that totaled $2.1 trillion dollars last year and represented a 14 percent increase from 2010. These exports supported millions of jobs and accounted for 14 percent of GDP. Moreover, the Post noted that aircraft exports are up 38 percent so far this year while those of oil field and agricultural equipment are up 24 percent and 23 percent respectively. Pharmaceuticals and telecommunications equipment exports are both up by 7 percent. The Post did note that wheat and corn exports are down 34 percent and 22 percent respectively, but explained this as a special circumstance resulting from the drought in the American heartland. It went on to emphasize solid progress in sales to China which are up 5.9 percent year to date, or roughly, said the Post, in line with the growth of the Chinese economy.

The Post did admit that these numbers are less impressive on an annual basis. August to August, U.S. exports to China are up only 2.2 percent and are actually down 3.5 percent to the EU, which after all is the world's single largest market. The Post said the big question is whether the recent downturns in Chinese and EU growth will be short lived enough that the more positive trends of the past eight months can take hold and presumably lead to rising U.S. growth and employment.

The weakness of this presentation is that it ignores much history. The story of the past forty years has been one of rising U.S. trade deficits, then the imposition of various "rebalancing" policies that capped or even reduced the deficits for a time, but then followed inexorably by another repetition of the cycle. It's not clear to me why the Post so emphasizes the first eight months of this year or even why it identifies the above trends as particularly positive. After falling in the wake of the financial crisis of 2008-09, the U.S. trade deficit has risen for each of the past two years and for the first eight months of this year. Indeed, the January to August trade deficit has risen during each of the past three years. In 2010, it was $331 billion and for this year it was $371 billion. Nor are the U.S. numbers are good as the Post thinks they are. For example, China's GDP growth was last reported to be about 7.8 percent. So that is more than the 5.9 percent growth of U.S. exports to China, meaning that the U.S. is losing market share in China. On top of that, the notion emphasized by the Post that U.S. exports are of sophisticated , complicated things like aircraft and telecommunications equipment is somewhat misleading as are the references to job creation. For one thing, less and less of the components of an American airplane are made in America. Take the Boeing 787 Dreamliner. Its wings are now made in Japan. Of course, exports do support jobs, but since the United States has a huge trade deficit of about $500 billion, on a net basis, trade costs America jobs.

But the real problem I have with this story is its suggestion that downturns in China and Europe may be short lived and that a long term surge in U.S. exports will take hold and bring the U.S. and global economies back to balance. There is virtually no chance of this happening. In the first place, for deep structural reasons both the EU and Chinese economies have to slow down. But remember that the United States had big deficits with them when they were growing at record rates. Remember that the EU is now imposing austerity and looking for export led growth while China remains an economy with strong export led tendencies. It is highly unlikely that the United States could rebalance its trade accounts only by increasing exports, desirable as that might be.

This brings me to the article about Summers. He, of course, is an advocate of further stimulus or, at least of not reducing existing stimulus to the economy. His view is that more stimulus provide demand that will jump start additional production, employment, and output that will provide the wealth to pay down debt as the economy gets back to a growth cycle. I am sympathetic to Summers on this point. But I also have much experience in Japan where I have seen stimulus piled upon stimulus without the forecast jump start starting but with an inexorable accumulation of a vast mountain of debt piled upon an increasingly aged population.

I fear the Japanese precedent, but am convinced that America does not have to follow it. Why? Because we have a huge trade deficit. Making things in America that are now imported from abroad could dramatically jump start the U.S. economy with no need for additional debt accumulation as the result of deficit spending stimulus. Make It In America should be the theme song of whichever candidate wins the upcoming presidential election. We now have studies from a variety of agents including the Booz&Co., the Boston Consulting Group, and McKinsey all of whom argue that manufacturing of a wide range of presently imported goods could be done competitively from an American base.

That's the real ticket for U.S. GDP growth. Exports are wonderful and the more we ship of them, the better. But if you double exports while tripling imports, you're not ahead. You're behind. So the real focus must be to reduce the trade deficit and that can most easily be done by "making it in America."

When China applied to join the World Trade Organization in 2001, the argument in favor of its admission went something like this: China has more and higher tariffs than we do. So its admission will result in greater relative liberalization of the Chinese market and will reduce the U.S. trade deficit by providing more opportunities for sales in China than for sales in the already relatively open U.S. market.

On top of that, a popular mantra that held sway in the media and in academia argued that while corporations may compete economically countries don't and if they try to do so they will only hurt themselves. It continued by saying that free trade will make all countries rich and that being rich they will all become democratic and being democratic they will no longer go to war because we "know" that democracies don't go to war with each other.

Now let's look at how things have developed over the past twelve years and at some recent headlines and editorial comments.

Contrary to predictions, the U.S. trade deficit has grown dramatically both overall and bilaterally with China. The notion that a greater relative opening of markets in China would reduce the imbalance has proven to be complete wishful thinking. Indeed, the method of China's opening has actually contributed to increasing the imbalance. For example, as a condition of being allowed to sell in China, many non-Chinese corporations were made to understand that they would have to produce in and export from China. Or, take the case of GE. Recently it announced it is moving its avionics business into a joint venture with a state owned Chinese company to which it is transferring its avionics technology. Unstated was the understanding that China will be a huge market for avionics and that for GE to be able to crack the market for what the Chinese government has designated as a pillar industry, it would have to transfer technology and production to China. To be sure, this is not a formal written condition. But there are indirect and unwritten cues that are universally understood and that can be very powerful.

The joker in the deck here is unexpectedly different approaches to capitalism and free trade. U.S. and other western negotiators bargained on the assumption that China's capitalism and its way of doing free trade would be more or less the same laissez faire variety as that of the United States. Or, at least they believed that China's understanding and practice of capitalism and free trade would trend in the U.S. direction. But, even if for some reason it didn't, they anticipated few problems because they believed that if China deviated from orthodox doctrine it would only hurt itself through wasted investment. This belief, of course, rested on the further belief that countries don't compete economically, that the Chinese government would never guide the activities of Chinese corporations, and that Chinese corporations would strive to attain business goals but not government policy objectives.

To understand that these assumptions were all misplaced one only has to glance at a few recent headlines. Yesterday's Wall Street Journal reported that "Japanese Auto Sales Plunge Amid China Rage." Behind this was the newly bubbling dispute between China and Japan over the rightful ownership of the Senkaku/Diaoyutai islands. In this case, globalization is not leading to democracy and peace. Rather it is leading to economic attacks on Japan as Chinese mobs attack Japanese factories and offices in China and Chinese buyers shun Japanese autos. The Financial Times of October 6, reported : "Chinese tourists give Japan wide berth." This was another instance of the broadening of the dispute over the islands into an economic confrontation. The same Financial Times reported also that Tokyo had lodged a formal complaint over the Korean invitation to visit the Takashima islands claimed by both Japan and Korea. So here are two democracies engaging in hostilities that have buried the proposal for a Japan-Korea Free Trade Agreement, at least for the moment.

The Washington Post of October 8 reported that the House Permanent Select Committee on Intelligence has issued warnings about doing business with China's telecom and electronics companies, Huawei and ZTE. The committee voiced concern about close ties between the companies and the Chinese military and national security agencies and how such ties might result in electronic intrusion into sensitive U.S. facilities. The same paper reported that government stimulated and rampant Chinese investment in excess production capacity for aluminum is pushing many of the other major world suppliers to the wall. It turns out that subsidized excess investment and capacity can hurt not only the Chinese investors, but also all the other participants in the world market.  

 Finally, in an editorial on October 10 entitled Targeting Huawei, the Financial Times confirmed that there may well be grounds for concern about Huawei as well as truth to the charge that China engages in wholesale theft of intellectual property as well as in manipulation of the value of its currency. The FT went on to warn that Washington should keep the big picture in mind and, whatever the merits of the cases of Huawei and ZTE, contain the risks of a trade war.

One sympathizes with the FT editors. They so desperately want globalization to work as advertised and wish for the United States to guarantee that it does or at least that its aberrations won't result in a collapse of the system. But by the FT's own admission and that of the other leading media, if not a trade war, at least something very different from orthodox free trade based globalization appears to be evolving and evolving in such a way that war war is more imminent than trade war or that trade war might be the lesser of two evils.

The bottom line is that to avoid both trade war and war war it will not be possible to keep pretending that countries don't compete or that free trade leads automatically to democracy and peace or that companies (especially those based in authoritarian, ideological countries but even sometimes those based in democracies) don't cooperate with missions of their home state.

We must recognize the true nature of the world in which we live and develop pragmatic doctrines and practices for dealing with it. In doing so, we must particularly address the question of the relationship between globalization and conflict. Does rapid globalization lead to conflict rather than peace? Or are there particular circumstances when it does and other circumstances under which it does not? Should different rules and codes of conduct apply to relations between countries with very different political and social systems?

Former GE Chairman and CEO Jack Welch was mightily upset last Friday when the latest job numbers from the Bureau of Labor Statistics (BLS) showed unemployment falling from 8.1 percent to 7.8 percent.

This was the first time it had fallen below 8 percent since 2009. Coming just in the wake of Wednesday's election campaign debate with Republican candidate Mitt Romney, this report would be helpful to President Obama's reelection bid by mitigating some of the political damage done by his poor debate performance. Apparently a Romney supporter, Welch dismayed by Obama's good luck. In fact, he wanted the public to believe that luck had had nothing to do with the numbers. So he turned to Twitter to arouse public suspicion.

I know it's hard to imagine a macho guy like Welch tweeting, but that was the fastest way for him to jump into the fray with the following message: "Unbelievable job numbers. These Chicago guys will do anything. Can't debate so change numbers."

I defy you to interpret that in any way except as a charge that the White House had intervened with the BLS and directed it to cook the numbers in such a way as to be favorable to the President's reelection bid. In other words, Jack was suggesting that Obama, the White House staff, and the BLS are all corrupt and conniving. If such a suggestion could be substantiated, it would be grounds for impeachment of the president and abolition of the BLS and perhaps of the whole Department of Labor.

But, of course, it couldn't be substantiated. I watched Jack dance around that problem in an interview with Chris Matthews on Friday night. Chris asked him if he had any evidence beyond his own suspicions and speculation of White House interference with the normal practice and procedures of the BLS or of any change in the normal methods and practices for calculating the unemployment statistics. "No" and "no" was the response. Chris further asked him if he was accusing anyone of improper interference and if so who. Jack squirmed and shifted his position. "No", he wasn't pointing the finger at any particular individual he said. Rather, he was just raising questions. Didn't it seem awfully coincidental that these favorable numbers would come out at just the right moment to help the president, he asked.   

He added that the BLS methodology is based on myriad assumptions and that it actually uses two different methods for calculation that sometimes appear to produce contradictory results. So, how, he asked, can anyone really know what the true numbers are.

That the calculations are based on a variety of assumptions and that they are complex and that different survey techniques often produce different numbers is all true. But that's not really the issue. Everyone knows about these vicissitudes. The real question is whether or not the usual assumptions and techniques were changed in some way so as to influence the latest report in a pro Obama direction. When Chris again asked Jack if he had any evidence of such a change in technique, Jack danced and squirmed again. "No," , but I'm just raising questions" he  said.

Maybe Jack's suspicions arise from his own experience with reporting good and bad numbers. His main claim to fame, after all, is that he produced a string of 80 quarters of uninterrupted increases in earnings for GE. This no doubt reflected his genius as a corporate manager, but it also reflected use of off balance sheet vehicles such as those used by Enron before its bankruptcy and other creative accounting techniques linked to GE Capital, the company's finance arm. So, maybe from this experience Jack thinks that happy coincidences just don't occur.

But this is where the difference between running a company and running the United States is so great. The employees at GE and GE Capital were all subject to Jack's whim. Not so the bureaucrats at BLS who as members of the Civil Service have job protection and cannot be fired by the President. They are in a position to defy any illegal directive from the White House and they don't take their thinking on methodology and practices from Presidential whims.

When Jack uses cynical innuendo to suggest conspiracy and corruption at the heart of our political system, he not only undermines a president whom he obviously doesn't like. He undermines public trust in the system itself.

If he has real evidence of such corruption, he should demonstrate it immediately. If he doesn't have such evidence, the not only owes the president an apology. He owes the American people one as well.

In last night's debate, President Obama and Governor Romney both emphasized that job one for them is to create jobs. Yet despite complaints about Chinese trade practices both are also pledged more of the free trade/globalization deals that have already contributed to chronic U.S. trade deficits, the off-shoring of 3-5 million jobs, and the recent Great Recession that is now threatening a second dip. Obviously neither of them understands what's really happening in the global economy.

Since both are proposing various kinds of Keynesian economic stimulus programs, both should also read John Maynard Keynes' views on globalization. A devotee of classical free trade as a young economist, Keynes became convinced by the experience of the Great Depression of the 1930s of the overriding importance of nations achieving balanced trade and avoiding large international debts. At the 1944 Bretton Woods Conference, he urged not only that a new international facility be designated as the lender of last resort to deficit countries, but also called for the imposition of temporary tariffs on the exports of countries with chronic trade surpluses in order to create pressure for balance in the trading system.

Then a surplus country, the United States defeated the tariff idea. However, since the 1970s when America developed a chronic trade deficit, U.S. negotiators have constantly complained of unfair trade and have striven to create a "level playing field." They never have and never will succeed because the World Trade Organization ( WTO), the International Monetary Fund (IMF), and the various Free Trade Agreements (FTAs) were never empowered to deal with the realities of globalization that Keynes foresaw.

For more than sixty years, leaders of both the Republican and Democratic parties have embraced the neo-classical textbook doctrine of free trade as always and everywhere a win-win game. It was on this basis that they led the establishment of the World Trade Organization (WTO) and have continued to negotiate a variety of bi-lateral and regional free trade agreements. In the textbooks, free trade is always win-win because all markets are assumed to be perfectly competitive (no single producer has any measureable impact on the amount of total production or on global prices -e.g. wheat), there are no economies of scale, no unemployment, no international flows of investment or technology, no manipulations of currency values, no subsidies for key industries, no special incentives for saving and investment, no administrative guidance or discriminatory support for indigenous technology development, and no export subsidies.

These assumptions may have approximated reality in an earlier age. But today, it is imperfect competition in oligopoly industries with few entrants and big economies of scale (autos, aircraft, semiconductors), huge global investment and technology flows, state owned enterprises, and government intervention in a wide variety of areas that predominate. In this framework, whether or not free trade and globalization are win-win or zero sum games depends on circumstances, and strategic economic policies can determine whether a nation wins or loses.

Indeed, virtually all the "economic miracle" nations have adopted government led economic development strategies. A bi-furcated global system has evolved in which half the players are roughly pursuing textbook free trade while the other half are engaged in neo-mercantilist targeting of strategic industry development and export led growth. This has led to the large imbalances and debt that Keynes so much feared. Countries like Germany and China perennially suppress household income and consumption, save and invest heavily, undervalue their currencies, provide support to targeted industries, promote export led growth, and accumulate chronic trade (technically current account) surpluses. Countries like the United States and Britain emphasize domestic consumption as the driver of economic growth, tend to under-save and invest, to have over-valued currencies (driven by the exporters' currency manipulation), to consume more than they produce, and to accumulate chronic trade deficits. The surpluses of the exporters slosh around global financial markets to finance the deficits of the importers in a kind of vendor financing scheme. In doing so, they distort interest and exchange rates while giving rise to destabilizing speculation, reckless lending, and the expansion of bubbles whose collapse eventually results in crises and recessions.

At present, the job creation strategy of the German dominated Euro Zone, the bulk of the Asians, and of most of the Latin American countries is export led growth, with America and, to a lesser extent, the UK as the buyers of last resort. In the face of this, traditional free trade policies will only produce continued off-shoring of jobs. Efforts to stem this with more stimulus or tax cuts will falter because much of this new money will leak abroad to buy foreign exports.

Obama and Romney both need to think outside the orthodox free trade box. That doesn't mean turning to protectionism, but it does mean dealing with the real rather than the textbook world and emphasizing balanced as well as free trade. They should be setting targets and plans for reducing U.S. trade deficits through a combination of production in-shoring and export doubling. After all, even halving the U.S. trade deficit would create 2-3 million jobs.  

Romney won the debate, but in addition to Obama, it was the country that lost.

Romney had more energy, spoke more fluently, had better zingers, was more focused, seemed to have a better understanding of the issues and a better grasp of facts, showed more empathy with the voters, and demonstrated a better sense of humor. Obama looked and acted as if he really wanted to be someplace else -- maybe celebrating his wedding anniversary. His delivery was hesitant and halting. He got bogged down in minutiae, never hit any of Romney's weak points, presented no compelling vision for a second term, and made claims that could easily be shown to be factually fuzzy.

But how could we have both presidential candidates spend an hour talking about the economy and job creation without mentioning the loss of U.S. international competitiveness, the continuing chronic U.S. trade deficit, the off-shoring of U.S. jobs and technology, the low rate of U.S. investment compared to countries like China and Germany, and the abysmal state of U.S. infrastructure compared to other leading countries?. How could there be a discussion of the economy without any questions about national priorities and without any comment on the impact of America's role as the international hegemon and provider of global security on its ability to keep delivering the American dream?

The statistics show very clearly that the United States has been suffering loss of competitiveness and stagnation and even decline of living standards for a very long time. Insanity has sometimes been defined as continuing to act in a particular way while expecting a different result. Neither of these candidates showed any awareness of the deep underlying currents that continue to erode the country's productive capabilities. Despite the sound and fury, the differences between the were very small. Romney said he wouldn't raise tax rates on the wealthy while Obama said he'd move the rate on the rich from 35 to 40 percent. Big deal. I can remember when it was 90 percent and the rich cheered when Ronald Reagan got their rate reduced to 50 percent. Neither candidate showed any signs of wanting to adopt a completely new game plan for America, of wanting, for example, to make economic competitiveness the nation's top priority in place of military dominance or of wanting to develop strategic economic policies in parallel with geo-political strategies.   

In short, both are playing essentially the same old game while expecting and predicting that they will produce new and different results. They won't. Regardless of which one is eventually elected, there is unlikely to be any substantial change in policies or results. So the  country will just continue on with its present insane and unsustainable priorities and policies.

Where is Ross Perot when we need him?

As the U.S. Presidential election campaign enters its final stages, both candidates are being criticized in the media for "bashing" China.

This is in response to Obama administration filings of anti-subsidy complaints against China with the World Trade Organization (WTO) and to Governor Romney's strong criticism of Beijing's currency manipulation that undervalues its yuan (or RMB) as a way of subsidizing exports and acting as a tariff on imports.

The best example is the Chicago Tribune. Recently, it flatly said that both candidates are "bashing" China and noted that "attacking China's export-subsidy machine is guaranteed to win applause at campaign stops in Ohio and other Midwest industrial swing states, where resentment of Chinese competition in manufacturing runs deep."

Now, from the tone of this, you'd expect that China is completely innocent of any trade rule violations and that the candidates are unreasonably and cynically beating on it as a scapegoat for the off-shoring, layoffs, and unemployment that have all skyrocketed in the mid-west over the past five years. Indeed, you might even think the candidates are in some measure motivated in their critique by racism. After all, the terms "bash" and "bashing" imply anger, rage, violent emotion, and unreasonable hatred. If someone is a critic, he is legitimate, but a "basher" is emotional and unreasonable. The terms are usually applied to characterize criticism of Japan or China but are rarely if ever used with regard to non-Asian nations. When was the last time you read about "Germany bashing"? So the implied charge in the case of one labeled a "China basher" is that he/she is a racist.

Thus, the continuation of the Tribune's commentary was surprising. It acknowledged that "China's efforts to promote its export sector with cash grants, below-market loans, preferential tax treatment and free use of government-controlled property make a worthy target. " In other words, some of China's policies are indeed problematic. In fact, the Tribune went on to note that the sense of a need to create a "level playing field" with China "has a basis in reality." It added that subsidies and regulations in a number of areas along with the power of state owned enterprises has prevented U.S. and other foreign companies from taking the lead in a wide range of Chinese markets. It further noted that theft of intellectual property in China, and China's policy of keeping the yuan weak are enormously problematic. 

So the Tribune appears largely to agree that China is doing all the things of which the two candidates have complained and against which the administration has filed complaints with the WTO. But if it agrees with them, why is the Tribune effectively pasting the racist label on the candidates?

In justification of its position, the Tribune makes four points that constitute the orthodox free trade case. First, it argues that even though it might help workers, any restriction or sanction on the free flow of Chinese goods into the U.S. market would be harmful to U.S. consumers. Second, it holds that the activities of getting imports from China unloaded, shipped, displayed, advertised, and sold create new U.S. jobs in place of the jobs that might be lost as a result of the displacement of U.S. produced goods by imports from China. Third, it asserts that any kind of trade sanction could lead to a ruinous trade war that could damage everyone, and fourth, it emphasizes that rather than trying to crack down on China's questionable policies and practices, the U.S. government should focus on persuading the Chinese fully to open their markets.

The difficulty with these points, often repeated by orthodox neo-classical economic commentators, is that they are superficial, internally inconsistent, and at odds with the realities of the trading world. Take the matter of possible harm to consumers arising from any increase in the prices of goods resulting from some restriction on imports. This ignores a couple of important facts. One is that most consumers are also workers. Cheap imports are of little consolation if they have lost their jobs and income. Lost jobs put downward pressure on all wages, not just those in the particular industries that suffer from import penetration. Of course, the exception to this is a situation of full employment which is assumed by the usual econometric models and writers like those of the Tribune. But full employment is not the normal circumstance for most economies. Certainly it is not now the circumstance of the U.S. economy and it is most certainly not true of the economy of the city where the Tribune resides -- Chicago. In situations of high unemployment, the loss of jobs and general downward pressure on wages may far exceed the savings to consumers of slightly lower import prices.

The notion that imports create unloading, shipping, and marketing jobs is also misleading. Think about it this way. Toyota makes a car in Japan and ships it in a Japanese vessel to San Francisco where it is unloaded by American longshoremen and driven by American truckers to a showroom in an American city where it is advertised, marketed, sold, and serviced by Americans. So there certainly are a number of American jobs associated with this import from Japan.

But now suppose that Toyota makes a car in Tennessee with parts made in America and with the assembly done by Americans. Then the car is driven by an American trucker to an American showroom where it is marketed, serviced, sold, and advertised by Americans. In this second case, more U.S. jobs are created than in the first case. Why? Because the vast bulk of the selling, overland shipping, marketing, and servicing has to be done in the United States whether the product is made there or imported. So the truth is that imports do not create net new U.S. jobs or jobs in any country unless they are products that cannot be made or made competitively in that country.

As for the dangers of trade wars, they are much exaggerated. The whole point of the WTO is to have a set of rules and adjudication of the rules. It is inevitable that there will be trade disputes. A main mission of the WTO is to deal with them so that they don't become trade wars. So far the record of the WTO is pretty good on this score.

With regard to prying open the Chinese market, the Tribune calls for that as an alternative to the trade actions called for by the two candidates.  This is an old story and it seems to keep selling. I only wish that those who sell it would once in their lives have to serve as trade negotiators. One of the main reasons for complaining about and sanctioning violation of trade rules is to gain leverage precisely for the purposes of opening the market. These negotiations are not pit a pat. Important and powerful interests are involved and they don't give up easily unless faced with consequences as well as opportunities.  Countries don't open their markets just because someone from Washington says that would be a good idea. A successful market opening negotiation requires sticks as well as carrots.

Neither Obama nor Romney is a "China basher". The Tribune owes them both an apology.

The current battle overthe Senkaku/Diaoyu Islands between China and Japan is revealing a number of important truths about the state of the world that Asia-Pacific leaders ought to take to heart and act upon.

First is the fact that its security commitments to Japan are entangling the United States in the internal politics of both Japan and China over issues that are of secondary importance for Americans.

Second is the fact that World War II is not yet over. Indeed, in both China and Japan, the embers of its dying fires are being fanned for domestic political gain by nationalist leaders hoping to capitalize on popular sentiment or to distract attention from other sensitive political issues. This is only possible because the grievances of the war have never been fully resolved either by serial Japanese apologies that have been widely perceived as qualified or by a willingness on the part of new generations of Asians to move on by absolving new generations of Japanese of blame.

Third is the fact that by increasing China's wealth, integration of its economy into the global system has also dramatically increased China's power and given it the ability to use intimidation both as a tool for obtaining satisfaction of grievances and as a safety valve to relieve domestic political pressure. This, of course, also means that contrary to expectations, globalization has not yet, turned China into a liberal, capitalist state run with a significant degree of transparency if not democracy. Despite having become the world's second largest economy and its largest trading state, China is still capable of instant mobilization of mobs to attack foreign factories or surround the autos of foreign diplomats in the service of perceived domestic and foreign policy needs. In other words, the line between public and private policies and activities is fuzzy to non-existent.

These facts suggest the need for a re-think of U.S. policy and deployment in the Asia-Pacific region. They also suggest a way out that could be a step toward changing some of these facts on the ground.

With regard to U.S. Asia/Pacific policy, the recent adoption of the concept of the so called Pivot to Asia should be revisited. This pivot mainly entails more deployment of U.S. military forces in the region and a broadening and deepening of U.S. commitment to support the claims of its allies whether justified or not. It more or less inevitably means more U.S. involvement in disputes like that over the Senkakus and more U.S. unnecessary confrontation with China over things that matter very little to Americans.

There is no payoff for America in this. Keeping the Senkakus firmly in Japanese hands will not further open the Japanese market by one dollar's worth nor will it inhibit the various policies most Asian countries use to entice direct foreign investment and technology transfer nor will it inhibit such countries from doing ever more business with China while doing less with America. Indeed, it may actually accelerate such activity by showing that America will insulate the rest of Asia from the possible negative consequences of becoming more dependent on China.

Washington could push everything in a very different and more constructive direction by urging Japan voluntarily to request adjudication of the question of ownership of the islands by the International Court of Justice in the Hague.

In the first place, Japan's claim is more than a little questionable. As Han-yi Shaw, a research fellow at Taiwan's National Chengchi University points out, various Japanese documents seem to indicate that the islands were seized as war booty by Japan when it also took control of Taiwan as a result of the Sino-Japanese War of 1895. Indeed, the Japanese group that leased the islands from the Japanese government at the time mention in letters and notes that the islands came into their possession as a result of the victory of the Japanese Imperial Army.

A Japanese request coupled with willingness to transfer control of the islands would constitute the most powerful and genuine of apologies by Japan while it would also remove the Senkakus from the slate of domestic Japanese political issues.  It would also put China in a potentially revealing position. Any refusal of arbitration would undermine the sincerity of China's assertions as well as its attractiveness as an economic partner. Successful arbitration would be a giant step toward finally ending World War II and toward fostering true globalization in the Asia-Pacific region. It would also obviate any need for further U.S. involvement of any kind. So it would be a win-win-win solution.

Nineteenth century free trade crusader and main opponent of Great Britain's Corn Law tariffs Richard Cobden wrote that "free trade is God's diplomacy and there is no other certain way of uniting people in the bonds of peace."

Washington must now hope that that notion will prove true. Otherwise it may have to decide whether to back its allies in war with China as well as which of its allies to back as they go to war with each other.

The precedents are not promising. From 1900-1910, the world economy became more globalized and integrated than it ever had been and than it would again be until about 1995. In 1909, Norman Angell published The Great Illusion, a book warning of the potential damage to the global economy and therefore of the madness of any policy of going to war. Indeed, Angell argued that war was unthinkable. Unfortunately, it turned out in 1914 to be all too thinkable despite the high degree of global economic integration.

More recently, New York Times columnist Tom Friedman predicted in his book, The Lexus and the Olive Tree, that no two countries with McDonald's restaurants would ever go to war. That turned out to be one of Tom's less fortunate predictions when the United States and its allies began bombing Serbia during the Bosnian War of the early 1990s. Not discouraged, Tom doubled down in his follow on book, The World is Flat, by arguing that no two countries that share a global supply chain will go to war.

Well, China has just sent six ships to patrol the waters of what Japan claims are its  Senkaku Islands, of what China says are its Diaoyu Islands, and of what Taiwan says are its Diaoyutai. This is in response to the Japanese government's purchase of the islands from private owners in a move aimed at avoiding conflict with China by preempting the acquisition of the islands by the archnationalist Mayor of Tokyo, Shintaro Ishihara. Meanwhile, just to keep things interesting, South Korean President Lee Myung-bak recently made an unprecedented visit to what Seoul claims are its Dokdo Islands (rocks would be a better description) and what Tokyo claims are its Takeshima islands. This was in the context of various exchanges between Korea and Japan regarding the need for an apology for World War II by Japan's emperor before he would be issued an invitation to visit Korea and the statement by Japanese Prime Minister Noda that there is no concrete evidence of the Japanese military forcing Korean women to become "Comfort Women" during World War II.

Of course all four economies ( Japan, South Korea, Taiwan, China) are locked into the iPhone and other common supply chains and Japan, South Korea, and China are talking about negotiating a three way free trade agreement while also agreeing to join in the Comprehensive Regional Economic Partnership free trade deal now being negotiated between the members of the Association of Southeast Asian Nations, Australia, China, Japan, Korea, India, and New Zealand.

So far at least, all the supply chain cooperation and economic talks have not seemed to deter or dampen a rising furor over the disputed islands. The situation is particularly awkward for the United States because it is committed by its security treaties with Korea and Japan to defend both countries in the event of conflict. Thus, in the case of the Dokdo/Takeshima islands, the problem for Washington would be to decide whether to defend Korea or Japan. Or perhaps it would be the U.S. Army defending Korea and its claims and the U.S. Navy defending Japan and its claims. In the case of the Senkakus, the United States has not interest of its own in them and certainly no wish to go to war with China over them. But it is in effect being driven by the mayor of Tokyo (famously the co-author along with Sony co-founder Akio Morita of the book, The Japan that Can Say NO) into a position that could easily lead to a U.S.-China face off.

The rising tensions have actually introduced a higher element of risk into the supply chains and are a factor in the consideration by some companies of relocating some manufacturing back to the United States and to other non-Asian locations.

As similar developments did in 1909, these events also raise the question of whether rather than God's diplomacy, trade is the devil's workshop. Before the relatively recent Japanese, Korean, Taiwanese, and Chinese economic miracles, there was no discussion or interest in these god forsaken rocks and shoals in the western Pacific. Over the years, the United States has enabled these countries to become rich by trading with them, investing in them, and transferring technology to them. Indeed, Washington has acquiesced in an asymmetric trading relationship in which the United States played the role of buyer of last resort as these countries pursued export led growth strategies. As this trade made them rich, Japan, Taiwan, Korea, and China all became more nationalistically sensitive and aggressive about their claims no matter how materially insignificant.

It's hard to say at this moment how things will work out. We just have to hope that Tom has it right this time about the supply chain thing.