Marc,

the hypothetical or real war with China you are describing is, to me, not much of a military matter. It is a matter of smart economic and social policy here that recognizes the inevitable consequences and opportunities of globalization. I don't think we should worry much about an enormous trade deficit with China or any other one country. Trade, being mutually beneficial theft, is a two-edged sword. They get a lot out of it too.

I have a huge trade deficit with the local grocery stores: They don't buy and read nearly enough of my papers. But I don't lose much sleep about that. We should worry about having a negative national savings rate across long periods of time...just as I should worry about a negative personal savings rate over long periods of time. But I do not care about running a truly massive and frightening trade deficit with Kroger, provided I am running surpluses elsewhere to cover it.

True, China could cause short-run pain here by cutting us off, but they would hurt too and there are a lot of other countries who would be only too happy to pick up the production slack. And then where would China be: "OH we promise never to do it again, please come back and buy our products...puh-leeeeeze?" Fool me once, shame on you. Fool me twice, shame on me. Trade wars, as countries have discovered, are very expensive, and cause people to diversify away from the aggressor, to the ultimate long-run detriment of the aggressor.

We should worry about income distribution and inequality of opportunity, things that are worsened by the loss of the jobs of yesteryear's economy, whatever they may be. But the gains we get from trade generally are enough to compensate for those losses. We need to be more serious about that compensation, and also get on with the business of distributing education (and re-education) widely.

True riches simply cannot be piled up by producing the goods of yesteryear, which have become so commodified that almost anyone can produce them, so that they essentially trade in competitive markets: There's no interesting rent to be earned there. Let the Chinese earn those relatively uninteresting and trivial rents and sell us the goods back at bargain basement prices. Relative to their incomes, those trivial rents look big and give them these big growth rates. Yes, $10 is 100% of $10. But it is only 1% of $1000. We cannot get their growth rate from producing those goods and earning those rents.

Real rents, massive surplus value, comes from innovation and creative destruction: We want to be the masters of that economic universe, and then distribute the gains sensibly. We do that by making our people highly educated, easily re-educated, easily mobile with highly portable health insurance and retirement and hence very dynamic employment markets, and so forth. Charity really begins at home here. These things are way cheaper, better and smarter long-run solutions to a "threat" like China than anything else I can think of that we might do.