Get ready for the coming trade war with China
Today's Financial News - Posted January 28, 2009
Turbo-Tax Man Timothy Geithner’s charges that China manipulates its currency could be the prelude to a full-blown trade war with China.
by J. Christoph Amberger
Baltimore—TFN: Something is brewing in Washington and it has nothing to do with stimulus dollars.
U.S. Treasury Secretary Timothy “Turbo-Tax” Geithner has called for China to loosen restrictions on its currency. Geithner said last week said that President Obama believes China is “manipulating its currency.”
This is a charge the Bush Administration had always been careful to avoid, even after Beijing restricted yuan gains against the dollar in July 2008. (The yuan had risen 21% since China loosened its exchange-rate peg three years earlier.)
It’s not new. Back in June 2007, a gaggle of Democrat and Republican senators planned to unveil legislation to force China to revalue its currency, threatening tariff hikes.
And this is what I think these refried charges are aiming at: A trade war with China.
Now, there’s no doubt in my mind that Bejing manipulates its currency. It has done so for years… by pegging the yuan to the U.S. dollar as the dollar declined against almost all other major currencies. Because in a global economy, you compete on price. Your most valuable assets are cheap labor and a devalued currency.
But Chinese labor has experienced serious cost increases over the past three years. And the U.S. dollar just posted 20-year highs against currencies like the British pound sterling… as almost all other currencies have declined by 20%, even 30% and more since their record highs last year.
For China’s exports, this is a double whammy: Its razor-thin margins are being squeezed by increased cost… and by the relatively higher price other nations have to pay for yuan-denominated goods.
*** Special Report: “This drug-resistant “superbug” could be the biggest source of “Jackpot Justice” since asbestos litigation”
So why would China voluntarily let the yuan appreciate even further, considering its exports are shrinking and its GDP growth contracting into the danger zone?
The manipulation charge makes no sense to people with a smattering of basic economics. Stephen Roach, Morgan Stanley’s Asia Chairman, told a panel in Davos, Switzerland today that allowing the yuan to strengthen would be “economic suicide” in an economic recession: “I’ve never seen an economy in recession voluntarily raise their currency. It’s horrible advice.”
It is so obvious that China would reject the very notion, we need to ask what the true motivation is.
I believe this is the opening salvo in what could become a full-blown trade war with China. It’s political in nature: Imposing punitive tariffs, say on China’s much-disputed textile or steel output, would make Chinese exports non-competitive with American-made goods. It would accelerate a movement of industrial relocation that has been going on for the last two years… the repatration of jobs from low-cost countries back to America.
It might even be a prelude to the promised “green job revolution”: As Germany experienced first-hand last year, it was mainly Chinese manufacturers who profited from government subsidies to instal solar panels on homes and businesses. Even German companies, who were the intended beneficiary of government largesse, had started to move production capacity to China… for the sake of higher margins. By setting the stage for punitive tariffs, Obama is making sure that money stays in the United States.
Politically, it’s a win-win situation. In the medium term, it would mean more manufacturing jobs in the States. Economically, it’s setting the stage for higher inflation: Globalism is deflationary in nature. Protectionism cerates higher prices for the same goods. And inflation is what’s needed to reduce the relative value of staggering new debt… and to increase the pressure on the American consumer to spend.
Who knows, if we apply the FDR patent remedy to economic depression, maybe even the “Old Reliable” of economic stimuli may find new use: A military build-up to counter the increasing hostility between China and the United States.
Then again, it may blow up in the Administration’s face. With soaring unemployment and inflation and sagging economic growth in China, the yuan might do what all other currencies have done as the American consumer stopped buying foreign-made goods. Plummet.
In which case, Washington no longer can blame currency manipulation for the competitive disadvantage.
Recommended Reading
“Prestige Brands: The best stock under $10?”
“Lithium: The one commodity with a profitable future”
Next Article: 30 inmates file lawsuit against PA prison: Prepare for a wave of MRSA litigation
Be the first to leave a reply.
Your comments are welcome
Follow TFN via RSS or Twitter |
 |
 |
 |
Advertisement
Latest Headlines
- The Big Picture for Sinobiopharma, Inc. (SNBP)
- Beazer Homes USA, Inc. (BZH) and Hovnanian Enterprises, Inc. (HOV) up despite horrid housing news
- The FDA catalyst: 2010 moves in MannKind (MNKD), Roche Holding (RHHBY), Acorda Therapeutics (ACOR) show it still works!
- Steepest drop since Feb. 2009: Here we go again!
- Is the silver run over? Coeur d’Alene Mines (CDE), Silver Wheaton (SLW), Alto Group (ALTO), Hecla Mining (HL), Endeavour Silver (EXK) close down