China Blinks

http://www.reuters.com/article/idUSTRE62H0D520100319

As reported in the above-linked article, China has softened its stance on the yuan exchange rate dispute and will send an envoy to Washington to try to defuse the issue. 

I’m not surprised.  Since the U.S. is the one with the huge trade deficit, we have absolutely nothing to lose by taking action to restore a balance of trade, and China has no effective means of retaliation.  Like a mugger who stands over his victim, wielding a knife, China now finds themselves powerless when the U.S. draws a 9 mm. 

The threat of the dumping of U.S. treasury holdings in retaliation for a move to label them a “currency manipulator” – a threat never made by China but merely feared by trade policy hand-wringers – was never a real threat.  Between other nations and the Federal Reserve, China’s treasury holdings could easily be absorbed.  On the other hand, the threat to China’s economy from the loss of its U.S. exports is real and serious.  It could collapse their economy. 

The U.S. has the upper hand.  The Obama administration should pull the trigger on that 9 mm.  Label them a “currency manipulator.”  Then hit them with tariffs, steep enough to restore a balance of trade.  If they complain, then remind them that, by all rights, we should hit them with even steeper tariffs and run a trade surplus until we’ve recovered the $2 trillion that they’ve drained from our economy in the last decade.

This is the first time that China has shown even a hint of humility in its relationship with the U.S. since it dictated to the Bush administration how many “very”s should precede the word “sorry” in Colin Powell’s apology for the American reconnaissance plane that supposedly wandered over their air space.  It’s a sign of just how terrified they are of losing even a little of their U.S. market share.  And it’s a sign to the Obama administration that they have nothing to fear from China’s hollow threats.

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9 Responses to China Blinks

  1. Mark Hall says:

    If China Blinks, we need to “wink” back and say:

    SORRY BUB, IT’S ONLY BUSINESS……

  2. WRC says:

    I beg to differ. China can afford to play along with us in an attempt to avoid any unnecessary disruptive action in the way of trade. But should push come to shove, I think we are the ones over a barrel rather than China. We might be able go a long way toward collapsing China’s economy in the short term, but we are already experiencing a collapsing economy.

    There’s nothing in the short term that we can do to restore a balance of trade between the U.S. and China. We’ve already given away the store — because we don’t believe in protecting our own owner/operated marketplace any more.

    Should Chinese imports be suddenly be cut off, our big problem would be “where would we get all of our stuff???” Walmart’s stock would dry up in a hurry! We’d have to find new sources for just about everything we ordinarily buy in a wide range of consumer goods. Our economy would be paralyzed

    China’s big problem would be to hastily redirect its excess production into its domestic market, which is four times larger than our own and developing fast.

    Tooling up to produce for ourselves again would take time — a lot of time. It has taken us over 20 years to export much of our productive capacity. We can’t rebuild it in a matter of months. We need to do it, of course, but we are not in a position to do it quickly.

    China would be hurt by losing part of its U.S. export market, but China is operating from a position of industrial strength, financial solvency, and huge monetary reserves. We, on the other hand, are working from a position of acute financial distress, lack of current productive capacity, and crushing debt.

    The things that have brought us to this impasse have been obvious ever since we opted for free trade, globalism, and international interdependence (dependence on others to do the production work for us). In opting to be a service economy of non-producing consumers, we opted out of all of our natural, hard-earned, national advantages.

    Now, after over 20 years of “free trade” (which has decimated our own “real” economy and shipped our jobs overseas), we accuse China of manipulating its currency. It hasn’t manipulated its currency, it simply pegged it to the U.S. dollar from the beginning. China told us, “We’ll deliver the goods at the cheapest prices possible” and we bought into it big-time. Whether they did it in good faith, or merely outfoxed the wolves, I don’t know. But what I do know is that the blame lays with Washington policy makers rather than China.

    The free traders told the American people that cheap imports from China (and elsewhere), were a greatest blessing American consumers could ever hope for. Cheap imports was what it was all about — like mana from Heaven. It was supposedly an extraordinarily good deal. It permitted people to by more with less. And soon they had less — fewer jobs and lower wages. And they had become addicted to cheap imports.

    Now we want to change the rules because we awaken, 20 years later, with no clothes. While people need even cheaper goods now than ever before in order to maintain their life-style, we’re in the embarrassing position of having to beg China to revalue its currency to make those goods more expensive to American consumers.

    If the Chinese won’t do it, we’re threatening to impose protective tariffs. They should have thought of that back when they decided protectionism was a bad, bad, bad thing. Protectionism is so bad that while we had it, we were always able to produce just about everything we needed right here in the U.S.A., and always had a favorable balance of trade.

    One more thing. China’s national destiny is in the hands of the Chinese government and the Chinese people. China owns its own banking system and its own money. On the other hand, our national destiny has been relinquished to international capitalists and private money powers who couldn’t care less about our country or the American people.

  3. ClydeB says:

    I would choose to quibble a bit. There is very little coming from China or any other foreign country that we actually need to survive. The greatest loss would be the unemployment at Walmart in the short term, while long term the tooling up to domestically produce that which was actually needed would provide relatively good jobs.
    Any beneficial change we make will be uncomfortable and resisted by many, but to do nothing will ultimately be much worse. We absolutely must break the pattern of massive foreign payroll subsidies.

    • Pete Murphy says:

      Agreed, Clyde, except that not even Walmart jobs would actually be lost. People would still consume the same amount of products, so those retail jobs would still exist, if not at Walmart then somewhere else. Actually, since wages would be higher, people might actually consume more, which would actually increasethe number of retail jobs.

  4. Randy says:

    Pete doesn’t want to accept that The Consumer is King and every nation is chock full of them fools and therefore the wise are completely outnumbered by their “wisdom” thus making democracy an exercise in futility.

    The productive employee is trapped in the triangle of stupidity that is the consumer, shareholder, and taxpayer.

    So what of value is the mythical USA vs China bantered about here? The productive in the USA lose their jobs while the productive in China don’t make squat. The arbitrage brokers and their partners in crime make all the loot.

    Here is The Consumer Speaking to you:

    “I don’t care if that food import is laced with heavy metals, its cheap.”

    “Antioxidants are good for me, the guru on TV said so. And lots of studies back it up”

    “I could go to several smaller retailers but the big box is so much more convenient”

    and on and on…

    The Consumer embraces Delusions and Monopolies.

    That ugly reality eventually results in a World Central Bank with enormous powers. How could productive people in manufacturing possibly compete?

    • Pete Murphy says:

      Randy, you are a consumer too. So aren’t you one of “them fools?” By what tortured logic do you therefore count yourself among “the wise … completely outnumbered by their (the fools’) “wisdom”? By your logic, all our problems would be solved if we simply eliminated all consumers.

  5. Mark Hall says:

    A TALE OF TWO MERCANTILIST COUNTRIES THAT TRADE WITH THE U.S.:

    Although the U.S. Import to U.S. Export ratios for various countries outline obvious trade imbalances, the U.S. Per Capita Consumption of imports from each country compared to each country’s Per Capita Consumption of U.S. exports coupled with the percentage of Total U.S. World Trade with each country reflects MUCH MORE STRIKING EXAMPLES of these trade imbalances.

    ** Population and trade data used in this analysis obtained from U.S. Census Bureau website.

    U.S. IMPORT TO U.S. EXPORT RATIOS:

    CHINA:

    1995 = 3.87 to 1.0
    2000 = 6.18 to 1.0
    2005 = 5.91 to 1.0
    2007 = 5.11 to 1.0
    2009 = 4.26 to 1.0

    JAPAN:

    1995 = 1.92 to 1.0
    2000 = 2.26 to 1.0
    2005 = 2.52 to 1.0
    2007 = 2.38 to 1.0
    2009 = 1.87 to 1.0

    U.S PER CAPITA CONSUMPTION OF IMPORTS
    FROM TRADE COUNTRY COMPARED TO PER CAPITA
    CONSUMPTION OF U.S. EXPORTS TO TRADE COUNTRY:

    CHINA:

    1995 = 17.67 to 1.0
    2000 = 27.29 to 1.0
    2005 = 26.12 to 1.0
    2007 = 22.41 to 1.0
    2009 = 18.55 to 1.0

    JAPAN:

    1995 = 0.90 to 1.0
    2000 = 1.01 to 1.0
    2005 = 1.09 to 1.0
    2007 = 1.01 to 1.0
    2009 = 0.77 to 1.0

    U.S TOTAL TRADE WITH COUNTRY AS %
    OF U.S. TOTAL WORLD TRADE:

    CHINA:

    1995 = 04.31%
    2000 = 05.81%
    2005 = 11.06%
    2007 = 12.38%
    2009 = 14.00%

    JAPAN:

    1995 = 14.14%
    2000 = 10.57%
    2005 = 07.48%
    2007 = 06.65%
    2009 = 05.63%

    COMBINED MULTIPLIER EFFECT:

    When you multiply the (Import to Export Ratios) X (Per Capita Consumption Ratios) X (Percentage of Total U.S. World Trade), the resulting number reflects the degree of imbalance.

    NOTE: ANY NUMBER ABOVE 1.0 IS NEGATIVE FOR U.S. ECONOMY

    CHINA:

    1995 = (3.87 X 17.67 X 4.31%) = 2.95
    2000 = (6.18 X 27.79 X 5.81%) = 9.98
    2005 = (5.91 X 26.12 X 11.06%) = 17.07
    2007 = (5.11 X 22.41 X 12.38%) = 14.17
    2009 = (4.26 X 18.55 X 14.00%) = 11.06

    JAPAN:

    1995 = (1.92 X .90 X 14.14%) = .24
    2000 = (2.26 X 1.01 X 10.57%) = .24
    2005 = (2.52 X 1.09 X 7.48%) = .21
    2007 = (2.38 X 1.01 X 6.65%) = .16
    2009 = (1.87 X .77 X 5.63%) = .08

    CHINA VS. JAPAN U.S. TRADE DISPARITY:

    1995 = (2.95 compared to .24) or 12.29 Times Worse
    2000 = (9.98 compared to .24) or 41.58 Times Worse
    2005 = (17.07 compared to .21) or 81.29 Times Worse
    2007 = (14.17 compared to .16) or 88.56 Times Worse
    2009 = (11.06 compared to .08) or 138.25 Times Worse

    AS EVIDENCED BY THIS ANALYSIS, OUR PROBLEMS WITH CHINA GO WAY BEYOND JUST POSSIBLE CURRENCY MANIPULATION.

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