Another Trade War Bill
On Tuesday, October 11, by a margin of 63-35, the U.S. Senate passed a bill that would penalize nations whose “currency is undervalued.” Countries found to be “currency manipulators” could see select products hit with higher duty rates, the choice of which would be determined on a case by case basis. While no nation was named, China is no doubt the primary target of this bill. You don’t hear our congressmen complaining about trade with Vietnam or Indonesia.
China is warning of a trade war if the bill becomes law. In the past they have threatened what they called the “nuclear option;” if Washington attempts to force them to revalue the yuan overnight at a fast pace, China would consider dumping their reserves of U.S. dollars and/or debt, which would send the dollar into a freefall and seriously threaten its status as the world’s reserve currency.
No one wins a nuclear trade war.
The bill now goes to the House of Representatives, and if it passes there, to the president’s desk.
John Boehner of the House of Representatives has gone on the record as calling the bill “dangerous.” So far the Obama administration has withheld its blessing on the bill, saying it prefers a policy of negotiation instead of lobbing political mortars. It doesn’t appear the bill will make it to law.
To me, such a bill is an act of desperation, or arrogance. Or both. According to the Federal Government’s Treasury.gov website, as of July 2011 China holds 1.17 trillion in treasury securities (U.S. debt). Because the US government has been unable to balance its books, China has become our biggest creditor. Putting a trade war bill forward is like going to a bank, hat in hand, to borrow a huge sum of money, receiving the cash, and then threatening to sue them.
Business relationships sour quickly under such conditions.
As far as currency manipulation goes, the U.S. government has printed trillions of dollars in recent years, devaluing the holdings of many nations who hold our currency—of which China is sitting on a pile of. There’s a hint of hypocrisy in putting a bill like this forward.
Let’s call it like it is.
I’m a sourcing agent that helps my customers import their products from China. Some readers might look at this and accuse me of bias. I try to avoid this as a rule and, especially, keep an apolitical approach. My aim is to report the truth no matter which side it comes down on.
- If the U.S. government’s fiscal house were in order (i.e. a balanced budget), we would have a stronger position with the Chinese when it comes to negotiating trade issues. In allowing the national debt to explode to dangerous levels we have abandoned our moral authority and positioned ourselves as a desperate debtor. It’s difficult to negotiate from a position of strength with the bank when your credit limit is maxed out.
- Even if the Yuan appreciated by 25% overnight, would we still be able to compete with China’s average manufacturing wage of less than $2.00 an hour, vs. ours of $20.00 an hour? I recently quoted a product for a customer where the Chinese price was one tenth of what he was paying in the U.S. A 25% increase wouldn’t have made a difference. Rather than putting out trade war bills, we would be better served in negotiating agreements with China to lower its trade barriers and make their markets more accessible to U.S. companies. Getting China to buy more from us would be a win-win scenario. We still have a 13 trillion dollar economy that they want to sell into, and we want to sell to their exploding, now second largest economy in the world. Starting a trade war will only cause a rise in inflation and decrease our exports to China, which means higher cost of ipods (no one is going to pay $1,200.00 for an American made version-if any U.S. companies even step up, that is), and fewer Boeings and Caterpillars going to China. Lose–Lose.
- Even though many complain about the loss of manufacturing jobs in the U.S., the fact is that we’re discouraging it. The president of Intel recently made a shocking statement that he could build a manufacturing facility anywhere in the world and get a billion dollar incentive—except for the U.S. Something’s dreadfully wrong with this picture; we’re shooting ourselves in the foot with a .44 magnum. We should be the most pro–manufacturing country in the world with all the innovation and design going on here. This isn’t going to change until our state and federal governments remove their feet from the necks of U.S. manufacturing companies.
Trade war bills aren’t the answer.
Restoring fiscal sanity, negotiating with the Chinese to open their doors to U.S. imports, and discontinuing the practice of treating U.S. industry like Darth Vader would be far more effective.
The Mother of All Chinese Holidays is Approaching
From about the third week of January through much of February, Chinese companies shut down for their nearly month long Chinese New Year holiday. Orders that must ship before the third week of January should be placed by November 15, at the latest.
Also, please keep in mind that when the factories come back from their holiday that it is to full order backlogs, so production times are often longer in March and April as they catch up.
Words of Wisdom
All hard work brings a profit, but mere talk leads only to poverty.
The Exchange Rate
Yuan to the dollar, as of today: 6.37 to 1
Rate when the Yuan was depegged from the dollar on June 19, 2010: 6.82 to 1
Change: .45 (6.6%)
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