Escalated Nonsense

Is Snow crazy? – at - the best of the week's international financial media.

On May 17, the U.S. Treasury Department issued yet another strong warning to China over its currency. A CNN/Money article on May 17 reports:

'China could be deemed a manipulative trade partner' if it doesn't revaluate the yuan soon. Current Chinese policies are highly distortionary and pose a risk to China's economy, its trading partners and global economic growth,' [the Treasury Department report] said. It's our view that the time has come' for China to have more flexible exchange rates, U.S. Treasury Secretary John Snow said Tuesday.'

U.S. exporters claim the yuan is as much as 40% undervalued, making Chinese goods unfairly cheap.

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On May 18, without even bothering to let the political dust settle, Snow escalated his China attack. Reuters reports:

'We are escalating the rhetoric and time is running out,' Treasury Secretary Snow told questioners after a luncheon address to the American Iron and Steel Institute, where he indicated he was confident that China will loosen the peg it maintains on its currency.

'I fully expect in the next few months we are going to see that,' Snow said, adding he hoped to help ward off mounting congressional calls for protectionist measures, which he said reflected a decidedly anti-China' feeling on Capitol Hill that was potentially dangerous.'

Snow went on to admonish China as 'a major source of knock-off' items from fake Rolex watches to computer software' and called on them to 'make a stronger effort to honor international trade commitments to open its markets and protect copyrights and patents.'

Would someone please shut this clown up before he does serious damage? Escalated rhetoric is just about the last thing we need. How can Snow possibly be helping matters by saying 'time is running out,' and, with Congress, threatening 27.5% tariffs?

As far as I am concerned, our only beef with China is over copyright protection and patents. Then again, corporations know who they are dealing with. No one is forcing U.S. manufacturers to outsource to China. At any rate, copyright laws, which are a legitimate U.S. gripe, do not have anything to do with whether or not the renminbi should float.

If anyone finds my 'clown' comment about Snow a little too harsh, then please consider the definition of 'strong dollar' put forth by Mr. Snow himself. Investment Rarities reports:

'Snow said that his understanding of a strong dollar is the people should have confidence in it. You want them to see the currency as a good medium of exchange, you want the currency to be a good store of value, something that people are willing to hold, you want it hard to counterfeit.''

Let's see. A strong dollar is one people have faith in because it is a good medium of exchange and hard to counterfeit. I suggest that economists the world over were laughing their heads off at the clownishness of that definition.

A few days earlier, on May 13, the U.S. government stated that U.S. consumers were paying too little for bras and underwear. Unfortunately, I am not joking. Here it is in black and white, or, if you prefer, in trousers and boxer shorts -- The Washington Post reports:

'The Bush administration will impose new caps on imports of clothing from China, responding to appeals from U.S. textile companies for protection from a rising tide of Chinese apparel that began to cross the Pacific after global trade rules were changed Jan. 1. The action, taken by a U.S. interagency panel, will limit the cotton trousers, underwear and cotton knit shirts and blouses that China can export to the United States this year.'

Look, do we or don't we believe in free trade? To me, it looks like we don't. In order to save, perhaps, 500 underwear-manufacturing jobs, or whatever the count might be, we want everyone in the United States to pay 27.5% more for their underwear. Is this a good deal? For whom? I suppose it makes sense for the 500 people making underwear, but for the rest of the 280 million people in the United States that wear underwear, I seriously doubt this looks like such a great deal.

Imagine what the U.S. inflation rate would be if all goods coming out of China were suddenly jacked up by 27.5%. Anyone care to calculate that?

Let's look at the reality of the situation:

1.China is holding all the cards.

2. China knows it is holding all the cards.

3. The United States may or may not be smart enough to know that China is holding all the cards.

4. The United States will be a huge loser in a trade war with China.

5. Actually, the whole world will lose if the United States goes into a trade war with China, as it will cause a worldwide recession, or perhaps even a depression, should the United States elect to put 27.5% tariffs on Chinese goods. Worldwide trade will come to a screeching halt.

6. Given the United States' short-term focus and China's long-term focus, China cannot and will not be stampeded or bluffed into doing something that it does not want to do until it is damn good and ready.

As proof of points 2 and 6 above, I offer evidence from a May 18 Reuters article:

'China...dismissed U.S. criticism of its fixed currency peg and attacked European and U.S. steps to curb Chinese textile exports as unfair...

'But a senior official reaffirmed an assertion on Monday by Chinese Premier Wen Jiabao that China would not be bulldozed into acting.

'We agree with many of you that a more flexible regime would be better for China's economy. But there is no time frame for such a change, as conditions are not ready yet,' Wei Benhua, deputy chief of China's foreign exchange regulator, told a trade conference in Singapore.

'Wei said accusations that China was deliberately holding down the yuan were groundless and told the United States to put its own house in order before blaming others' for its trade deficit.

'Commerce Minister Bo [Xilai] also cried foul at moves by the United States and Europe to curb China's textile exports...

'Bo said Washington and Brussels had had 10 years, until the end of 2004, to phase out quotas on developing countries' textile imports.

'Regrettably, developed countries such as Europe and the United States failed to do so,' he said. 'They kept the vital part of 70-90% of quotas until the end of last year, which led to a temporary surge in Chinese textile exports early this year.''

In a harsh attack against selective enforcement of rules by the United States and the European Union, Bo went on to say, 'In international trade, we can't have pragmatism: If the rule is favorable, you implement it; if it is not favorable, you don't implement it. The current problem of textile trade is a typical case.'

Let's step back from all this rhetoric and take a look at the facts. China fixed its currency, the renminbi, to the U.S. dollar in 1995. For nearly seven years, until January 2002, the Chinese currency went UP with the U.S. dollar. In this time frame, no one, including the United States, complained about the peg.

Since January 2002, the renminbi has been going down along with the U.S. dollar. Over the same period, the Chinese have become the biggest U.S. trading partner, and Chinese goods exports form a significant portion of the U.S. trade deficit.

China has held its peg through thick and thin and avoided at least one major Asian currency crisis. Does that sound like manipulation? If it sounds like manipulation to you, then please reply and tell me how.

Let's recap. In the past month, we have officially accused China of manipulating the renminbi, threatened China with tariffs, reinstated textile quotas, and escalated the rhetoric one day later.

Originally, I thought that Congress could not possibly be stupid enough to risk passing another Smoot-Hawley-type protectionist bill, or if by chance they did, that the president would not sign it, but this escalated nonsense now has me wondering.

Then again, perhaps Congress has it correct. Underwear is just too cheap for our own good. We all have plenty of money to afford 27.5% higher prices, don't we?

by Mike 'Mish' ShedlocFor Whiskey & Gunpowder