Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

China Currency Bill: Politics vs. Economics, Is the U.S. ready for a global trade war?

Politics / US Politics Oct 10, 2011 - 02:17 AM GMT

By: EconMatters

Politics

Best Financial Markets Analysis ArticleThe latest move on China politics at Washington is the China currency bill, due at the U.S. Senate on Tuesday, Oct. 12.  The proposal would levy tariffs on China and four other Asian countries for artificially depressing the value of their currencies to boost their exports.

To us, it seems evident that those in Washington have not thought this through completely (or chose to ignore).  Here is how the math would work.


According to the government trade data, China imports from the U.S. about $57.7 billion for the first 7 months of 2011 ($100 billion annualized), and the number will only grow with increasing Chinese household income.  So just based on pure math, the Big Question #1 is this:

How many American jobs will be lost if the U.S. loses all or even part of the $100 billion annual export business with China when China retaliates with similar tariffs on U.S. goods?  

The same math works for the U.S. imports from China, which is at about $374 billion annualized using the July 2011 year-to-date figure.  So the Big Question #2 is:

How much damage would the U.S. tariff on Chinese imported goods do to the pocketbook of American business and consumers?   
It seems many are quite fixated on the trade deficit number the U.S. has with China.  However, as the table (showing the top 10 countries) and chart below illustrates, America runs trade deficits with many other trading partners, not just China.  And realistically, the total trade deficit of $160.4 billion for the first seven months of 2011, even if completely reversed to zero, is a tiny drop in the big bucket of the $14-trillion U.S. economy.

The point is that even if China revalues Yuan to Washington's satisfaction, it will not have the significant impact to the U.S. economy and jobs as some are led to believe.

Chart Source: U.S. Census Bureau


One strong support of this currency bill is that by keeping the Chinese Yuan artificially low, many American jobs have lost/outsourced to China; whereas in fact, tax is actually one of the biggest considerations that U.S. corporations have moved operations overseas, including China.  

Another reason China has become attractive to many western firms (including the U.S.) is the access to a large and highly educated work force on a lower pay scale.  Due to the long ingrained cultural belief that values higher education, China has too many college graduates that the domestic economy can't fully absorb yet.

Apple, for example, has a huge China operation with Foxcom producing its popular i products, but hit a wall at Brazil. Reuters reported that Apple's $12 billion iPad deal with Brazil came to a screeching halt partly due to "Brazil's own deep structural problems such as a lack of skilled labor," high taxes and bad infrastructure.

In addition to decades of anti-business policies, including unfavorable tax treatments and bureaucratic regulations, to disincentivize establishing business at home, the U.S. also has similar structural problems to those of Brazil in labor and infrastructure.

A few forecasts we have seen so far already indicate that the U.S. is not producing enough college educated work force to even fuel its normal growth.  On the infrastructure side, according to the estimate by the American Society of Civil Engineers (ASCE),  America is in need of $2.2 trillion investment to high-grade the aging and outdated infrastructure up to where they should be.

Now, since the central focus of this latest currency bill is China's "currency manipulation", we can take a look at other countries that have also dabbled in this sport.

For instance, Japan has repeatedly intervened in the currency market over the years.  So, does the massive unprecedented G7 Yen intervention  in March count?  How about when Swiss National Bank (SNB) vowed to "defend" the minimum EUR/CHF exchange rate at 1.20 with some very sizable interventions in the open currency market?

The two aforementioned examples may all have perfectly legitimate reasons, but they highlighted the fact that no country wants a strong currency which hurts its export business.  Many central banks have intervened in the currency market (some well publicized, some more "discrete") when its currency put the country at a disadvantage.  And these past interventions will not be the last either.

On that note, China most likely could make a fairly good argument that the U.S. Fed's programs of QE's, Twist, the rising federal deficits, and debt are all just part of the effort by the U.S. government to debase the Dollar in order to have the trade advantage over rival currencies as well.

Also from a logical point of view, should the bill not be amended to include all of the U.S. trading partners who have engaged in currency intervention activity?  If so, then the Big Question #3 would be:

Is the U.S. ready for a global trade war?   

So it is quite hypocritical for the politicians at Washington to single China out when there are many other countries (including the U.S.) doing exactly the same thing.

What it comes down to is that many U.S. politicians are facing reelection in 13 months, and China currency bill is one easy mark to show voters that they are doing something to address the unemployment issue.  However, one such bill would come with a hidden high price tag and serious repercussion to the U.S. economy that taxpayers can not afford to foot.

Even if Washington has the answers and contingency plans in place for the 3 Big Questions asked herein (which is highly improbable, and also begs the question of risk/reward and value-add), the currency bill is nothing more than politics to save their own jobs in the next election, instead of one with any kind of economic considerations.

Frankly, in light of the U.S. debt and deficit shamble, lawmakers would be much better off focusing on cleaning the fiscal house (and not to repeat the embarrassing debt ceiling debate to get yet another sovereign credit downgrade), instead of spending precious time and energy taking on China and/or any of the trading partners over currency valuation.

By EconMatters

http://www.econmatters.com/

The theory of quantum mechanics and Einstein’s theory of relativity (E=mc2) have taught us that matter (yin) and energy (yang) are inter-related and interdependent. This interconnectness of all things is the essense of the concept “yin-yang”, and Einstein’s fundamental equation: matter equals energy. The same theories may be applied to equities and commodity markets.

All things within the markets and macro-economy undergo constant change and transformation, and everything is interconnected. That’s why here at Economic Forecasts & Opinions, we focus on identifying the fundamental theories of cause and effect in the markets to help you achieve a great continuum of portfolio yin-yang equilibrium.

That's why, with a team of analysts, we at EconMatters focus on identifying the fundamental theories of cause and effect in the financial markets that matters to your portfolio.

© 2011 Copyright EconMatters - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

Ernie Messerschmidt
10 Oct 11, 10:31
we already have a global trade war

We already have a global trade war. The real American economy and the interests of the American people have pretty much lost. China and the international corporations and big banks have pretty much won. But the fat lady hasn't sung yet. The shitty status quo that the author defends is in crisis, the American people are rising up. Ian Fletcher is 100% right in his book Free Trade Doesn't Work. "Free trade" is theoretically wrong ideology, suicidal for the American economy and people, and in place because it is in the ruling capitalist pigs' interest. Things can turn around. War is the nature of things, certainly in international economics. America, an ideology-drugged sleeping giant, needs to wake up and fight back. Watch out, China!


Post Comment

Only logged in users are allowed to post comments. Register/ Log in