Dumb and Dumber
Last week, improved trade numbers gave hope that the
protectionist crowd might back off a bit. No such luck.
Since last week’s figures, Washington has turned up the
heat even further. On Friday, "safeguards" were imposed on
Chinese textile imports (trousers, shirts, underwear).
On Tuesday, the Treasury Department, as part of a biannual
report to Congress, threatened to accuse China of
manipulating its currency if the yuan is not allowed to
rise. The Financial Times notes that Beijing has been "put
on notice," and the Treasury Department expects a
revaluation "within six months."
At Outstanding Investments, my newsletter, we feel the Bush
administration is risking the health of the global economy
with these idiotic demands, and there could be implications
for commodity prices.
In a recent column, Bloomberg columnist Andy Mukherjee
"No safeguard can protect the $9-an-hour apparel-industry
wages in the United States when 15 million people in China
are cutting and sewing for an average 88 cents an hour.
Indian textile wages are even lower. Free trade in textiles
is valuable for the world’s poor people because it came
after three decades of oppressive quotas. Sacrificing it,
to fix China or perpetuate a false sense of job security in
North Carolina, is too high a price to pay."
Blocking textile imports from China will not help the U.S.
textile industry. It will simply allow other low-cost
producers, like India, a chance to step in and fill the
Washington is willing to risk an escalating trade war in an
effort to protect an industry that represents less than 1%
of U.S. jobs, with tactics that don’t even make sense in
the first place.
This is all political calculus. Despite what the president
might say in public, free trade is not a priority of the
Bush administration. By pandering to the textile states,
the White House can buy political support for its other
struggling initiatives (like Social Security) and take
momentum away from the Democrats at the same time. The
real-world consequences of these actions are simply brushed
under the carpet.
The loud calls for China to revalue the yuan are equally
moronic. Whether you think it imperative for China to
adjust its currency quickly or not, browbeating, lecturing
and thinly veiled threats are not the way to go about
making a proud country do anything… especially not an
authoritarian country with global leadership aspirations
and a wide nationalist streak.
Imagine how the United States would have responded if the
European Union had criticized Bush’s tax cuts, demanding
that they be repealed for the health of the global
financial system. Or imagine if the United Nations had
objected to the $295 billion highway bill making its way
through the U.S. Senate at the moment on the grounds of
fiscal profligacy. Dick Cheney would still be muttering
Yet in demanding a change in monetary policy, this is
exactly what the United States is doing to China.
Regardless of the economics behind an immediate China
revaluation, Washington gets a big fat "F" for
effectiveness (let alone diplomacy).
The hypocrisy of the situation makes it even worse: China
is being singled out because it is clearly visible in the
public eye, while the smaller Asian tigers are not. When
you combine the mercantilist foreign exchange policies of
South Korea, Taiwan, Singapore and Malaysia, the net effect
of their manipulation is hugely greater than China’s. But
picking on the little countries doesn’t make for good
press, while standing up to the dragon does.
Geo-politically speaking, this is a no-win situation. If
China’s leaders are forced to revalue sooner via the
strong-arm tactics and threats of Washington, they will
privately feel bitter, angry and humiliated. And what is
the point of antagonizing an opponent to little gain? If it
is a friend, you have only hurt the friendship. If it is an
enemy, you only increase its willingness to do something
rash in response to your threats.
There is also the very real chance that Beijing is more
afraid of the destabilizing effects of a premature
revaluation than it is of Washington’s words. Given the
awful state of Chinese banks and capital markets, it
remains to be seen whether China can open the foreign
exchange floodgates without triggering a daisy chain of
crisis events. If Beijing maintains the peg out of fear, or
for some other hidden reason, then the war of words can
only escalate, to no one’s benefit.
Meanwhile, China remains the second largest holder of U.S.
Treasurys, after Japan. By buying U.S. Treasury bonds,
Chain has been indirectly financing the U.S. consumer, and
the U.S. economy as a whole, as long-term interest rates
have moved lower. The Senate appears completely oblivious
to this. Bretton Woods II, our nickname for this long-
standing trading arrangement with Asia, has allowed the
United States to maintain its pace of spending in the first
place. Now congress want to throw a spanner in the works.
What does all this have to do with the markets? Simple: An
outbreak of protectionism is the single greatest threat to
the health of the global economy, which in turn drives the
demand for natural resources. Washington is risking
everything for the sake of petty political gamesmanship. It
is either too shortsighted to see what it is risking, or
too cocky and overconfident to care.
Protectionism is a bit like a nasty virus. The global
economy is more susceptible to the virus when it is
weakened, as it is now, and it only takes one carrier to
spread the virus and cause an epidemic. We haven’t seen a
true outbreak yet, but I can tell you I’m worried about
On the bright side, the markets have brushed off the
Treasury’s report, perhaps relieved that the language was
more restrained than it could have been, or hopeful that a
stalemate will persist.
By A Reader In Norway
First of all, I’d like to thank you for educating me in the
financial and economic realities of the world. The media
and politics are too full of incompetent people making
flawed arguments and statements. Your views and opinions,
presented in your easily understandable writing, are
exactly what I need.
But I wish you’d comment on the Norwegian markets
occasionally. I believe Norway holds some excellent
opportunities for savvy investors…like you guys at the
As I’m sure you know, Norway has a significant trade
surplus and a foreign exchange fortune closing in on $200
billion. For a country of 4.5 million people, this is a
It’s all thanks to oil and gas exports. The problem is that
the politicians here, just as in the U.S., don’t have a
clue. They are spending the oil and gas revenues on better
schools, better homes for seniors, more expensive roads,
higher minimum wages, etc. and all of this is driving up
prices. Now we are facing a rate hike, I’d guess.
Of course, the higher costs of producing anything in Norway
is killing business activity, except oil and gas
production, so the bust will come, just like it has in
every other country that has ever made a fortune exploiting
natural resources. And when that time comes, if I’m still
kicking, I’ll be short the Norwegian stock market and move
to Sweden – or France for that matter.
For the record, I am a 28-year-old Norwegian citizen and a
consultant in the oil and gas industry. I try to help the
oil companies make even more money than they already do,
which is an ungrateful job, as the oil companies don’t seem
to understand this concept.
If I made any economical [sic] blunders in this letter it’s
because my Masters degree is in engineering, not economics.
Somebody fooled me into believing I’d make more money as an
engineer. It still has not bought me the Grand Soleil 40 I
desperately need… so I’m now counting on the dollar
WTI NYMEX CRUDE