Remember Smoot-Hawley

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I'm not saying this is a sure thing, but look for the equity markets to tank tomorrow on news that the U.S. will impose new restrictions on Chinese exports of men's and boy's clothing.

Markets had rallied on news that the Treasury Department, while calling on China to cease yanking the yuan around like a White House reporter at a press briefing, had stopped short of actually doing something about the yuan yanking, like imposing trade sanctions.

When governments signal that they intend to stop markets from working, markets tend to respond.

NEXT: The Rumsfeld Diagram

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  1. Actually, the market’s move today probably had more to do with inflation data and, to a lesser extent, HP’s earnings report. Most people didn’t expect trade sanctions over the Yuan issue just yet, so I doubt that this reprieve mattered a lot to Wall Street. And judging by the fact that the dollar fell today, I think that many now that feel that more pressure will be placed for a revaluation.

    And if meaningful pressure is placed on China to revalue the Yuan, and it’s believed that the move is likely to force Beijing’s hand and not spark a trade war, the markets might respond positively. For they recognize that screwing with the market for currencies is as harmful over the long run as screwing with the market for goods and services.

  2. One smart thing China has done is to keep its currency stable in relation to the currency of its biggest customers. Keep those cheap microwave ovens coming. I want one strong enough to pop a bag of popcorn between innings.

  3. Twba:

    Keep in mind, China is doing that through rigorous government control of its currency. Aren’t we all about the free market here? How is this a good thing?

  4. But also keep in mind that lowering trade barriers is beneficial even if it is entirely unilateral and unrequited.

    The trade impediments imposed by the Chinese government fall by and large on their own populace. And anything the US might do to “retaliate” or “enforce our trade agreements” hurts the US populace more than doing nothing does.

  5. The trade impediments imposed by the Chinese government fall by and large on their own populace.

    Not true. China’s pegging of the Yuan at an artificially low rate means that products made in the US (or any other foreign market, for that matter) are sold at an artificially high price relative to Chinese goods in foreign markets (including China). So non-Chinese manufacturers – American, Japanese, Brazilian, whatever – suffer in the process, hurting the respective nation’s economy.

    In addition, China’s currency manipulation has helped fuel overinvestment in the manufacturing sector within China, which could harm not just China but the broader global economy in due time. And the US treasury bond purchases that China has used to maintain its peg have kept US interest rates artificially low, enabling problems such as the housing bubble and Bush’s monstrous deficits. Granted, the currency manipulations of other nations maintaining trade surpluses with the US have also played a role here, but only Japan’s action comes close to China’s in terms of harm done.

    The question of whether retaliatory measures would do more harm than good depends heavily on how successful they are in getting China to revalue, and how much damage is done in the interim. I have to admit that if Congress’ proposal for an across-the-board 27.5% tariff on Chinese exports in the absence of a revaluation was carried out, the revaluation would have to come pretty quickly in order to justify the damage.

  6. I had asked in an earlier post if the new US Trade Representative, Rob Portman, had had a hand in any of this.
    No answer.
    If he had not, why not? Had someone done greased his skids so he could hit the ground skidding?
    Locally, the WhistleBlower, my buddy, is trying to have fun with Rob “Rob” Portman and the many candidates vying for his Congressional seat. The WhistleBlower has also nicknamed him, Rob “Fighting for higher WalMart prices” Portman.
    His District 2 of Ohio is eagerly sought after because there is no way to lose reelection, once you have won the first one.
    District 2 is as secure as Social Security and a United Airlines pension used to be.

    Did anyone notice how USA Today came out again today more or less against the infamous War on Durgs?

  7. By the way, the economic impact of Smoot-Hawley seems to have been much exaggerated. See
    http://eh.net/encyclopedia/?article=obrien.hawley-smoot.tariff

  8. I wonder how the guys demanding the revaluation of the yuan are going to deal with the massive tanking of the bond and Treasuries markets that’s sure to follow once the Chinese central bank stops vacuuming up every T-bill in sight? Not to mention all the hedge fund morons who have bet so heavily on the status quo – I wouldn’t mind seeing the hedge funds collapse, as they’ve been a disaster waiting to happen for 4 years now, but they’re bound to cause a lot of collateral damage on the way down.

  9. China’s pegging of the Yuan at an artificially low rate means that products made in the US (or any other foreign market, for that matter) are sold at an artificially high price relative to Chinese goods in foreign markets (including China).

    So, the Chinese made DVD player I paid less than fifty bucks for was sold at an artificially low price. If China is intent on giving away its products, I won’t object. If Burger King sells Whoppers for ten cents, I won’t object.

  10. Eric II,

    My “by and large” may have been either too by or too large. I was just skimming an Australian government document that estimated that another country reducing its tariffs provides only one-ninth the benefit to the Australian economy as Australia’s reducing its own tariffs. But I’ll grant that I don’t know the currency market effects enough to claim an order of magnitude difference between the effects on China and the US there.

    That said, to a first order approximation, people in the US are sending little green pieces of paper to China in exchange for actual goods. And those actual goods are the whole point of having an economy. That a fair number of those pieces of paper come back to finance the US government’s oppression of its populace is more a fault of the US than China.

    It seems to me that the main problem with China’s mercantile collection of dollars is that it adds unpredictability to finance markets in the future. But there are lots of unpredictabilities in the finance market. This, oddly enough, is an unpredictability that we can predict.

    It comes down to what these things always come down to. The currency imbalance is a boogeyman that can be whined about until the government Does Something. And those doing the whining propose the Something Which Needs To Be Done so as to profit the whiners.

  11. David T,

    The article claims that as much as 20% of the decline in GDP can be attributed to retaliation! That’s hardly insignificant and moreover ignores the fact that higher import prices for US companies may have made US products that relied on imports completely uncompetitive.

  12. Today’s more potent marijuana carries substantial health and social risks. It can lead to depression, thoughts of suicide and schizophrenia, especially among teens, according to government research.

    USA Today is good for lining birdcages. Ruthless, do you buy it for the sports section?

  13. Going short on news on shorts.

  14. EZE: “The article claims that as much as 20% of the decline in GDP can be attributed to retaliation!”

    No, it claims that “the decline in real exports” could account for 20% of the decline in GDP, and goes on to add “Bear in mind, though, that not all — perhaps not even most — of the decline in exports can be attributed to retaliation for Smoot-Hawley. Even if Smoot-Hawley had not been passed, U.S. exports would have fallen as incomes declined in Canada, the United Kingdom, and in other U.S. trading partners and as tariff rates in some of these countries increased for reasons unconnected to Smoot-Hawley.”

    This is not to justify Smoot-Hawley but just to suggest that its importance has been grossly exaggerated.

  15. Perhaps I am baffled, but it seems to me that if China is buying or selling (unlimited )Yuan at something other than the market price, won’t investors take advantage of that fact and MOVE the market price to that point? China pegs its currency in principle by nothing other than the age old method of taking Yuan off the market and injecting them back in response to market changes. When the fair value of a Yuan is more than 8.3 to the dollar, China must remove Yuan from circulation to maintain the value of 8.3. If less than 8.3 Yuan correspond to a dollar at market price, China must inject Yuan into circulation.

    The printing and destruction of Chinese paper does not affect the relative costs of my labor vs that of a Chinese. I fail to understand this whole ‘undervalued’ argument at all. If it is true, why isn’t every investor buying up these undervalued assets, pushing the price higher until they ARE worth 8.3?

  16. mr chad, i think that the capital flowing into “undervalued” yuan/renminbi are exactly what has helped spark the investment boom in china that has enabled rapid growth. the chinese gov’t directs some of the capital back into us treasuries; some of it goes to help keep chinese banks — which have solvency issues — afloat.

    china is not eager to end this, for so long as inflation remains stable. but property booms and a car craze indicate that things were too hot, and china is becoming more amicable to a revaluation.

    but folks here should be very wary. the white house is calling for it; that doesn’t make it a good idea. with the size of imbalances that have built up as a result of the fed’s manipulation of interest rates and a general american psychology of conspicuous consumption, NO ONE can say what effect a revaluation may have. it will probably have benefits and drawbacks.

    we should probably focus on the potentially severe drawbacks. revaluation means a reduction in chinese central bank purchases of us treasury bonds. this means a rise in interest rates, which will squelch domestic lending and lead to recession — entirely independently of federal reserve action. the more severe the revaluation — or if, as has been speculated, the yuan moves to a basket peg — the more likely and severe the rise in basic american interest rates.

    the fed can respond to this in some fashion, but none of the options are good.

  17. “the hedge funds collapse, as they’ve been a disaster waiting to happen for 4 years now”

    Okay, tell us, who are “the hedge funds”? Would you care to inform yourself enough to at least name a particulary investment strategy that you find reckless or offensive? Or would you rather sound like an ignoramus by painting all investment funds with one brush?

  18. revaluation means a reduction in chinese central bank purchases of us treasury bonds.

    And we know it won’t lead to a reduction in government spending. So it’s basically the White House begging the Chinese to continue funding U.S. government irresponsibility.

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