A Subtle Statement

For the third time in his presidency, President Bush rejected Congress' request to implement trade sanctions on China. Congress requested the sanctions after China continued to refuse to devalue its currency and update its system of linking the yuan to the dollar. The Bush administration, while balking at senators who point out that the cheaper Chinese goods hurt US manufcaturing industries, is subtly making a statement about the US economy. The administration is saying, albeit softly, that manufacturing jobs are not what the United States can rely on and placing sanctions on a giant such as China hurts US service industries (which are the bulk of the US economy) that depend on trade with China.

Comments

[Warren]

Is that what he's saying? Given the way every president since Nixon has distanced themselves form any anti-China rhetoric they campaigned on, and fully embraced expanding trade with China, I figured it was something closer to "Ever since I was first elected the Chinese have been pouring money into a numbered bank account"

[Douglas Fletcher]

You're just jealous, man.

[The Real Bill]

I'm generally against tariffs and for free trade, but I don't think any nation that doesn't float their currency should be allowed into the WTO. It's bullshit that China can peg their currency to the dollar when their economic growth rate is so much greater than that of the US. Free trade doesn't mean we have to be a pushover for every slave state in the world. Although, as a libertarian, I can't really think of any states that aren't at least partial slave states.

[joe]

Ben, you're like the reporters in "Being There."

The only statement Bush is making is that more of his contributors sell Chinese made goods than operate American manufacturing plants.

[carabinieri]

right. what's good for wal-mart is good for america. or something.

[jc]

More like the White House is figuring that pissing off our largest buyer of debt is not a good idea. That's one of the advantages of being a somewhat anonymous member of Congress - you can vote for massive spending increases and sanctions against the country that allows you to spend like it's not your own money, while using 534 other reps as a shield.

[6Gun]

Come on folks. 5 minutes after the Chinese unhook the yuan from the buck everything will be back as it is now. Except for the US inflation and setting the Chinese back a couple decades, that is.

A more expensive yuan > fewer exports > temporarily raised US production > more expensive dollar > new trade imbalance.

[R C Dean]

6Gun, lets not forget that a more expensive yuan>lower prices for exports>lower profits for Chinese firms>reduced investment in China>more investment elsewhere.

Lets also not forget that a more expensive yuan>cheaper imports into China>boosted export industries elsewhere.

Its pretty obvious that the cheap yuan is distorting competion between Chinese industry and its competitors in favor of Chinese industry (duh - that's why the Chinese are doing it). It looks like the cost of the cheap yuan is being borne internally in China by consumers who are denied access to cheap foreign goods, but nobody gives a crap about them since they can't vote. it is also being borne externally by China's competitors.

Just something to think about.

[kwais]

Though I am certainly no economist, I am with Bush on this one.

By all means free trade with China.

If the Chineese want to use the power of their government to affect trade and how much foreign goods are bought ect. The only ones they are really hurting in the long run is China.

Isn't that the Libertarian philosofy also? We are supposed to have free trade, we would like other governments to have free trade with us. If we impose tarifs and such we are hurting ourselves. If the Chineese impose tarifs and restrictions, they might hurt us, but they are hurting themselves in the long run, and they are a sovereign nation, so have at it.

The same with the French.

[fyodor]

kwais,

Yup, that's presicely how I'd read the orthodoxy. And I think it makes the most sense, too.

[Russ R]

The Chinese have already severely hurt themselves, but have yet to feel the pain. They've consumed the sweat and toil of a billion labourers and mountains of raw materials, combined these into REAL goods, which they've heavily discounted and shipped across the Pacific, in exchange for a mountain of paper IOU's denominated in a currency that they can't control for much longer.

Revalue the yuan, and those dollar denominated IOU's in China's huge and growing collection lose a whole lot of value. That's when the pain sets in.

[Eddy]

Given my usual skeptical nature, the size of US debt held by China and volume of Congressional whining, I have to question the motivation of said whining. Now I am not an economist so I have to ask, how would the value of said debt change should the yaun be floated as desired by the people who created that debt?

At any rate, I thought this was an interesting commentary.

[Eddy]

Hey Russ R, thanks. I see I should have refreshed the page before posting.

[crimethink]

Eddy,

The article you link to misses the point. True, I have trade deficits with grocers, etc. However, the capital I trade for goods has to come from somewhere; in my case, it comes from having a trade surplus with my employer.

The US, on the other hand, doesn't have trade surpluses with anyone. The capital we use to cover our trade deficit comes largely from borrowing (which includes both bonds and stocks), which can't go on forever.

[gaius marius]

how would the value of said debt change should the yuan be floated as desired by the people who created that debt?

not the face value, but the value after exchange would be reduced by an increase in the value of the yuan vis-a-vis the dollar. which would create a disincentive for further chinese central bank purchases.

of course, such disincentives already exist, but have been overridden by other concerns -- primarily, keeping domestic banks solvent, encouraging fdi and keeping chinese exports strong.

the premise to being "outraged" by all this strikes me as being specious. if you're an idealist and unaffiliated with reality, then fine -- you object to an orthodoxy violated, and no one can argue with unreality.

but pragmatically -- free trade is a bit of a joke. it doesn't exist. the united states has never been a laissez-faire trader in the manner imperial britain was; it simply extorts the most favorable terms of trade it can, and engages in protectionism anywhere it likes -- textile, ag, steel, what-have-you. china knows this. expecting china, then, to deregulate some aspect of its system for our advantage when we certainly wouldn't for it is prima facie ridiculous.

so what's in it for china? we've already talked about the loss china would take on foreign reserves. their export-oriented and banking sectors would suffer. so why should they?

i'm still looking for an answer to that. the only one i can see is as a brake on inflationary pressures which carry over from american profligacy.

[gaius marius]

Foreigners aren't stupid. Dumping large amounts of Treasury bonds would depress their value. Foreigners and we would both take a hit.

beyond what mr crimethink astutely observed about this article, one has to be familiar enough with markets to see that this is a fallacy of complacency.

holders can and do liquidate at a massive loss when they are compelled to. central banks are sometimes compelled to dump foreign securities in defense of their currency -- "contagion", as it became known in 1998. and a situation could easily be envisioned where chinese central bankers would be forced to defend their currency.

another form of compulsion is fear for the future value of any of their securities. dramatic losses in the dollar as a result of fiscal or monetary mismanagement -- essentially a "default" by inflation -- would be reason enough to get foreign holders to cashier their securities. and it only takes those at the margin to panic first.

the idea that it'll never happen because everyone's too smart is about as fallacious as any statement that can be made about the market. not only can it happen -- it will certainly happen, given enough time.

[Jennifer]

Very slightly off-topic, but before World War I a lot of knowledgeable people insisted that the great powers of Europe would NEVER go to war, because they had such complex trade links that war would decimate their economies. The moral: never, ever assume that people or societies will avoid certain courses of action just because they're stupid and self-defeating.

[Steve P]

I know little about economics, but could this have anything to do with the White House's One China policy? That is, if sanctions were levied against China, wouldn't they also extend to Taiwan? By implementing sanctions, they'd include Taiwan as well, right?

[Ken Shultz]

So Bush had the chance to do something against free trade and he didn't take it?

...Somebody must have been asleep at the wheel.

[Nike Dunk Low]

thanks