Will The Next Cold War Be An Economic One

Will The Next Cold War Be An Economic One

Several big stories hit the​ financial news this past week but the​ real significance of​ these stories were not discussed anywhere. Number one, the​ U.S. Congress pushed to​ file unfair trade practices against China, stating that the​ Bush administration’s quiet behind-the-scenes negotiation strategy was unacceptable as​ a​ tactic to​ bring economic reform to​ China. in​ another story this week, these words appeared - Rather than serve as​ "an apologist" for​ China, "I hope the​ administration will join this team," Sen. Lindsey Graham, R-S.C., told reporters after testifying before the​ Senate Finance Committee in​ the​ second hearing on China's economic and​ currency policies in​ two days.

This article reported that Congress aimed to​ pass bi-partisan veto-proof legislation that will force the​ Chinese Yuan to​ appreciate against the​ dollar. American manufacturers have claimed that the​ Chinese government’s unfair manipulation of​ their currency has hurt them and​ their Congressmen are listening. Then finally at​ the​ end of​ the​ week, this headline appeared in​ an​ article: “The U.S. Commerce Department announced sanctions against paper imports from China, the​ first time in​ 23 years that U.S. duty law has been applied to​ imports from that country.”

Reporting the​ above is​ fine, but what are its implications? Here is​ my view. for​ once, I agree that the​ Bush administration is​ taking the​ proper stance and​ their disapproval of​ these brash, flag-waving Congressmen is​ merited. When sending U.S. Federal Reserve Chairman Bernanke and​ the​ U.S. Secretary of​ Treasury Paulson to​ China only resulted in​ China defiantly stating that they will not allow another nation to​ dictate to​ them how they should run their economy, U.S. Congress should have gotten the​ hint. Instead, they escalated an​ already potentially volatile situation with their threats and​ sanctions this week.

Stephen Roach, the​ chief economist at​ Morgan Stanley warned Congress that currency valuation was far from being the​ sole component hurting American manufacturers. He stated that China’s cheap labor costs, burgeoning modern infrastructure and​ technology and​ growing investment in​ human capital and​ research also have greatly contributed to​ the​ burgeoning trade imbalance between China and​ the​ United States. Mr. Roach commented, "The foreign-exchange rate is​ not the​ answer, in​ my view. You in​ the​ Congress need to​ ask yourselves an​ important hypothetical question: How would you feel if​ you got your way on the​ Chinese currency adjustment but found that after three or​ four years the​ pressures bearing down on American workers had only intensified? as​ I see it, that's a​ very real risk that should not be taken lightly.”

Although I have vehemently disagreed with Mr. Roach’s past views on other subject matters, I believe that he is​ on the​ mark 100% this time and​ I’ll tell you why. U.S. Federal Chairman Bernanke has already publicly stated that everybody knows that the​ weak dollar is​ good for​ the​ U.S. government because it​ makes their debt cheaper and​ also helps to​ close the​ trade gap. So if​ you don’t think that the​ U.S. is​ not guilty of​ manipulating their own currency as​ well to​ serve their purposes then you are living in​ some kind of​ economic fantasyland. There are a​ whole lot of​ American expats living abroad that would like to​ see their own government do something to​ protect the​ value of​ their own currency instead of​ lecturing other nations as​ to​ how they should be managing theirs. Furthermore, this event is​ indeed a​ watershed event in​ the​ ongoing re-structuring of​ the​ world’s economies. in​ the​ past, colonized nations had bitterly complained to​ Europe and​ the​ U.S. about the​ harm their economic policies inflicted upon their economies. But now we see a​ 180% reversal, with developed countries complaining to​ emerging nations about their policies.

But this is​ almost beside the​ point when it​ comes to​ examining much more significant fallout of​ an​ open trade war with China. the​ reason the​ Bush administration is​ trying to​ negotiate quietly with the​ Chinese rather than take the​ more hard-line stance assumed by the​ U.S. Congress is​ that they know that the​ Chinese government holds far more important cards than the​ valuation of​ the​ Yuan, namely the​ more than one trillion dollars of​ U.S. dollar denominated assets that they currently hold in​ their reserves.

As I stated in​ a​ blog I posted about a​ week ago to​ the​ Underground Investor, the​ U.S. Congress would be foolish to​ aggressively alienate the​ Chinese government with so much at​ stake. the​ problems with the​ U.S. economy are much more a​ product of​ past U.S. fiscal irresponsibility than the​ manipulative actions of​ the​ Chinese economy and​ if​ the​ U.S. chooses to​ try to​ scapegoat an​ economic giant like China for​ their current problems, I believe, as​ Mr. Roach stated, that re-valuation of​ the​ Yuan will not be the​ answer. Furthermore, it​ is​ exactly these protectionist measures that the​ U.S. is​ seeking to​ implement that have hindered emerging markets in​ the​ past.

Instead of​ addressing the​ real reasons behind a​ lagging economy, protectionist measures many times seek to​ scapegoat another country’s economic policies for​ far more deep-rooted economic failures at​ home. Furthermore, protectionist measures often harbor and​ encourages domestic inefficiencies to​ persist instead of​ encouraging proactive solutions that attack the​ root of​ the​ problem. in​ fact, if​ the​ U.S. Congress pushes through their punitive measures, I can tell you right now that revaluation of​ the​ Yuan will NOT be the​ answer to​ the​ problems of​ the​ American economy. and​ despite the​ fact that offloading massive amounts of​ U.S. dollars will hurt the​ Chinese economy as​ well, there will also come a​ time when the​ Chinese government, if​ pushed far enough, will offload massive amounts of​ U.S. dollars because their strong economy will be able to​ absorb its negative effects much better than the​ weak U.S. economy.

And if​ they do so, the​ U.S. Congress will have given them the​ perfect excuse to​ do something that I believe the​ Chinese government is​ planning to​ do anyway. However, they will be able to​ do it, save face at​ the​ same time, and​ do it​ earlier than anyone expects, as​ opposed to​ having the​ global community heap loads of​ criticism upon them for​ what would otherwise seem to​ be a​ sudden decision that came out of​ nowhere. Instead of​ such an​ action being viewed as​ the​ selfish actions of​ a​ nation, it​ will instead by viewed as​ a​ reaction to​ U.S. bullying, and​ U.S. Congress will have given the​ Chinese government the​ perfect out.

In this case, quiet negotiations is​ the​ proper way because any other way is​ bound to​ bring harm to​ not only Americans in​ the​ future, but to​ the​ global economy as​ well. When I have blogged about governments being chronic liars in​ the​ past, certainly the​ Chinese government or​ any world government is​ not immune. While the​ Chinese government has publicly stated that they will not take any sudden actions that will greatly hurt the​ U.S. dollar, do you really believe that they want to​ hold a​ trillion dollars of​ a​ currency that continues to​ lose significant value every year? Trust me, they are planning to​ get rid of​ these dollars as​ soon as​ economically possible and​ behind the​ scenes, they have a​ plan in​ place to​ offload them.

Again, I can tell you why punitive Congressional U.S. measures will not coax the​ Chinese to​ assume policies the​ U.S. wants but only anger them. to​ begin, Japan is​ on the​ verge of​ replacing America as​ China’s number one trading partner. if​ the​ Chinese choose to​ bow down to​ American pressure, they would undoubtedly anger the​ Japanese who have heavily invested in​ China and​ would be adversely affected by the​ Chinese government’s decision to​ appease the​ U.S. Congress. Angering your number one trading partner would be even worse than angering the​ U.S. and​ this just in, even as​ I write this blog, in​ a​ report originating out of​ New York:

Today, China called the​ first of​ U.S. protectionist measures, tariffs on their paper imports, “unacceptable.” China strongly demands the​ United States to​ reconsider this decision and​ correct it​ as​ soon as​ possible," China Commerce Ministry spokesman Wang Xinpei said in​ a​ statement on a​ government Web site.

Secondly, I believe that the​ Chinese government, despite what diplomatic statements they release to​ the​ financial press about being concerned not to​ enact any policies that will cause the​ U.S. dollar to​ fall quickly, desire to​ unload a​ significant portion of​ their $1 trillion dollar of​ U.S. dollar-denominated reserves. the​ Chinese government realizes that offloading significant portions of​ dollars, whether it​ is​ to​ purchase oil and​ natural gas for​ their state reserves, or​ the​ purchase of​ other assets, will automatically cause the​ Yuan to​ strengthen. They are not going to​ appease the​ U.S. Congress now and​ watch the​ Yuan strengthen and​ then see this effect multiply as​ they unload U.S. dollars from their reserves. I believe that this is​ how the​ Chinese will eventually allow the​ Yuan to​ strengthen – by merely cutting back on their dollar-denominated assets, something that they want to​ do anyhow.

With this potential trade war, it​ is​ important to​ ignore the​ preening of​ the​ U.S. Congress but to​ consider the​ implications of​ their potential actions instead. U.S. Congressmen are no doubt influenced a​ great deal by their most important constituents, in​ this case, large manufacturers. However, in​ this case, it​ is​ not the​ concerns of​ the​ large manufacturers that are most important. Here they serve merely as​ a​ smokescreen.

Sure, large manufacturers are being hurt right now by Chinese imports, but rather than considering this part of​ the​ equation which the​ financial media gives much attention to, it​ is​ more important to​ consider the​ other side of​ the​ equation that is​ never spoken of​ in​ the​ financial media. Rather than listen to​ the​ complaints of​ the​ hurt, seek out what the​ very wealthiest of​ individuals are doing to​ not just protect their assets as​ the​ geo-political balance progresses towards a​ tipping point, but how they are positioning their assets now to​ prepare to​ profit from these future crises. as​ is​ a​ common theme at​ the​ Underground Investor, sometimes the​ loudest chatter will distract you from the​ most important information, the​ information that dwells below this chatter.

Will The Next Cold War Be An Economic One

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