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House China Tariff Bill Will Take America Down the Wrong Road

Politics / US Politics Oct 01, 2010 - 05:26 AM GMT

By: Money_Morning

Politics

Best Financial Markets Analysis ArticleKeith Fitz-Gerald writes: The U.S. House of Representatives this week overwhelmingly passed a bill that would enable the Obama administration to impose punitive tariffs on almost all Chinese imports into the United States - a controversial move that's intended to punish China for refusing to revalue its currency.


The House China tariff bill faces opposition in the Senate and from the Obama administration and isn't expected to become law. Let's hope that reluctance continues to hold: This bill is little more than a political con job and is quite possibly the stupidest thing that Washington could do right now.

Not only will this touch off a war the United States literally cannot afford to fight, but it's going to hamstring millions of already cash tight Americans by raising the cost of living dramatically while further eviscerating our already fragile gross domestic product (GDP).

Let me show you why...

A Slippery Slope
One of the bill's key goals is to force China to revalue its currency, the yuan, especially as it relates to the U.S. dollar. By making the yuan more expensive, the lawmakers figure, China's cost advantage will vanish - as will the massive trade surplus that China runs with its trading partners. Once that happens, all of America's troubles would magically disappear.

Trouble is, the legislation wouldn't function as expected.

China will simply shift its focus and press its advantage in different areas, the most obvious and significant of which would be natural resources. Most of these resource- commodities - such as oil, gold, and other precious and industrial metals - are priced in dollars.

By making the yuan more expensive, the bill's backers would practically guarantee China the ability to buy more resources at a lower price. As Money Morning readers well know, China's already scouring the planet for anything that's not nailed down. Were this bill to become law, China would only redouble these efforts - and the fallout could be staggering.

Consider petroleum. At the rate China's oil consumption is accelerating, it could buy up nearly all of the world's excess production capacity. I don't need to explain what effect that will have on oil and gasoline prices.

Were this retaliatory legislation to become law, the cost to U.S. consumers would be horrific. It would grant the Obama administration much broader powers to slap punitive tariffs on almost all of China's U.S. imports -totaling $300 billion this year, reports The New York Times.

And that, in turn, would result in price increases of 30% to 60% for everything from blue jeans to copiers that are made in China and imported into the U.S. market.

In very practical terms, this means that millions of already-cash-strapped American families would suffer when they head to their local Wal-Mart Stores Inc. (NYSE: WMT) outlet and discover they can no longer afford the "everyday-low-price" goods they can right now afford to buy on impulse.

This, too, is problematic because 70% of our economy is tied to consumer spending. And that means t he fallout from this type of retaliatory lawmaking will take one of two forms:

•American consumers will shift their spending to similar products from other emerging-markets.
•Or they will gladly go along on the principle of the matter and pay far higher sticker prices on everything from toys to clothing to electronic goods - itself a new economic reality that will have a whole series of implications of its own for the wheezing U.S. economy.
The bill's backers apparently have no clue that a revalued Chinese yuan won't be a panacea for the struggling U.S. job market. When it comes to our massive, double-digit unemployment rate, it's not a cheap yuan and low wages in China that are the issue: It's the uncertain economy and hostile business environment that are acting as the obstacles to a sustained rebound of the American marketplace.

Regulatory Stranglehold
The truth is that our government has created an onerous regulatory burden that's prohibitively expensive for companies to navigate. We do not need more regulation or even punitive tariffs. We need to more-effectively use the regulations that we already have and to streamline or eliminate those that are excessive or unnecessary.

Throughout the financial crisis, f or example, top officials repeatedly referred to banks and brokerages that were "too big to fail." But what happened to the anti-trust enforcement efforts that kept institutions from reaching the point where a failure could have dire consequences for the entire economy?

This tariffs bill puts us on a dangerous path. For instance, while the Great Crash of 1929 may have delivered us to the precipice of the Great Depression, the ill-conceived Smoot-Hawley Tariff Act (signed into law on June 17, 1930) was one of the key catalysts that shoved us over the edge and kept us in the abyss for the next decade.

This country is already choking on regulation. Recent Wall Street Journal data shows that the annual cost of federal regulation here in the United States increased to more than $1.75 trillion in 2008. That cost has increased 3% in real terms over the past five years, and now accounts for about 14% of national income.

If you add in the federal tax burden (21% of national income, for a combined total of 35%), slightly more than $1 out of every $3 earned in the United States goes to pay for, or comply with, federal laws and regulations. Unless something changes, that "regulation tax" burden is only going to get worse.

Not surprisingly, the small businesses that are the backbone of the U.S. economy and the engine of job creation are getting creamed by this creeping cost of compliance. This isn't rhetoric nor is it related to the Chinese yuan. According to the U.S. Small Business Administration (SBA), U.S. small businesses employ more than half of the private work force and have created 60% to 80% of all new jobs over the last decade.

Writing in The Journal this week, Lafayette College economists Nicole V. Crain and W. Mark Crain stated that companies with fewer than 20 employees incur regulatory costs 42% greater than firms with between 20 and 499 employees, and costs 36% greater than firms with more than 500 employees. The regulatory cost per employee for small businesses was $10,585, compared to $7,454 for medium firms and $7,755 for large firms.

That's hardly the way to treat the backbone of the economy.

Given the opposition the new legislation faces from the Senate and the Obama administration, and the very clear evidence that challenging China to a global trade duel won't have a happy ending, we have to ask the question: Why on earth did the House overwhelmingly pass this bill?

Target For Tonight
First, it's clear that this idea is polling well, and given that the midterm elections are mere weeks away, I believe House members clearly saw this as a way for them to appear tough at this critical (and political) juncture.

The American public is worried about the U.S. economy's seeming inability to get healthy. And voters are sick and tired of the bickering and political infighting that seems to divert lawmakers' attention from the "real" issues that aren't getting addressed.

The hope is that this bill will create the appearance of doing "something," meaning it will serve as a rallying point for voters who don't understand just how dangerous and damaging this legislation would actually be. In other words, it's a political con job designed to appear as if the entire legislative body is worthy of sitting where they sit (and keeping their jobs).

Now that you do understand just how misguided this bill is, it's time to pressure your representatives to start making the right moves.

Here are four key initiatives that will help us get the U.S. economy moving in the right direction again. Our elected officials should embrace the following platform:

•Cut Leverage: If there's been a common catalyst in virtually everything that's gone wrong during the global financial crisis, that catalyst has been "leverage" - borrowed money. Leverage on Wall Street, leverage in consumer goods, leverage in mortgages and leverage in our own spending. The ratios at times reach a staggering 100 to 1! Congress needs to change the rules and change the tax laws to diminish the allure of leverage and borrowing in the dealmaking market. Once that happens, the regulators need to administer the laws with an iron fist .
•Fewer Regulations = A Fatter Wallet: If lawmakers would reduce regulation - and especially the afore-mentioned cost of compliance - U.S. companies would grow at a much faster pace. And small businesses, which shoulder a disproportionately greater burden, would get back to their role as top job generators.
•Don't Tax Job Creation: It's crucial that Washington eradicate taxes associated with job creation. Lawmakers say they're interested in creating jobs, so why is it that they still tax that process? Nothing makes less sense than culling $800 billion from our payrolls every year.
•Rein in Wall Street: A reasonably small group of self-important, self-aggrandizing individuals played the key role in creating one of the biggest financial crises in history. And they did so by building and protecting an environment of speculation that has little or no economic benefit to the rest of us. Require fiduciary responsibility, outlaw the credit default swaps and quit putting lipstick on the pigs running the barnyard.

[Editor's Note: Commentator and best-selling author Keith Fitz-Gerald has maintained a perfect record with his Geiger Index advisory service. If you missed out on all or part of that run, don't despair: Subscribers to his newest service, TheMicroQuake Alert, will be able to benefit from the insights of one of the shrewdest investors in the marketplace today. To find out more about MicroQuake, please click here.]

Source : http://moneymorning.com/2010/10/01/house-china-tariff-bill/

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Comments

Rick
01 Oct 10, 15:31
Time To Restart The 1930 Smoot-Hawley Tariff Act

The House China Tariff Bill (if passed) will finally move America in the right direction for once, and it's certainly long overdue. It's only regrettable that it has taken this long for Congress to at least have taken a token response to address the massive trade imbalance with China, and with it the serious job deterioration in this country.

Yes, the time is ripe to create a real and vibrant economy again, and the only proven and effective tool that we have at our disposal at this time to accomplish this goal is to impose steep duties on all imported goods and services.

To their credit, the U.S. corporations along with the labor unions worked feverishly in 1930 to craft a blueprint for what would later be heralded as a marvel for their time and a model for future generations, the 1930 Smoot-Hawley Tariff Act.

Contrary to what right wing politicians, Wall Street blinded economists and misinformed pundits have been brainwashing the American public for years, the 1930 Smoot-Hawley Tariff Act neither was responsible for the Great Depression nor aggravated the downturn. The level of trade between the United States and its other trading partners at the time was simply too low to have had any measurable effect on the economy.

Yes, things in America will be rough for a period if Congress should levy punitive tariffs on all imported goods and services, but times are hard already. We will never have any other opportune time but the present to revisit the 1930 Smoot-Hawley Tariff Act and restore the shattered manufacturing base in this country. America has nothing to lose by rekindling the Smoot-Hawley Tariff Act and everything in the world to gain.


Shelby Moore
01 Oct 10, 17:21
Not what we say, but do

Rick, the western countries' actions mean they want (or are hopelessly conflicted) the Yuan peg, irregardless of what they say:

http://www.marketoracle.co.uk/Article23054.html#comment95070

Besides, more centralized barriers (e.g. tariffs) is the worst possible thing we could do (so I expect we will):

http://financialsense.com/contributors/shelby-moore/perpetual-deflation-causes-inflation

You will be so delighted until the reality I describe above shows you that your tariffs force the world into deeper rationing (which causes war usually).


Shelby Moore
01 Oct 10, 19:38
coming trade wars

Apologies for successive comments, but I just came across some analysis very relevant to this article and Rick's comment and my counter-point.

A person I often agree with, the monetary PhD scientist Antal Fekete has postulated that the Yuan is strong:

http://financialsense.com/contributors/antal-fekete/the-donkey-in-the-china-shop

But the reason that I disagree with him is very relevant to why tariffs do not work.

The centralization of fitness is always a weakness. Maximum annealing to optimum fitness only occurs with a free market of individual trials. I am sure Dr. Fekete understands why I say, this is why only gold is money.

For the specific weaknesses of China's centralized economic and monetary policy, read my recent article linked in my prior comment above.

Note I recently wrote a scholarly research paper about the theory of annealing fitness and free markets:

http://goldwetrust.up-with.com/knowledge-f9/book-ultimate-truth-chapter-6-math-proves-go-forth-multiply-t159-15.htm#3640

That research derives or fits into a theory of the universe that I have proposed as a way to unify Einstein's General Relativity and Quantum Mechanics (Quantum Information):

http://goldwetrust.up-with.com/technology-f8/theory-of-everthing-t124.htm#3681

(note I am planning to study "Q-Orders" as potential self-similarity case of "frequency" in my theory)


Rick
02 Oct 10, 14:17
Happy Days Are Here Again (Smoot-Hawley Tariff Act)

Shelby: Interesting. Yes, quite interesting. You can probably sell those arguments hands down in any court of law. Yes, but I'm also quite aware (as you probably are)that the Chinese have been guilty of manipulating the Yuan for quite some time. The really sad part of it all is that preciously little was done in Congress through the years to punish China for this injustice.

Now permit me to depart from this momentarily and present to you a somewhat weak analogy, but it nevertheless makes a point. Allow me to quote some minutes from Queen Christina of Sweden in 1530 as she was addressing her subjects at her court in reference to the thirty year war:

"You (Shelby, Nadeem, Money Morning & other pundits) have all spoken. You my nobles (Wall Street Banksters And Paid Economists along with their whores in Congress), you my gallant generals (Rothschilds', Morgans', Rockefellers'), you my Arch Bishop (Former President George W. Bush), and you my hearald cousin (Former House Speaker Newt Gingrich). I have heard all of your voices. But what of the peasants (Main Street)? What have you (Joe Six Pack) to say?"

The obvious point being made here is that since Main Street was going to bear the brunt of whatever decisions were hashed out in Congress in regards to NAFTA, CAFTA and other free trade treacheries along with their tragic offshoots, shouldn't their voices have been heard also? The answer is that their voices were not heard. Has any poltician ever bothered to poll their consitutents as to their opinions on NAFTA, CAFTA and other free trade schemes and boondoggles? The answer is that there were no such polls.

When decisions such as these could have so far reaching repercussions and consequences for Main Street, the point is that you just don't hatch out something of this magnitude in a back room of some Capitol building while the country's back is turned. Nothing good (for Main Street)could ever have come out of this hatched buffoonery as is already evident to us all.


Shelby Moore
02 Oct 10, 18:56
masses fool themselves

Rick, so you are agreeing that only in the free market, do the masses each get to express their independent opinion by being free to trade with whom ever they wish?

Because obviously you have noticed that pooling (ahem your "polling" of) opinions ignores the opinion of each individual.

And in case you didn't notice what you pointed out, yes the majority opinion (since Perot in 1992 at least) was "no free trade", and that is exactly what we got. The Yuan peg is not free trade (individuals free to trade with individuals), it is managed trade through a funnel of the Communist Party control over their central bank and exchange rate.

Glad you are coming to your senses (even if you didn't see your own point).

So you still going to advocate more oppression of the individuals via your tariffs and play right into the plans of the oligarchy? Of course you will, as the majority will too, as they always have. More examples:

http://www.marketoracle.co.uk/Article21650.html

I sincerely hope you finally get my point. Socialism is not the solution, it is precisely what is the problem. Tariffs = socialism.


Nadeem_Walayat
02 Oct 10, 20:29
Protectionism

The soviet union tried protectionism for decades, sure worked for them ;)

The US is turning into a soviet style sociailst state, protectionism would be the straw that broke the camels back.

companies would close, unemployment would soar and just state companies will be left producing what nobody wants.

Those that advocate protectionism would put the US on the fast track to a soviet union style collapse after which pure corrupt ganagster capitalism would fill the black hole that was the US economy.

Offcourse China would also collapse, thousands of closed factories, revolting workers, and heavy losses on its $2 trillion of reserves.

If you want to prosper then invest in education and worker productivity.


Rick
02 Oct 10, 21:48
Free Trade? Punitive Tariffs? Which is it?

Shelby: Let me get this straight. I am surmising from your previous comment that you are in favor of free trade (in priniple at least), and as long as no rules are broken in the process. Is that a fair deduction?

Assuming this is so, what did you and the rest of the learned pundits on this site expect was going to happen when one is dealing with oppressive third world Communist regimes? Only the naivete could believe that such governments would abide by the rules. You just don't find any of this in textbooks.

So here we have a Communist dictatorship that has perpetually kept the Yuan artifically high (despite repeated protests from the U.S. government) with the sole purpose of guaranteeing that their exports to the United States will be favorably priced while simulataneously ensuring that our exports to China will be prohibitively expensive. Ding dong?

So I take it from you and the rest of the pundits on this site that even though China has continually broken the rules, the United States is not free to take punitive action on its own behalf by imposing stiff duties on all imported goods from China? Or do you just propose "more of the same" and just take our lickin's?


Nadeem_Walayat
02 Oct 10, 21:50
china

China communist ?

It may be many things (gangster capitalism) but its definetly NOT communist.

No need for trade wars.

simple solution, don't buy chinese junk.


Shelby Moore
03 Oct 10, 02:04
who is oppressing?

Rick, did you forget what I showed in the links of my first comment on this page?

China would be unable to enforce a Yuan peg without our western governments being complicit as they are.

China allows their citizens to obtain passports, but the western countries won't give them even tourist visas if they are not very wealthy.

If our governments were truely sincere about ending the Yuan peg, they could do it in a very free market way, which would also end the real estate crisis too.

They could simply offer immigrant (or just visitors) visas to any Chinese willing to bring their savings to USA and buy or invest in a home or time-share.

Do you think with that offer, that millions of Chinese would put up with their own government blocking the migration out of the country with their savings (in form of gold or Yuan or what ever)?

Perhaps what you don't seem to understand is that afaik one of the main reasons China can maintain the Yuan peg, is because the middle class is not trying to bring large sums out of the country, because they have no place to go with that money. There is no direct internal political pressure against the Yuan peg, because our governments are not giving the Chinese any ability to migrate or visit to invest. There is indirect internal pressure on the Yuan peg, e.g. wage strikes, but the Chinese do not understand that their low wages are due to Yuan peg.

The Communist Party is not the most oppressive-- they opened the exit door, but our governments did not open the entry door.

With tariffs you will simply make goods more expensive for Americans and transfer their money to the Obama government to further waste on increasing the size of government. You won't stop the Yuan peg that way, nor will you bring back manufacturing businesses that have < 1% profit margins. What you do not seem to understand is that across the board tariffs simply raise the cost of everything at least in the medium-term, so it doesn't help us compete on price at all, it just steals from ourselves and gives it to people who don't work and feed off the government. And in the long-term, it causes our competitive companies to become lazy and fat, because there is no way to perfectly target tariffs.

No matter how you analyze it, any form of centralized decision making always causes non-optimum fitness over the long-term. In this aspect Nadeem is wrong to say that China is not socialist still-- they just aren't as socialist as we westerners are in many metrics.

In short, the whole world is moving towards socialism, and the fundamental cause is the culture usury and future contracts:

http://www.marketoracle.co.uk/Article21650.html

I urge you to look at the global net birth rate chart and observe that every where that culture is prevalent, the net birth rate is incredibly low and such that their economies can not survive the future demographic implosion:

http://goldwetrust.up-with.com/economics-f4/changing-world-order-t32-105.htm#3692

That culture where men think they can control nature and promise the future, is going to destroy them, just as was promised in 1 Samuel 8. It is simply a mathematical fact of entropy (universe trending to maximum disorder).

I don't expect many people to understand that. It is over their science and mathematics head.

We are oppressing, especially we westerners and our "man is in control" culture.


Rick
04 Oct 10, 12:13
Protectionism: The Road To Prosperity

Nadeem: For one thing, the Soviet Union is not the United States. What may or may not work in one country does not necessarily mean the same for another. In fact, the East European countries had commercial ties with the West in varying ways and degrees, and all of them had been "burned". The Soviet Union learned from that experience, and could only conclude that it should not expose itself to the world economy in any way.

Now as for the United States, isn't it already evident that free trade is not working (except of course for the exploitative multi-nationals and their confederates)? To put it in another way (borrowing a quote from former President Ronald Reagan during the 1980 presidential debates): "Are you better off than you were four years ago"? If the answer to this is negative, then you should perhaps take a cue from the Smoot-Hawley Tariff Act.

Now didn't you hear? Companies all across the country have already closed their doors and moved their operations to third world $1.00/day sweat shops. For that type of labor, it may have been better if they had been working for Pharaoh and just drag along some stone blocks for the Sphinx.

As for unemployment soaring, didn't you hear? We have double digit unemployment now, so what you are still advocating is "more of the same"? This is exactly the same tired approach that those hundreds of "paid" economists and university economics professors used in their communication to former President Herbert Hoover shortly before he signed the 1930 Smoot-Hawley Tariff Act. Coincidentally, surely President Hoover must have mused: "We're mired in a scathing Depression, and these learned scholars are recommending just to stay the course with 'more of the same'"? Well, that's exactly what it must have sounded to him. I suppose that the nation should have been grateful at the time that they had indeed elected a natural born leader with great vision.

As for education, didn't you hear? Our educational system is in shambles (or to put it in another way, a shame). Most of today's American students who manage to complete high school still can't read nor write. But for those who can, you're suggesting that their parents should sell the house just so those children can then land some frickin' $14.00/hr factory job? Wow! I guess all of those lucky ones should send you a box of candy and a thank you note.


Shelby Moore
05 Oct 10, 02:05
non-solutions

Rick, and so you propose more non-solutions to an intractible problem. Tariff (protectionism) non-solution will simply aid the oligarchy as I had explained above. So you play right into their hands as they expect you to do, and help them to oppress us even more.

The reason that we are being oppressed is because we do not understand COMPLEXITY and thus are stealing from ourselves with our love of the usury, future contracts, insurance, "man can control his future" culture:

http://www.chrismartenson.com/blog/prediction-things-will-unravel-faster-than-you-think/45297?page=5#comment-90479

I hope you take the time to copy+paste that link above into your browser, because that is Chris Martenson's blog who is very famous for producing some instructional videos about the crisis entitled the "Crash Course". I think you will find my comments there very insightful.


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