Tariffs, Schmariffs ...
... and then GOLD
Alex Wallenwein
Apr 13, 2005
Congress is about to do China
a huge favor - unwittingly.
It is also about to cause the dollar to further drop in the forex
markets.
In its attempt to slap together what it considers a "punitive"
tariff and impose it on Chinese textiles, Congress is en route
to making life far easier for the Chinese than it already is.
Their idea behind the tariff: Punish China for refusing to snap
to a salute and revalue its currency on (US) demand.
The unintended effect: It will relieve China from the pressure
of having to buy ever more (by now extremely unwanted) US dollars
in order to keep its currency peg intact.
Think of it this way: What Congress (and the Bush White House)
are complaining of is the fact that China enjoys an unfair trade
advantage because its currency is so cheap relative to the dollar
that Americans are virtually forced to buy ever more Chinese
imports to assuage their over-leveraged monthly budgets.
Congress wants the Chinese to let the yuan climb in value relative
to the dollar so American companies can compete better with Chinese
products in the world markets.
Will the Chinese relent and revalue?
No. They'd be stupid to do that. (See below)
But what if the tariff is then actually imposed after they refuse?
What will be the real effect?
For one, Americans will have to pay a 20% to 25% surcharge on
all Chinese imports affected by it - so they'll buy less of them.
To China, that means less exports to the US, and presumably lower
profits, to be sure. But it also means that China can take a
much-needed breather from its self-imposed force-feeding of dollars
Since they will earn less dollars for their diminished US exports,
their dollar-reserves will rise at a slower clip than before,
which will put less upward pressure on the yuan, and that means
they have less reason to sell yuan for even more dollars to keep
their currency peg intact, so dollar-demand will be that much
lower. (They will also have less appetite for US treasuries,
putting further upward pressure on US interest rates).
Which will put more downward pressure on the dollar.
Which will make non-Chinese imports less affordable to Americans.
And since American products - due to high labor costs
etc., - are too expensive for over-leveraged Americans, they'll
have to go to the only place where the buying is still cheap
- China.
Instead of textiles (on which the tariff is imposed) they'll
spend more money on other consumer goods.
Bottom line, economically speaking, its a wash.
American textile manufacturers may rejoice, but Congress' intended
effect will have been nil - except that China will then be seriously
ticked off at the US, the yuan will still be pegged, Americans
will still be buying mainly Chinese goods, the dollar will still
continue to drop, the trade deficit will still keep on climbing
(loading another straw onto the dollar-camel's back), etc.
Not a very good picture.
The only real difference is that American textile manufacturers
will be getting a government-instigated (but consumer, i.e.,
taxpayer-funded) subsidy from which no one else benefits.
Will China Give In?
There is no way the Chinese
will revalue their currency just because of this tariff. They
have no reason to.
They are already working on the adjustment process. They know
they have only until the end of 2006 to let their currency freely
float under rules agreed to during their WTO accession. Speeding
this vital adjustment process unduly is in no way in their interest.
They can live with a year and a half of lower textile exports
to the US (they did live with them in the past, until as recently
as 2004). But they can not live with the sudden, premature,
loss of their entire export competitiveness.
Besides: what will American companies who have "outsourced"
to China do when the yuan and the dollar reach near-parity? Their
profit margin will be severely diminished. Sure, Chinese labor
will still be far cheaper than US labor, but the currency advantage
will be gone, and they will still have to carry higher transportation
costs.
But eventually, in due time, China will revalue.
What About the Trade Deficit?
So, what about the trade deficit,
then? Will it shrink as a result of revaluation?
Probably.
When the yuan climbs to its "market value" after the
adjustment process (one way or the other), the last pressure-valve
for US consumers trying to get more bang for their buck will
be gone.
Walmart will have to raise its prices.
Americans will buy less "Chinese" - but will still
not be able to afford US prices and keep consuming anywhere near
current levels.
So they'll spend less.
US companies, in turn, will lose whatever "pricing power"
they have left as a result, which will drag on profits - and
therefore on the Dow.
And the dollar will inevitably decline against the yuan.
But not only against the yuan!
With the currency peg gone, China will no longer be needing to
buy anywhere near the amount of dollars it must buy now to keep
its peg in place. Other Asian exporters will now be more competitive
relative to China since the yuan will rise relative to their
own currencies, so they can export more to China and need to
export less to the US.
So, they also will need to buy far less dollars to keep their
own currencies low to the buck.
That will drop a rock onto the dollar-camel's already strained
back.
And that means OPEC will get far less value for the dollars it
gets paid for selling its oil.
They won't like that.
So they'll have yet another reason to be thinking about selling
oil for euros - and when they decide to do that, the dollar is
toast.
By that time, though, the euro may already be toast as well.
The Europeans can't agree n very much these days, so the constitutional
ratification process is in jeopardy.
The Stability Pact lies in shambles, and the ECB's hands are
tied because even the most light-handed credit policy is useless
when over regulated and paralyzed economies can't come up with
the necessary demand to take advantage of the cheaper money.
So, what remains?
First, the paper-trained world will rush to the yuan - but, ultimately,
only gold remains. (The Chinese are already being told by their
government to stack up on gold. One could only wish that our
own government had as much foresight as the Chicoms.)
Got gold?
I sure hope you do!
Alex Wallenwein
Editor, Publisher
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