To err on the Subject of Chinese Tariffs May Expedite a Shakespearean tragedy.

March 13th, 2007

March 13, 2007-

Sometimes the U.S. Congress is foolish. In order to cover up the inadequacies of the federal reserve and poor fiscal policy, Congress wants to impose tariffs on Chinese goods, and in doing so, supposedly make U.S. goods more competitive against Chinese goods. However, in doing so, would such a move really help the struggling U.S. economy, an economy which, according to statements recently issued by U.S. Secretary of Treasury Hank Paulson, is doing just fine? I would argue that in the long run, punitive tariffs imposed upon Chinese imports for the Chinese government’s failure to respond to the U.S. directive of strengthening the yuan would do much more harm than good. If the U.S. imported less suddenly more expensive tariff-inflated Chinese goods, the supply of cheap goods that were no longer coming in from China would then come from elsewhere – perhaps Vietnam or countries in Latin America. The free trade agreements that the U.S. has aggressively pursued in SE Asia and Latin America called for the significant reduction or total elimination on tariffs on a large majority of U.S. exports.

So what does the U.S. do if due to more expensive Chinese goods, the U.S. market is flooded with cheap Latin American or Vietnamese goods. Renege on free trade agreements and slap harsh tariffs on goods from these countries as well?

But the bigger concern and threat to the U.S. economy from such Congressional legislative initiatives would be the further loss of whatever remaining political goodwill the U.S. has among nations she depends upon to continue buying U.S. dollars and propping the dollar from further declines. U.S. Congress has already alienated China once before by blocking Chinese state run oil giant CNNOOC’s bid to buy U.S. oil company Unocal by calling the purchase a threat to national security, even as U.S. companies clamor for a larger piece of the pie in China. However, a bigger threat to the national security of the U.S. would be a decision by China to dump a large portion of its estimated $1 trillion of U.S. dollar denominated reserves.

However, the U.S. is somewhat protected against such actions as dumping U.S. dollars would cause yuan appreciation and also hurt the Chinese economy as their exports would grow more expensive. So perhaps in the short term, the U.S. Congress is attempting to prevent China from offloading dollars. If U.S. Congress imposes prohibitive tariffs on Chinese imports, if China then follows that move by dumping dollars, this would be a double negative blow to the Chinese economy. So in imposing tariffs, such a move would in essence be a pre-emptive economic strike against the Chinese government that prevents them from offloading U.S. dollars.

However, such a short term victory would only cause a long term, much more significant defeat. Such actions would certainly alienate the Chinese government further, and any pleas by President Bush, U.S. Fed Chairman Ben Bernanke, and U.S. Secretary of Treasury Hank Paulson to the Chinese government asking them not to offload dollars in the future would almost certainly fall on deaf ears. I would guess that if tariffs do pass through Congress, that in the future, if the Chinese can dump massive amounts of dollars without such actions seriously hurting their own economy, then they will do so without concern for its effect on the U.S. economy.

Currently, although the U.S. dollar is incredibly weak, it is amazingly being kept afloat at its current level only due to the enormous amounts of U.S. dollar denominated assets held by many emerging and developing nations. Besides Asia, of course the Middle East is awash in petrodollars from the oil boom of last year. However, in this instance again, the U.S. alienated some of its strongest allies like the United Arab Emirates when it denied Dubai Ports World from handling security detail at some of its ports, though this denial, due to its extremely sensitive political nature, was nearly inevitable. Although everyone’s focus is on growth in Asia, the Middle East, due to the aforementioned massive petrodollar reserves, has a great deal of influence over the U.S. dollar as well.

And in the Middle East, even states friendly to the U.S.(though they are few) such as the UAE announced last year its intention to increase its central banks reserves from 2% Euros to 10% Euros, dumping U.S. dollars to achieve this rebalancing of reserves. If the U.S. destroys its remaining political capital in Asia, I don’t believe that Middle Eastern countries will eagerly come to the rescue of the U.S. economy. In fact, given the U.S. energy conglomerate Halliburton’s announced relocation of corporate headquarters from Houston, Texas to Dubai, the U.S. can not even count on its own corporations for support. Corporations, just like nations, will do whatever is necessary to grow and protect their own interests.

In a game of financial chicken that is currently taking place between the U.S. and many of the world’s emerging and developing nations, destroying the remaining political capital the U.S. has on reserve simply is not wise.

Technorati Tags: China tariffs, China nuclear option, politics and stocks, dollar crisis, U.S. Treasury, Halliburton, Dubai

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J.S. Kim is the founder and Managing Director of SmartKnowledgeU™, a comprehensive online investment course that uses novel, proprietary advanced wealth planning techniques and the long tail of investing to identify low-risk, high-reward investment opportunities that seek to yield 25% or greater annual returns.

Entry Filed under: China Investments, Politics and stocks