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China Flexes Its Muscles
I got a laugh from this Bloomberg story.
The US-China Business Council whose membership includes the likes of
Caterpillar, IBM, Citicorp and Boeing (a total of 200 US multinationals)
is lobbying D.C. to fend off U.S. legislation aimed at forcing the
Chinese to raise the value of their currency.
Hello? China’s global trade surplus has narrowed somewhat of late. But
the most recent reading showed a $20 billion surplus. Guess what? 90% of
that surplus is a result of the trade surplus with the good old USA.
And our major corporations are spending big bucks lobbying Washington to
ease up the pressure on China to accelerate the revaluation of their
currency. Go Figure. From the article:
The
legislation, sponsored by Representatives Tim Ryan, an Ohio Democrat,
and Tim Murphy, a Pennsylvania Republican, would let companies petition
for higher duties on imports from China to compensate for the effect of a
weak currency.
The
measure “is totally counterproductive,” William Lane, government
relations director for Caterpillar, the largest maker of construction
and mining equipment, said in an interview. “Some in Congress want to
start a trade war and undermine our efforts to sell to our
fastest-growing export market.”
Here’s how I think this went down:
China to Citi:
If you want to expand your branches and business in our country you will lean on Congress not to pass this bill.
China to Boeing:
We can buy aircraft from Embraer in Brazil, or Airbus. If you want us to buy some from you, you must appose this law.
China to Caterpillar:
If
you want to open a manufacturing facility in our country you have to do
as we say. And we say you must tell your Congress to drop their effort.
The US-China Business Council to China:
We will do as you wish
The only reason that these global heavyweights are using their muscle to
pressure Congress is that China Inc. has used their muscle on the elite
of US corporations.
This development makes the Administration (in particular Treasury
Secretary Geithner) look pretty stupid. They have been pushing China on
the FX issue since they took over. Now, the big shots that line campaign
coffers are pushing in the opposite direction. Only in America could
this happen.
The year to date trade deficit with China is 145 billion. The article had this to say on that big number:
“In
2010, the trade deficit with China reduces U.S. GDP by more than $400
billion,” Peter Morici, an economist at the University of Maryland in
College Park, wrote this month in a report. “Unemployment would be
falling and the U.S. economy recovering more rapidly, but for the trade
imbalance with China and Beijing’s protectionist policies.”
I
am in the camp of Mr. Morici. China is not a partner. They are a
predator. The have wracked up a nearly $1 trillion reserve position with
the US because they are predators. They are moving whole factories to
their land. They recently announced a massive cutback in rare earth
metals exports (they are 97% of the market, they cut exports by 72%).
Unemployment is higher than it should be and the economy is weaker than
it might have been were it not for the continued imbalance of trade.
Watch for this proposed legislation to die. There are hearings on 9/15
and our boy Timmy G. is set to talk about this to Congress on the 16th.
As the election is near, expect to hear some rhetoric from Tim.
Looking like one is ‘tough on China’ is a vote getter. But beyond the talk there will be no action.
Just to confirm. The small guy in America does not stand a chance. The ‘big interests’ are not aligned with their interests.
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Since the early 1980s, American companies have gone to China in search of profits. First, the goal was a source of product (to reduce CoGS) and only since the mid-90s as a market to sell to (top line). The Chinese, as a quid pro quo, encouraged US and other foreign firms to establish manufacturing and with gusto entire factories were shipped off to China. These American companies actually disassembled their obsolete plants and rebuilt them. This was happening not just with our companies, mind you, but European, Japanese and South American as well. So while we disposed of antiquated P&E in a profitable manner, China was able to utilize its excess labor (China's fundamental problem). It really was a matter of mutual gain.
So why don't we make sheets, towels and shoes? Because they're all low-margin businesses. Would you invest in any such US start-up today? No way. And as a Chinese lawyer friend of mine always reminds me, "How many pairs of shoes will pay for a Boeing 747?"
As to finance, US and foreign institutions have invested heavily in China over the years. The result has been a transfer of knowledge and all the politics that entails. When I carried a Citibank business card, it should have read "Teacher" instead of "Vice President" because every local banker I met was thirsty for knowledge. Citi held numerous seminars regularly on FX, swaps, and just about every product because we wanted to do business. And they learned well: a man I knew as a Department Head at the Bank of China head office now runs Hong Kong Branch. And while economic fraud occurs at BoC and other Chinese banks, there is a growing army of very sophisticated bankers that will lead their future.
So am I bullish on China? I was but no longer; China's great success in transforming the country from a nation of peasants to one with a huge and growing middle class has come with the greatest of sacrifices--the environment. Can't breathe because of the world's worst air pollution; can't drink because the water is so toxic the cities don't water their parks with it; and can't eat because the food is laced with growth hormones and pesticides. China may very well implode under the weight of its success.
Edit: The politics of reform... http://www.rawstory.com/rs/2010/09/china-citizens-chance-dissent-officia...
Above, I refered to inner pressures that led to outsourcing. That huge capability to pollute and destroy an environment was developped in the Western World. Nothing to compare with the Jungle Amazonian Dweller and his acre of burned forest now and then.
The only solution provided by the Western World was to export the polluting activity and the pollution with it. That is one of the inner pressure. The Chinese did not burst their environment, the outsourcing process did it.
And you are nothing sure about them not repeating the same pattern,starting to drop the pollution on others so they can clean up their environment.
You're talking minor engineering there, Bruce, not nuclear physics. We can gear this stuff back up in a very short time. Besides that, we have enough undies and shoes to last us for 50 years already!
"Can you point me to where they make sheets and towels in America? How about Jeans or even underwear?"
Yes.
http://americanapparel.net/
Okay, okay. But if you point me to this you must also know how much has changed in this industry in the past 20 years.
In 2009 (a stinky year,'10 will be "better") Apparel and shoes were a net deficit with China of 37.5B. Globally China had a net surplus from apparel of $100b. So this implies that net net China produced enough shoes and clothes for its population and an extra 100b worth. How much 'goods' did the US manufacture 2009? What were total imports? What percent was made here?
My point was that if there were a law tomorrow that banned textiles, clothes and shoes the US could not produce enough to meet a fraction of the demand. So we would have no underwear.
Doesn't that strike you odd? It won't happen of course, It's like oil. We consume it and run deficits. Those pieces of paper that are the result will choke us one day however. And we will have no oil or underwear.
You're introducing Eden. You sly dog.
"I am in the camp of Mr. Morici. China is not a partner. They are a predator. The have wracked up a nearly $1 trillion reserve position with the US because they are predators. They are moving whole factories to their land."
"They" moved "whole factories to their land"? NOT. The multinationals you just mentioned did. They are the ones who made Congress pass all these FTAs.
Spineless.
They, in fact, have moved entire factories to their land.
Be careful who you call out on being without facts. You'll find the Chinese ultimately behind the scenes in these examples:
http://www.freerepublic.com/focus/f-news/1433243/posts
http://icarusfilms.com/new2007/lose.html
http://www.fas.org/sgp/crs/misc/RL33317.pdf
http://www.christusrex.org/www2/china/Manufacturing/pg4.html
The Soviets carried off factories wholesale following WWII. It has developed into a rather routine activity for China by now.
Have factory, will travel.
China does not move whole factories to their land. They 've managed to concentrate what has been thrown out of the windows by the western world.
Outsourcing is firstly the result of inner pressures. You could remove China from the picture, outsourcing would happen.
The issue with China is that they've managed to collect much more than it was expected. At first, it was supposed to be a world tour of misery, with a country getting an activity for ten years before it being moved to another one.
China is not a predator because they've stashed billions in currency. They are not alone and this move is primarily a defensive one.
The fact is that the US commands the trade routes of the world and has largely used this superiority to its benefits. The US can close major trade routes at will and suffocate countries. The main service provided by the US is security over the trade routes.
This leads countries to hoard money in order to be able to pay for the security service.
It also blows up the tale like China will pick up as an engine of world growth(consumption)
The Chinese cant. The more they will consume, the more they are going to rely on foreign supply of basic resources, the more they will have to hoard to afford paying for the US security service.
A non consistent system that cannot work.
As long as the same security service will exist, the Chinese are going to curb their consumption.
Maybe for the best in the US.
Good analysis. However, you do remember the 1993 Russo-Chinese announcement of a multi-polared world don't you? Does China need to pay for the retirement benefits of veterans and since it has it's own manufacturing base does it need to purchase weapons from the U.S.?
China is still mostly a shit-hole from what I can tell. Sure, there are some world travelers here on ZH who have been there -- and been given the 25 cent tour. How about all the vacant cities cum wasted resources, and the lack of water/abundance of sand, coal poured into power plants? We say we are digging our own economic grave; well, they are digging their own ecological one as well. Not sure that I wouldn't survive better here than there. We are the equivalent in geographic size, but vastly different in arable land and populations. And that's only part of the story. Reverse engineering is nice and all that, but it's the original concept, design, and working model that matter. Wasn't it the Japanese who were going to eat our lunch? What happened there? With no natural resources, other than people, there isn't much to see there. We throw more useful crap into our landfills that Japan could ever mine or manufacture. Sure, we will commit economic suicide, but not be victims of murder from any outside source.
China has a lot of males 18-34 who are NEVER going to get married.
There aren't enough women.
Put an AK-47 into their hands and point the way to punani-ville and watch what happens.
Still stuck in the nooky-patrol? Just like many other armies in history they will condone homosexuality in the military or help set up the camp follower accommodations. I'll give ya that satisfying a healthy woodie is nice, but that cat can be skinned in many ways. Think outside the BOX.
It's not just about getting your banana skinned. All animals on Earth (at least the ones who don't live on the Upper West Side) feel urge to procreate. To buy a lotto ticket to immortality by passing on their genes.
To me, the lack of punani in China looks a lot like the adage "never surround your enemy completely, as without an exit or chance at survival, he will stand and fight instead of run."
Maybe Lindsay Lohan and her ilk could be enticed to go visit Beijing and not come back. How much does an 8-ball go for nowadays?
We could invite some selected Chinese male citizens over to roam the streets of Los Angeles for open season on any women who have an exposed navel. The license for hunting would be high but might help their deficit. Arrangements for shipping the catch back to China can be made. Of course, as with classic hunting etiquette, they'll have to eat what they catch.
Okay, Rock. Even I admit that was funny.
:D
+1 - Some common sense in an increasingly retarded thread.
Good point Rocky. People sometime forget they had to stop all manufacturing activities in Beiing for over a month before the Olympics just to make sure athletes didn't die from foul air during the games. They are making all our ecological mistakes of the early 20th century with 10x the population and less land. China is a disaster just one bad rice harvest or flu pandemic from total chaos.
The corporations and government were very happy with the relationship. Businesses could sent manufacturing to China and it kept pressure on wages at home, but the cheap Chinese labor meant that the US consumer felt richer because their wages would go further. China plowed the USD revenues back into Treasuries and mortgage bonds, keeping rates down, making life easier for the Treasury and helping to fuel a housing boom the majority was happy to go along with.
The US thought they could develop a master slave relationship with China, but this turned out to be false. Now, the US decides it doesn't like the arrangement so tries to change it....
Quid pro quo, pandering, intellectual property theft, trade-for-treasuries....Is anyone really surprised by this.
Hu Flung Poo
The Chinese are very intelligent, and very patient. Thousands of years of knowledge, vs our mere few hundred. Patience, that we in the West do not have a shred of hope of understanding nor imitating.
It was always meant to be this way, a quick study of our corporatist/fascist system, hunger for material items, and lack of fear of debt slavery....this was an easy coup.
"The Chinese are very intelligent, and very patient. Thousands of years of knowledge, vs our mere few hundred."
Steve, recent archeological works show quite ancient advanced civilization in Western Europe that predates that of even Egypt. It's just that due to the abundance of forests most everything was built with lumber (except for Stonehenge) so the monuments etc. did not endure for millenia. Bucky Fuller remarked that the wooden ship building technology exhibits a developmental curve that could approach 10,000 years. The West needn't apologize to anyone about being Johnny come latelys.
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Stupidest.post.ever.
White people have been around for longer than 1000 years.
The rest of it is "they have slanty eyes and therefore are magical"
Study what the Asians discovered several thousand years ago, perhaps start with some Mahayana/Hinayana/Zen Buddhism. Compare it with what we see as "reality" in the West, and feel free to repost.....
Please. China has been a dump for at least three hundred years. Where was all their collective wisdom and brilliance then? It's easy to compete when you mandrake the wealth of entire nations in the West over there for over 40 years. How about R&D? It was really thier expansive intelligence and collaborative wonderful society that got them there right.
That after three hundred years of being used as tools by Western powers that they finally figured it out using our own supercomputers Clinton let them have is not exactly what I call brilliance. Kudo's to them for hanging us with our own rope like Marx always said would happen someday, it just too a century or so later. A shame the hubris of Western leadership is blinding them to the epic bait and switch. BRIC is building their own peer-to-peer banking system and abandoning fractional reserve lending.
I generally shut up those "brilliant" Chinese with a simple question:
You're so smart, how come you never invented a fork?
That ends that conversation.
That's a good post RD. I agree with it all. You pretty much said what I did, just filled in a few blanks.
This makes sense. Thanks for the excellent post. China is in fact a predator. But the US is eating its own as well.
Just cut taxes for the upper 2% to 0% and this will all get fixed. Sheesh!
The truth is that we can't have ZIRP without China. China keeps the CPI looking manageable. The US doesn't need China but the Elite do!
After China, who's next? ET? Is that really why we're so interested in finding suckers, ahem, life, on other planets?
After China, only Africa is left and they're really not an option. It's game over.
The next real war will take place on and over the Continent of Africa between the Chinese and their Korean/Filip minions and the "Western powers."
You're prolly not going to see a lot of it on Brian Williams' show but it will be the undercurrent for decades to come. Not gold. Moly, Beryl and Einstein are back in force.
And I hate to tell the Westerners that we are simply scraping salt in Afghanistan. "Twelve trillion dollars worth of 'rare earth' metals in Afghanistan," says the US military. Yeah right. It is the same land as in China- not even a fault line betwen them.
Yet, the Chinese have gone to St. Elsewhere (Africa...) to find what they need.
Man, it's sure settin' up for a shakedown cruise...and it's gonna get nasty. Big bucks, make your name...
Become a Mercenary. Click here to learn more.
y'know, the "china is a predator" story isn't helpful - nationstates are the tools by which wealth is acquired by the oligarchy, who use nationstates, and their corporations, to artificially create trading scenarios over time. . . the distraction is people who identify their "beingness" with the nationstates, a massive stockholm syndrome of hope 'n' faith 'n' non-sense. . .
nationstates are NOT on your side, why the loyalty?
Exactly, the people of this world who want nothing more than a comfortable income, freedom, dignity, family, friends and peace are all getting fucked by the wealthy elite, just as we have always been and we always fall for the same mother fucking trick... Divide and conquer... Capitalism was always a necessary means to an end but now, capital efficiency has reached its physical limits and its the developed worlds turn to pay the bill (and about fucking time we get some of our own medicine)... We must use the only tools we have whilst we have them, to unite and fight against the plague of the profit system of energy distribution... Communication technology is our only weapon so lets not waste anymore fucking time... Chinese, America, black, white, Christian, Muslim, whatever, it matters not... We are all in the same rotting ship and we're drifting in the horse latitudes with the capitalist zombie parasites fighting for the last flesh meal even though they know that the sea and the salt will eventually devour us all... We must unite and man the oars, all willing hands and open minds welcome... Racists, religous bigots and greedy ignorant nationalistic morons stay aboard the ship where you belong... We can take our chances and brave the unknown or die praying on our hands and knees for fresh winds to a god that does not exist or is sick of our whining and is not listening... I know I wont be fooled by the false sense of safety aboard HMS CAPITALISM and her parasite crew... Time is up, time to choose folks... This ship cannot be saved...
there's a non-barking dog here: the bulk of china's trade surplus is generated by western multinationals mfg'ing in china and exporting to the west.
traderjoe has it right : "Corporate America knows the game plan. Without access to Asia they have no growth prospects. Without access to cheap labor they have no profit margins. Without access to rare earths, they will be starved for materials. Slowly, we are losing the economic war. And like Afghanistan, we are funding our own enemies..."
of course these corporate wretches are going to side with beijing when push comes to shove. based on their demented obsession with short term bottom line dynamics, there is no other choice to be made.
as long as the problem is posed as a chinese currency threat, the 'morts' in the west will never understand that the problem is actually a septic symptom of the global trading game.................
Just found this great mug to sip the morning chocolate/coffee in while reading about the deindustrialization about the western world..
http://www.cafepress.com.au/+crisis_what_crisis_mug,242097264
bruce, excellent article mainly because i agree 100% with what you wrote. china is a predator. and the big multinationals in this country are allied with them against usa citizens.
if president i would slap tariffs (no ricardo arguments from the peanut gallery - he believed in mutual trade between advanced countries) on the commie ba*&^$ds and wire them their lousy money. then i would start listing names of usa corporate sellouts, and the number of chinese workers they employ at the expense of usa workers.
and as far as the chinese united nations diplomat who ranted (twice) that he hates americans i will advise him that the feeling is mutual for many americans toward the chinese.
hmmmm, I wonder what that kind of trade war with China would end like...
1. US slaps tarriffs unilaterally on China
2. China dumps its $843.7 billion worth of treasuries, causing a run on treasuries and an hyperinflationary collapse of the dollar
3. The US, with insufficient industrial production capacity and huge needs of imported oil, is now forced to pay chinese producers and oil producers with a mixture of Fort Knox Gold, American Real Estate and Land, and shares in American high tech companies....
What would Obama do ? Drop a few nuclear bombs on China and the gulf states? Or start licking Chinese and Saudi asses ?
Hint : to reason as if the US was still the largest creditor nation in the world is... stoping free trade is something it should have thought about when it wasn't yet the largest debtor nation in the world. Now it is .... too late.
I enjoy your emphasis on the role of credit creation versus fractional banking systems.
However, I think that the "nuclear option" of China dumping USTs is remote. I defer to Michael Pettis on this. Essentially, the Chinese have accumulated the $ because we run a trade deficit. The question becomes, where would China put the $800bn? 1) Return to China selling $ and buying RMB, causing massive inflation (as if the 3.5% CPI print were even remotely real). Historically speaking that would end badly. 2) Sell $ buy EUR. Europeans would enter the trade war just as quickly as the Chinese try to gain more competitive advantage over the Germans, driving up the EUR. Rinse and repeat for all of the other "reserve" proxies which exist in diminishing returns.
The UST balance will diminish as the US trade deficit diminishes. How does that occur with a manipulated currency and open imports / corporate mercantilism in its current form? Answer, it doesn't.
So what's the motivation for US Corporations not to do business in China with the current cost strucutures? None (technology theft maybe, but not to the tipping point yet). The cost structure / labor arbitrage needs to be addressed. Not easy.
I don't think it's "remote" if the US started a unilateral trade war. I think it's "very likely".
But anyway, as I'm quite sure the US won't have the guts to start a trade war with China (when China holds all the cards for this), the whole scenario is very unlikely.
It was just in response to the commentator Lieutenantjohnchard who thought it 'd be a good idea to slap tarriffs on China. It's a bit too late for doing that now that they own a quarter of our foreign debt. Maybe our politicians should have thought about that a few decades ago before opening free trade with China like druken sailors.
There are never "easy solutions" once you've created a big mess for yourself. The key is to avoid creating the big mess in the first place.
The US Govt wanted free trade, they wanted credit led growth, there was nothing for Americans to gain from this but short term profits for US corporations. Now they've got a big mess on their hands.
"2. China dumps its $843.7 billion worth of treasuries, causing a run on treasuries and an hyperinflationary collapse of the dollar"
Yeah, because the Fed/proxies won't just buy them all up at whatever value necessary to maintain the illusion of dollar strength.
Oh wait. You must have forgot that they have an unlimited quantity of the denomination by which they're priced. Going to retort with the Forex argument? Are you aware of the fact that the USD is not any stronger or less strong than what the currency manipulators decide? Are you aware that the value of the gold held by China is only as valuable as the people who decide gold value choose? Let's not forget who runs this shit; it sure as fuck isn't China, Russia, or the UAE (or the elected officials of the US government). They are completely ass raping the entire world population.
"Yeah, because the Fed/proxies won't just buy them all up at whatever value necessary to maintain the illusion of dollar strength."
Of course they would, but what would happen to the dollar and what do you think other foreign investors would do with their treasury holdings? They'd want to get out of it a.s.a.p and you'd get your beautiful run on treasuries and the dollar everyone on this blog has been discussing about.
The trigger for a run on US treasuries and the dollar cannot be, as Gonzalo Lira suggested in a post yesterday, a blip in the price of oil, but could well be a trade war with China, causing China to dump its holdings (why would they keep US dollar reserves if they have no more trade with the US?) and the rest of foreign investors to loose confidence on the US Govt's ability to make payment in full.
The only reason China keeps these reserves in dollars and Euros is to safeguard itself from a trade war with the US and Europe.
It's : I buy your shit (US treasuries), but you gotta keep buying my shit (chinese junk). China doesn't keep quasi a trillion $ worth of treasuries because they "love" treasuries or think they are a "safe-haven", but because it's their best card to protect themselves from a trade war.
At least until the PRC accumulates enough PMs on the QT PDQ to make the US trade war possibility OBE.
Then we're SOL.
You're a little late on the ass licking scenario.
true
4. Unrest causes China to collapse.
Oh because you think this scenario wouldn't cause some level of "unrest" in the US before anything happened in China?
I wonder why Americans are still so convinced that they hold all the aces : here are the cards the US has now been dealt with (after decades of nonsensical government policies) :
1. largest debtor nation in the world (from largest creditor nation in the world)
2. largest oil importer in the world (ditto for many other essential commodities)
3. hardly any manufacturing capacity left but the most voracious consumers in the world
4. largest military arsenal in the world but not a cent in the bank to pay for its variable costs (manpower, energy, etc...)
oh but I know, the Obama dream team and congress will get everyone working together again.
Your ability to assess the character of the entire population of the US is absolutely amazing!