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Why The Mutual Assured Destruction Of Global Protectionism Could Very Well Be Upon Us
We are at a point in the September beta ramp, when the market seems to go up on all news: good, bad, worse, worst, and completely irrelevant. After all there are just 10 more trading days in which funds needs a market rise of at least another 5% before they can sleep confident that tomorrow their largest LP won't send in that dreaded redemption notice. Yet there is still one potential gray swan that the market appears to not have factored in - the emergence of full blown protectionism, which will impact the core game theory relationship between the US and China at its very foundation, and begin a process of ever-escalating defection between the two fiat system dilemmatic prisoners. What could bring this disastrous development to the fore? Why Washington, D.C. of course. And if you are about to say that there is no chance of something like that happening in the nearest term, especially before the mid-terms, not so fast. Here is Goldman's Alec Phillips explaining why the passage of a protectionist law in the next few weeks is not only possible but probable.
From Goldman Sachs
The congressional focus on China’s exchange rate policy has increased significantly ahead of the upcoming midterm election, and at this point legislative action is a more serious risk than it has been since Congress first took up China-focused tariff legislation in 2005. In response to this rising pressure, the US yesterday filed two complaints in the WTO regarding Chinese trade practices, and Treasury Secretary Geithner took on a somewhat more aggressive posture in today’s congressional hearings.
Activity on this front seems likely to escalate further over the next few weeks. There is a clear possibility that the House of Representatives will take up legislation that would allow for tariffs on certain imports from China. But while House passage would represent an important escalation of the debate, the more important issue is whether the Senate will act on the issue, and ultimately whether a new tariff regime could become law.
We think that the risk that such legislation is enacted this year is still fairly low. There is little time left on the legislative calendar, and not yet a clear legislative strategy. That said, we also don’t expect this issue to disappear after the election, given that the current political reaction is driven by the weak economy and labor market as much as it is by the political cycle.
Congress has ramped up its focus on US-China economic relations, driven by the upcoming election as well as the sluggish economic recovery. At this point legislative action is a more serious risk than it has been since Congress first seriously took up tariff legislation in 2005. Over the last week, we have seen several developments in US-China economic relations:
- The US has initiated dispute settlement proceedings in the WTO regarding Chinese trade policies. The US Trade Representative (USTR) challenged China’s imposition of countervailing duties on certain US steel products, and the difficulty that US firms have in getting access to the Chinese market in payment card services.
- Secretary Geithner’s testimony reflected mixed views. Geithner’s comments today were more confrontational than usual, noting that efforts to date haven’t yielded progress and that appreciation has been too slow and too limited, and expressing a general concern about the ability of US businesses to do business in China. While he stopped short of supporting pending tariff legislation, he implied that a legislative remedy could be appropriate if designed correctly. On the other hand, Secretary Geithner also made it clear that the Treasury sees little benefit in naming China as a currency manipulator in its semiannual report, as doing so would escalate US-China trade tensions without providing a specific remedy.
- Democratic leaders are considering reviving exchange rate legislation before the election. House and Senate leaders appear to be considering bringing China-focused legislation to their respective floors for consideration. Chairmen of the relevant committees appear less inclined to act, but also have less influence on the congressional agenda over the next few weeks. No decision has been made, but with nearly 150 members of Congress sponsoring the House version of the legislation, House Speaker Nancy Pelosi is under significant pressure to allow a vote, and may also find it politically advantageous to do so.
From here, we expect the political risk around this issue to increase further over the next few weeks and expect it to recede only gradually thereafter:
- Passage of currency legislation in at least one chamber of Congress before the election is very possible… The bills pending in the House and Senate differ from one another, but both would essentially do two things: first, the Treasury would be required to identify currencies that are undervalued or overvalued as a result of “protracted large scale intervention”, based in part on analysis from the IMF. Second, as a result of such a finding, affected US industries could seek relief through countervailing and antidumping duties equal to the calculated undervaluation. However, an important distinction between prior proposals and the current legislation is that the latter would not impose an across the board tariff on imports from China, but rather would require US manufacturers to apply for case-by-case relief for specific products.
- ...But enactment still seems like a long shot. If the House does indeed pass legislation, the Senate could come under more pressure to act. However, Senate passage is more difficult, since considering even minor legislation in that chamber can take almost a week. In addition, as noted above, the bills in the House and Senate are different, and would probably need to be reconciled, requiring additional time. The Senate will be in session for only three more weeks before the election, and the House potentially for only two more weeks, so the calendar is a major obstacle. On the other hand, we suspect that many proponents of the legislation would actually like to see it enacted. In the past, some lawmakers supported the concept of retaliatory tariffs in part because they never expected them to become law. The obstacles in front of this legislation are great enough that it probably still won’t reach the president’s desk this year, but it is no longer as clear that Congress is “bluffing.”
- Another semiannual report will be submitted to Congress, but probably not until after the election. The Treasury is required to submit its next semiannual report on exchange rate policy six months after the last report, which was due on April 15 but wasn’t submitted until early July. Thus, depending on one’s interpretation of the requirement, the Treasury would be required to submit the report to Congress by October 15—two weeks before the upcoming midterm election—or could wait until January 2011. The Treasury has indicated only that it will submit its report on a “timely” basis, but it seems fairly likely that this will not occur until after the election, particularly in light of the fact that there is no penalty for a late submission. Given Secretary Geithner’s view expressed today that the report is counterproductive, the risk that the Treasury names China in its report seems as low as ever.
- Further WTO disputes are likely. The USTR’s decision this week to initiate dispute settlement proceedings in the WTO seems unlikely to be its last. If the Treasury comes under additional pressure from lawmakers regarding trade relations with China, it seems likely that additional complaints could be filed. Intellectual property-related issues and subsidies in the renewable energy sector seem likely areas for additional action before the WTO if the administration decides to take further action.
- Tension will persist after the election. Although discussions of exchange rate policy have hit an acute phase due to the upcoming election, the issue won’t recede quickly. First, discussions are apt to continue following the US elections; for instance the G-20 summit in Seoul on November 11 is likely to focus on this topic among others. Second, the sentiment currently on display in Congress is driven as much by the weak economy and labor market as it is by the campaign season. A look at tariffs imposed over the last 50 years demonstrates a much tighter relationship with the unemployment rate than it does with the US political cycle (see for instance “Trade Policy: Storm Brewing or Tempest in a Teapot?” US Daily, September 16, 2009).
Alec Phillips, Goldman Sachs
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Mostly just pre-election posturing.
Take a look at number 5 again:
Tension will persist after the election.
Or did you get that far in your haste for the top spot?
Yes, I did read no. 5. Some posturing will continue after the election. My point still stands.
In the current global trading system, the only permitted export from the US is the dollar. Others have to earn it, we just create it from thin air!
Nothing is going to change until there is an alternative reserve currency.
There is an alternative reserve currency.
And it is displayed prominently on the ECB balance sheet, as well as that of the EU member nations.
http://www.ecb.int/stats/external/reserves/html/assets_index.en.html
I am referencing a reserve currency that is used for daily trade -- not the reserve currency that is for Armegeddon!
As the economy deteriorates - poverty, food stamps, foreclosures all at record highs - politicians will look for a scape goat (or plural). Blaming a far off land that can still be passed off as "communist" will be more convenient than looking at their own policies.
As the heat gets turned up, game theory becomes more clear: the Prisoner's Dilemma favors the first one out, even if the likely outcome is that everyone gets hurt in the end. They can keep it together for awhile, but eventually it will become everyone for themselves.
Of course, the PTB know this and know their exits...
War-mongering sons of bitchez!!!
6. Feline AIDS is the #1 killer of domestic cats....
It might be premature to declare doom, but one thing is clear: the two-step is getting faster and the stakes have never been higher.
Confucious say???
Or was that Johnny Cash?
Smoot-Hawley by any other name is still perilous. Facts be damned.
"China is a currency manipulator, blah-blah-blah". Just a bunch of election season clap-trap.
You can be F-ing sure nothing substantial ever comes of it.
http://mpettis.com/2010/09/what-do-the-good-trade-numbers-tell-us/
Exactly. Read Pettis, read Wolf. Global imbalances have to and will in the end be resolved.
In the end, Americans will have less material wealth, Chinese more. But remember, America's last 10-20-30 years of growth has been aided by a debt fueled binge, leveraging deep pools of cheap labor abroad and technology at home. A large part of the "wealth" has been illusory. And who can really argue that we would not be better off with less debt, cleaner balance sheets, healthier lives.
Labor arbitrage has its limits. The deleveraging of the US consumer will continue. But China's exports will continue to be subsidized plainly and simply by more debt in the US. The inertia of the machine. The dilemma.
Short of every American boycotting Walmart etc., how does one break such a codependancy? The rich get richer and the poor (everyone else) pay less at Walmart and do not riot ... Flip side China. The Chinese consumer goes from 50% of GDP to 35%, his wealth is stolen by the CCP and State which amasses $2.5TN in foreign reserves, but he gets off of the pig farm, feeds his family and does not riot.
It's not going to be easy. Do the politicians lack the stomach for it (to put it more bluntly, will they be bought off by the multinational corporations looking at their needle and spoon?). We shall see over the next year or so.
There are other alternatives but both sides seem to be so locked in, nothing short of an intervention seems waranted.
As Churchill said : "Americans can always be counted on to do the right thing ... after they have exhausted all other possibilities."
I think that a important piece is missing from your piece namely the bogus triple-A securitised toxic loans sold all over the world and an highly leveraged dark derivative powder keg estimated between $800 trill - $1500 trill which caused the wicked situation we're in right now. For which nobody went to jail. If you wan't to talk about solultions you have to start at the root of the problem. China is not the real problem, they've got their own problems but so does the U.S. be it of a different nature.
Wrong incestives given to cheap mortgage sellers who don't even shared any personal risks if these mortgages blew up cause their commissions were allready paid for. These mortgages were repackaged and under the eye of Goldman Sachs and sold as triple-A while knowlingly selling this stuff ready to blow up. But heck lets make money on that inside information which in fact is their business model, trading on inside info "Fraud".
THE PROBLEMS & SOLUTIONS 1 - Stop expensive wars. 2 - Stop expensive bailouts. 3 - Financial Disarmament which means dismantling the shadow banking system and freezing the instruments of speculative trade. 4 - Democratizing monetary policy by taking their control over the monetary policy by making the illegal FED really Federal and, skip out J.P.Morgan out of the equation during this proces which saves the American taxpayer 3% of thefting. The FED is not really Federal now but a couple of private banks owned by a hand full of families. 5 - Reverse the very very bad rules from the past: A - Reverse –>1999 Repeal of the Glass-Steagall Act that separated commercial from investment banking by the Clinton Administration. B - Reverse –>2000 Derivatives and credit default swaps were excluded from regulation. C - Reverse –>2004 The greatest mistake setting aside capital requirements by exempting the investment banks from maintaining reserves to cover losses on investments engineered and This allowed the investment banks to leverage financial instruments beyond any bounds of prudence. 6 - This only can be done if the current failing financial Hanky panky hokes are removed from their office especially when the whole “Fancy Fair” is Nationalized. During this process Skip J.P.Morgan out of the equation.Saves the American taxpayer 3%. Start publishing real figures again which are “for real” this time so confidence can restore. 7 - Separate the bad mortgages from the good ones. - Revalue the mortgage-backed securities accordingly. - Completely sort out counter party risk for credit default swaps and interest rate swaps. (With help from; Alex Jones, Michel Chossudovsky, Dr. Paul Graig Roberts, Bob Chapman, Max Keiser, Peter Schiff, Tarply, Joe and others.)No doubt China will not take this lying down, either. That's the other side of this that wasn't covered in this article. What will they do?
Let's just hope they don't shoot first!
All the current provocations out of Washington around the Chinese borders (Korea, Iran, Afghanistan, Treasury, WTO,....) are designed to provoke China into looking like the bad guy. But that ploy will fail if the Chinese just continue to bide their time and watch Washington self-destruct.
After all there are just 10 more trading days in which funds needs a market rise of at least another 5% before they can sleep confident that tomorrow their largest LP won't send in that dreaded redemption notice.--------
Bulls are long and Bears are in cash ( with a bit of losses in their previuos PUTS).....but could we see something Like October 1987 next month....i found this article in google which i missed earlier in MAY.......
http://money.cnn.com/2010/05/17/magazines/fortune/2010.crash.1987.again....
May be those who are in cash will not even get a chance to Buy PUTS and we can see 30% collapse......bulls lose and the BEARS also dont get the profit they r hoping for
Thomas Rusticci, an economist of the Austrian school at George Mason University has written a book and given a talk on how Smoot-Hawley made the first depression much worse than it would otherwise have been.
http://www.econtalk.org/archives/2010/01/rustici_on_smoo.html
Great link and website. Thank you!
Chinese companies control both ends of the Panama Canal and most of the large port facilities on the West coast. They still have a queen, two nights, a rook, and a bishop on their side of the chess board. We have a king and a couple of pawns left, so yeah, let's start some shit...
Unfortunately, those port facilities are owned by one of the oligarchs. :(
Futures are up 47 points; it's off to the moooon!!!
...and gold at 1283.60...
Up 65; Weeeeeeeee!!! Timmy and Benny will be in a soapy lather by now.
Dont interrupt. William F Buckley and Louis Rukeyser are talking about Macro Economics ( Fucking Yawn )
The mixed conflicting market signals return. It reminds me of periods in 2007/2008 during the market uncertainty and dislocation in addition to market intervention or rumours of market intervention (like the QE chatter now).
http://stockmarket618.wordpress.com
They are trying everything in their power to repeat the great depression it seems like...
I have been thinking the same thing for a while now. It's like...WTF?? Ben must not be a very good student of history. For all the talk about him being an expert on the Great Depression and all he seems to be doing nothing to prevent it. Again....WTF??
So what is the U.S. gonna do forbid China to buy treasuries? Don’t think so cause there is nobody to replace them except maybe for the London Proxy but this would than get even more obvious risking total exposure of their london proxy cover.
So China could use their Dollars to buy oil for quiet some time and it also could make currency deals with other countries to get their Dollars in exchange for Yuan. Remember that most of U.S. Dollars are not under U.S. control but outside the country.
What China could do is higher the Yuan a bit, which is possible cause the Japanese yen is very high and than buy more dollars so that the dollar rises. Nobody can blame them than.
What China should do however (Max has said it many times) is buy Gold with Dollars. This puts pressure on the U.S. and at the same time strengthens China’s Gold base. Gold is the End Game but it seems that not many countries realize this.
Wei Gu: "Most changes so far have focused on trade. In 2009 China started letting exporters and importers in a handful of places settle cross-border trade in yuan. It recently broadened that to 20 Chinese provinces and all of China’s trade partners. These flows of yuan mostly replace existing trades in dollars, yen or euro, so don’t really breach the capital controls.
But trade only goes so far. Few foreigners have yuan available to buy Chinese goods, and not everyone wants to accept them in return for selling to China. Hang Seng Bank expects yuan-settled transactions to more than double to 100 billion yuan ($15 billion) by the end of 2010, but that would still be a tiny part of China’s $2 trillion yearly trade."
From: China’s yuan: a guide for the perplexed http://blogs.reuters.com/columns/2010/09/10/chinas-yuan-a-guide-for-the-perplexed/
The Chinese Yuan rises to new high against the USD http://www.livetradingnews.com/the-chinese-yuan-rises-to-new-high-against-the-usd-21600.htm
China is testing how far it can go: “China is moving slowly, seeing how far it can get without upsetting the status quo.” Wei Gu (remember that name cause her China pieces are excellent)
Ulrich Says Gradual Yuan Gains in China's Best Interest Vid http://www.youtube.com/watch?v=rfOkgj7ZgmQ
Tim Guitner will screw it all up... Gold / Silver will shine..
End the Fed...
Passage of currency legislation in at least one chamber of Congress before the election is very possible…
Oh great, the value of sovereign currencies in relation to the dollar is going to be dictated by a committee of headless chickens. What could possible go wrong?
...rhymes with Smoot-Hawley.
It's going to be very difficult to double our exports from the U.S., as Pres. Obama promised, in an environment of protectionism, but the United States this week has fired the first shot against China in its filings at the WTO. These people must be in a dream world if they think that this will end well. How could Americans have made such a catastrophic mistake?
Back to the banks-this country just pushes plastic while everyone else actually makes things.
The US has initiated dispute settlement proceedings in the WTO regarding Chinese trade policies. The US Trade Representative (USTR) challenged China’s imposition of countervailing duties on certain US steel products, and the difficulty that US firms have in getting access to the Chinese market in payment card services.
It would be better for us to get the Keymaster and the Gatekeeper together than to allow Smoot and Hawley a 2nd act.
A last gasp from the Corruptocrats. Let's divert attention from all the totalitarian socialist legislation and the exploding debt. News flash! China manipulates its currency! Wow. The USA would never do that.
"Smoot-Hawley made the first depression much worse than it would otherwise have been."
>>>>>>>>>>>.....
How we even post those words here on ZH is criminal..CRF/NWO has brain washed most into this mind set.
Tariffs did fund the Fed Gov at one time when we did not have the IRS.
60 billion plus trade deficits are fact.
loss of production in USA is a fact
High unemployment is a fact
Tariff rates across the world on USA produced items average 20%+ vs 2-3% in USA imports: see dept treasury web site for confirmation of this. A tariff war has been in effect against USA for years.
The idea that OTHER countries must produce our consumer goods when we have a country with an educated workforce, plenty of natural resources and energy(if gov would let us produce)..is on it's face a lie.
It is economics at it's basic form: give off shore production a 15%+ advantage and you push industry and JOBS off shore.
CFR and NWO has brain washed the economists and Pols into this obvious fallacy that our economy is better off with NO PRODUCTION or those JOBS HERE.. BS
do people even have a clue to what SH was? The situation with China has nothing to do with Smoot Hawley. These clown economists have been telling us for years that trade deficits don't matter!
Our manufacturing base has been destroyed. We were doing fine before NAFTA and the trade deal with China and to reverse those agreements has nothing to do with Smoot Hawley
JFC, don't most of the people on this forum GET that China is a WANTONLY protectionist State?
They are already destroying us using it. If you do business in China, the State steals your technology then forces you out. That's how it works.
Everybody has been conditioned against the spectre of "protectionism" when it is de rigeur all over the world.
It's unfortunate that China won't respect property rights, but the time long passed for the US to "retaliate."
exactly.
So is this all coming from the banksters? Just because they can't get into China? I'm thinking it is since Chris Dodd, the biggest bankers mouthpiece is going on a tirade about it.
Actually I don't blame China, they don't want Goldman Sachs to do to them what was done to Greece. Geithner is a bit arrogant about all this isn't he? Who are we to be telling China what to do? If Timmy & Co persist in this little game they'll ruin the chances of any businesses getting into China's markets forever. Then what will we do? Will Timmy declare war? Timmy & Co are going about this all wrong. Idiots.
I highly recommend reading "Fall of Imperial China" by Frederic Wakeman. Americans were dreaming of exploiting China's vast markets in the 1800s. Beyond the opium wars, the outcome was minimal.
Another nice read on the vastness of Chinese history along with cyclical nature of its governance is "China's Imperial Past : An Introduction to Chinese History and Culture" by Charles O. Hucker.
Correcting global imbalances has nothing to do with the US telling China what to do. "China" has benefitted enourmously from US deficit spending. That situation is not sustainable, nor is 20% unemployment in the US sustainable. New paradigms in the relationship need to be developed but at this point no one really knows how to do that. Labor arbitrage exploited by multinational corporations and a chinese oligarchy had its positive effects but has since become pathological by shear magnitude. The labor gradient is very real and debates about the FED, monetarism and Austrian economics are sorely lacking when it comes to this reality. The symptom of pathology is $2.5TN in foreign reserves while there remain roughly 1 BN chinese who still earn less than $2000 a year.
Float the Yuan, consume more in China, less in the US etc. etc. The pace of change is glacial at best. The Tea Party movement did not spring up like mushrooms after a rain. The anger simmering at America's oligarchy which enriches itself is coming to a boil. China is not a scapegoat but is part and parcel of the very real problem of global imbalances. China the mercantilist must accept its share of responsibility, as must the US. Put differently, We the People must accept responsibility which entails political involvement. The FED is itself more of a symptom. The FED is not destroying you. You have created and help to sustain the FED through overconsumption and under accountability.
A look at China's history is most instructive. My view would be that "China" or the current ruling complex of the CCP, Oligarchs, People's Army etc. would happily amass $5TN in foreign reserves and build more empty cities in the desert if they could. They can't, and there is indeed a growing debate within China about this.
If we don't end the wage arbitrage, there will never be job growth.
It is not a reasonable position to give away jobs in the name of capitalism and then have those with jobs have their pay confiscated to pay social security, Medicare, food stamps, unemployment and welfare. Predatory oligarchical capitalism and socialism cannot remain core elements of our system.
"tariffs on certain imports from China. "
Why not all? Because you can't reward you friends or screw your foes unless you have targeted tariffs. Need to buy those votes.
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