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Time's Rhymes


We have written in the past that investors should keep a close eye on China generally but on the currency revaluation issue specifically. If you missed it, earlier in the week, US senators (both Democrats and Republicans) were calling for the US administration to pressure China to devalue the Renminbi (RMB), and now there is legislation pending that calls for 27.5% tariffs on all Chinese imports. Well, those US senators are now being joined by EU finance ministers (in this case the Italian finance minister), as the below headline across my Bloomberg illustrates.

"EU to Address China's Exchange-Rate `Problem,' Tremonti Says"

The logic, if it can be called that, of this pressure for China to devalue the RMB has its roots in jobs. Their theory is that a devalued RMB will make EU and US exports more competitive on the world market, and therefore support or create jobs related to those export industries. Politicians are sensitive to nothing more than they are sensitive to "do something" about jobs; particularly with a US presidential election 13 months away.

No one debates that China is the world's most efficient (read: cheap) manufacturing platform. The only debate should be about who really wins and who really loses in such calls for protectionist policies.

One wonders if these US senators understand that for every $1 of goods shipped from China, US companies add about $4 in value. That means that, unlike Japan in the 1980s, China's open system and cheap manufacturing platform actually benefit US companies and US consumers. Companies get cheaper goods and higher margins (read: profits) and consumers pay less for their goods.

Add punitive tariffs on Chinese imports and consumers pay more for their goods; estimates I have seen are that US consumers save something like $100 billion per year on goods thanks to China's low cost manufacturing platform. Add these tariffs and US companies that benefit from the low cost platform see reduced profits and sales. Like night follows day, such revenue and profit decreases will cause them to cut jobs.

The point is that China isn't a closed system; they aren't the only beneficiaries of their low cost platform. US consumers, US businesses, and therefore US employment, benefit too. Any policies designed to hamper Chinese imports will only have the effect of shooting ourselves in the foot.

As with most political preening, such protectionist legislation plays well on TV; it makes it seem like our representatives are "doing something" about jobs. Alas, it would do more harm than good.

Make no mistake, the ongoing loss of jobs is a serious matter; 21 months from the trough of the latest recession, non farm payrolls have declined by 1.3 million jobs. Had this been a "normal" post-recession bounce, we would have seen well north of 2 million jobs created by now. But lionizing China and calling for currency devaluation is not even close to the solution. In fact, it will make joblessness worse; possibly much worse.

The most disconcerting aspect of these calls for Chinese RMB devaluation is how this episode so closely parallels the post-1929 environment, when employment ran north of 20% and politicians and central bankers lined up to "do something" about it. The massive fiscal and monetary stimulus by FDR and the Smoot-Hawley Tariff act of 1930 proved a disastrous combination for this nation's economic life.

Let's hope against hope that Graham-Schumer, Bunning-Durbin, Dole-Bayh or whatever this piece of legislation gets called, never makes it to a vote.
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