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Protectionist Crackdown: Seen vs. Unseen


From this aspect the seen is: cheap goods from China, cheap funding for a war in Iraq, and cheap credit for U.S. consumers. It is the aftermath of the unseen that everyone should be looking at.


In response to Living Wages & The Protectionist Train Crackdown, I received the following question from Minyan YTL:

So my question: how long does the US allow itself to trade with a country that manipulates its currency and also has hundreds of millions of near-slave labor to tap, in order to misallocate resources towards its country?

YTL, thanks for the question.

Let me start by asking a couple of questions of my own: How long does China support the US' reckless spending habits? At what rate of interest?

It is far too easy (and perhaps simplistic) to point the finger at a scapegoat, China, and blame them for what really ails the U.S. What really ails the U.S. is the cost of the war in Iraq, a troubled medical system (more on this coming up soon), a multitude of unfunded liabilities, and an increasing inability to compete in a global economy.

Look at the irony. The U.S. asked Russia to "tear down this wall" and for China to embrace capitalism. Both happened. Now, instead of competing against central planners America has to compete against real economies. The U.S. got what it asked for; did it not?

It seems the U.S. does not like it. That is one side of the coin. The other side of the coin is that China is doing America a favor by providing cheap merchandise; thereby raising the standard of living of those in the U.S. and in China.

Yes, the U.S. has lost manufacturing jobs to China. But in a global economy was America ever going to keep them? At what price? Bear in mind that China is now losing manufacturing jobs to Vietnam. Productivity is also increasing. A few years back, my hometown of Danville, Illinois was excited to get a new aluminum stamping plant. Danville's present population of 32,000 had shrunk from the 44,000 residents from when I was growing up. This plant was going to be a savior. In reality, the plant provided something like 10 jobs! That is how automated things are these days.

It is silly to think that putting tariffs on China will bring back jobs. Even if it did, how many jobs would the U.S. save? 10,000? 20,000 perhaps. In return for those 10-20K jobs; the price of underwear, TVs, and cars goes up for everyone by 25%? Is this a good deal? For who - other than those whose job was saved?

People complain about China manipulating its currency. What about the manipulation of the U.S. currency through policies at the Fed, Congressional spending, and the administration? America is blatantly pursuing a weak dollar policy. It has the Fed manipulating interest rates. If central planners at the Fed can set arbitrary interest rates; why can't central planners in China peg to currencies?

Focusing on jobs, we must consider the seen and the unseen. Cheap goods from China are, for now, providing scores of trucking jobs in return for those lost in manufacturing. It also provides more dock work jobs and more employment opportunities at Wal-Mart (WMT), Lowe's (LOW), Home Depot (HD), plus countless other stores.

The Fed's setting of interest rates like communist central planners and this administration blowing trillions of dollars in Iraq have both caused far more damage than any peg setting by China.

There is one other way to look at it. The U.S. can no longer dictate what the world does. Before pointing the finger elsewhere, it should simply clean up its act.

For the moment, let's assume you still disagree. For the sake of argument put a 25% tariff on goods from China. Will that be the end of it or, will goods start pouring in from Vietnam and Brazil? I suppose the U.S. could put a 25% tariff across the board on everyone. If it does, America could save some 20,000 jobs and crucify millions of consumers in the process.

Can the U.S. really save any jobs by such an action? Of course not. For every underwear manufacturing job it saves; it would likely lose 10 restaurant jobs from people who could no longer afford, or be willing, to eat out. Once again that is the seen and the unseen.

However, there is still one more seen vs. unseen consequence to the China peg. As I discussed on my blog in the article Stir Fried Stocks; that peg is, for now, fueling a massive boom in Chinese equities. It is also, along with policies at the Fed that ignore asset bubbles, fueling unsustainable trends in stock buybacks and leverage buyouts.

From this aspect the seen is: cheap goods from China, cheap funding for a war in Iraq, and cheap credit for U.S. consumers. It is the aftermath of the unseen that everyone should be looking at. Protectionism will only heighten the complications of the unseen.

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