The Trade War Escalates

Posted by Ray on September 13, 2009 under Main | Be the First to Comment

As I talked about yesterday there is a trade war that is quickly heating up. Contrary to what the experts in the Whitehouse think, we desperately need China to help us fund our ever increasing deficits. The Whitehouse said that they do not believe a trade war will erupt, but what do you call the actions of the Chinese over the past 2 days? It is a trade war that has consequences we cannot comprehend.

As stated yesterday, Obama, in order to appease his labor union friends, instituted a 35% tariff on tires from China. China immediately filed a complaint with the WTO, which I am sure we will win since we usually never lose those fights, but today the Chinese are claiming ‘dumping’ of auto products and chicken products. Those are serious accusations and also an indication that China is not going to back down and why should they?

Frankly, we need them more than they need us as they fund our deficit spending and provide us with cheap products, that we really don’t need, but hey we like to buy stuff. Yes, we provide China with a market, but we are no longer their largest market, Europe is. Not to mention that their population could, theoretically, support itself or they could just sell more products to India or other large populated countries. I believe in the decoupling theory and we might just be at this point as China gets fed up with the amateurs in the Whitehouse, who insist on fiscal irresponsibility and embrace crony capitalism to benefit the unions instead of America as a whole.

If you do not think this is a big deal, think again. They have two ways to really engage us on this issue and rattle our cage.

Net sell dollars they hold, in a bigger fashion than they are already doing; or
Not buy at the treasury auctions in the near future

I know that we Americans think we can do anything, and we put that to the test daily, but right now we desperately need the Chinese to fund our deficit. If they do not fund us we are going to feel a world of pain because Helicopter Ben will simply print the money to quantitatively ease our way into hyperinflation. Not to mention that the Chinese could hurt us one other way that most people do not realize exists, they could stop buying our financial products which account for a large portion of our exports.

China has already said their banks do not have to honor derivative contracts they own and are, as far as I know, forbidden from entering new derivative contracts, which presumably started this incident. Whether they started it or not is irrelevant because we did not need to escalate it. I firmly believe that the Obama administration has shown its arrogance and inexperience with this situation. From what I see it is clear that they do not understand how money works and that they think printing money is just fine, it is not. This trade war, if it escalates, has the potential of crushing our currency which is already struggling.

Looking at this from the Chinese perspective, I can see why they would be upset. Their dollar holdings are worth less than 12 months ago and they were probably sold some MBS, CMBS, CLO’s and whatever else Wall Street could pawn off to them which they surely lost money on. Now the Chinese are funding our deficits and we go and throw a tariff on one of their products, which makes no sense. I think they have played our game for too long and lost, to a certain extent. Now, they want to play by their rules and we are in a predicament because we need them more than they need us.

I fear this will grow out of control and make a tenuous situation into a dangerous one for the US. We need to get our budget under control so we will not be subject to, for lack of a better term, blackmailed. What I mean is that if the Chinese called up Geithner and said remove the tariff or we will sell $200 billion US dollars tomorrow, what do you think would happen? Exactly. The other issue is the only one who truly pays for higher tariffs are the US citizens because they are now denied a lower cost product and forced to buy a more expensive product, no matter who they buy it from, the US or the Chinese.

Once again the average American loses because of Washington’s idiotic behavior.