FYI | Oct 01 2010
By Greg Peel
By a vote of 348-79, the US House of Representatives has passed a bill which provides the US Commerce Department with a green light to assess the imposition of trade tariffs on goods imported from China. The bill is retaliation for US anger over China's artificially undervalued currency.
The irony, of course, is that China is America's biggest creditor, holding the largest amount of US Treasury and agency debt. Were Beijing to be sufficiently angered by such protectionist measures, it need only call in its marker. One hint that China was exiting US Treasuries and the age of the American Empire would end not with a whimper, but with a bang. The Great Depression would look like a mild downturn by comparison.
But the trade relationship which has built up between China and the US over the past couple of decades is internecine. If America implodes, the Chinese Miracle would be over. China might as well go back to Communism. The whole world would simply be cast into a new round of the Dark Ages.
Beijing is fully aware of its predicament, which is why it will not pull the pin. But it will dictate the terms, and that means it will revalue its currency in its own good time. It can fake anger at Washington for any protectionist measures, but that will not stop its wider agenda. In the twelve months to July, China reduced its US bond holdings by 10% to US$846.7bn. The money went into other currencies, gold, commodities, and direct investment in commodity producers. China is diversifying its risk – quietly.
Since June, the renminbi has been revalued by 2%. It's a far cry from the 20-40% undervaluation that can be claimed using various comparisons, but it's all part of the process. The renminbi is now pegged not just to the US dollar, but to a basket of unnamed currencies. The US dollar has weakened as a result.
In the shorter scheme of things, tariffs imposed on Chinese imports to the US will mean lower import volumes, which will mean lower manufacturing output, which will mean lower raw material demand, which will impact on the Australian economy. A simplified conclusion is lower iron ore exports out of Australia, and there goes the Aussie dollar. But the Aussie dollar hasn't “gone”. Why not?
Because it's all a load of rubbish, that's why.
For starters, the House has not passed a bill to impose tariffs, it has passed a bill to allow the Commerce Department to think about imposing tariffs. So the onus lies solely with the bureaucrats. This is a good thing, because the Congressional impetus behind the passage of the bill is entrenched in local politics and nothing else. The Reps are simply trying to look tough in front of the rednecks they represent ahead of the mid-term elections.
It is true that a lot of the Reps would be simply too ignorant of the wider implications and too blindly arrogant as Americans to appreciate the folly. But realistically its also about self-serving politicking and using the Australian parliamentary model of “dumbing down” policy to appease the great unwashed. There are a great many American workers who find it easy to believe they're out of a job simply because of those evil Chinese. The fact America long ago overspent its income is not on the agenda. Stoke a bit of jingoism and you're a shoe-in for mid-term re-election.
And that's where the joke's on the rednecks. The bill will never pass through the Senate and it was never intended it would pass through the Senate. The Senate has already indicated it will not be voting on the bill this year given the “lame duck” period is about to begin and tax legislation before that time will take precedent. When the new Congress is sworn in next year, all bills are declared null and void. If the Reps want to put it up again, they have to start from scratch. By that time they'll be safely ensconced for two years and probably won't bother.
It would not be a stretch to assume all of this has been carefully explained to Beijing.
So Australia can rest easy for now. Over time, Chinese currency revaluation is a two-edged sword, given a stronger renminbi means more iron ore purchasing power but also means more expensive Chinese imports for the US and Europe and thus lower demand. But the Chinese story is no longer one of export growth, it is one of domestic economic growth. It is that, and that alone, which has everyone from the Australian Treasury to Access Economics forecasting a surplus in FY13.
As for what happens after that, well – anything can happen in the ensuing three years anyway.
