International | Jul 11 2007
By Greg Peel
Max Baucus (D-MT, and US Senate Finance Committee Chairman), Charles Schumer (D-NY), Lindsay Graham (R-SC) and Charles Grassley (R-IA) are currently pushing legislation before Congress to let US companies petition for steeper “anti-dumping” duties against countries that keep their currencies undervalued. Put another way, these bipartisan Congressmen want to introduce protection against Chinese exports.
The fundamental capitalists of the US (mostly Republican voters) are very concerned about recent developments in Democrat policy. First came the move to end the 15% tax rate on partnerships, ostensibly an attack on hedge and private equity funds that will see their tax rates jump to the top level 35%. Next came talk of raising the top tax rate (but perhaps lowering the middle) and increasing spending – a classic socialist agenda. And recently the Clinton and Obama campaigns have hitched their wagons to the growing protectionist movement. Free marketeers see protectionism as anathema to capitalism.
Of course George Bush has the power to veto any legislation passed by the Democrat majority houses, and has already done so on more than one bill, rendering him less of a lame duck than final-year status usually affords. But the capitalists are concerned that the next president will be a Democrat, rendering 2008 the last year of prosperity. The Republicans are gaining some hope, however, in that the momentum that gave the Democrats the majority last year (anti-war sentiment) is now being clouded by these somewhat arrogant assaults. The Democrats still have to win the election, and may yet lose the anti-war support of Republican swingers if they feel their hip-pocket is in danger.
But there is a grave fear among the fundamental capitalists that protectionist sentiment is growing among the middle class Republican voters, let alone the disenfranchised auto-worker fraternity. It is one thing for the Chinese to dump cheap exports onto the US at the expense of local manufacturers, but it is another thing if those exports are lacking in quality controls and can even be dangerous. There is a warning out from US regulators at the moment not to use Chinese-made toothpaste, because it may contain antifreeze, to steer away from pet foods, which may contain industrial chemicals, and to avoid tyres, as they have proven defective. In general, the US consumer is now trying to avoid just about anything with a “Made in China” stamp.
The problem is, that’s either nigh on impossible or comparatively very expensive. We are not just talking goods that originate in China, we’re talking goods that US companies contract Chinese manufacturers to produce. So it’s no good sticking to familiar US brands. US consumers are in a quandary, and that is fuelling protectionist rhetoric. If the US shuts up shop to China, the economies of both countries will be severely affected, and that will flow on to the global economy. US congressmen would do well to consider this when they clean their teeth.
China, of course, has its own way of dealing with such problems. Realising that poor quality control on US exports was threatening the entire economic balance the government yesterday executed the former head of food and drug regulation.
If there has been any backlash against Chinese exports across the globe to date it certainly wasn’t apparent in the June trade figures. China’s trade surplus to the world surged to a record US$26.9 billion for the month, exceeding consensus estimates. The figure is 87% higher than June of last year, which was about the time Chinese officials began seriously stepping up (in their minds) initiatives intended to reduce the global imbalance. About half of China’s trade surplus is with the US.
The level of this surplus is historically unprecedented, and is a direct reflection of the fact that the artificially-pegged renminbi is some 40% undervalued. The renminbi jumped 0.27% last night on the surplus announcement – the most it has ever moved under the range pegging system that replaced the full peg system in June 2005. The renminbi has now appreciated 9.2% against the US dollar since the peg was lifted. By comparison, the euro has appreciated 12%. Europe also runs a trade deficit with China, but a surplus with the US.
Chinese exports to the world surged 27% last month to crack the ton for the first time at US$103.27 billion. Imports into China rose only 14% to US$76.4 billion – the slowest growth in four months. China desperately wants to spark up domestic consumption. It isn’t working.
There is a slim hope that the situation may improve slightly in July, given that certain export tax rebates will cease this month. With that in mind, Chinese exporters made a last ditch effort to ship goods out of the country in June. The roads to Shanghai’s docks were reportedly jammed with trucks for all of the final week. Nevertheless, China’s own economic agency forecasts a trade gap of US$250-300 billion in 2007. The foreign receipts pouring into China have fuelled an 85% rise in the local stock market this year and a 26% increase in factory and property investment.
And each week we wait for that interest rate rise that has been predicted but never seems to come. Maybe it will come now. But it will make little difference.
