Friday, January 29, 2010

China Giving U.S. Commerce Secretary a Massive Headache - May We Suggest Some Acupuncture, Followed by Soothing Herbal Tea?

CNBC is reporting that, the U.S. Commerce Secretary has got a massive headache listening to all the whining complaints about China, from U.S. corporations. Their gripe: "Uncle Sam please is turning protectionist". According to CNBC:
Chinese policies that promote domestic firms and create barriers against foreign ones could cause American companies to lose interest in China, U.S. Commerce Secretary Gary Locke said on Thursday. Locke's warning to Beijing against backsliding on economic openness and the rule of law came amid rising complaints about trade from both partners in a bilateral trading relationship worth more than $330 billion last year.
He also criticized a Chinese government plan to promote "indigenous innovation" by giving Chinese companies that use Chinese intellectual property an advantage in bidding on government procurement projects. Major U.S. business groups wrote to Locke, Secretary of State Hillary Clinton and other administration officials this week to complain about the initiative.
The Chinese plan "significantly disadvantages" U.S. and foreign companies in bidding on contracts worth an estimated $85 billion annually and violates market-opening pledges Beijing made in 2009 commercial talks, Locke said.
Mr. Locke settle down in a comfy arm chair. After you have had your acupuncture session and herbal tea we suggest you read the following:
In case you forgot China is only taking a page out of the United States government playbook: Barack Obama's $787bn 2009 stimulus plan, promoted the use of American goods and labor. Last February BusinessWeek detailed this, "The clearest attempt to wall off foreign companies from U.S. spending came in a "Buy American" provision. That rule requires that only U.S. iron, steel, and other manufactured goods be used for public buildings and public works funded under the bill. This sparked a debate about whether such rules in a global economy amount to protectionism".
Much to China's dismay, the Obama administration has imposed tariffs on imports of Chinese tires and steel products:
Now there is an important distinction to be made here: The U.S. of course imports a lot of stuff from China, most of which is made by American corporations for American consumption/exports to other nations (using cheap Chinese labor) - so of course there will be NO U.S. import tariffs on any of this stuff. But tariffs are being imposed on those products made by a Chinese company for which there is a strong domestic industry in the U.S., e.g. steel and tires. And the U.S. has every right to do so, because the focus is to keep Americans employed. The Chinese government is no different. It has the same domestic priorities, which is to keep Chinese citizens employed in domestic industries.
After the Asian financial crisis in 1997, Asian economies learnt bitter lessons that they have not forgotten.
The two lessons they learnt were 1) the need to promote domestic industrial development instead of depending on foreign corporations/imports and 2) stashing huge amounts of foreign reserves to adequately defend their currencies. During the Asian financial crisis, foreign capital and industrial investment by foreign corporations was withdrawn as quickly as it was put in. That left Asian economies grappling with a sudden lack of capital in their economies, and vanishing jobs (as industries departed) which greatly exacerbated the downturn.
One good example is the case of foreign banks. When a foreign bank such as Citigroup, enters an emerging market it takes in local deposits and lends the money out into the local economy. Now consider that foreign banks are the only ones present in the country and an economic crisis hits. Most of these foreign banks waste no time shutting shop and calling in the loans made to local companies. Lending dries up, at a time when funds are needed the most, jobs disappear and the economy crumbles. This is precisely what happened during the Asian crisis, which is why most Asian government have limits on the amount of deposits a foreign bank can take in.
The same logic extends to other industries. India and China the largest Asian economies, have therefore vigorously promoted domestic industries such as steel, shipping, mining, oil and gas exploration etc. This provides local employment which will not be held hostage by a foreign corporations penchant to get up and leave whenever a crisis hits. Both nations have been very protective of opening up many key domestic markets to foreign competition, and they are not about to change that policy anytime soon. (As a aside: William Engdahl in his recent interview (which we have posted today) has an interesting discussion on how to the U.S Treasury engineered the Asian financial crisis, which was then further exacerbated by ridiculous IMF policies.)

What all this boils down to, is that we will see the following trends unfolding in the near future (next 2-5yrs):
  1. Faced with a deepening world-wide economic crisis, nations will increasingly turning PROTECTIONIST.
  2. Trade barriers are only going to INCREASE in future.
  3. Every nation will strive to defend LOCAL industries from foreign competition so that they can save LOCAL jobs.
  4. Free trade is DEAD.
  5. "Exports as the engine for growth" mantra is soon going to be DEAD. Anyone relying on exports entirely, is going to be a dead duck.
  6. The key to controlling trade deficits will be to CUT IMPORTS (and not grow exports) by moving industries back on-shore. Barack Obama has moved in this direction by announcing an end to tax breaks for companies shipping jobs overseas.
  7. Every country where possible will give priority to local companies. If their own domestic industry cannot produce goods, only then imports/foreign corporations will be allowed entry in those markets.
  8. Greater LOCAL PRODUCTION followed by LOCAL CONSUMPTION will be the new normal.
  9. Trade controls will also be followed by CAPITAL CONTROLS as fiscal situation of many nations including the U.S. deteriorates. Movement of capital across borders is going to get restricted.

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