Barack Obama is on a risky path toward further confrontation with America’s banker, the Chinese. As his economic stimulus package makes its way though Congress, Uncle Sam’s biggest trading partners are warning we face a spiral of protectionist policies. The House-approved version includes a "Buy American" provision that generally prohibits the purchase of foreign iron and steel for any infrastructure project in the bill.
While it may not hit the Chinese economy directly, this provision has the potential to stir up a nationalistic backlash among government officials in Beijing. Running big trade and budget deficits indefinitely is not possible for America, either economically or politically. The Chinese indirectly control Washington’s purse strings. China has become the biggest foreign holder of U.S. debt, second only to the U.S. government itself in overall holdings.
Obama is testing an already shaky bilateral relationship. The new president committed a gaffe last week by allowing his nominee for Treasury Secretary Timothy Geithnerto say the administration "believes that China is manipulating its currency."
This led Beijing to react forcefully, arguing Obama and his team were wrong. Kenneth G. Lieberthal, visiting fellow at the Brookings Institution, warns that the Obama administration may take a tougher line with China, according to the NY Times. "The Chinese are probably one of the few people in the world who were sorry to see President Bush go, and are nervous about his successor."
As a candidate, Obama criticized NAFTA and proposed a deal that would have lowered barriers with Colombia. "It is no surprise there is increasing talk that the incoming Obama administration will focus its trade spotlight on China,” wrote Derek Scissors of the Heritage Foundation in Washington. "As it is usually the president who restrains Congress when protectionist sentiment strengthens, the storm clouds are plainly thickening."
In our global economy, what does “buy American” actually mean? With supply chains spread the world over, it is not as simple as it was in the 1980’s when “Buy American, it could be your job” was the American industry’s response to Japanese imports. Today, the “Made in China” label means many American companies, and their stock investors, benefit as well.
In the middle of a painful economic downturn, sound policy choices often fall victim to emotional outbursts. If Obama and the protectionists in Congress are successful, US firms with operations in China face the risk of retaliation by Chinese trade officials. As many China observers have noted, a number of struggling US-based firms including Motorola (MOT), Dell (DELL), GM, along with countless other manufacturers, are successfully selling billions of dollars worth of mobile phones, computers, and Buicks manufactured in China to Chinese buyers. And according to traditional trade statistics, American branded products produced by American companies in China are not considered American, but Chinese.
Foreign companies are likely to face more roadblocks down the road. Cola-Cola’s (KO) attempt at buying Huiyuan Juice Group has drawn scrutiny under China’s new anti-monopoly law which came into force last August. We can look forward to more economic nationalism in China as the overall economy continues to decline. And research shows Chinese imports often help poor America’s poor make ends meet. In November, The American reported:
The Broda-Romalis paper, “Inequality and Prices: Does China Benefit the Poor in America?,” shows that from 1994 to 2005, much of the increase in U.S. income inequality was actually offset by a decline in the price index of the goods that poorer households consume. Inflation for the richest 10 percent of U.S. households, which tend to spend more on services, was 6 percent higher than inflation for the poorest 10 percent, which tend to spend more on nondurable goods, the type of goods often imported from China and sold at Wal-Mart (WMT).
Broda and Romalis found that in the sectors where Chinese imports have increased the most (especially nondurable goods such as canned food and clothing), prices have fallen dramatically. They estimate that about one-third of the price decline for the poor is directly associated with rising imports from China. “In the sectors where there is no Chinese presence,” Broda says, “inflation has been more than 20 percent.”
As the Smoot Hawley tariffs clearly showed in the 1930’s, protectionism is the wrong remedy for a global economic slump. With a large Democratic majority in Senate and Obama the new occupant in the White House, passage of the stimulus package, in some form, seems to be a near certainty. In the Year of the Ox, we are going relearn some history the whole world would rather forget.
Stock position: None.
