Looks Like the Trade War Is on, Maybe

America fired the second shot in the trade war with China and contrary to popular belief it is a major problem. As you may have heard, there have been two shots fired in this potential trade war between the US and China. It is only fair to state that China did fire the first shot by allowing its banks to bail out of derivative contracts issued by foreign banks, i.e. US investment banking firms like a Goldman Sachs (GS) or Citigroup (C). The Chinese bailing out of those contracts is a major problem, but a livable one as it would basically only hurt the investment banks, which I think they really deserve at the moment.

However, Mr. Obama just escalated this dispute by shooting back a trade tariff on tires from China, which smells of protectionism to me. This was perhaps the dumbest move that a government official could have done. It should make everyone question his judgment or total lack of experience. The 35% tariff was enacted because a union had begged for it, Bush was asked for the same tariff, but declined to enact it, and since Obama is in up to his neck with the unions he jumped at the chance. Even though the other US tire companies, Goodyear (GT) and Cooper Tires (CTB), did not support this tariff as they knew or know it will only hurt American product sales in China. However, that fact was ignored by Obama.

The tariff is on top of a 4% existing tariff on Chinese goods which means that once cheap tires that struggling Americans would probably buy are no more as the price will increase by the new 35% tariff. While I agree that America needs the work, I also realize that cheaper prices are far more important as we are broke. If the American product was better, than it would have been selling anyhow, regardless if the cost was more, but clearly the American consumer wanted value for their money and that is what the Chinese gave us, until now.

The free market had decided that the Chinese product was acceptable and in demand while the American product was not. However, we have an interventionist government who loves to payback political favors to the detriment of our long-term financial health. Enacting a tariff to appease a union is criminal and a sign of corrupt politics. This will not help the US in the long-term and it appears that this tariff was just not a political favor, but also a way to fire back against the Chinese legalizing the right to void derivative contracts. What we are seeing here is a textbook example of how a trade war begins and given our weakened state we will lose.

We need to realize something, America is still the #1 consuming nation on the planet, but India has over 1 billion people and China has 1.3 billion people. Based on those quick demographic facts do you really think that China needs to be our biggest trade partner? No, they don’t. In fact, Europe is now China's largest trade partner and Japan's largest trade partner is China. At this rate it looks as though decoupling may not be just a theory after all and may materialize in the very near future. A trade war will not help us right now and may lead to a steeper economic decline.

I do not expect our elected officials to understand any of this because they are lawyers and lack the knowledge to understand economics or money, besides what they can pocket. However, China holds enough of our dollars and is buying assets all over the world that could adversely impact the US if China decides to play hardball. I do not think it is a coincidence that the dollar tanked over the last 6 days and gold broke to new 12 month highs as the President and China play these games with each other. Also, contrary to popular belief, China does not need to buy our debt and nor do they need to hold our debt.

What I mean is this, China holds $1 trillion dollars and has another $1 trillion to spend. Do you think the Chinese are more worried about losing $1 trillion today or do you think they want to risk losing $2 trillion at a future date? I believe the latter is more likely than the former. As they watch the dollar decline, the Chinese will want either collateral or much higher interest rates in order to keep buying our debt. To think otherwise is simply absurd. If the Chinese want to escalate this potential trade war then they will start by selling $100 billion in treasuries, which would raise some eyebrows.

We cannot back down from them, but we have to be smart in how we approach the Chinese as they can heap economic damage upon us that will further cripple us, economically. We clearly have bad leadership in Washington, in all branches of government, and their inexperience and general knowledge only means more pain for us over the long-term. They simply do not understand what they are doing and the very last thing we need is a trade war and that war is coming very fast at this point.

Comments

[manya05:]

I beg to differ with you on two counts:

- Bush DID establish tariffs too, the steel tariffs of March 2002. The tariffs did nothing to save steel jobs in the US or stem the hemorrhaging through the trade deficit. They were lifted without any other effect than a brief boost in political standing internally for certain constituencies. The tire tariffs will be no different, it is just political posturing that will have no effect whatsoever.

- I would not be so afraid of the Chinese and their Trillion dollars, our debt is much more than that and we could print a Trillion in a heartbeat. It is a MAD situation, if we were to go nuclear on an economic war with China, yes, we would suffer tremendously but eventually will get over it, but they go back to the Middle Ages. So I think they need us much more than we need them. They can talk like a power, and have dreams of world dominance, but they are dreaming...don't worry about them.

Sep 13 09:38 AM

[User 485528:]

There was a political MAD situation brewing in Europe in at the turn of the century. In 1914, Stein's law reared its ugly head and out popped WWI.

Sep 13 11:09 AM

[myscreenname:]

Buying cheap chinese crap made by slave labor gives us short term economic benefit of cheap goods but eventually without jobs we wont even be able to afford the cheap slave made crap. The chinese have been cheating for years by holding their currency low and by refusing to implement any sort of environmental or labor policy. Economists have been feeding us this free trade creates jobs for years so where are the jobs? At some point you have to pay attention to the measurable evidence instead of the bullshit.

Sep 13 11:18 AM

[the rabble:]

You say "cheaper prices are far more important as we are broke." Why do you think we are broke.? That's the Wal-Mart mentality.
Cheaper no matter what the cost. Well the long term cost of short term thinking is now upon us. It's called American jobs. Since when do most american care about quality. You apparently, like most Americans have no idea about a business notion called "the cost of quality." I have an outdoor patio light. I replace it 3-4 times a year with bulbs made in China. When I bought this depreciated house 17 years ago a bulb literally lasted 3-4 years. It was twice the cost. Guess where it was made. You do the math. Trivial example but it extrapolates to much larger areas and economic implications. Quite a few in fact.
I read an article on seeking Alpha about the horror of tariffs in regards to this tire thing.. Do you know what his beginning, middle, ending and only statement for the horrors of tariffs was...'A study by a economics professor at Rutgers University suggested..." then went on to say that we would lose 25,000 sales jobs in the tire industry, etc. I question that study by that fellow. He mentioned the failure of the National Industrial Recovery Act as a snip againt protectionism. I suggest one read the details on the act and decide exactly why it failed. I question every single article like this that fails to provide data and analysis. This is not your fathers economy. You talk about protectionism. Has not done the Chineese too bad has it. Or the Koreans. Or the Indians. Anyone care to enter a discussoin about the esoteric difference between "fair" and "free" trade. In our case it's called jobs and a declinning standard of living and rapidly rising poverty class. Do you really think the Chinees give a fat rats a$$ about fair trade. Watch how fast they "protect" their tire industry if American sales even began to remotely threaten it. They have shown time and time again they will disregard with impunity ANY trade policy for even a slight economic advantage. People do not seem to understand the Chineese do not believe in or want fair trade. Just the opposite. Literally. You really need to spend some time analysing the Chinees and you will realize real fast that the longer we play this fair trade nonsense the worse its going to be when we have to (and we will) directly confront them. There is going to have to be some real pain and depression (if not worse) style years ahead of us. You say the gov does not understand finance and economics. True. You can bet the American Corporate structure sure as he!! does. Wal-Mart along the to big to fail entities would see the majority of american living in abject squalor while touting the live better live cheaper slogan to employees that only make minimum wage because the gov says they have to pay it. (excluding the execs of course) All for the sake of the bottom line.
I'll say it again. The notion of Fair trade is not in the Chineese mind set. It exists only to the extent they can use our notion of it to gain access to our markets while forestalling any advantage our access to their markets may gain us. It is a restraint that a totalitarian government has learned to use effectively against us. You say they (our gov) do not realize the last thing we need is a trade war. What do you suggest, and what is your battle plan. ? It is simply not a "economics where we all make money by cooperation and business" with the Chineese. It is a "we win and you lose" scenerio, and guess what a totalitarian gov means by that.
We CANNOT keep going like this. Our job creation engine is literally shut down. Do you know what this means in the mid to long term. ?
What was it the famous french revolutionist said to the King as the rabble stormed the palace. "When people get mad, desperate and hungry...they do bad things.." ...Lets hope cooler heads prevail, but I agree with your last sentiment...they won't.

Sep 13 11:56 AM

[rosey99:]

This is argument is absolutely exhausted. While I am not convinced that the tariff on tires was inspired by practicality instead of politics, it is abundantly clear that trade with China (in its current form) has not been the "win-win" it was supposed to be. People may be ignorant, but they are not blind. And even an economist should be able to see the reality of the ever growing trade deficit, as opposed to wallowing in theoretical constructs of "benefits to all." That dog won't hunt - not any more.

I'm not saying that a trade war is the best way to deal with our trade issues, but something has got to give. This is a logical progression given the proclivity of some to simply regurgitate the wonderful theories that have been proven disastrous in their application. I'm not surprised that the CEOs of tire companies don't approve, they are after all part of that relatively small group who have reaped enormous prosperity while for the majority of Americans the perceived costs have far outweighed the perceived benefits. And again. . .There's the FACT of that pesky trade deficit.

The author might consider inventing a new rationalization for perpetuating the status quo, the justifications that have prevailed for decades have - for a growing number of people - been discredited by experience.

Sep 13 02:52 PM

[pigdog67:]

I bought dinner plates and bowls made in China. Of course they are relatively cheap but looked fine. They all chipped within a month. I was wondering where I could find decent plates. I had to go to Macy's of all places and buy some that are made in Germany. They cost $25 a plate but have lasted 6 months so far without any chipping. Chinese manufactures are JUNK.


On Sep 13 11:18 AM myscreenname wrote:

> Buying cheap chinese crap made by slave labor gives us short term
> economic benefit of cheap goods but eventually without jobs we wont
> even be able to afford the cheap slave made crap. The chinese have
> been cheating for years by holding their currency low and by refusing
> to implement any sort of environmental or labor policy. Economists
> have been feeding us this free trade creates jobs for years so where
> are the jobs? At some point you have to pay attention to the measurable
> evidence instead of the bullshit.

Sep 14 12:44 AM

[silent obse...:]

"I'll say it again. The notion of Fair trade is not in the Chineese mind set. It exists only to the extent they can use our notion of it to gain access to our markets while forestalling any advantage our access to their markets may gain us."

You hit the nail right on the head rabbi

I'm an American in China I know whats going on.

Sep 17 07:05 AM

[silent obse...:]

I don't know a damn thing about econmics. All I know is that playing fair with China will only make the situation worse.

You talk about protectionism?

This year alone China has blocked Facebook, Youtube, and Twitter
People here cannot access it...and never will be able to

But let me tell you this...

They now have an exact clone of facebook called xiaonei.com check it out yourself...and it's totally accessible

Youtube? youku.com

Twitter? comming soon

Also I own over 500 movies not one of the actors that are portrayed in those films get any of my money.

Why?

Well its simple there are no places to buy them...only pirated copies are sold here...

That goes for movies,music, prada bags, cabbage patch kids

Anything you think of China has a clone of it.

If I want to buy something like flour

Domestic flour 5 yuan

American Flower 50 yuan

How can we dare compete?

Every foriegn company that starts up here MUST have a Chinese partner.

My wife works for BP(British Petrolium) and the MUST be partners with SinoPec(China's firm)

So who is playing fair by WTO standards...

Certainly not here. They break every rule in the book
There are no laws here

Maybe Obama is making a bonehead decision, but atleast some body has grown some balls but its time we fight back.

Like I said I know nothing about economics, but some of this stuff is just fairly obvious.

Sep 17 07:21 AM