Obama's Trade Battle Explained

The Obama Administration waited until the wee hours of September 11th, 2009 to quietly inform Americans of its decision to slap new tariffs against low-end tire imports from China. Coming only days before this week's important G-20 meeting in Pittsburgh, an occasion when China will likely renew its campaign to push the world towards a post-dollar economy, the timing of the announcement seems particularly ill-advised.

To be frank, it is like waving a red flag in front of a bull. It is not surprising that China instantly retaliated with their own duties on U.S. auto parts and agricultural products.

The Administration's action could be simply explained by the president's need to mollify the trade unions that played a big role in his ascendancy to power. However, the equation may be more complicated.

Despite the mindless chortling of those who believe that the United States will experience a "jobless recovery," employment holds the key to a healthy economy. It is also a potent political issue. In particular, labor unions subscribe to the idea that protectionism, in the form of trade barriers, preserves domestic jobs.

It is increasingly apparent that America and China are competing partners in a delicate and momentous power struggle, held together, temporarily, by mutual interest. America is the great consumer of the world; China, the great producer.

As a result of this relationship, America's manufacturing base has been eroded severely, perhaps even mortally. This industrial destitution has been a key factor in the run up of American unemployment, now approaching twenty percent. Although this number is roughly twice the published official unemployment level of some ten percent, it is in fact a truer indication of the health of the labor market.

The difference is due to the fact that the official unemployment figures exclude all those who have given up searching for full-time employment or are only able to find part-time work. No such pass was given to out-of-luck workers during the Great Depression or the 'stagflation' days of the 1970s. Unfortunately, this propaganda campaign to hide the true level of unemployment has been a smashing success.

Critics of protectionism rightly argue that barriers that would result from a trade war would negate any gains made by the intent to shield domestic industries. As such, they see this policy as a foolish confrontation with China. But bear in mind that these new tariffs come at a time of continued dollar weakness.

Perhaps the Administration has come to realize that the retaliatory barriers enacted by the Chinese will be overcome by the increasing competitiveness afforded by a weakening dollar? Perhaps this gives them the confidence to roll the dice.

By making U.S. products more competitive overseas, a weaker dollar would help American exports. From the Administration's perspective, a debased dollar also offers the U.S. other benefits, including reducing the real value of all debts denominated in U.S. dollars. As America now has total debts of some $58 trillion, a devaluation of some 30 percent equates to a debt reduction of 17.4 trillion... a handsome saving!

It is quite possible the Obama Administration is overtly unveiling a new policy of increased trade protection while covertly pursuing a policy of gradual dollar debasement. In so doing, it hopes to both reduce the burden of America's outstanding foreign debts and protect American manufacturing.

But if you let your own currency go up in flames, you'll be the first to get burned. This strategy, though less suicidal than many presume, still ignores its biggest victim: average Americans. While Obama claims credit for a shrinking debt and growing exports, Americans will pay the price through rising costs for everything from tires to milk, continued joblessness, and depleted savings.

Comments

[BullnBear:]

Interesting points, great article, and I would also like to add that I’ve seen mention that the tire tariffs were announced in part to work into the support needed from the unions for the health care reform bill that is currently being worked on.

Sep 24 02:05 AM

[Greame H:]

And let's not forget the likely social problems caused by declining real earnings. Much of the so called "new competitiveness" will be absorbed in the form of productivity and technological inputs, thereby doing little to provide employment for the "20%" unemployed. Decades of poor education and attitudes have made this group unattractive assets, but how will they react to the remaining 80% of the population who will survive or even thrive? Not well I suspect, and this opens the door to politicians with nasty redistributive social policies.

Sep 24 09:46 AM

[GlobalTrekker:]

This is indeed a mistake of the left. But there could be a more reasoned discussion on all these economic issues if the right would not so blindly and violently attack every necessary non-conservative idea. At this point, health care reform is desperately needed by us small business owners to stay afloat. The right has no ideas and offers zero cooperation with policy exploration. Why should Obama discuss anything with them? Their record for dialogue is Joe Wilson, and to them post-partisanship is anathema. All the right suggests is caps on doctors' malpractice claims. The left-ish CA legislature already passed that. Seeking Alpha readers, who are overwhelmingly conservative, should get their representatives to move past this mindless, extreme partisanship. When there's some cooperation from the right, I am certain Obama will listen and guide a far more moderate trade policy.

Sep 24 01:13 PM

[Duforest:]

The trade war started by th INCOMPETENT Obama will be the nails in his presidency.

Sep 24 01:46 PM

[Riles:]

As a VERY far left-leaning liberal, (former member of the SDS!) I was amazed, nay infuriated, to see Obama bending to the will (lobbyists BIG Bucks) of Wall Street and BIG BIZ, with his protectionism of these two culprits!
He very obviously took a page out of the 1930 works of the Ultra-Conservative REPUBLICAN Senators Smoot and Hawley, with their Pro-US BIG BIZ Smoot-Hawley Bill, drastically increasing tariffs on ALL things imported!
This negroid has indeed run as a Democrat, but is, in fact, a Far-to-the-Right, Pro WS and BIG BIZ SHILL!.

Sep 24 06:50 PM