The U.S. House of Representatives this week overwhelmingly passed a bill that would enable the Obama administration to impose punitive tariffs on almost all Chinese imports into the United States - a controversial move that's intended to punish China for refusing to revalue its currency.
The House China tariff bill faces opposition in the Senate and from the Obama administration and isn't expected to become law. Let's hope that reluctance continues to hold: This bill is little more than a political con job and is quite possibly the stupidest thing that Washington could do right now.
Not only will this touch off a war the United States literally cannot afford to fight, but it's going to hamstring millions of already cash tight Americans by raising the cost of living dramatically while further eviscerating our already fragile gross domestic product (GDP).
Let me show you why...
A Slippery Slope
One of the bill's key goals is to force China to revalue its currency, the yuan, especially as it relates to the U.S. dollar. By making the yuan more expensive, the lawmakers figure, China's cost advantage will vanish - as will the massive trade surplus that China runs with its trading partners. Once that happens, all of America's troubles would magically disappear.
Trouble is, the legislation wouldn't function as expected. China will simply shift its focus and press its advantage in different areas, the most obvious and significant of which would be natural resources. Most of these resource- commodities - such as oil, gold, and other precious and industrial metals - are priced in dollars.
By making the yuan more expensive, the bill's backers would practically guarantee China the ability to buy more resources at a lower price. As Money Morning readers well know, China's already scouring the planet for anything that's not nailed down. Were this bill to become law, China would only redouble these efforts - and the fallout could be staggering.
Consider petroleum. At the rate China's oil consumption is accelerating, it could buy up nearly all of the world's excess production capacity. I don't need to explain what effect that will have on oil and gasoline prices. Were this retaliatory legislation to become law, the cost to U.S. consumers would be horrific. It would grant the Obama administration much broader powers to slap punitive tariffs on almost all of China's U.S. imports -totaling $300 billion this year, reports The New York Times.
And that, in turn, would result in price increases of 30% to 60% for everything from blue jeans to copiers that are made in China and imported into the U.S. market.
In very practical terms, this means that millions of already-cash-strapped American families would suffer when they head to their local Wal-Mart Stores Inc. (NYSE:WMT) outlet and discover they can no longer afford the "everyday-low-price" goods they can right now afford to buy on impulse.
This, too, is problematic because 70% of our economy is tied to consumer spending. And that means t he fallout from this type of retaliatory lawmaking will take one of two forms:
- American consumers will shift their spending to similar products from other emerging-markets.
- Or they will gladly go along on the principle of the matter and pay far higher sticker prices on everything from toys to clothing to electronic goods - itself a new economic reality that will have a whole series of implications of its own for the wheezing U.S. economy.
The bill's backers apparently have no clue that a revalued Chinese yuan won't be a panacea for the struggling U.S. job market. When it comes to our massive, double-digit unemployment rate, it's not a cheap yuan and low wages in China that are the issue: It's the uncertain economy and hostile business environment that are acting as the obstacles to a sustained rebound of the American marketplace.
The truth is that our government has created an onerous regulatory burden that's prohibitively expensive for companies to navigate. We do not need more regulation or even punitive tariffs. We need to more-effectively use the regulations that we already have and to streamline or eliminate those that are excessive or unnecessary.
Throughout the financial crisis, for example, top officials repeatedly referred to banks and brokerages that were "too big to fail." But what happened to the anti-trust enforcement efforts that kept institutions from reaching the point where a failure could have dire consequences for the entire economy?
This tariffs bill puts us on a dangerous path. For instance, while the Great Crash of 1929 may have delivered us to the precipice of the Great Depression, the ill-conceived Smoot-Hawley Tariff Act (signed into law on June 17, 1930) was one of the key catalysts that shoved us over the edge and kept us in the abyss for the next decade.
This country is already choking on regulation. Recent Wall Street Journal data shows that the annual cost of federal regulation here in the United States increased to more than $1.75 trillion in 2008. That cost has increased 3% in real terms over the past five years, and now accounts for about 14% of national income.
If you add in the federal tax burden (21% of national income, for a combined total of 35%), slightly more than $1 out of every $3 earned in the United States goes to pay for, or comply with, federal laws and regulations. Unless something changes, that "regulation tax" burden is only going to get worse.
Not surprisingly, the small businesses that are the backbone of the U.S. economy and the engine of job creation are getting creamed by this creeping cost of compliance. This isn't rhetoric nor is it related to the Chinese yuan. According to the U.S. Small Business Administration (SBA), U.S. small businesses employ more than half of the private work force and have created 60% to 80% of all new jobs over the last decade.
Writing in The Journal this week, Lafayette College economists Nicole V. Crain and W. Mark Crain stated that:
companies with fewer than 20 employees incur regulatory costs 42% greater than firms with between 20 and 499 employees, and costs 36% greater than firms with more than 500 employees. The regulatory cost per employee for small businesses was $10,585, compared to $7,454 for medium firms and $7,755 for large firms.
That's hardly the way to treat the backbone of the economy. Given the opposition the new legislation faces from the Senate and the Obama administration, and the very clear evidence that challenging China to a global trade duel won't have a happy ending, we have to ask the question: Why on earth did the House overwhelmingly pass this bill?
Target For Tonight
First, it's clear that this idea is polling well, and given that the midterm elections are mere weeks away, I believe House members clearly saw this as a way for them to appear tough at this critical (and political) juncture.
The American public is worried about the U.S. economy's seeming inability to get healthy. And voters are sick and tired of the bickering and political infighting that seems to divert lawmakers' attention from the "real" issues that aren't getting addressed.
The hope is that this bill will create the appearance of doing "something," meaning it will serve as a rallying point for voters who don't understand just how dangerous and damaging this legislation would actually be. In other words, it's a political con job designed to appear as if the entire legislative body is worthy of sitting where they sit (and keeping their jobs).
Now that you do understand just how misguided this bill is, it's time to pressure your representatives to start making the right moves. Here are four key initiatives that will help us get the U.S. economy moving in the right direction again. Our elected officials should embrace the following platform:
- Cut Leverage: If there's been a common catalyst in virtually everything that's gone wrong during the global financial crisis, that catalyst has been "leverage" - borrowed money. Leverage on Wall Street, leverage in consumer goods, leverage in mortgages and leverage in our own spending. The ratios at times reach a staggering 100 to 1! Congress needs to change the rules and change the tax laws to diminish the allure of leverage and borrowing in the dealmaking market. Once that happens, the regulators need to administer the laws with an iron fist .
- Fewer Regulations = A Fatter Wallet: If lawmakers would reduce regulation - and especially the afore-mentioned cost of compliance - U.S. companies would grow at a much faster pace. And small businesses, which shoulder a disproportionately greater burden, would get back to their role as top job generators.
- Don't Tax Job Creation: It's crucial that Washington eradicate taxes associated with job creation. Lawmakers say they're interested in creating jobs, so why is it that they still tax that process? Nothing makes less sense than culling $800 billion from our payrolls every year.
- Rein in Wall Street: A reasonably small group of self-important, self-aggrandizing individuals played the key role in creating one of the biggest financial crises in history. And they did so by building and protecting an environment of speculation that has little or no economic benefit to the rest of us. Require fiduciary responsibility, outlaw the credit default swaps and quit putting lipstick on the pigs running the barnyard.