The Barack Obama administration waited until the wee hours of September 11 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 Group of
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.
It is like waving a red flag in front of a bull. It is not surprising that
China instantly retaliated with its own duties on US 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 20%. Although
this number is roughly twice the published official unemployment level of some
10%, it is 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 who
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 US products more competitive overseas, a weaker dollar would help
American exports. From the administration's perspective, a debased dollar also
offers the US other benefits, including reducing the real value of all debts
denominated in US dollars. As America now has total debts of some US$58
trillion, a devaluation of some 30% 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 both to 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.
John Browne is senior market strategist, Euro Pacific Capital. Euro
Pacific Capital commentary and market news is available at
http://www.europac.net. It has a free on-line investment newsletter.
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