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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.
Regulatory Stranglehold
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, f or 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.
[Editor's Note: Commentator and best-selling author Keith Fitz-Gerald has maintained a perfect record with his Geiger Index advisory service. If you missed out on all or part of that run, don't despair: Subscribers to his newest service, TheMicroQuake Alert, will be able to benefit from the insights of one of the shrewdest investors in the marketplace today. To find out more about MicroQuake, please click here.]
News and Related Story Links:
- The New York Times:
Eye on China, House Votes for Greater Tariff Powers. - RTT News:
House Approves Bill Authorizing New China Tariffs. - Money Morning Investment Research:
What Companies Are Profiting From China's Commodities Crusade? - Wikipedia:
Smoot-Hawley Tariff Act. - The Wall Street Journal:
The Regulation Tax Keeps Growing. - Slate.com:
Where Does the Expression "Put Lipstick on the Pigs" Come From?
About the Author
Keith Fitz-Gerald has been the Chief Investment Strategist for the Money Morning team since 2007. He's a seasoned market analyst with decades of experience, and a highly accurate track record. Keith regularly travels the world in search of investment opportunities others don't yet see or understand. In addition to heading The Money Map Report, Keith runs High Velocity Profits, which aims to get in, target gains, and get out clean, and he's also the founding editor of Straight Line Profits, a service devoted to revealing the "dark side" of Wall Street... In his weekly Total Wealth, Keith has broken down his 30-plus years of success into three parts: Trends, Risk Assessment, and Tactics – meaning the exact techniques for making money. Sign up is free at totalwealthresearch.com.
Although not an American citizen (British and living in Europe), this is one of the finest pieces of dissuasion I have seen for a long time. It is not only the American government that should take note of its contents but the messages it imparts should be almost mandatory reading by the 'faceless mandarins' of the European Union (whose only raison d'etre seems to be to embroil as many people and companies as possible in a dervish dance to destruction).
Congratulations on an excellent piece – and thank you for 'blue-sky' thinking!
Ray Fletcher
You are right in everything you say; America is shooting itself in the foot and it does look as if congress is deliberately dismembering it self into a third world country without development.This marks the beginning of an end to a great civilization. It is sad for the Western world and for the American people. The real problem with the US is that they have ceased to be a democracy; it is an elite plutocracy run by run by international bankers who are solely concerned with gathering wealth and political power. All past empires have shared a similar fate.
Nothing that the House of Representatives or the Senate does or whatever Mr. Fitz-Gerald has to say on anything under the sun will help the US economy easily. There is only one problem that the US economy faces and that is its mistake of transferring one billion jobs to China over the years. naturally today Americans have no jobs. Even if you import cheap from China most poor people don't have money to buy anything. Importing from China knocked the marginal hourly worker out of his job. How long will it take Walmart's suppliers to open their own outlets outside… Read more »
Mr. Fitz-Gerald: Your arguments are certainly appealing, but miss a few key facts. First, China slapped prohibitive tariffs on American poultry, so the tariffs would be going both ways. Was it "over regulation" that caused the Gulf oil spill or was it a lack of effective regulation? Was it "over regulation" that caused the recall of over a billion tainted eggs? Was it "over regulation" that caused the recall of dangerous meats? Was it "over regulation" that caused the recall of tainted medicines? Was it "over regulation" that caused the recall of defective automobiles? Your 4th point about "Rein(ing) in… Read more »
We all know that protectionism almost destroyed the world and local economies at the time of the 30ies recession, but few realise how much more vulnerable the world economy is today.
Nobody wins, everybody loses, Surely we can learn from that past stupidity and not just repeat it mindlessly with some nationalist or misplaced family homily justification?
With the economy, we must always remember, what goes around comes around, money generates money, no goes around, – Nothing.
I don't think he is saying in this article "not to regulate". He is saying that there is plenty of regulations on the books – some of it is not necessary and what is necessary needs to be enforced. The SEC didn't catch Bernie Madoff because of a lack of regulations but because they didn't enforce the regulations that were there to cover the situation. The BP oil spill could happen (and often has) anywhere. China has had bad spills off its coast and so have certain African countries. If you plan on eliminating ALL offshore drilling then you better… Read more »
If you are more widely read you know that open borders and free trade is the mantra of the Brahmins of India, who have throughout history bribed the priests and kings to facilitate their trade, which once was spices but now ranges from dead meat carcasses to the planes that carry them. Global trade is good, but the effects of it have destroyed the U S the past 20 years and I see nothing wrong when parochials wake up and say what's good for the Brahmins is bad for us. Five years ago I sat through a Dartmouth parents meeting… Read more »
Well it all starts with someone giving or spending the money….and seeing how China now has the most …or all of ours….I guess they better start soon…and americas for sale at bargain basement….whats not already sold…or China already owns!!
We need to do 4 things to get the U.S. on a path to long term prosperity. 1)A flat tax of 15% for all incomes with NO deductions.Those wanting to pay more tax to govt could choose any % tax and the amount above 15% would be applied to low income individuals to lower their %.This would allow Americans to actually choose how much they want to help others,either through giving to private charities or govt.Govts stealing from one person and transferring to another is not charity-it's theft. 2)No more borrowing by govts.They have proven irresponsible borrowers and their credit… Read more »
Smoot-Hawley Redux?
It's all part of their game plan. Dumb and naive Americans will be busy blaming China for inflation or the negative impact of higher prices instead of what the Obama team and the Fed have been doing to cause inflation. This is the deception of the socialist agenda. I endured this crap for 6 years after the fall of South Vietnam to communist North which really have been a bunch of manipulative/greedy/corruptive elitists at the top hiding behind the fanciful disguise of the nationalistic movement facade. Real solution? Let the war in all forms between China and the US of… Read more »
I think that your article is correct in a microcosm – but misses the overrarching general issue of our huge predicament with China. Yes, a trade war with China will cause a temporary rise in cost of living, and yes, it may not result in a huge number of new jobs. It might even result in a recession.. but eventually we will have to significantly change our policy with china (who absolutely refuses to stop cheating in trade), and it will be painful regardless – but much more painful the longer we wait. What you and many others fail to… Read more »
We all know that the biggest, most vibrant economies in the world were built under the umbrella of protective tariffs and organized labor. The US economy is on the verge of total collapse since we no longer have a well paid workforce to provide the demand that allows business to thrive by supplying that demand. When the US government returns to doing the job for which it was instituted, protecting its people and borders, then and only then will the economy heal itself.
As you implied, basically this bill is an attempt to convince voters that Congress is trying to fix a major problem in order to get votes. Unfortunately, as usual, they have not considered either what caused the problem or what the effects of their actions will be. It becomes urgent because they have neglected to act when the problem began.
The underlying problem that the trade imbalances created is the false boost in liquidity generated by the currency pegging process via primarily the asian 5 countries. In order to peg their currency to the $US, money was printed and placed on the FX market to depress their respective currencies. Tarriffs are a bad way to try to correct this market manipulation, and unfortunately probably won't work but there needs to be found a way to balance these FX market imbalances for normal productivity growth to occur.
I spent time putting together an argument of why I feel free trade with China is a farse, and that a trade war is in the best interests of the United States. If not now then later was basically my argument since China cheats and is a Communist nation that is essentially already in the mindset of waging economic war against America. This site chose to remove it and to not post it. No reason.. it just disappeared. I am discontinuing my reading of this site and your mailings by opting out – there is no reason to read your… Read more »
They won't pass it, Congress have no intention of passing it. But the discussion helps some get re-elected, and it (the jawboning and discussion) MIGHT move the currency.
It's good to hear Anish's comments come to the light of day. Anish is 100% correct. America's extistence was sold down the river the day our congressional whores and president clinton sign NAFTA & GATT into law. The yearly trade deficits exploded. Unlike the Budgetary charades financed by monoply money we are currently playing, these trade deficits are REAL dollars and REAL jobs leaving this country. There is no way to compete with countries that have no over regulating and taxing governments, low wages and packs of lawyers drumming up business to punish the few businesses that remain and actually… Read more »
Yuo are right ,this will be disaster for wealthy people, but for people who lost a job will be benefits. Europe ,wright now are doing buch better without all this Chines product ,because high tax on Cinines product. Thing about poor people who do not have job. We export all labor to Chine (one hour cost about 38 cents) instaed keep these jobs in US.
JP
Consumers are expected to continue spending and going into debt to lift the economy. But consumer income is inadequate because their jobs have been outsourced to foreign countries. So, without jobs or with poor paying jobs they are expected to borrow money to purchase products produced overseas. You can't expect the economy to grow with just consumers and no producers. Any high school kid knows that this is unsustainable and will not work. After the crah of 2008, consumers have wised up; they're saving money rather than speding more than they have and they're are reducing their debt. I'd say… Read more »
I pasted my artcile but it has not been published
Do Americans really think that all their financial problems are caused by the value of the RMB, and that revaluation will solve al the economic problems that the USA has gotten into thus far.
This does not sound like Economics 411—but deserves an "A" for Political snowballing.
We are all learning the hard way. The U.S. Congress has been woefully inept at oversight controls for Trade which should be fair and reciprocal. U.S. Dollars made in the United States should stay in the United States for re-investment and creative productivity. The Cotton Industry was sold out to European Investors in the 1920's; the U.S. Citizens and Workers have been over-taxed and the increased U.S. Dollar Growth Under-regulated allowing Billions to go out of the Country; thereby enslaving productivity and economic growth. Oar # 19 with Ben Hur.
By Joseph Foster. Author, ''Destruction of America'' Release date November 2010 The US entered into a trade treaty with China based on attaining Geo political influence, At the time it remained focused on Containing Communism as its prime objective, the second being trade. We now found out the fall of the Berlin wall has contributed to the De Industrialization of the US, it has caused more damage than the threat of Communism. One flaw of the WTO agreement it is detriment to western labor, moreover it does not give American business incentive to hire Americans since their wages are too… Read more »
America has long lost the right to be entrusted with the world's reserve currency. Democracy in America today means if you vote for what we want O.K. but if not we shall ignore you. If America stops buying Chinese goods just remember you can be replaced. You, America, are just one country among hundreds and for far too long you have failed to treat your fellow citizens of the world as you would like to be treated. Why should China now be held responsible for America's dissolute behaviour? For too many years America has paid her suppliers with unbacked paper… Read more »
Contrary to your opinion I (and many other Americans) would tradeoff higher consumer goods from China to compensate for the deflating of asset prices that should never had occured starting over 10 years ago in what should have been a deflationary environment that Greenbubbles wouldnt allow.
and effective medicine. the world is full of crooks and scheemers. there will always be companies who will cut corners for the sake of a little extra profit. remove external controls and we all pay for it, eventually. we had enron, valdez,BP's multiple transgressions. maybe you want to trust things to self regulation but I don't. When you discover that your hip replacement his defective and has to be replaced because it wasn't cleaned properly in manufacture, or your miner husband would have been saved by a $20 piece of equipment you appreciate the value of regulations.
DON'T SAIL IN A JUNK An awful lot of the materials made in China and found in your neighborhood hardware store are JUNK. For example, buy a hose bib at OSH Hardware. The ones "Made in China" don't hold up as long as American made hose bibs. Also recall in the sixties when a few people drove those "little Jap cars", or when a imported product had "Made in Japan" on it? At first they were junk. Eventually, these imports were sought after for first rate quaility and by the mid-seventies, "Made in America" was seen as "JUNK". So remember,… Read more »
the beginning of my post was cut off. I said that I am all in favor of strong regulations with teeth. We are about to experience a tsunami of problems because financial intitutions could not be bothered to preserve chain of title on mortgaged property with proper documentation and recordation. I want safe food, safe transportation, products that are not dangerous to my health, employers who play by rules, pure water to drink and air to breathe, financial products I can trust Regulation is there for a reason.
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I'm president of a U.S. electronics manufacturing company and I import from Asia daily. Let me tell you how things really work for me. If we continue on our present course, there will be little money left in our country to purchase my products and my company will eventually fail. If the tarrifs are increased a little, I will continue to import and just raise my prices. My company will fail sooner, because I will collect more money to send to Asia. If the tarrifs are raised such that it cost less to manufacture here than in Asia, I will… Read more »
China is destroying you economically with unfair tactics and it will never be too late to do something about it. The cowardly act of being afraid of them and just allowing them to run over the top of you may not bring you to war this week. Did Europe not deal with pre-WW2 Germany in just the same timid manner and look how that ended up. China needs to be put into its place economically through very strong and large tariffs. Yes, the short term effect will hurt the US consumer. But, if some regulations on your industry can be… Read more »