Uh.. Did ANYONE in the U.S. Read the News Yesterday??

Thursday, June 21, 2007 14:34

For the last 18 months, the daily news has been much the same.

China needs to reduce the RMB… that China is not playing fair… that SOMETHING NEEDS TO BE DONE.

yet.. the day after the Ministry of Commerce announced that they would reduce the VAT rebate on nearly 3000 products …. nothing.

Radio silence… actually, the only paper (I looked at WSJ, NYT, IHT, FT, and Washington Post) to have anything China trade related was WSJ in their article Paulson Appeals to Congress where the teaser was

U.S. Treasury Secretary Henry Paulson Wednesday assured members of Congress he is doing all he can to persuade China to speed up the pace of economic restructuring, and urged U.S. legislators to resist trade protectionism.

Uh.. maybe I missed something, but doesn’t reducing the VAT rebate on 3000 products constitute a MAJOR step in the right direction?

For those that don’t understand the nature of VAT, essentially what ha just happened is that export manufacturers will see their tax return on a per shipment basis get reduced. you know.. their COGS just went up… their COST ADVANTAGE reduced by 5-8%?

This was a surgical strike aimed at reducing the trade gap, and for a lot of manufacturers in China, this is going to hurt. It is going to make many uncompetitive.. and may actually PREVENT manufacturers from U.S. or E.U. from offshoring in China.

Now, I am not saying that China deserves a medal, but a little credit is definitely deserved.

Call my cynical, but at some point I am sure this VAT rebate reduction will be the target of many stories once prices of “made in China” products goes up.

Maybe I have missed something here, but I think it is time that credit is given its due..

and I am not the only one who thinks so

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4 Responses to “Uh.. Did ANYONE in the U.S. Read the News Yesterday??”

  1. Chris Corkery says:

    June 22nd, 2007 at 7:33 am

    Rich:

    I was also shocked at the lack of publicity. It was a sad sad day for American politics as it showed the true motivations behind the upsurge in China bashing: to win the support of uninformed voters. Though they are not my Senators, I have actually written a message to Sens. Schumer and Graham to express my disgust. Of course they will be ignored. Look forward to a very confusing and poltical year!

    Chris

  2. Rich says:

    June 22nd, 2007 at 7:49 am

    Chris,

    I think what irks me the most is that this action is a much stronger one than a simple RMB revaluation.

    It will make many firms think twice about moving offshore, it will reduce the ability of low margin operators to operate, it protects the State-owned banks from what would have been a massive bleed out, and it protects the general macro-economic movement as well.

    Depending on the industry I am estimating that this is an equivalent 8-10% RMB revaluation. Your thoughts?

    Anyway. Glad you wrote the letters. Hopefully more people will do the same and in a way that shows them the economics behind it, and how they would be better to applaud China’s step than to continue along this path.

    The next 16.5 months are going to get ugly… really ugly

  3. Chris Corkery says:

    June 22nd, 2007 at 12:40 pm

    Rich:

    8-10%…This seems about right, with the lower end perhaps seeming to be more appropriate. Just as important to me, it is a more fair way of making things more equitable for domestic U.S. firms. Currency revaluation hits China two times as hard if we consider the huge loss they must take on their bond holdings. That just isn’t a fair way to treat our war financiers.

    From a purely academic standpoint it will be interesting to watch the pebble in the pond. We can watch for the impact on interest rates in the U.S. as China even more dramatically pulls back from purchasing U.S bonds, which many feel explains the recent run up in the 30yr mortgages. This will of course continue to impact housing, etc., etc., etc. From a personal standpoint, it will be a tough time for all of us connected to China, I suspect. Those of us involved with China procurement may be doubly cursed…at least for a time.

    If we take this glass half empty approach to the next election I am left with the question: what do we tell our clients? Can we ethically just ask them to wait it out…all will be better after 2008 September? How will the EU react and what impact will they have? I feel I have even fewer answers than usual in regards to China and world politics. Keep us on our toes Rich!

  4. Rich says:

    June 22nd, 2007 at 9:44 pm

    Chris,

    Unfortunately I think you are right in that it will be difficult until after the election, and that just shows how as much as we consult… we need to educate.

    After all, if people are put of on China because of politics, then they should not be here. Coming to China is an economic decision, and there are a number of people who came here on hype and realized that the economic didn’t make sense.

    My broken glass theory (U.S. is either full or dry at this point), is a full on public tit for tat that damages the trade relationship… Big Box retailers increase prices because their China suppliers stop giving in.. inflation for the middle class kicks in (and just plain kicks the lower class)… MR/ MRS middle class get mad at the congressman/ congresswoman and demand action…. congressman/ congresswoman blame China for price gouging and get reelected

    What I would love to see is someone stand up and take corrective actions in the U.S. that match China’s step. There are dozens of ways, and if this were a political blog (sometimes I let it slip), I would put a few out there.

    but then again, politicians have a lot of money, and I am a consultant… so maybe I will wait for their people to contact my people 🙂

    Have a good weekend

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