Are You Prepared for Tarriffs (Part 2)

Wednesday, March 28, 2007 11:12
Posted in category Uncategorized

Following our previous post Are You Prepared for Tariffs? 6 weeks ago, reports in the Washington post, IHT, and others are reporting that the U.S. congress is now preparing a Veto-proof bill that in the words of Charles Schumer would

carefully crafted to abide by World Trade Organization while forcing “the Chinese to do something they won’t do on their own.”

Sen. Graham is a little more aggressive

“The goal … is to get the administration off the sidelines, quit playing referee and become an advocate” for fairer trade with the Chinese

Also evident in the articles is that many view the results of Paulson as little more than talk. Again, we quote Schumer

“I think it’s pretty clear that we’ve given up on the administration. Secretary Paulson is a good man, but he’s climbing up the same mountain that everyone else did, which is a lot of nice talk and not much action”

It is timely that this comes out as I was just discussing this very topic with a fellow Thunderbird over lunch. The Chief rep of a major sports brand in China, he has spent a significant portion of his career abroad, and the topic of whether or not trade statistics were relevant, and whether or not they should they be relied upon.

The answer, the relevance of the statistics depends on the person making the decision.

For example, if you are a senator or congressman looking to prove that American products are not competitive, and that the Chinese are unfairly pricing their currency, the you will take the trade stats at face value. you will stand up in the house or senate and claim that the very fact that Chinese exports outstripping U.S. exports by a factor or 5,8, or 10 is proof that the Chinese are manipulating the system. That they are not trading fairly…. AND THAT SOMETHING NEEDS TO BE DONE ABOUT IT!!!

Another example may look like this. You are a person who previously spent time in China, and perhaps has worked in international operations for a significant portion of our career. Recognizing that trade flows are imbalanced, you peel back the onion a little further and see that a large portion of those goods being exported by “China” are actually coming from factories owned by American companies.. who pay taxes in America.

Peel back on more layer, and you will find that not only have U.S. companies been very successful at this model, but their products are so popular in China itself that they have opened a second line (or second plant) to service this market…. all of which hits the bottom line at home.. and more importantly is taxed at home.

Unfortunately, this success has skewed the traditional trade stats, and now it looks imbalanced as good that were traditionally made and sold in the U.S (a zero trade effect) are now made in China Foreign trade zones and sold into the U.S. (considered an import). Add to that the fact that the goods sold in China are made in China, and that sale of an American item that would have once counted as an export from the U.S.A. is now not considered at all..

A double whammy for the U.S. right? Not really… but Graham and Schumer would love for you to believe that it is.

Before you go our and Rock the Vote I suggest you consider the fact that while China is certainly constructing market barriers to protect national economies (many have charged the same thing about the U.S.), that it is not in the same way their politicians are selling it to them… and in fact any duties, quotas, or tariffs would actually impact the U.S. more than China.

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4 Responses to “Are You Prepared for Tarriffs (Part 2)”

  1. Chris Corkery says:

    March 29th, 2007 at 9:35 pm

    Wow Rich! Taking the bull by the horns with this one. Speaking as someone in the U.S., working in global procurement, reading U.S. news, it is refreshing to see someone with even a modicum of perspective on the issue. While I would like to agree with you entirely, I must record a small protest. Yes, trade statistics with China are indeed skewed and do not take into consideration US companies producing in China for the U.S.. Nor do they take into consideration industries such as clothing/fashion, where work was perhaps once done entirely in Indonesia or Thailand and now are shipped to China for ‘final assembly,’ again officially adding to the China-U.S. trade disparity though it may be less of a black and white issue. However, I am less certain that this all boils down to simple trade statistics. It does for Schumer and Graham, of course, but that is another issue. One thing you are seemingly missing is jobs…If U.S. companies produce in China for U.S. comsumers, pay taxes to support war efforts, tax cuts, or democratic upcoming agendas and nothing is done to reorganize the employment situation in the U.S., then this is quite harmful and U.S. citizens should be nervous. The frictional employment issue is currently quite serious in the rust belt and even these days in the sun belt, as auto firms begin to shut down their unprofitable Southern factories as well. So while I am firmly on your side of the argument, I think we also have to recognize the severely crippling effect the trade imbalance is having on the working class and the negative side effect of lower personal income tax collected, unemployment, crime, etc.. You and I can invest and potentially reap the benfits of corporate profit windfalls, but not everyone can. The news on the homefront seems to be a dramatic widening of the income gaps and further class stratification…which doesn’t always end pretty. Just ask the UAW, currently threatening strikes this year, before official negotiations with the Big Three even begin. That not withstanding, it is refreshing for someone to give a more accurate picture of trade statistics…we don’t seemingly get much chance to view that from here.

    By the way, I haven’t done any research on this topic in the last year or two…how is HK fitting in to the picture these days? Entrepot trade in HK and triangle trade with Japan is another interesting aspect of these trade statistics.

  2. rbrubaker says:

    March 29th, 2007 at 10:17 pm

    Hi Chris,

    How is everything these days? Glad to see you are still popping in.

    Totally agree on all fronts, and in my previous post I indirectly addressed this in that I believe that while there are imbalances, it is only the RMB and trade barriers that are being highlighted as issues. This is a very complex issue, and a 5% change in the RMB will not save a single job.

    Nowhere have I seen a politician stand up and say that there are things inside the borders of the U.S. that are contributing to the problem. Nor, have I seen anyone speak up about real solutions to address unemployment in the sectors you have mentioned.

    As you suggest, Americans should be nervous, but for me I am nervous because politicians that have shown little ability to analyze and understand intelligence are continuing to make policy. If you do not understand the fundamental reasons as to why an event or series of events are occurring, then how can you create a solid strategy to alleviate or fix the problem.

    Slapping a 27% duty on Chinese imports is not a solution to the problem, it is a political move that could severely impact the U.S. consumer’s economic stability. Remember, Walmart accounts for 20% of China’s imports into the U.S. Imagine if now those products are 27% more expensive… who gets hurt?

    The Chinese suppliers will continue manufacturing because WM has no domestic U.S. suppliers ready.. so they are ok.

    Wal mart will pass on the price increase to consumers… so they are ok

    But all of a sudden Mr. and Mrs. middle class who have refinanced their house are on the hook for the 27% rise of their salt & pepper shakers, alarm clocks, mobile phones, etc.

    And that is not a solution to fix the problems that scare the middle class.. it is what SHOULD be scaring middle America

    of course, since nothing has been passed yet, the final bills are not final. I just hope that should something be passed, that it is very specific in nature, and that it addresses real problems. I know it is a bit to ask, but U.S. politicians really need to figure out that China is not the threat that is widely publicised. There are going to be imbalances, but by simply blaming the RMB our politicians are not doing their job.

  3. Paul Jarvis says:

    May 2nd, 2007 at 11:05 pm

    When Chinese cars begin coming on to the market in the US, the US carmakers will lose another 10%. I believe that Congress will have no choice but to increase tariffs.

    Related to this, The Bush administration is planning to fund a railroad in Mongolia in order to increase the transportation of raw materials, copper, coal, lumber to Chinese industries. Check the proposal to the MCC from Mongolia: http://www.mcc.gov/

    Paul

  4. rbrubaker says:

    May 2nd, 2007 at 11:37 pm

    Hi Paul,

    Interesting that the Bush administration would be funding a railroad that would provide a conduit for fuel needed in China.

    As for the car market, my theory is that Anhui Chery will buy into one of the big three to avoid an senate/ house actions.

    Thanks for checking in
    R