U.S. Trade Policy: Up and Downs.. Smiles and Frowns

Wednesday, June 20, 2007 3:19
Comments Off on U.S. Trade Policy: Up and Downs.. Smiles and Frowns

Maybe I am getting a little to creative with titles lately, but I am having a good week and have decided to not be so academic (not that that is a bad thing).

This week has been a great week for U.S. trade policy, and while it will not start showing for another 6-12 months fully… July 1 will be a turning point in trade.. and China (more on that later).

The good news for the U.S. is that China reduced the VAT rebate for nearly 3000 products (see our posts: Call Your Accountant QUICK! VAT is going DOWN and Rollin.. Rollin.. Rollin.. Get those Containers Floatin! and It’s Official. Call Your Accountant NOW), and with that effectively made the material inputs for those goods 5 – 8% more expensive for the manufacturer… now 1 of two things will happen:

1) Manufacturers will increase their prices across the board, and either the retailer or the consumer will bite the bullet (my bet is the consumer will pay the increase). this will of course INCREASE the dollar size of exports to the U.S overall, but more than likely these increases will be offset by the next option

2) The recent increase and reduction in foreign tax exemption, will reduce the draw of China as cost savings will be reduced. This will be particularly true in low margin commodity industries that require little labor, and as a result U.S. firms will take a second look at their China plans.

On the plus side for China, the domestic market will benefit as well as U.S. firms will no longer enjoy the rebate on their imported goods, and as such they will look to source Chinese materials as inputs.

Now, at this time … when champagne corks were hitting the oval office ceiling.. it is interesting that Washington then decided to release new rules on the export of dual-use technologies… sending the minister of commerce into a tirade.

By imposing restrictions on more categories, Washington has ignored China’s efforts at enlarging imports from the United States, which will negatively affect the process of balancing two-way trade, Yao Shenhong, a spokesman for the Ministry of Commerce, said yesterday.

I find it interesting from 2 sides:

  1. The Chinese has just taken what will be seen as a huge step in reducing the trade gap… and then the U.S. goes out and reduces the ability of Chinese firms to purchase American goods… thus widening the trade gap
  2. With GE, Rolls Royce, and Boeing all producing aircraft parts in China (and operating R&D centers).. and Microsoft, Nokia, IBM, and others already operating shops in china…. I am wondering what the use of this new regulation is as many of the core applications are already here…

so.. ups and downs this week, but as I alluded to earlier: This will be a week that defines the U.S. China trade…. more to come.

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