For a recent flurry of wanting your cake and eating it too attitude, look no further than the US trade policy for blatant hypocrisy. Apparently it’s OK for the US to have a weak dollar policy and to flood the world with US$, but it’s NOT OK for other nations to defend their currencies as they see fit.

Let’s kick off the discussion with this article on Protectionism.

Protectionism arises in ingenious ways. Protectionists seem to always be one step ahead of free traders in creating new ways to protect against foreign competitors.

One way is by replacing restrictions on imports with what are euphemistically called “voluntary” export restrictions (VERs) or “orderly” market arrangements (OMAs). Instead of the importing country restricting imports with quotas or tariffs, the exporting country restricts exports. The protectionist effect is still the same.

That has been the case with Japan’s voluntary quotas on exports of cars to the United States. The United States could have kept Japanese car imports in check by slapping a tariff on them. That would raise the price, so that consumers would buy fewer. Instead, Japan limits the number of cars shipped to the United States. Since supply is lower than it would be in the absence of the quotas, Japanese car makers can charge higher prices and still sell all their exports to the United States. The accrual of the resulting extra profits from the voluntary export restraint may also have helped the Japanese auto producers to find the funds to make investments that made them yet more competitive!

We usually think a foreign firm is dumping when it sells at a lower price in our market than in its own. But the U.S. government took an antidumping action against Poland’s exports of golf carts even though no golf carts were sold in Poland.

In the March 24th issue of The Nation, William Greider writes about Elite Protectionists.
Fred Bergsten, the multinationals’ leading economic authority, warns that the United States is in “big trouble,” taking on foreign debt beyond anything any industrial nation has experienced and comparable to Mexico and Thailand just before they crashed in the 1990s. Bergsten, director of the Institute for International Economics, is lobbying elite circles to demand decisive action by the Bush Administration–an “import surcharge” as high as 50 percent on all Chinese imports–to avert financial meltdown.

Meantime, a bipartisan group of senators–nine Democrats, five Republicans–has introduced Senate Bill 295, which targets China with a 27.5 percent tariff. Charles Schumer, the lead sponsor, calls it “a tough-love effort.” The co-sponsors include Democratic minority leader Harry Reid and, more surprising, Hillary Clinton, a longtime free trader close to financial leaders like former Treasury Secretary Robert Rubin, now an executive at Citigroup.

The multinational club does not intend to abandon free-trade dogma. Bergsten’s strategy–threatening tariffs–is meant to bluff China and other Asian nations into letting their currencies appreciate and allowing the dollar to fall much further so the US trade deficits will shrink, at least enough to avert a financial crisis.

Now I don’t know about you, but this kind of protectionist talk is just plain scary to me.
1)Bergsten thinks we can bluff China into floating the RMB
2)Bergsten thinks that a 50% tariff will actually save jobs here
3)Bergsten thinks that a 50% tariff will avert a financial meltdown.

Just what is this guy smoking? Let me go strongly on the record by saying that 50% tariffs would have about the same affect as the Smoot-Hawley Tariffs did during the great depression. If one wants a financial meltdown look no further than huge protectionist tariffs.

On April 4, the Bush administration launched a China Trade Investigation to determine whether quotas should be re-imposed to protect textile and clothing manufacturers against a surge in Chinese imports.

The Committee for the Implementation of Textile Agreements (otherwise known as the Committee For Higher Priced Underwear – CFHPU), voted Monday to launch investigations in three clothing categories: cotton knit shirts and blouses; cotton trousers; and underwear made of cotton and man-made fibers.

I wonder, just how much of a tariff would be needed to save US shirt and underwear manufactures from demise. Let’s see if we can find out:

The Union-Tribune article Imbalance of power reports that a study commissioned late last year by the U.S. Bureau of Labor Statistics estimated that the average Chinese factory worker makes 64 cents an hour, including benefits.

The low wages have drawn businesses from around the world to China. Between 15,000 and 20,000 new manufacturing facilities open each year in China – mostly subcontractors to U.S. and other foreign firms. Many of the factories are more modernized than their rivals overseas, giving them a competitive edge. Nearly half of Chinese factories are less than 10 years old, compared with less than 10 percent of U.S. factories.

“While America’s industrial base continues to erode, China has been investing steadily in new plants and equipment, adding state-of-the-art production capacity,” said Jim Pinto, founder of Action Instruments, who now works as a business consultant in San Diego. “America is just not investing in machinery the way that China is.”

Let’s see: .64 per hour in China and perhaps $10 per hour or so with benefits here in the US. Also remember that China has upgraded their manufacturing equipment while we have not. Hmmm. If we doubled or even tripled the price of underwear via tariffs would it save any jobs? For how long? Wouldn’t production just shift to Brazil or Mexico instead? Is it worth it for everyone to pay twice as much for socks, shirts, pants, bras, and underwear just to save 500 or 1000 jobs here (if that many)?

Now the odd thing about all this is the bulk of the U.S. trade deficit with China does not even come from Chinese companies!

“Between 60 percent and 80 percent of the goods China exports to the United States are the products of such companies as Adidas, Sony, Mattel, Walt Disney, Dell Computers or other multinationals that have set up shop in China to take advantage of its low costs. Those multinationals would not be affected by anti-dumping rules.”

This revelation prompted Harmy on the Motley FOOL to write:
“In other words US legislators by passing anti-dumping laws will be legislating against their own American companies. What a God-awful mess this whole business is becoming.”.

Yes Harmy, you have that right.

Here is how I see it:
• We want to save US jobs but we want cheap goods to stock Walmart and Home Depot shelves as well.
• It’s OK for Japan to keep buying US Treasuries to keep our interest rates low but it’s NOT OK for China to do what they want with the RMB.
• It’s ok for the US to have price supports on oranges, tobacco, cotton, sugar, milk, cheese and God knows what else, but heaven forbid Poland from undercutting US golf cart manufactures.
• We have depleted the Gulf of Mexico of shrimp by over fishing, yet we demand protection against freshwater shrimp from Asia.
• We want our cake and we want to eat it to and we want China to spoon feed it to us and we want China to like it.
• If China does not like it, we will threaten them with protectionist actions.

I had dismissed extreme protectionist action from the US as unlikely, but now I am not so sure. Consider this article hot off the press just this evening: Congress weighs China currency action.

The Senate and House were set to separately consider legislation this week that would put limits on Chinese imports unless Beijing allows its currency to become more flexible. Sens. Charles Schumer, D-N.Y., and Lindsey Graham, R-S.C., introduced an amendment Wednesday to a State Department appropriations bill that would slap a 27.5% tariff on Chinese imports if China doesn’t revalue its currency within 180 days.

Lawmakers have expressed growing frustration over China’s refusal to weaken the yuan’s peg to the dollar. They contend that the tie has left the yuan significantly undervalued, putting U.S. manufacturers and workers at a disadvantage and contributing to the sharp rise in China’s trade surplus with the United States.

If lawmakers want to blame someone for the weak US$ they should start by looking Greenspan, at themselves, and at the Bush administration. We have had blatantly reckless spending, inappropriate tax cuts and tax credits while wasting $300 billion fighting a war based on false pretenses. President Bush has not vetoed a single bill and most of them were so loaded with pork that democrats and republicans alike had to hold their noses to pass them. Meanwhile Greenspan was busy slashing interest rates to 1% and GSEs were and still are lending money with zero % down to anyone that can breathe. This combination of nonsense fueled reckless consumer spending, a bubble in housing, and led to the decline of the US dollar as we have discussed in previous articles. The collective blame is therefore not on China. It belongs squarely on Greenspan, President Bush, and the Republican Congress.

We want the US$ to have reserve currency status, but we want none of the problems associated with it. This is just more “have your cake and eat it too” impossible demands we are placing on the world’s monetary system.

Well I’m sorry but it is both arrogant and wrong to think we can dictate the currency policy of China. Furthermore, given the massive wage differentials, floating the RMB won’t solve a damn thing unless one thinks it would cause the US dollar to fall something like 90%.

At the Davos economic conference in January, the deputy governor of the People’s Bank of China asserted Chinese autonomy in yuan decisions and had this to say:

“The idea that China has the key to the balance of the whole world’s economy is totally wrong. The imbalances are attributable to many reasons, but not whether the yuan exchange rate is flexible or not flexible. Leave this issue to the Chinese people and the Chinese government. We will certainly figure out what is the most suitable approach for China’s economic development.”

That seems to me to be a not so polite but well deserved way of telling the US to “stick it”.

It remains to be seen whether Congress passes this ill-advised legislation but if they do I confidently predict:

1) It will not save any jobs
2) It will crash the stock markets in short order
3) It will plunge the world into nonsensical trade retaliation wars
4) It will plunge the world headlong into a recession.

Then again, a huge recession is coming anyway. Perhaps it’s best to just bring it on. Unfortunately the biggest drawback that I see is this:

5) It will give Greenspan an “out”. He will attempt to blame all of problems on ill-advised legislation rather than on his own bubble blowing policies that were going to cause a huge world-wide recession sooner or later anyway.

In the meantime I am pondering:
Free Trade? Where Is It?