U.S.-China Trade: A Secret Standoff?

 

In the last few weeks, there's been a flurry of reports in the U.S. media about Chinese products exported to the United States.

Toothpaste imported from China was found to be tainted with diethylene glycol, a thickening agent - and an ingredient in anti-freeze..

Five types of farmed fish and seafood that supposedly contained traces of potentially harmful antifungal and antibiotic drugs were placed on hold by the FDA.

The popular wooden toy trains of Thomas and Friends, made in China, were recalled in early June due to the presence of lead in some of the surface paint.

U.S. regulators ordered New Jersey tire importer Foreign Tire Sales to recall about 450,000 Chinese-made tires that were missing a gum strip, a safety feature that prevents tread separation.

Almost every day, it seems, we hear about a new product from China that may be hazardous to our health. According to the U.S. Consumer Product Safety Commission, Chinese-made products have accounted for 60% of recalls this year... and U.S. consumers are getting more and more wary of any goods from that country.

Even though only 15.6% of all U.S. imports come from China, some areas weigh more heavily than others. For example, within the last decade, China has become the third-largest exporter of seafood to the United States. According to USA Today, China produces 75% of the world's garlic, and 2006 was the first year that U.S. consumers bought more garlic grown in China than in California. 40% of the apple juice consumed in the U.S. comes from China, and 19% of our honey.

Since 2002, reported MarketWatch, "Imports of Chinese agricultural, fish and forestry products have grown from $2.9 billion to more than $7 billion last year, a 69% jump."

But China has been exporting goods to America for decades, so why has this problem only come to light recently, and with such a Fox News, seizure-spawning, flashing alert flurry?

We at WWNK, ever vigilant for ulterior motives, have been wondering why the government-induced, U.S. media machine-hyped "Chinese Contamination Scare" is reaching such a climax these days.

Don't get us wrong, we don't enjoy digesting poisonous substances any more than the next guy. And we're more than happy to see tainted products being eliminated from the market.

But... and it's a big "but," we doubt very much that this contamination started only yesterday. Until recently, apparently U.S. regulatory authorities didn't find anything wrong... or simply failed to take a closer look. In our recent article "China's Food Scandals" (WWNK 5/15/07), for example, we talked about the lax regulatory procedures in the U.S., with less than 2% of Chinese imports being sampled by inspectors.

Of course you could say that after the pet food scandal in April, the Food and Drug Administration has become more alert and has been scrutinizing Chinese imports more closely. And it's probably true.

However, we don't believe in the inherent benevolence of the FDA, a government agency that has repeatedly proven to be acting in its own self-interest. Thus, we've had the suspicion that there might be more behind this sudden scrutiny than meets the eye.

To examine the bigger picture, we have to enter the area of U.S.-Chinese economic policy... an area that seemingly has nothing to do with the recent scandals.

The Trade Deficit

If you're a longtime WWNK reader or a subscriber to any of our other services, you've heard us talk about the U.S. trade deficit with China, which hit a record $233 billion last year. In other words: we've been importing cheap goods from China but haven't been exporting much back to them. Instead, we've been paying the Chinese in U.S. dollars, which - as our resident investment guru, Doug Casey, likes to say - are basically an "IOU Nothing."

That fact slapped the Chinese in the face when in June 2005, they attempted to actually convert a few of their paper dollars into real assets by buying U.S. oil giant Unocal for $18.5 billion. Suddenly the free-trade-touting, globalization-supporting U.S. Congress started to put up protectionist fences and ultimately thwarted the deal. And even though all kinds of "sensible" political reasons were cited at the time, that move was the equivalent of flipping the Chinese off, telling them that their accumulated U.S. paper was worthless.

Beijing didn't take very kindly to that. In the last few years announcements have grown louder that China is planning to diversify their foreign currency reserves, which plainly means getting rid of their U.S. dollar holdings and putting their money into other currencies and assets. And they're not the only ones concerned about the mountain of dollar bills piling up in their vaults.

Meet Congressmen Charles Schumer (D-New York) and Lindsey Graham (R-South Carol.), two Americans the Chinese most definitely have seen more of than they ever wanted.

About four years ago, Washington conceived of its own masterplan for reducing the trade gap: China, the U.S. government reasoned, should drop its currency peg to the U.S. dollar, thereby raising the value of the Chinese yuan/renminbi and lowering the value of the dollar. Less value, less debt... simple, eh?

Or so they thought. The Chinese didn't like the plan a bit. Not only was there nothing in it for them but a revalued yuan would make Chinese exports more expensive and therefore less competitive. Bye-bye, everyday low prices at Wal-Mart.

China's booming economy relies on the fact that they can produce and sell goods more cheaply than other countries. And a recent study by China's National Development and Reform Commission (NDRC) stated that the country faces its worst employment crisis ever, due to the children of baby boomers flooding the job market. China, states the report, needs to create 25 million new jobs each year... that's the combined population of Australia and New Zealand. You do the math.

Meanwhile, on the U.S. side, messieurs Schumer and Graham were sent to China to negotiate the de-pegging deal, and were met with some serious stonewalling. Yet, after numerous visits - and some heavy bullying in the form of threats to introduce a 27.5% tariff on all Chinese goods - the Chinese government agreed to remove the dollar peg in July 2005.

The result, though, was not quite what Washington had hoped for. Instead of allowing the yuan to float freely against the dollar, the Chinese central bank kept it on a tight leash, restraining the currency's movements. Between July 2005 and June 2007, the yuan appreciated only 8.2% against the greenback, leaving the U.S. government fuming in frustration and the trade gap continuing to grow.

Since 2005, Schumer and Graham have been jetting over to Beijing almost every month - negotiating, debating, pleading and threatening. And every time the Chinese officials smilingly nodded and promised that yes, soon, very soon, the yuan would be allowed to rise higher... honestly, cross our hearts and hope to die.

Fighting the Wrong Fight

Of course, as with almost all things that occur in one of the world's largest collection of self-dealing poseurs, the U.S. Congress, they are missing the point entirely, which makes this whole battle painful, yet comedic, to watch.

A current account deficit doesn't necessarily imply either a good or a bad connotation. Any thesis that begins with the notion that the large U.S. trade/capital imbalance is a problem which must be actively rectified is hopelessly flawed, because the supposed imbalance is not a problem. It is either a symptom of a problem or is not indicative of any problem whatsoever.

Any economist or Congressman who is focused on reducing the "trade deficit" is like an auto mechanic recommending ear plugs or a louder stereo as an unequivocal fix to the loud knocking sound in your car engine rather than attempting to deduce the reason why it is making that sound.

For the sake of time and space, and the point of this article, we won't go into the real reasons resulting in the large U.S. trade deficit, but suffice it to say that its roots lie mainly in monetary inflation of the U.S. dollar, which Congress has played a key role in fostering and propagating.

Given that the problem originates with the U.S. government and the Federal Reserve itself, something the Chinese likely know all too well, the monthly visits by American politicos to Beijing must be greeted by increasing skepticism and behind-the-scenes derision.

The Game Continues

Nevertheless, the game goes on.

In the last two years Congress has several times come close to branding China a "currency manipulator," a hypocritical condemnation that could lead to severe trade restrictions.

In return, a recent China Daily article stated that "China sold more U.S. Treasury bonds in April than any time in at least seven years," worth $5.8 billion - while Fed Chairman Ben Bernanke and U.S. Treasury officials were busy denying that such a sell-off even existed.

And so the skirmishes continue: You slap me, I slap you, an eye for an eye. The outwardly appearance of the U.S. and China being friendly trading partners has become a paper-thin patina for brooding hostility.

And now there's the U.S. scare about tainted Chinese products that seems to have ballooned into a full-blown scandal. Although we don't doubt that the contamination is real, we wonder if the new-found diligence of the previously rather indifferent and incapable FDA is just another blow in the tit-for-tat battle with China.

Could it be that, as long as China was considered a "friend" by the U.S. government, officialdom was encouraged to overlook tainted products? Could it be that the sudden concern with Chinese products is one way to punish the Chinese for not complying with the U.S. government's misguided monetary policy demands? It's certainly possible... and, we think, likely.

[Ed. Note: As we write this, there's news that the yuan has risen to unprecedented levels against the dollar. China Daily reports that "the People's Bank of China (PBoC) set the midpoint at 7.5951, breaking the 7.60 barrier for the first time since China ended its peg to the U.S. dollar in July 2005." Coincidence? What do you think? Let us know at [email protected].]

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Posted 07-10-2007 12:49 AM by Shannara Johnson