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Category: Taiwan Market News
Washington Picks Fight With China

Storm Clouds over

Washington and Beijing

The rapturous media reception given to President Barack Obama and his team over the past week has obscured some early trouble clouds. Obama's choice for Treasury Secretary, Timothy Geithner, fired the opening salvo, telling congressional questioners that he believes China is "manipulating" its currency.

'So what?' you might ask. Well, the term "currency manipulator" has very serious legal implications and if the label sticks, Washington will be compelled to retaliate against Beijing with trade penalties to get relief for perceived unfair trade practices.

But the last thing China and the United States need right now is a trade war. Remember, the last time the U.S. threw up harsh trade barriers (the Smoot-Hawley Tariff Act of 1930), American trade was abruptly cut in half and a severe economic recession became the Great Depression of the 1930's. A trade war with our most important trading partner is the last thing America (or China) need at a time like this.

The Chinese know this and they are taking Geithner's words very seriously. The People's Bank of China, the country's central bank, immediately rejected the designated Treasury Secretary's words. In a statement that reminded Washington of the dangers of trade wars, the Chinese bank's governor warned, "We should avoid any excuse that might lead to trade protectionism. It will do no good to fight against the crisis, nor will it help the healthy and stable development of the economy."

The argument over China's currency valuation is a long-running dispute that we covered in the last issue of the China Stock Digest. Many congressmen and economists have contended for years that China has kept the value of its currency artificially low by as much as 40% in order to gain an unfair pricing advantage in trade with the U.S. In the February issue we also noted that China uses a variety of trade subsidies, tax grants and rebates to promote its products by lowering prices.

Is this unfair? Will it lead to a trade war? Well, Geithner invoked Obama's name in making his accusation against China. As he put it, "President Obama - backed by the conclusions of a broad rage of economists - believes China is manipulating its currency." This follows a formal U.S. complaint to the World Trade Organization (WTO) by Susan Schwab, trade representative under the Bush administration. Schwab demanded relief from the many Chinese government-funded incentives that make Chinese imports so remarkably cheap.

This is the kind of political action we worried about in the last issue of the China Stock Digest. Like all Americans we are eager to see U.S. jobs protected fully and fairly. No one should have an unfair advantage that puts a single American out of work unfairly. But a breakdown in trade relations between China and the U.S. would help no one, just as the ill-fated Smoot-Hawley Tariff Act, intended to protect Americans, cost millions of jobs.

China remains America's most important trade partner. Yes, it's true that China enjoys a growing surplus in its balance of payments with the United States and most of the world. But China remains one of the United States' biggest customers for high-tech and resource products. A tariff war would send the Chinese looking for other high tech and resource vendors, something they would have no trouble finding in today's economic climate.

Even worse for the United States, Beijing holds most of the cards in the new political and economic realities of 2009. America is a debtor nation and China holds the largest single slice of America's foreign debt, amounting to almost $700 billion and rising daily.

As Charles Freeman of the center for Strategic and International Studies told Bloomberg News, "The signal this sends is not good...it opens a Pandora's Box. We need the Chinese to hold onto their Treasury and agency debt." We clearly cannot afford a trade war or a currency war with Beijing. But Obama's hand-picked Treasury Secretary is swinging a big stick.

We'll be looking much more deeply into the changing relationship between the new administration and the emerging financial colossus of China in the upcoming edition of the China Stock Digest. There will be winners and losers in this evolving relationship and our commitment is to keep our subscribers will be kept well ahead of the curve.

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