 Global Trade War Update
by Jim Willie
CB
Jim Willie CB is the editor of the "Hat Trick
Letter"
April 13, 2006
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Trade war in my opinion coincides
with erosion of sovereignty from decades of chronic inflation.
Trade protection, even protection from foreign ownership of prized
assets, are the manifestation of failed policies. The United
States is one of the worst offenders in trade tariffs and policy
in opposition to free markets. Year after year of large scale
monetary inflation erodes the body economic. It tilts the economy's
wealth generation apparatus toward the financial sector, where
inflation most vividly appears and where work is minimized. It
renders the worker and wages to be uncompetitive, resulting in
destroyed entire industries. In the face of frustration, like
folded arms, a nation protects itself after years of highly destructive
economic policies have wrecked havoc. The consequence is a final
chapter marked by wide destruction of commercial relationships.
Trade war usually precedes (if history teaches anything) armed
conflict, as in war. Voters (often more aware of economic conditions)
tend to push Congress toward that war, in both forms. In the
1930 decade, Japan stood in the path for American trade dominance.
Now China stands in the path, both as a real and imagined powerful
rival and threat. A certain future rival, potentially an enemy,
in some ways China is painted as a scapegoat. USGovt leaders
are being outfoxed by China on currency management and tactical
maneuvers with its vast capital reserves. We are seeing an increasingly
toothless America, damaged by both inflation and reckless policy,
whose influence and prestige are on the wane. An all-out trade
war with China would rocket up US long-term interest rates, causing
significant damage quickly.
See "The
High Cost of Inflation" for a rant on the subject of
consequent economic hardship, and lately lost control, diminished
security, and threats to national security. The US public has
seen globalization ride as a trend, after a few decades of rampant
monetary inflation (govt and credit). Global trade has advanced
the industrial growth and power of China. Energy cost distress
has advanced the efficient industrial revival in Japan. The US
distinguishes itself by making the most powerful (and expensive)
weapons. In the United States however, wage gains are non-existent,
as three consecutive years of inflation adjusted declines have
taken place. The suffered declines are worse than stated, since
the adjustment for inflation is very inadequate from gross under-statement.
We have created a monster with inflation, and another monster
with war. A quote passed my desk last week, relevant to today.
"For the man who sets
out to fight a monster, look to it that he himself does not become
a monster." -philosopher
Friedrich Nietszche
The Schumer-Graham trade tariff
bill against China epitomizes our occasional economic stupidity
on the global stage. It is on again, off again, like a threat
put on the shelf, then picked up, then put back. Cool heads prevail
in recent weeks fortunately, the bill now twice suspended. An
argument can be defended that the risk of trade war rises when
communication lines are cut, clashes develop in commerce, and
hostility is in the air. Nowhere do we see such extremely poor
judgment, as we pressure an exporter whom we encouraged five
years ago, and put at risk a large slice of capital and credit
they supply. The United States has embarked on trade protection
legislation on more than one front. We seem to have embarked
on a path of economic suicide, with exploding federal deficits,
reliance upon foreigners which won a gigantic trade deficit.
Now we want to erect one-way street signs certain to anger our
trade partners, whose low-cost output is critical to our way
of life. We have marched into a corner of our own making. We
exchanged low-cost supply for lost industries and colossal debts.
Now we resent them for our decisions, when the actual demons
were our bad policy and chronic inflation.
Our leaders strain to understand
China and its economic state. Boomtowns like Shanghai are not
typical. Failure to properly comprehend comes with great risk.
Ignorance back in the 'hood and back on the farm, where many
emotional poorly read voters reside, carries the same risk when
Congressional members must satisfy their occasionally deep hostility
and frustration. They will be sorely tempted to play the "anti-China"
card. On one hand politicians permit inept and ineffective economic
advisors to ransack the nation, to lose jobs, to cater to Wall
Street. On the other hand voters loaded for bear with angst urge
their Congressional representatives to deliver hostile messages
and to enact hostile measures directed against what they perceive
to be the villain. In most cases it is not Japan, but rather
China. Japan quietly has eaten our lunch. China more visibly
eats the entire lunch table, but at our invitation.
While much about China deserves
criticism, namely intellectual property royalty payments, like
human rights violations, like environmental abuse, like lack
of transparent corporate accounting, their yuan currency is just
one of several managed Asian currencys. The Japanese yen receives
little harsh criticism, yet they abuse the intervention card
more than China ever did. Since 1997 and the Asian Meltdown,
Asia has embarked on a path whereby they favorably trade economic
development and calm financial volatility in exchange for a pile
of USTBond IOU paper credits underpinning huge domestic debt.
Few realize that without a formal active bond market, China operates
at a huge disadvantage in managing its yuan currency. The challenge
is like steering a boat without a rudder. It must order a storm
so as to shift the boat in location.
MANEUVERS & EMOTIONS
By permitting a measly
2.1% official yuan upgrade, China abided by our demands last
summer, and thus put the ball in the US court. In addition to
the Schumer bill, which would slap a 27.5% tariff on all Chinese
imports if they fail to make progress on yuan currency upgrades,
other legislation is underway. A House of Representatives bill
would block foreigners from buying a wide spectrum of US companies,
from energy firms to utilities. The US Congress actually cites
the need to protect "American sovereignty" without
noting the double standard. Few remember, but Wal-Mart used to
have a sales slogan "Made in America" which has been
discarded in an about face. We want foreign finished products,
but not foreign ownership from purchases using the IOU scrap
paper given to them, mere paper with ink on it. Soon they will
lose interest in owning USTBonds. The Committee on Foreign Investment
might soon be granted veto power over foreign bids. Without its
topline label, the USGovt is slowly laying the foundation for
the equivalent essence of the Smoot Hawley Act, a disastrous
trade protection measure, which advanced and worsened the Great
Depression. The shocking process impresses the psyche, whereby
some movements seem unstoppable, even though our eyes are open
to risk.
Simply stated, a diverse nasty
trade war with China would send long-term US interest rates up
2% to the 7% level. It would knock down the housing market by
20%, knock down the major stock market indexes by 20%, generate
several million new bankruptcies, and lift the jobless rate by
4%. These are rough guesses, but not far off the mark. By diverse
and nasty, one should imagine dockworker strikes, boycotts of
Wal-Mart chains, certain to spark angry demonstrations in the
cities, if not riots. On the China side of the ledger, similar
damage would be unleashed. It is in neither national interest
to kick off such a trade war. Watch for the uncontrollable path
of human nature to take over soon, whose road signs include negative
emotions. An adjustment is in progress. Per capita annual incomes
are almost $37k in the USA versus under $1200 in China, while
wages for professional workers differ by 10-to-1 in ratio.
INSANITY OF PRESSURING CHINA ON THE
YUAN
US Congress keeps insane
pressure on China for a yuan valuation upgrade. A yuan upgrade
of 500% is required to bring into near balance the wage differentials.
US leaders press for a lose-lose outcome, wherein we deeply anger
Chinese leaders. Rebalance of this bilateral trade deficit is
totally out of the question with a lost US manufacturing base.
Rather, the outcome is most likely higher imported finished product
prices, a consequent reflection in higher price inflation (even
with the corrupted CPI index), and higher long-term interest
rates. Conversely, their resentment overseas is most likely to
motivate a complete halt by China in USTBond support, probably
outright selling under the euphemistic phrase "diversification"
of their nearly $1000 billion in foreign reserves. Thus the "lose-lose
outcome" to be seen. Meanwhile, trade tension escalates
between the USA and China, alongside the financial conflicts.
Leaders in Beijing face pressures at home, just like our leaders.
Objection was recently raised regarding the Chinese purchase
of US railroad optimization software, which highlights the recognition
that their military can benefit from private sector efficiency
tools. China is rumored to desire the software for rapid deployment
of missile systems moved on railways. Before the resentment from
the failed Unocal acquisition deal wore off, fresh wounds are
opened. One must wonder if USGovt officials will urge Canadian
govt leaders to block Chinese investment in Alberta oil sand
projects. Methinks yes, already underway secretly in my humble
conjecture and considered estimation.
Chinese leaders must deal with
a growing gap between rich and poor, corruption charges, and
to environmental issues. They must find an efficient quick path
for wealth to pass down to rural areas, to the lower class whose
numbers are legion. Foreign capital has infused their economy,
and knocked dead some domestic firms. An estimated 60% of the
bilateral Chinese trade surplus with the US comes from US multi-national
firms building products in China, which we so vigorously encouraged
after the granted Most Favored Nation status in 1999. We wanted
lower cost finished products, but ignored warnings for lost US
wages and the threat from foreign accumulation of our debt securities.
The bilateral trade deficit was $201.6 billion in 2005, up over
20% from 2004. The Chinese trade surplus zoomed from a mild $2.43
billion in February to an outsized $11.2 billion in March. Their
crude oil imports rose over 25% in the first quarter, versus
one year ago.
In late March, both the US
and European Union filed a complaint against China before the
World Trade Org, in an effort to stop an imposed import tariff
on foreign-made car parts. Other deals are drawing fire and scrutiny.
Citigroup has been bogged down after an attempt to gain 85% stake
in Guangdong Devmt Bank. The Carlyle Group has drawn attention
from its $375 million deal to grab an 85% stake in state-run
Xugong Group Construction Machinery. The German ZF Group has
been in talks for three years over its bid for a 70% stake in
Hangzhou Advance Gearbox Group, a builder of marine jet propulsion
systems. Another deal with Caterpillar has been criticized more
publicly, involving Shanghai Diesel. Not only Caterpillar, but
John Deere have knocked out rival domestic firms in the capital
equipment sector. The state-run Xibei Bearings used to supply
train bearings, but no longer, not after the German INA Schaeffler
bought into the business in 2003. Reaction is widespread, aided
by domestic Chinese lobby groups, an American exported concept.
Recently proposed legislation calls for a limit of 40% for foreign
equipment suppliers on key projects funded by their central and
local govts, in an effort to satisfy the "national will"
according to Xinhua News.
Objections are laid that Coca
Cola dominates their soft drink market, and Eastman Kodak holds
a 50% market share in the film business. US presence has grown
tremendously. In 1980, only 23 US firms were invested in China,
with $120 billion in total investment. In 2005, a whopping 49
thousand firms were invested with total investment of $51 billion.
President Hu faces resistance from broken farmers, and business
leaders trying to maintain a grip on their power, along with
ministry officials. Lobbyists actually dot their political landscape,
as they plead cases and exert influence. Wal-Mart and French
Carrefour dominate large supermarkets. They are grateful for
putting to use formerly idle state assets and bringing efficiency
to their industrial structure, even promoting progress in technology.
Problems stem from concentration in certain sectors, now dominated
by foreign firms. President Hu and Premier Wen Jiabao see no
benefits in reactionary movements, but rather urge continued
reform. Much in China is similar to the US from yesteryear. Progress
has its peril.
NATIONALISM COLLIDES WITH GLOBALIZATION
A highly dangerous
new trend is underway, wherein nationalism and security have
motivated trade protection on three continents. France, the United
States, and China expose the trend which extends even to South
Korea, Spain, and Poland. On the European continent France began
their protection blockade last year with a raft of actions. Closer
to home is the mandated call to nationalize Bolivian industries.
The US is on the path of protectionist policy directed toward
certain key financial assets. Europe and Asia might walk the
same path. Nationalism has collided with globalization, with
no valid solution, as the global economy has shrunk in size,
labor differentials abound, and commanded wealth disparities
linger. A certain backfire from a sense of national insecurity,
the protectionist movement is furthered along by heightened border
security concerns, whether valid or not. The latest casualty
is the nixed Dubai Ports World deal, or rather its apparent alteration.
Watch the Alcatel deal with Lucent in the telecommunications
sector, a clear merger of weaklings in the 3G wireless arena.
The United States must attract $10 billion in foreign capital
per week, a fact of life which should render security issues
and national spirit as secondary, unfortunately. The degree of
our national vulnerability is overshadowed by how much our strong
military backs the USDollar currency and USTBond (in)securities.
Get prepared for a new round of self-destructive stupider economics
to follow three decades of stupid economics. If we preach peace
through war, and wealth through debt, then why not also put blame
for our errors on our trade partners, and urge them to fix their
house when ours has faulty construction???
According to Thompson Financial,
almost $900 billion in cross-border mergers and acquisitions
were finalized in 2005, up more than 50% from 2004. Only the
insanity of 1999 and 2000 eclipsed such levels. The following
quote from a US Congressman summarizes the growing sentiment.
"We are dealing now with a brand new international animal
called state owned enterprises that are looking to spend a lot
of money abroad. They are not capitalistic. They are not free
market. They are not bound by the rules of profit and loss, and
they are going to gobble up international businesses as we know
them." So said Illinois Rep Manzullo. We approve when
state owned agencys intervene and rescue the USDollar and USTBond,
but they are not permitted to use such money as legal tender
in acquisitions. Such is a dilemma founded in a shade of hypocrisy.
The benefits from cheap foreign products might seem more costly
when our own employer is acquired by a foreign entity, especially
a state owned one. Such is what can be called "the rub"
or friction in the one-way street. Some experts on the subject
of trade point to fear based upon the terrorism threat, but also
fear of cheap foreign labor taking good jobs in richer countries.
Clearly, the marquee names are attracting attention on what is
being bid for in such acquisitions. We are not talking about
Rockefeller Center and Pebbles Beach Golf Club anymore. We are
rather talking about major US icon corporations, the heart &
soul of America. If and when empty carmaker plants owned by General
Motors and Ford are snapped up by Toyota, Nissan, Honda, Mitsubishi,
or worse, by the Chinese Chery, look out !!! Violent demonstrations
might ensue.
The IBM PC business was acquired
by Chinese Lenovo in 2005 for $1.25 billion, a deal which might
not slip through passage today. In fact, reports indicate that
a great many PC's used in USGovt and Pentagon facilities are
of IBM PC type, posing a potential security risk. Nationalism
and security concerns have collided with global trade. The harsh
reality is our enormous staggering foreign dependence on their
money, their savings. The earned benefit is the high price of
chronic corrosive catastrophic inflation. Such is the center
piece of our horrendous economic policy since the Vietnam War
and the Great Society. We as a nation permit foreign portfolio
investment, such as stocks and bonds. We see no alarms when foreigners
accept our IOU debt paper. When it comes to its usage in foreign
direct investment at home, we properly see the stark reality
of lost control. Decisions on workers and suppliers directly
then affect US citizens.
France is a focal point to
trade protection, better labeled as inhibited asset acquisition.
The French govt blocked a deal where US Pepsico would acquire
French Groupe Danone (yogurt producer) as they actually blurted
"economic patriotism" in the process. When the French
Suez (water, waste, energy) became the target for acquisition,
their govt rushed a merger by state owned Gaz de France. A schizophrenia
persists, since other French companies have been successfully
acquired by foreign entities. See aluminum maker Pechiney, insurer
Assurances Generale de France, and bank Credit Commercial de
France, each successfully acquired.
The latest scrap involves French
Alcatel and US Lucent, a telecomm merger of weaklings. Lucent
lacks bay stations, radio frequency amplifiers, and wCDMA tower
equipment. Each company has a firm grip on 2G (second generation)
wireless technology, so they are motivated to merge and share
their disadvantage, if not misery. The Lucent CEO Russo is slated
to head the merger conglomerate, yet she speaks no French. What
a laugh, aint gonna play in Gay Paris. Each firm must wrestle
with the reality of their obsolescence in the telephone industry,
as old business models yield to newer ones. Russo has stated
a newly created independent board of Americans will make decisions
on contracts bearing on security matters. The importance of the
joint corporation is minimal, yet the negotiation for USGovt
and French govt approval could be distorted in importance. Americans
openly tout their dislike of anything French, except of course
some clothing and lingerie, and yes, wine & cheese. Some
latent disgust over NATO refusal to back the poorly sold Iraqi
War is sure to surface. Anti-European sentiment might come to
the fore. Lucent's importance and prestige might also be grossly
exaggerated in the process. It contains the once prestigious
Bell Labs, the home to my ex-wife's father. Expect a snafu to
anger France and deepen resentment on the protection front.
We grip to a bizarre contempt
for the French as cowards and diplomatic Napoleons, despite the
fact that 95% of US citizens do not speak the language and have
never traveled to that fine nation. In seven days in Aug2003,
mine eyes did not spot one native obese person, nor was any rudeness
displayed to me in countless encounters. Well, there was that
one snotty restaurant fellow in Paris, but nothing like what
certain clueless friends warned about. When directions were asked
of this unkind little man a second time, he said "assez"
with a rude gesture which means "enough." An expletive
was uttered under my breath following a dirty jackass glance
over the shoulder. Tu vers, moi je parle un peu de français.
(you see, I speak a little French myself)
Even the smaller nations are
participating in protective actions. France, Spain, and Poland
have blocked bids to purchase various domestic companies. The
Korean govt has resisted Carl Icahn on a move to bid on a tobacco
company. The true madcap laboratory observation can be seen with
Bolivia, where foreign investment has virtually dried up overnight.
President Morales won election on a platform to renationalize
their natural gas industry, along with more sweeping change.
He plans to take back from private hands and regain control of
privatized companies in energy, oil, telecomm, airways, and railroads.
They might not know about the Smoot Hawley Act in 1932 down there,
but they have learned to march to its tune. We do know, but we
proceed anyway despite some citation of the disastrous trade
war act seven decades ago. The Bolivian govt has promised fair
compensation (much like South Africans for gold mining companies),
but their state treasury cannot finance development. It lacks
sufficient resources for exploration and development, especially
after payment in compensation. Bolivia risks losing access to
the US market at the end of 2006. More importantly, the energy
market is likely to see less natural gas supply come the market,
even as its price will rise. That is the tragedy of protectionism.
CHINA PLAYS HARDBALL
The Ukraine incident
last winter with the natural gas pipeline used as a weapon is
Russia's contribution to the vicious game of protectionism. They
cut off Ukraine in midwinter to prove a point, that energy supply
is a powerful weapon when interrupted. The world now is well
aware of Russian willingness to use the weapon. Behind the scenes
on the geopolitical stage, leaders of nations fear Russia as
a result. Putin (or is the KGB?) wishes to control supply and
price in pursuit of power. With a shrinking pond comes more nasty
politics. (See academic department battles for a vivid display.
My youth came with a ringside seat to watch academic battles
over tenure, promotions, chairman selections, hiring, and distinguished
professor invitations. Nasty indeed. My doctoral pursuit required
a sidestep from an unprincipled and impersonal chairman who did
not object to attempts to skewer me three years after a battle
over a woman.) Check out the stall in Gazprom production, a well-kept
dirty little secret. Few realize to what extent most of Russia's
vast energy complex is in decline. Putin's response is treachery.
RUSSIA IS NOT OUR ALLY, DESPITE CHILDLIKE PRONOUNCEMENTS BY USGOVT
LEADERS.
A recent Stratfor Intelligence
Brief provided a glimpse of the game going on between Russia
and China. A deal in principal was struck on April 3rd between
China and Turkmenistan. The two nations agreed to build a natural
gas pipeline through their countries. They are intent on avoiding
Russian soil in its connection, since Putin cannot be trusted
with such a potential converted weapon. China relies almost exclusively
on domestic natgas production. Chinese President Hu wishes to
complete the pipeline network. China already plans to construct
similar pipelines to the Turkmen neighbor Kazakhstan. The network
displayed in the graph illustrates to what extent China will
go avoid Russia and the US Naval Fleet. This intermediate land
is not easily put under control, and includes vast stretches
of desolation. It would make more sense for China to opt for
a pipeline connection to the ample Siberian gas fields. China
wants more control and less vulnerability to Russia. They have
a history together.
Few seem to comprehend the
full nature of the Energy War. It is certainly not totally clear
to me. Iran has significance beyond anything mentioned in the
press. IRAN HAS WON THE PIPELINE BATTLE. No significant pipelines
lead to Turkey, after the dust has cleared. A sizeable amount
of energy output from Central Asia, otherwise known as the former
Soviet Republics, will pass through Iran for sale at their ports,
and not Turkey's ports. The majority will be transported via
pipelines overland to China and Russia. In the Ukraine conflict
resolution, it was clear that Russia desired pipeline control
not only to Ukraine but to Eastern Europe and parts of Western
Europe. China watched and learned, then reacted. They remember
well several broken agreements where Russia failed to honor the
terms of their past deals. Such is Russian treachery. For more
examples, see Yukos, see Pan Am Silver, see British Petroleum,
and so on. Turkmenistan does not like dealing with Russia. The
ex-republics are each treated like serfs from the disbanded Soviet
Empire. The Turkmen deal with China would be at market prices
using hard currency, something Russia never provided.
Some amusement might be due.
The Turkmen nation has its own challenges apparently. Their self-styled
leader is eccentric as best, a lunatic at worst, named Niyazov.
He exerts stifling influence over the nation, from required study
of his nutcase philosophy, his personal brand of household goods,
his own brand of vodka. His nation of vassals have no choice.
He even has changed the names of the calendar months and days
of the week to suit those from people in his life, no lie. First
of all though, Niyazov is a business man. He needs to continually
purchase the loyalty of his henchmen and Praetorian Guard for
security. It seems each nation designs its own custom Praetorians,
like the National Security Agency in the United States.
COORDINATED CHAOS ???
A coordination of intentional
chaos ignition seems evident among some nations. The US Congress
proposes a law to criminalize illegal immigrant hiring, to limit
immigrant access to benefits, and to force citizenship or deportation
of Mexican aliens. Laws in France have made easier job layoff
for younger citizens (25 yrs & younger) in their nation.
Protests abound and have erupted in some violence. Violent uprisings
in China have neither stopped nor been reported, in response
to progress in industrial expansion, in residential construction,
in environment compromise, and from worker inactivity. A network
of US internment camps is under construction, past inception,
for the stated purpose of housing illegal immigrants. A concerted
effort seems afoot to instigate chaos, what seems to be a "bunker
mentality" having emerged.
Hundreds of thousands of immigrant
Americans have marched onto the streets in dozens of major cities,
angered by the perceived betrayal. The United States is a nation
of immigrants. My mother was raised on an Irish farm, my father
a native corn fedder from Iowa.
To me it seems some national
leaders are inciting nationalism much like what was instigated
in Europe seven decades ago. Following a bad bad bad Treaty of
Versailles, an aggressive talented but misled nation struck back.
They reacted to extreme stress and perceived external threat.
The United States, following bad bad bad economic policy for
four decades, is also aggressive, talented, and misled. It is
striking back. Where will it all end???
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Jim Willie
CB
 Jim Willie CB is the editor of the "HAT
TRICK LETTER"
email: jimwilliecb@aol.com
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Jackass
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Trick Letter
Jim Willie CB
is a statistical analyst in marketing research and retail forecasting.
He holds a PhD in Statistics. His career has stretched over 26
years. He aspires to thrive in the financial editor world, unencumbered
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