Thursday 23 September 2010

China-US trade war finally hoves into view

The main cause of the financial crash was undoubtedly the combined poor macroeconomic management of the World's trade. The Western response to growing supply of goods from China was to cut interest rates as we imported Chinese deflation. These low rates boosted Government revenues and popularity

They also created the huge Real Estate and Asset bubble that wasted the economies in 2008 - perhaps irretrievably, we won't know for a decade or so.

Despite this obvious narrative, nothing was done following the crisis to remedy the key issue, the huge trade imbalance between East and West. In the East, they are keen to keep their artificially low currency rates to help spur growth and hollow out Western economies - it is pure mercantilism.

So this news today that the US is finally going to do something about this is welcome. Yes, it is gonna hurt. you can see from the Chinese reaction that they are not just going to go along with this challenge to their strategy. yet it has to happen, or else the West will be denuded of jobs and in turn the East will overheat and suffer a collapse that will take the West even further down. if China think they can win they should remember the US has the World's reserve currency and can print its way out of Chinese deflation.

What is worrying in the world today is that the international economy is so developed and yet the international institutions, indeed international feeling for the common man, is very underdeveloped. Solving these macro issues is both crucial and a Sisyphean task.


Old BE said...

During this very long discussion I have never understood why, if the US thinks that the Yuan is x% undervalued, it does not simply slap an x% tariff on Chinese goods.

CityUnslicker said...

BE - they are getting there. They don;t because the Chinese own $ trillions of US treasuries - it is a faustian pact. China sponsors US debt so that the US can buy its goods.

Steven_L said...

All the regional governments there heavily subsidise the rents on the factories etc. too according to a wholesale I spoke too.

Of course the biggest scandal over there is their organ export business, the growing suspicion seems to be that they shoot 'dissidents' to order.

No wonder they want to expand their little empire around the South China Sea - more doners?

Old BE said...

CU, but it's a pact where the US could easily call China's bluff. The importer and the debtor can always win. What are the Chinese going to do, collapse the value of their own holdings?

Sebastian Weetabix said...

It's about time the west collectively took action against China. Their mercantilist nonsense and blatant IP theft has been going on long enough.

Steven_L said...

BE, if they do that (or if they allow the Yuan to go up too much) I've heard that they then can't meet their debts (i.e. the savings of their citizens)

PacRim Jim said...

Each and every item exported to America from China must be hand-inspected in American Samoa. That should send a message.