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Monday, June 23, 2008


the return of smoot-hawley

via mish -- stunning, but it demonstrates clearly that the myopia of politics trumps even the most desperate need of policy.

"This marks a fundamental shift in U.S.-China trade relations," said Gilbert Kaplan, a lawyer for U.S. pipe makers. "It's the first time we've confronted their subsidies by putting duties on imports."

Two types of tariffs will apply to the Chinese pipe: countervailing duties, used to counter subsidies, will average 37.2 percent; and anti-dumping duties, to compensate for goods sold overseas at prices below those at home, will be 69.2 percent on 31 of the largest producers. Other companies face higher duties.

the sincere stupidity of this move comes over on may levels. in the face of finished goods price deflation against raw input price inflation -- the age old mechanism of recession in which business margins are squeezed and firms are sent to bankruptcy -- the government of the united states proposes to, in essence, further raise the prices of inputs and unfinsihed goods by taxing the low-cost provider of choice (ie, china).

it means even greater pressure on profit margins for those who use an unfinished good like steel pipe, which will push more finished goods manufacturers to bankruptcy than would have been the case otherwise. it means higher unemployment, as the manufacture and sale of finished goods has become a larger part of our economy than it ever was in the 19th or early 20th century.

but steel pipe in itself is not nearly so important as the follow-on consequences -- two of which jump out at me.

first is the prospect of retaliation. china is already revaluing the yuan lower, which is steadily drying up its need to finance the american economy. in curtailing chinese imports, that impetus will be reinforced by compounding the currency adjustment with a reduction in trade volume.

the full impact of the yuan's slow but accelerating revaluation hasn't hit yet, as brad setser points out that foreign central bank reserve growth is still massive and flowing into american agency and treasury debt. a trade war, however, might put the entire balance of terror on new terms.

second is the misguided diminishment of one of the anglophone empire's primary institutional tools, along with the united nations and the world bank: the WTO. if free reciprocal trade is moved further down the list of american priorities, will the importance of the WTO -- which as much as any other institution is responsible for the global dominance of american multinationals and finance -- be diminished? such a progression would be to the detriment of the united states, dependent as it is on foreign trade and capital flow for just about everything.

UPDATE: michael pettis sees a change in the nature of chinese reserve accumulation.

It now seems that China’s rate of reserve accumulation, seemingly unsustainable even two years ago, has reached even higher levels, but what is powering it now is not the (relatively) stable trade surplus and FDI accounts but rather highly unstable speculative inflows.... If I am right, it seems to me that there has not just been a quantitative change in China’s and the world’s balance of payments accounts in recent months (i.e. even more rapid growth in an already unsustainable rate of Chinese foreign currency reserve growth), but also a qualitative change – the cause of China’s reserve growth has shifted significantly. The old mechanism, large trade deficits in some countries balanced by rapid reserve accumulation in others, has been converted into something much more complex and maybe even pro-cyclical (hence volatility enhancing): large trade deficits in some countries plus massive speculative inflows in others are being balanced by even more massive reserve accumulation in the latter countries.

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