China Flexes Its Muscles

I got a laugh from this Bloomberg story. The US-China Business Council whose membership includes the likes of Caterpillar, IBM, Citicorp and Boeing (a total of 200 US multinationals) is lobbying D.C. to fend off U.S. legislation aimed at forcing the Chinese to raise the value of their currency.

Hello? China’s global trade surplus has narrowed somewhat of late. But the most recent reading showed a $20 billion surplus. Guess what? 90% of that surplus is a result of the trade surplus with the good old USA. And our major corporations are spending big bucks lobbying Washington to ease up the pressure on China to accelerate the revaluation of their currency. Go Figure. From the article:

The legislation, sponsored by Representatives Tim Ryan, an Ohio Democrat, and Tim Murphy, a Pennsylvania Republican, would let companies petition for higher duties on imports from China to compensate for the effect of a weak currency.

The measure “is totally counterproductive,” William Lane, government relations director for Caterpillar, the largest maker of construction and mining equipment, said in an interview. “Some in Congress want to start a trade war and undermine our efforts to sell to our fastest-growing export market.”

Here’s how I think this went down:

China to Citi:

If you want to expand your branches and business in our country you will lean on Congress not to pass this bill.

China to Boeing:

We can buy aircraft from Embraer in Brazil, or Airbus. If you want us to buy some from you, you must appose this law.

China to Caterpillar:

If you want to open a manufacturing facility in our country you have to do as we say. And we say you must tell your Congress to drop their effort.

The US-China Business Council to China:

我会做你想 (We will do as you wish)

The only reason that these global heavyweights are using their muscle to pressure Congress is that China Inc. has used their muscle on the elite of US corporations.

This development makes the Administration (in particular Treasury Secretary Geithner) look pretty stupid. They have been pushing China on the FX issue since they took over. Now, the big shots that line campaign coffers are pushing in the opposite direction. Only in America could this happen.

The year to date trade deficit with China is 145 billion. The article had this to say on that big number:

“In 2010, the trade deficit with China reduces U.S. GDP by more than $400 billion,” Peter Morici, an economist at the University of Maryland in College Park, wrote this month in a report. “Unemployment would be falling and the U.S. economy recovering more rapidly, but for the trade imbalance with China and Beijing’s protectionist policies.”

I am in the camp of Mr. Morici. China is not a partner. They are a predator. The have wracked up a nearly $1 trillion reserve position with the US because they are predators. They are moving whole factories to their land. They recently announced a massive cutback in rare earth metals exports (they are 97% of the market, they cut exports by 72%). Unemployment is higher than it should be and the economy is weaker than it might have been were it not for the continued imbalance of trade.

Watch for this proposed legislation to die. There are hearings on 9/15 and our boy Timmy G. is set to talk about this to Congress on the 16th. As the election is near, expect to hear some rhetoric from Tim. Looking like one is ‘tough on China’ is a vote getter. But beyond the talk there will be no action.

Just to confirm. The small guy in America does not stand a chance. The ‘big interests’ are not aligned with their interests.