Beijing Borrowing from Washington's Playbook

As the saying goes, you reap what you sow. In early June, Chinese authorities announced the commencement of Beijing's own version of the "Buy American" clause. Yes, it now seems Washington's pandering to populist sentiments in the American Recovery and Reinvestment Act of 2009 is going to actually result in jobs losses right here in the United States. Why? China has now imposed a requirement that Beijing's economic stimulus projects be accomplished using domestically manufactured goods.

Under the new regulations, "Government investment projects should buy domestically made products unless products or services cannot be obtained in reasonable commercial conditions in China." The order goes on to stipulate, "Projects that really need to buy imports should be approved by the relevant government departments before purchasing activity starts."

If you are a Caterpillar employee reading this column the time for gnashing of teeth and bemoaning the world's injustices has arrived. Caterpillar did approximately $2 billion of business in China during 2008. In July 2008, the firm went so far as to predict this figure could double by 2010. I'm betting that is no longer the case. In fact, it looks as though the 2,200 Americans Caterpillar laid off in March 2009 are going to remain on the unemployment rolls.

And I'm willing to bet the former Caterpillar employees won't be the only ones who get to pay for Washington's myopic behavior. In May, the Washington Post reported Canadian officials in towns along the U.S. border implemented regulations that essentially barred American firms from bidding on municipal contracts. It would appear that alienating our largest trading partner -- Canada -- is no brighter than aggravating our largest creditor -- China -- and yet Washington continues to act as though we are the only game on the planet.

The days of threatening to quit and take our ball home are over. In mid-June Washington announced Beijing's U.S. Treasury note holdings had dropped to $763.5 billion in April 2009. This was down $4.4 billion from China's U.S. Treasury note holdings in March 2009. The cause of the decline? As one of Barclays Capital Research analysts put it, the decline "seems to stem from net selling of Treasury bills."

I hasten to note the Chinese are not selling these holdings as a means of responding to a domestic economic emergency. Last week the World Bank raised its forecast for China's economic growth -- that's right, growth -- in 2009 from 6.5 to 7.2%. According to the World Bank, some of this rosier forecast can be explained by Beijing's $586 billion stimulus package. This does not mean China is out of the woods. Chinese officials and the World Bank agree the nation's dependence on exports is worrisome, particularly as it appears it may be years before we finally shake off this latest recession.

But perhaps that's why Beijing decided its economic stimulus projects be completed using domestically produced goods. American economists and politicians have been warning China about the need to promote consumption at home. Of course, the first time Chinese officials seriously set about accomplishing this task they are immediately ensnared in a classic case of Catch-22. That is, Beijing's efforts are condemned as protectionist and discriminatory -- language that has also been used to describe China's focus on stimulating growth through a focus on exports. It would appear there is just no keeping Washington happy.

So what to do? Well, if I were a Chinese official my first response would be to remind Washington that what is good for the goose is also profitable for the gander. Then I would suggest U.S. authorities need to spend time mulling over the consequences of the Smoot-Hawley Tariff Act. This fine bit of protectionist legislation signed into law on June 17, 1930, raised U.S. tariffs on over 20,000 imported goods to record levels. (The law specifically imposed an effective tax rate of 60% on more than 3,200 products and materials imported into the United States.) The ultimate result? A tit-for-tat retaliatory tariff war that served to curtail global trade by approximately 10%.

Don't think it could happen again? I would recommend taking a close look at Moscow's recent efforts to protect its struggling automotive sector. In a bid to save the estimated 1.5 million people employed by the Russian automobile manufactures and their suppliers Moscow essentially made buying a used import as expensive as purchasing a new domestically produced Lada. I'm betting similar proposals are being floated elsewhere.

In the mean time, don't expect any apologies or second thoughts from Beijing. Like their American counterparts, Chinese officials have learned to cover their tracks through obfuscation and semantics. Rather than admit the new regulations were protectionist, China's Foreign Ministry declared, "The purpose of issuing the notice is to ensure a fair and competitive market." Adam Smith must be spinning in his grave.

Comments

[MAWBlogging]

Will the last American who leaves China please turn out the lights? Caterpillar has done nothing but downsize their Beijing offices for over a year. They have hired locals to do the jobs Americans once held, all to appease China and stockholders, alike. We have watched our jobs be relocated to Mexico, China and God knows where else for the price of stock. Now it is going to bite us in the arse worse than ever. I live in Peoria and I can tell you, it's not pretty! Harry Greb has it right.

[January]

So now it's every man (country) for himself? Then we shall see whose system has the best capacity for maintaining order when times get tough. Unfortunately, I expect we shall see both systems pressed to the limits and maybe beyond the limits. Isn't that what they mean by a "pissing contest"?

What we lack in discipline we have always tried to make up for in abundant resources--we have so much that we can afford to give it away; usually we are simply wasteful. Whether we know how to take care of our own is another question. From where I sit, I'd rather be in a society with a monitor on each block who looks after the well-being of the neighbors than in one where every other house has multiple guns as their only means of protection. But perhaps I lack a full appreciation for "the American Way." Time will tell.

[themodernleader]

Idytme. You are absolutely correct. International trade and financial monopoly are structured to bring all the wealth to the top to a hand full of malefactors of great wealth, Robber Barrons, predatory capitalists, financial dictators. Governments or the United States Govenment can and must break up these dangerous power centers that result in poverty, famine, mass migrations, human dislocations and suffering, finally horrendous human decimating wars.

[Idytme]

As the right wing goes into hysterionics about tariffs, the corporations have their own. The most publicized is the difference between pharmaceuticals, but just look at the internet. I believe that the reason why we are almost the only country in the world not to go the the metric system, is trade.

[Idytme]

I guess I have to add that most of the products that are not "metric" are made outside of the US, research the rest.

[Realization]

The top priority for U.S. national security is to eliminate the trade deficit and excessive foreign borrowing and to rejuvenate American manufacturing. Wars are won with manufacturing expertise and capacity.

Rich Country, Strong Army. The Japanese have it right.

[Idytme]

Strong Arm? Are you kidding? We forced the Japanese to have no army after WWII, That is why they had so much money to go into global trade. Do you realize that one *half* of our budget is somehow regulated to our military? Want to know how much health care that will buy? Have you read about how Japan took over the TV market in about the 80's? They basically sold everything under cost so American companies could not compete. Congress did nothing about it. We have laws to stop monopolies in this country (with the obvious exception of the financial industry) but no laws to stop the overseas markets from taking over our own. The right wing, Freidmandits, stopped any tariffs and the entire industry went under. We were brainwashed to think that cheaper TV's (insert product here) was better for America than American jobs. Even if those were sold under cost. That was way back then with Japan having a higher standard of living than those we are competing against today. Tell me how we can compete over someone living on $2 a day.

[Idytme]

When you see how China got to where it is today with trade surpluses and the top buyer of our debt, and not running record deficits every year, it is disingenuous to look at this one thing and blame America. Multinational corporations got the politicians in this country to tell the public that sending out all our jobs overseas was good for all Americans. They told folks that they just had to get into tech jobs - like all Americans are adapted for that and no one else in the world was smart enough for tech jobs. That has certainly been debunked by now. In the meantime, China has had so much protectionism in their trade and their currency that they have become what they are now and our government cannot do anything about it. In Norway many small farmers still have jobs because of tariffs on dairy, and while there *is* an intricate dance between protecting your workforce and the global economy, it should be obvious that free trade will only be good for this country if our wages are as low as the global wages we are competing against. In otherwords, a depression greater than the last one.

[themodernleader]

If your China apologistic ideas have been seriously considered and implemented, I can understand why we are where we are. You blame us for tariffs of the Chinese. Of course it was awright for them to ship us billions of their products while we shipped them hundreds of dollars of our products. Just enough products that could be taken apart and manufactured. It was all right for them to decimate every industry that we operated. Who's national security are you representing.
We must reinvent our manufacturing. That means tariffs. We may not be able to sell them. but we have a large domestic market. Then we can raise families without poverty or the public dole.

[harry greb]

Trade war? Bring it on. China buys nothing from us, it is WE who import their leaded toys and contaminated medicines. They need us WAY more than we need them. The only thing of any consequence that we export to China is jobs. By the way, the depression was well underway before Smoot Hawley, find a new bromide.
I see you're a "National Security advisor". For which country? We tried it your way and you've bankrupted us. Now get out of the way before you get steamrolled, we're not taking it anymore, 14 guys from "Caterpillar" notwithstanding.