Free Markets, Free People

China

Obama, NAFTA, Mexico, China, Trade and Tariffs

Our congratulations go out to the Obama administration on their latest foreign policy and trade triumph. Last week, apparently without consultation, they did away with a NAFTA pilot program which allowed Mexican trucks to deliver goods to certain areas of the US. Mexico has responded:

Mexico has released the list of U.S. products that will see tariffs of 10 percent to 45 percent. The move is in retaliation for the U.S. scrapping a test program allowing Mexican trucks to deliver goods beyond a U.S. border zone.

Among affected goods are certain fruits and vegetables, wine, juices, sunglasses, toothpaste and coffee, according to a government statement. Most tariffs are 10 percent to 20 percent, with unspecified fresh products subject to a 45 percent charge. The tariffs will apply to $2.4 billion of goods and take effect today.

Just what you need in a down economy – punitive tariffs for political stupidity. And there won’t be a solution anytime soon:

Talks to diffuse the first [self-inflicted -ed.] trade dispute of President Barack Obama’s administration can’t begin until the U.S. has a Commerce Secretary, Economy Minister Gerardo Ruiz Mateos said.

So far I’m really not at all impressed with the status of the “better relations” throughout the world promised by the Obama administration.

Oh, and for an encore, how about this little goodie:

Energy Secretary Steven Chu on Tuesday advocated adjusting trade duties as a “weapon” to protect U.S. manufacturing, just a day after one of China’s top climate envoys warned of a trade war if developed countries impose tariffs on carbon-intensive imports.

Mr. Chu, speaking before a House science panel, said establishing a carbon tariff would help “level the playing field” if other countries haven’t imposed greenhouse-gas-reduction mandates similar to the one President Barack Obama plans to implement over the next couple of years. It is the first time the Obama administration has made public its view on the issue.

“If other countries don’t impose a cost on carbon, then we will be at a disadvantage…[and] we would look at considering perhaps duties that would offset that cost,” Mr. Chu said.

Brilliant.

~McQ

Understatement of the Week

China expresses some … um … “concern” about whether or not it will ever see its money back:

The Chinese prime minister, Wen Jiabao, expressed unusually blunt concern on Friday about the safety of China’s $1 trillion investment in American government debt, the world’s largest such holding, and urged the Obama administration to provide assurances that the securities would maintain their value in the face of a global financial crisis.

"How much chance China get repaid?"

How much chance China get repaid?\


Speaking ahead of a meeting of finance ministers and bankers this weekend in London to lay the groundwork for next month’s G20 summit, Mr. Wen said he was “worried” about China’s holdings of United States Treasury bonds and other debt, and that China was watching economic developments in the United States closely.

“President Obama and his new government have adopted a series of measures to deal with the financial crisis. We have expectations as to the effects of these measures,” Mr. Wen said. “We have lent a huge amount of money to the U.S. Of course we are concerned about the safety of our assets. To be honest, I am definitely a little worried.”

Just a little? There’s an old saying to the effect of “if you owe the bank $1 Million, then the bank owns you; if you owe the bank $1 Trillion, then you own the bank.” China’s feeling pretty nervous because it knows it can’t sell its holdings except at a tremendous loss — both from the normal discount expected, and from the fact that it is by far the largest mover in the market (e.g. what do you think would happen to Microsoft stock if Bill Gates started selling off?) — and it doesn’t see a whole lot coming out of Washington to instill confidence.

But there’s no need to fret PM Jiabao! Unnamed economists are here to save the day:

While economists dismissed the possibility of the United States defaulting on its obligations, they said China could face steep losses in the event of a sharp rise in United States interest rates or a plunge in the value of the dollar.

Whew! That was close. Nothing but a little market risk to worry about there, Jiabao. Default? Pffft … never gonna happen.

Back in the land called “reality” however, default is plays a bigger part since, aside from reneging on the debt, there are only three other ways for the government to pay for its spending binge: higher taxes, printing more money, or borrowing. Higher taxes impedes growth and leads to less revenue. Printing money leads to hyper-inflation. So, even though those two choices will be used to a certain extent, further borrowing is the only viable alternative to default. But who’s going to lend to us?

Maybe China?

The bulk of China’s investment in the United States consists of bonds issued by the Treasury and government-sponsored enterprises and purchased by the State Administration of Foreign Exchange, which is part of the People’s Bank of China … much of the Treasury debt China purchased in recent years carries a low interest rate, and would plunge in value if interest rates were to rise sharply in the United States. Some financial experts have warned that measures taken to combat the financial crisis — running large budget deficits and expanding the money supply — may eventually create price inflation, which would lead to higher interest rates.

This puts the Chinese government in a difficult position. The smaller the United States stimulus, the less its borrowing, which could help prevent interest rates from rising. But less government spending in the United States could also mean a slower recovery for the American economy and reduced American demand for Chinese goods.

It may just be the case that China’s best option is to support its investment by propping up its best customer with yet more loans. Unfortunately, that means that Washington will have little incentive to slow down spending (since it owns the bank). The nasty little cycle of borrowing > spending > inflation > rising interest rates > falling dollar, will continue necessitating even more borrowing. China, in turn, will have serious questions about the value of its investment, and the US will start having serious discussions about declaring a default.

In short, China’s not just “worried” about the current fiscal mess. It’s crapping its collectivist shorts.

Charles Freeman And The Obama Administration – What Is Going On? (UPDATE)

What is going on with the Charles Freeman nomination, and is it an indicator of a overwhelmed administration losing control?  Who, exactly, is in charge there?

Frankly, approaching 45 days into this administration, the transition process, at least as it pertains to critical nominations, has been an unmitigated disaster.  But it is the Freeman nomination which begs the question “who is in charge”.  Charles Freeman has been nominated for the chairmanship of the National Intelligence Council (NIC), the organization in charge of preparing our most sensitive intelligence estimates.

Obama’s Director of National Intelligence Dennis C. Blair apparently never ran the nomination by the White House.  That means Freeman has never been formally vetted.  Now this may all fall back on Blair, but you have to wonder what sort of guidance or lack thereof provided him with the belief that this was the way things worked?

More importantly, why did Blair decide Freeman was the man for the job?   A former ambassador under George H. W. Bush,  to Saudi Arabia and senior envoy to China, Freeman is seen by many as having very serious conflicts of interest which were apparently ignored.    Freeman was also a board member the China National Offshore Oil Corp (CNOOC) owned in majority by the Chinese government and other Chinese government agencies. And there are other financial ties which are suspect. Freeman is president of the nonprofit educational organization Middle East Policy Council (MEPC), which paid him $87,000 in 2006, and received at least $1 million from a Saudi prince. You can read about the ramifications of those connections here.

But its not just who Freeman has been connected with, but some of the statements he’s made that make one wonder about his objectivity and, frankly, his moral and ideological foundation.  This is a person who remarked that the Chinese government had shown too much “restraint” when putting down the Tiananmen Square protests in 1989. And in testimony before the 9/11 Commission, he advocated the use of a national identity card.  After all the wide-spread panic from the left concerning the Bush years and the claim that he was leading us down the path to totalitarianism, this seems like the type of person the left would really find unacceptable for a position.

Then there is the Congressional side of the question.  Jennifer Rubin asks:

Does Diane Feinstein think Freeman is an acceptable pick? It is interesting to note how lacking in — what’s the word? ah yes — “oversight” the government is now that Congress and the White House are controlled by the same party. Imagine if George W. Bush had nominated someone whose earnings depended on the largess of the House of Saud or who advocated crushing Chinese dissidents — indeed faster than the Chinese government.

And she further asks, is this the type of person who will give the administration “the “unpoliticized” advice they are looking for?”

Given what we know, I’d say no.  However, this nomination is just one more in what can only be characerized as a shambles – Commerce, HHS, Treasury, questions about his housing czar and nominees for other Treasury posts jumping ship – that is the nomination process.  

This points to a very inexperienced administration learning on the job in one of the more turbulent times in our history. That is not a good thing, folks, but exactly what was predicted given his lack of a resume. We’ve now seen the result of a campaign based on vacuous slogans. A campaign that was part demonization of the opposition and part beauty pageant. A campaign in which few focused on what the responsibilities of the office entailed and whether the candidate had the qualifications to fulfill them. We’re now “enjoying” what that brings.

UPDATE: Politico reports that Charles Freeman has withdrawn his nomination. Heh … that’s the fastest reaction I’ve ever had to one of my posts.

~McQ

With Hat In Hand …

Pretty sad when you have the Secretary of State soliciting funds for debt instruments:

US Secretary of State Hillary Clinton has urged China to keep buying US debt as she wrapped up her first overseas trip, during which she agreed to work closely with Beijing on the financial crisis.

Ms Clinton made the plea shortly before leaving China, the final stop on a four-nation Asian tour that also took her to Japan, Indonesia and South Korea, where she worked the crowds to try to restore America’s standing abroad.

In Beijing, she called on authorities in Beijing to continue buying US Treasury bonds, saying it would help jumpstart the flagging US economy and stimulate imports of Chinese goods.

“By continuing to support American Treasury instruments the Chinese are recognising our interconnection. We are truly going to rise or fall together,” Ms Clinton said at the US embassy here. 

Of course, its absolutely necessary that China (and the rest of the world) continue to buy these bonds and fund this spending debacle or taxes will have to be raised dramatically (and not just on the ‘rich’) and/or more money will have to be printed. That’s not to say that both of those won’t be done anyway whether China continues to buy or not.  My guess is it’s only a matter of time. Don’t forget, health care reform legislation and environmental legislation are yet to come. Both may end up taking even more out of the private side of the economy than the so-called “stimulus” did.

~McQ

Now That’s “Change” We Do Believe

You could hear jaws dropping all over the world’s human right’s establishment as Secretary of State Hillary Clinton stated the Obama administration’s new policy about human rights vs economic, environmental and security concerns:

Amnesty International and a pro-Tibet group voiced shock Friday after US Secretary of State Hillary Clinton vowed not to let human rights concerns hinder cooperation with China.

Paying her first visit to Asia as the top US diplomat, Clinton said the United States would continue to press China on long-standing US concerns over human rights such as its rule over Tibet.

But our pressing on those issues can’t interfere on the global economic crisis, the global climate change crisis and the security crisis,” Clinton told reporters in Seoul just before leaving for Beijing.

Hmmm … 4th place.

But Gitmo?

Bad.

~McQ