China and the USA are engaged in trade negotiations. That is something we all know. In the past, whenever the Chinese were even slightly challenged by America's government, they threatened some move or just refused to change. Obama backed off immediately which was his usual method of dealing with every challenge. The reality was that Obama only challenged the Chinese once, and that was not on trade. Obama sailed some navy ships through international waters that the Chinese were trying to claim as their own. President Bush also didn't do much to confront the Chinese. He followed the policy that reasoned that with the Chinese entry into the World Trade Organization, China's increasing wealth, prosperity and trade would cause the government there to open up to individual freedoms for its people. That policy proved to be a total failure. Our current negotiations, however, are different. President Trump has confounded the Chinese by not backing off. He keeps hitting them with tariffs while telling the world about his great relationship with Chinese president Xi. The Chinese put on countervailing tariffs, but they have basically run out of items to tax. We will soon see how this all plays out.
Not surprisingly, the forces of the economic and political establishment in the USA are having a nervous breakdown over the US change in tactics to playing hardball with the Chinese. These elites like the idea of America just giving in to the Chinese on everything because it didn't make waves. "We can't risk that" seems to be the rallying cry for these people. As a result, each time there seems to be an logjam in the talks the purveyors of gloom and doom come out of the woodwork to scream about all that is likely to go wrong. It's a tiresome refrain, but it gets pushed in the media each time they bring it forth. After all, it's a way to claim that the President has failed or messed up.
Today's story line is that China may be about to dump all the dollars it holds in its foreign reserves. China is one of the world's largest holders of dollars. Were the Chinese to sell all those dollars in exchange for Euros or Yen or Sterling, it could have a large impact on the foreign exchange markets in the short term. The supposed "experts" are busy screaming "Oh no, the Chinese may do this!" Of course, that is just plain silly. If the Chinese dump their dollars, think what would happen. It would drive the price of the dollar down. That would, at least temporarily, make dollar denominated goods cheaper than those priced in other currencies. That would make American steel more competitive with Chinese steel, American autos more competitive with Chinese products, indeed all American products more competitive with the products produced in the rest of the world, but especially those in China. This move would lessen the impact of those tariffs that the Chinese place on US goods and would increase the impact of the tariffs the US put on Chinese goods. And it wouldn't last. China has huge dollar reserves, but it would quickly run out of those as it tried to buy up other currencies. At that point, all things being equal, the dollar would rebound. China would have hurt itself in the short term while helping US exports and US consumers. Then things would go back to where they were except China wouldn't have US dollar reserves any more. Only an idiot policy maker would choose to do this.
Yesterday's threat was that the Chinese would cut off export of rare earth elements. That too seems like a non-starter for an attack. China now produces something like 95% of the rare earth elements world wide. That has more to do with China's tolerance for pollution and it's subsidizing of certain industries than anything else. China has used subsidies to drive non-Chinese companies out of the business. A few years ago, China limited the export of rare earths and prices soared as a result. A big batch of American companies opened mines to produce these elements and prices fell. Sine the Chinese saw that they were losing their monopoly, they produced enough to push the price down so that many of the new mines were closed. That could easily happen again. After all, despite being called "rare" earth elements, these elements are not rare. For the most part, they are all over the place. If the Chinese used rare earths as a weapon now, the most likely American response would be a crash national program to produce a supply adequate for American needs. China would lose its biggest export market. There would be a disruption while the new supply came on line, but it would not be anything that would have a long term effect. This tactic won't work.
Before the rare earth element alarm, we were told that China would dump its US treasury bonds. "No one will buy our debt!" is the rallying cry on this one. "Interest rates will soar" is another point the "experts" keep making. China owns about 5% of all US treasury debt. If the Chinese were to put all that debt on the market quickly, it would surely raise interest rates. That means that the price of treasury bonds would fall, and the Chinese would have to take a loss on their investment. The bond markets, however, are large enough to digest the Chinese position. So long as other nations like Japan do not dump the US bonds as well at the same time, we would see a very short term change and then a return to equilibrium. It is not something that one would like to see happen to the American economy, but the effect on China would be measurably worse than it would be on the USA.
The truth is that the biggest problem we face with the Chinese right now is that president Xi and his advisers know that if Trump is turned out of office, he is likely to have a new president like Old Joe Biden to deal with. Biden actually said last week that China is not a threat to the USA or even a competitor of ours. He is so out of touch that Xi knows he will be back to the old days where he called the tune in every negotiation. Other Democrats are also weak on this score and would want to show that they were changing Trump policies in every possible way, including those pertaining to China. Xi may well feel that it is in his nation's best interests to try to stall the negotiations until he can see if President Trump will get another 4 years.
Not surprisingly, the forces of the economic and political establishment in the USA are having a nervous breakdown over the US change in tactics to playing hardball with the Chinese. These elites like the idea of America just giving in to the Chinese on everything because it didn't make waves. "We can't risk that" seems to be the rallying cry for these people. As a result, each time there seems to be an logjam in the talks the purveyors of gloom and doom come out of the woodwork to scream about all that is likely to go wrong. It's a tiresome refrain, but it gets pushed in the media each time they bring it forth. After all, it's a way to claim that the President has failed or messed up.
Today's story line is that China may be about to dump all the dollars it holds in its foreign reserves. China is one of the world's largest holders of dollars. Were the Chinese to sell all those dollars in exchange for Euros or Yen or Sterling, it could have a large impact on the foreign exchange markets in the short term. The supposed "experts" are busy screaming "Oh no, the Chinese may do this!" Of course, that is just plain silly. If the Chinese dump their dollars, think what would happen. It would drive the price of the dollar down. That would, at least temporarily, make dollar denominated goods cheaper than those priced in other currencies. That would make American steel more competitive with Chinese steel, American autos more competitive with Chinese products, indeed all American products more competitive with the products produced in the rest of the world, but especially those in China. This move would lessen the impact of those tariffs that the Chinese place on US goods and would increase the impact of the tariffs the US put on Chinese goods. And it wouldn't last. China has huge dollar reserves, but it would quickly run out of those as it tried to buy up other currencies. At that point, all things being equal, the dollar would rebound. China would have hurt itself in the short term while helping US exports and US consumers. Then things would go back to where they were except China wouldn't have US dollar reserves any more. Only an idiot policy maker would choose to do this.
Yesterday's threat was that the Chinese would cut off export of rare earth elements. That too seems like a non-starter for an attack. China now produces something like 95% of the rare earth elements world wide. That has more to do with China's tolerance for pollution and it's subsidizing of certain industries than anything else. China has used subsidies to drive non-Chinese companies out of the business. A few years ago, China limited the export of rare earths and prices soared as a result. A big batch of American companies opened mines to produce these elements and prices fell. Sine the Chinese saw that they were losing their monopoly, they produced enough to push the price down so that many of the new mines were closed. That could easily happen again. After all, despite being called "rare" earth elements, these elements are not rare. For the most part, they are all over the place. If the Chinese used rare earths as a weapon now, the most likely American response would be a crash national program to produce a supply adequate for American needs. China would lose its biggest export market. There would be a disruption while the new supply came on line, but it would not be anything that would have a long term effect. This tactic won't work.
Before the rare earth element alarm, we were told that China would dump its US treasury bonds. "No one will buy our debt!" is the rallying cry on this one. "Interest rates will soar" is another point the "experts" keep making. China owns about 5% of all US treasury debt. If the Chinese were to put all that debt on the market quickly, it would surely raise interest rates. That means that the price of treasury bonds would fall, and the Chinese would have to take a loss on their investment. The bond markets, however, are large enough to digest the Chinese position. So long as other nations like Japan do not dump the US bonds as well at the same time, we would see a very short term change and then a return to equilibrium. It is not something that one would like to see happen to the American economy, but the effect on China would be measurably worse than it would be on the USA.
The truth is that the biggest problem we face with the Chinese right now is that president Xi and his advisers know that if Trump is turned out of office, he is likely to have a new president like Old Joe Biden to deal with. Biden actually said last week that China is not a threat to the USA or even a competitor of ours. He is so out of touch that Xi knows he will be back to the old days where he called the tune in every negotiation. Other Democrats are also weak on this score and would want to show that they were changing Trump policies in every possible way, including those pertaining to China. Xi may well feel that it is in his nation's best interests to try to stall the negotiations until he can see if President Trump will get another 4 years.
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