THURSDAY APRIL 8, 2010

China Thaw

The economic relationship between China and the US has been frosty for the last several months.  The huge trade deficit has been a political football and barbs have been flying back and forth over the Pacific.

U.S. politicians want China to let its "undervalued" currency, the yuan, float on the open market.  They claim that the currency relationship is the cause of US job losses, particularly in manufacturing.  So, in the name of protecting US jobs, a 28% import tax has been proposed on all Chinese imports.  Quick, raise your hand if you want to pay 28% more for that flat screen TV!  Of course, not all of our jobs have moved to China.  What the politicians fail to understand, many US jobs exist because of the China.  Think of your typical electronic product, say a computer or a smart phone.  The reality is, these products are "Made in America" and "Assembled in China."  The real high paying jobs, those in research and development, design, advertising and marketing, are in the US.  The low wage job is combining the semiconductor designed by Intel with the flat screen designed by Corning with the server designed  by Cisco.  By threatening a trade war by placing punitive taxes on these "made in China" products, the US would only hurt itself.  The net effect will be less US jobs, not more.  There will be fewer really cool I-Pad ads...and fewer jobs at the ad agency...and fewer jobs at the Apple retail store.  Nonetheless, the US has rattled this trade war sabre.

On the other side of the Pacific, China has been quick to point out that they are currently our "banker", as China holds over $1.5 trillion in US government debt.  Start a trade war, and China will stop financing our debt.  Think the trade balance is out of whack, China will tell the US to get its financial house in order and control spending.

Fortunately, both nations seem to understand the futility of their threats.  Each will continue to rattle their sabres but understand they would only hurt their own people if they act on their threats.  After all, does Congress really want to increase taxes on virtually every product sold at the local WalMart or Target in the current economic environment.  Does China really want to sell their Treasuries?  Exactly where do they think they will go with $1.5 trillion, to the Euro?  Maybe Greece?  Don't think so.

It is encouraging that there appears to be a thawing in the trade wars.  There are several "low level" meetings scheduled between the two countries, highlighted by a pending trip to China by Treasury Secretary Geithner.  I doubt these meetings would be occurring if a trade war was imminent.  The solution to the trade imbalance is for each county to do a little of what the other wants.  The US must get a handle on its fiscal status and China should allow the currency to increase somewhat.

I hope both of these things occur in the near term, because no one wins in a trade war!

POSTED AT 1899-12-30 12:16:00.0

KEN ENTENMANN, CFA
SENIOR VICE PRESIDENT AND
THE DIRECTOR OF INVESTMENT MANAGEMENT SERVICES

Ken is a Senior Vice President and the Director of the Trust and Investment Services at Alliance Bank, N.A. He has 23 years of investment experience and oversees the management of assets totaling $1 billion. He holds a B.S. in Applied Economics and Business Management from Cornell University and an M.B.A. from the William E. Simon Graduate School of Business Administration at the University of Rochester. He has also earned his Chartered Financial Analyst designation. He is a member of the Executive Committee of the Trust Division of the New York Banker's Association. He is also a director of the Central New York Community Foundation.

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