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In A Recession, Obama Presses Chinese to Raise Prices to the Poor and Middle Class

September 24, 2010, 7:38 am

Consider this story in the context of my previous post on the poor having a lower inflation rate due  in part of the effects of Wal-Mart and Chinese -made goods:

President Obama increased pressure on China to immediately revalue its currency on Thursday, devoting most of a two-hour meeting with China's prime minister to the issue and sending the message, according to one of his top aides, that if "the Chinese don't take actions, we have other means of protecting U.S. interests."...

The unusual focus on this single issue at such a high level was clearly an effort by the White House to make the case that Mr. Obama was putting American jobs and competitiveness at the top of the agenda in a relationship that has endured strains in recent weeks on everything from territorial disputes to sanctions against Iran and North Korea.

Democrats in Congress are threatening to pass legislation before the midterm elections that would slap huge tariffs on Chinese goods to undermine the advantages Beijing has enjoyed from a currency, the renminbi, that experts say is artificially weakened by 20 to 25 percent.

Somehow this was written with words like "competitiveness" and "artificially weakened" to hide the fact that what we are talking about is raising prices to American consumers (by as much as 20-25%, one infers from the last paragraph).  Not only would this make Chinese goods more expensive, but it would reduce the downward price pressure on goods made elsewhere.

Which of course is the whole point, because this is a narrow special interest issue putting a few vocal industries interests over those of the broader group of American consumers.  How many of us are consumers?  How many of us work for service and manufacturing and retail businesses that buy Chinese goods?   Now, how many of us work for a product business that competes directly with Chinese manufacturers?  The first two groups dwarf the second, but Obama is just as beholden to these interests as was Bush.

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Category: Trade Policy
  • Danny

    Obama clearly still does not understand how a country is capable of undervaluing its currency. There is only one way to do it without introducing insanely large currency black markets: By increasing foreign reserves.

    Of course if Obama knew this, he wouldn't be trash-talking the Chinese. He would be trash-talking himself and the democrats for running deficits so large that our bonds can only feasibly be purchased by foreign nations.

  • caseyboy

    Given what I believe are the longer term objectives of Progressives, this confrontation with China makes perfect sense. If they can start a trade war with our biggest creditor it can't help but tank our economy further thereby providing more impetus for the government's power grab. Our recession grew into a depression in a large part due to Smoot-Hawley tariffs. Everyone seems to think Obama is naive. He knows exactly what he is doing. Another depression will allow him to finish what FDR started.

  • http://evilredscandi.blogspot.com Evil Red Scandi

    Works for me. More expensive Chinese goods are good for my business.

  • Noah

    "Works for me. More expensive Chinese goods are good for my business."

    Bad for your customers. Good by, business.

  • Chris

    @Noah, Evil Red Scandi belongs to the minority of businesses that compete with Chinese companies in the production of goods and services. His statement appears factual from what he shared.

    While for the overall economy this would be a dramatic step backwards, I imagine there are some interesting investment plays to partially negate the impact for an individual.

  • http://www.cogfactory.net colson

    It's a smart play if the Chinese are stupid. But they are not. Unpegging their currency (and assuming it rises) or pegging it upward only devalues the investment they have in our debt. If this were not "foreign policy" it would be akin to a debtor threatening to break the loan shark's kneecaps.

  • Mesa Econoguy

    In a recession, Obamalini raises taxes.

  • Mesa Econoguy

    In a recession (or slightly close to recovery), Obamalini raises taxes.

  • Mesa Econoguy

    And then....Obamalini passes Dodd-Frank, killing lending.

  • Mesa Econoguy

    Right after he passed SNAFU Obamalinicare.

    http://devilish-details.blogspot.com/2010/03/so-it-really-doesnt-save-any-money.html

    These people are highly intelligent.

    Yes.

  • http://stopthebreathing.blogtownhall.com/ astonerii

    I'm going to go out on a limb here and guess that our illustrious blog owner here does not in fact buy anything wholesale from the Chinese and then sell it. Increasing the wholesale prices from China by 20 to 25% will not increase Walmart prices for Chinese manufactured goods by 20 to 25%. The prices for the items at Walmart include shipping costs, as in trucks and trains from the port of entry to the warehouses and then truck shipping to the actual stores. Add in the cost of labor, the cost of the store footprint and other misc American items, and the cost of the Chinese item, such as a shirt or a pot or an electronic gizmo is far short of 50% of the cost to Walmart of the item, before markup to the profit margin desired. So, in the end, yes prices would rise, but certainly not the hysterically funny amount of 20 to 25%, more in the ball park for clothes and other low tech items going up maybe 5%, higher tech items around 10% and perhaps electronics by 12 to 15%. Those are the high end estimates and the low end estimates are pretty much all 100% 0 because China will still work hard to keep the market share it has by simply lowering the cost of manufacturing these items by 20 to 25%. They have a near unlimited number of dollars a year earners who would be willing to take the jobs the current workers have, just like we have a near unlimited number of dollars a month people to take the jobs Americans workers would be doing.

  • morganovich

    here's the great flaw in this attempt to "create jobs".

    if the chinese appreciate their currency by 40% or so as many claim is warranted, their buying power for raw materials goes up (as most are traded in dollars). this will drive their costs down on a great many products. this means that a great deal of the purported "competitiveness gains" are illusory.

    then let's look at the rest of costs:

    increasing a the costs of chinese labor 40% in dollar terms still gets you nowhere near what you'd get paid working at mcdonalds in the US, much less GM. so that won't help much either, especially not in low productivity jobs like the ones we have exported.

    chinese companies also have a huge leg up in terms of insurance costs, costs associated with regulatory compliance and restrictions, and have access to cheaper money in many cases (particularly the state run enterprises).

    so, a 40% forex change might lead to 10% higher prices to out lower and middle classes.

    that will not shift the competitive balance meaningfully.

    the stronger yaun will also make it much cheaper for them to buy better capital equipment and invest in productivity (and a lot of that will come from japan and the EU)

    so, we gain pretty much no competitiveness, increase our own costs, and unleash a more ferocious investment campaign in china while infuriating our largest creditor by massively depreciating the value of our debt in their currency which will have dire effects on the cost of our government borrowing.

    the chinese have moved into very short term US debt. all they have to do is not re up and we'll have massively failed auctions.

    this may well be the worst plan since FDR was in office.

  • Fred Z

    When you have a small loan the lender is your master, when you have a large loan the lender is your partner, whether either one likes it or not.

    The Chinese have become America's partner and will do nothing drastic, unless from sheer stupidity....uh oh.

  • Ben S

    F Walmart.

  • dave smith

    "Our illustrious blog owner" said prices would rise "as much as 20-25%." Which is a correct statement. He never said "prices of everything made in China will be 20-25% higher." While I don't think he needs me or anyone else to defend him, he certainly understands that not all the costs of China made goods are not represented in China's currency.

  • happyjuggler0

    Guess what? The Chinese aren't afraid to play chicken, so to speak. They just raised "anti-dumping" tariffs of US chicken parts.

    http://www.marketwatch.com/story/china-raises-antidumping-duties-on-us-chicken-2010-09-27

    In Obama's mindless quest to help his union backers he is now hurting the American farmer.

  • http://stopthebreathing.blogtownhall.com/ astonerii

    Dave Smith:
    "Somehow this was written with words like “competitiveness” and “artificially weakened” to hide the fact that what we are talking about is raising prices to American consumers (by as much as 20-25%, one infers from the last paragraph)."

    As I said, wholesale prices are not what "American consumers" pay for items. We may be able to get things from Sams or Costco closer to wholesale, but that wholesale is the American enhanced wholesale price. Do you really think a manufactured in China designer handbag costs close to $350?

    Do not get me wrong, I love cheap stuff from places like Walmart, I refuse to pay more than $10 for a good quality shirt for the office and do not pay more than $20 for my pants. I also have no doubt that prices of the low cost items at Walmart and other stores will go up if Chinese wholesale prices go up, I just know it will not be a 1% for 1% rise.

    Coyote knows better, I would imagine, but because he wants to demagogue this issue, he is willing to exaggerate and lie in order to convince those who may not know better. I just wrote what i wrote to make sure people actually think before concluding that a 20% increase in cost to China would translate to a 20% increase in prices. If it does translate, then someone is scalping.

  • Bearster

    Think of this from China's point of view for a moment. They have trillions of dollars worth of bonds that they carry on their balance sheet, denominated in yuan. Asking them to move the renminbi/yuan upwards is asking them to take a permanent write-down on their assets.

    Now let's imagine this happens in a chinese bank. They have, say 1M yuan of liabilities (deposits, bonds, etc.) and say 1.05M yuan of assets. Let's say of those assets, 240K yuan are US Treasury bonds. Now the yuan is devalued relative to the dollar by 25%. That is a hit of 60K to their capital. At that point, the bank is insolvent.

    Without even looking at the issue of manufacturing competitiveness, I wonder if the Chinese would be willing to do this to their banks...

  • http://www.salesproposaltemplate.org sales proposal

    Revaluing Chinese currency in recession is good for the local business health and not for the poor class and middle class people. I am not supporting this but the fact is that business men drive the economy of a country.