Friday, June 24, 2005

Call it coincidence ... The day after a Chinese oil company announced a hostile takeover bid for the American oil giant Unocal, Fed Reserve chairman Alan Greenspan advised Congress that trade tariffs imposed on Chinese imports wouldn't work.

Clearly the timing was just a coincidence -- the hearing had to have been scheduled prior to the Cnooc announcement -- but it underscores what a major issue Chinese trade has become, and how confused Congress is in reacting to it: Congress is currently thinking in terms of manufacturing and currency, but China itself is now thinking in terms of capital.

In a sense, then, Congress's current debates are already anachronistic; if China persists in its attempts to acquire U.S. interests, in the long run it will be in China's patent interest to revalue the yuan, which in turn would significantly impacting its manufacturing.

In other words, the currency and import issues would eventually take care of themselves.

Meanwhile, the issues which would take their place all have to do with America's current dependency on cheap credit. As I've noted before, at present China is underwriting America's trade imbalance by buying Treasury notes. Should China begin to significantly divert their earnings into capital markets, some pretty funky things would begin to happen -- chief among them a rise in domestic interest rates. Yet that, in turn, would depress growth most in the one sector currently driving the bulk of U.S. growth, the housing sector.

I know that analysis is stretched thin, but in my view the gist is thus that the Unocal bid wasn't a warning shot to America's board rooms so much as its consumers. Rather than renewing calls for protectionism, our response should be to focus on our Achilles heal -- the dependency, even addiction, to artificially low-interest rates.


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