The Gathering Storm: Trade, Debt and Disaster

Here's a tip: government speeches and announcements released from Monday through Thursday aren't always the most newsworthy, feature the best possible media spin, and are often designed to obscure painful realities. When the Administration has bad news and hopes to control the timing and discussion of the issue, the press release appears late on a Friday afternoon.

This past Friday was no exception.

Friday's announcement that the Obama Administration decided to raise tariffs on the importation of tires manufactured in China caused little, immediate stir in the U.S. press. After the brou-ha-ha surrounding the President's healthcare speech, imported tires may have seemed a small issue. But it is likely that, with this decision, the US has now taken steps leading to a bitter trade dispute, with disastrous implications for all Americans.

There has been a rising tide of protectionist policies over the past 8 months, as the new Administration pushed agendas originating from trade unions, which are demanding higher tariffs on imports, greater subsidies for U.S. workers and products, and more regulatory burdens for all foreign goods.

Consider, for example, the recent decisions to increase fees on Mexican-Canadian-U.S. cross-border trade by restricting entry of Mexican trucks (in support of the Teamsters) or the increased duties on imported ethanol (to subsidize Midwest corn farmers). These decisions have allowed the Administration to pander to certain special interests, but have pushed us further into protectionist trade policies. But, it is the Administration's decision on Chinese tires that will likely become the straw that breaks the camel's back and sets off a trade wars and an economic crisis for which few are prepared.

Protectionist policies are self-defeating, rewarding favorite domestic producers and punishing efficient foreign producers, all at the expense of domestic consumers. The Obama Administration has tried to help the US Steel Workers union by imposing added duties of 35% on Chinese imports. The reality is that these tariffs won't make the U.S. more competitive; workers won't become more innovative or produce more efficiently. Tariffs will only limit consumers' options and increase costs as the free market is distorted.

Trade disputes are dangerous because they begin with simple things, such as tires, and then morph into far more serious affairs. Remember: the Great Depression really kicked into gear when Congress passed the Smoot-Hawley Act to raise import duties on foreign goods in an effort to protect American producers.

The unintended consequences of Smoot-Hawley resulted in foreign companies retaliating on American exports and producers by raising duties as well. Tit-for-tat followed, and soon a worldwide trade war was ignited, and the great depression went global.

The Obama Administration's decision to back out of trade agreements with Mexico has already resulted in Mexico raising duties and fees on 89 different American exports ranging from toilet paper to Christmas trees. Get ready for a bigger shoe to drop when the Chinese respond!

Years of fiscal mismanagement and Congressional malfeasance with our finances have caused China to become our largest creditor, holding some $1 trillion dollars in American government debt. We depend upon China to continue to finance our deficit , now running at nearly $1.5 trillion a year. The U.S. is paying $1.2 billion each month on interest alone on the debt to China. Got that? Put more bluntly, China is our banker and holds our notes, allowing the federal government the ability to meet its current obligations.

Our President and Congress are making this situation nightmarish. They are planning huge, new entitlements and spending programs which require even greater borrowing in the future, while at the same time, the Administration is poking a very sharp stick in our Chinese bankers by establishing high tariffs on imports such as tires.

Worse yet, the Administration seems arrogant and unaware of the growing unease of those that hold so much of our debt. Consider, for example, Bank of China Ltd. Vice President, Zhu Min, in a Bloomberg Television interview on Friday made a statement that, "Bankers on Wall Street are suffering from "over confidence" and are "myopic" in the face of a continuing financial crisis. Min added that the financial crisis in the US is "not over yet" and that "the real economic crisis has just started."

Not exactly the kind of warm and fuzzy you want to hear from the banker the U.S. is most dependent upon. The same concerns were reinforced by China's minister of commerce on Saturday who warned, "This is a grave act of trade protectionism".

Clearly, lines are being drawn as the momentum for destructive trade wars moves forward.

So, here's a key question. With the U.S. economy on the edge, with the highest unemployment rates in 26 years, was this really the time for the Administration to ignite a trade war, just to throw a bone to the United Steelworkers? Are we prepared for the inevitable retaliation that comes from such a move?

Finally and most importantly, how do we intend to finance Congress' out-of-control spending, our monstrous deficit and Congress' ambitious, new social welfare projects should China decide to either slow or stop buying the $600 billion of annual U.S. Treasury debt that we now require them to purchase to keep the whole, rickety system from collapse?