Trade War with China Looms

When your average free-market economist like Robert Samuelson says we probably should have a trade war with China, you know the shit is about to hit the fan.

My modest suggestion if we were to have a trade war is not to slap any tariffs on their products - that would violate the WTO agreement. Instead devise a tax on the purchase of treasuries or other US government bonds made by foreign central banks, government institutions etc. The way China keeps its currency low is not just through controlling the exchange rate, but by using all the US dollar funds from exports to buy US financial instruments to "sterilize" their trade surplus from causing a strengthening of their currency.

This would also affect Japan, Taiwan, and Korea who also play the sterilization game to some extent or another. This is important not just because they too should not be manipulating their currencies so much, but also because China has in the past bought Yen with their US dollars. This made the Yen strong which forced Japan to step in and do China's work for them, so to speak.

Now, China could buy private bonds, but those have default risk, which makes their game far more riskier. Also, I am not sure they could find enough bonds to purchase. I would also explicitly remove US government backing from Fannie and Freddie bonds. Let China take some risk of losing money on their US dollar holdings. One reason China is afraid to allow their currency to appreciate normally, is because their mountain of US treasuries and bonds will immediately lose value. Well, adding some risk on the other side might make it more palatable for China to change their position. Personally, I think we should have given them a haircut on their Fannie and Freddie holdings back during the crisis instead of making them whole.

Incoming

I will arrive in Taichung on Wednesday.

Supposedly only there for a couple of weeks before I go to China for a long stay.

Is anybody left in Taichung now?

I will poor a Kirin down a 7-11 sewer grate in memory of my homies: Bread, Frenchie, Hannibal, Kevlar, Pimp, and Stony. (alphabetically)

Did I miss anyone?

Summer's Over, Slackers

The governor of California is in China, and is keen on Chinese high speed rail system.

"We want China, for instance, to invest in our high-speed rail, to build high-speed rail, to be part of this bidding process we are going to go through," Schwarzenegger said in a speech in Shanghai.
"Many countries will be bidding to build high-speed rail. And we are also looking for financing from China," he said, lauding the "great potential" for increasing trade between China and California.

This is causing a hoopla in California for various reasons, but let's break this down carefully, because The Terminator was not clear what Cali is looking for:

1) China is part of the bidding process = China SELLING us some or all of a high speed rail system

2)China investing in the system = China actually OWNING some or all of the high speed rail system.

3) China financing the system = China LENDING us money to buy their rail system.


Now, some people in California are worried about China "owning" the rail system - that would be option 2. Personally, since I am not sure if high-speed rail even makes money in Europe or Asia, which have higher population density, more public transport links, and shorter distances between cities, I have to wonder if letting the Chinese put some skin in the game isn't a good idea. The problem will be that if the system fails - will it be bailed out? Of course it will! But that will happen in any case. Maybe it would be better to get at least some Chinese money in there.

The most likely is option 1 & 3: the Chinese lend us the money, probably conditional on buying their equipment. If they are smart, the money they lend will not be tied to the success of the project. So, if it fails to make money, they still get paid back. I think the governor probably "misspoke" when he used the word "invest" and meant lending the money to buy their system.

MY COMMENTS AND SUGGESTIONS, BASED ON THE ASSUMPTION THAT CALIFORNIA CAN ACT JUST LIKE CHINA DOES:

1) Demand that all of the materials and equipment used in this project be built in California by Joint Ventures with California firms, where the California firms own 51% of the JV. Of course, technology transfer is part of that, including a waiver for any accidental IP infringement that happens along the way.

2) Make sure to invite lots and lots of Chinese provincial officials over and explain to them about Environmental Impact Reports. The Chinese officials should eventually figure out that you can hold up anything with these, and while CA officials cannot reap any economic rents from this, Chinese could. Make sure to offer some technology transfer of our own in this way, by training up thousands of Chinese students to become lawyers. Nothing like lawsuit after lawsuit in China to make America look better.

3) The entire deal must be financed using State of California IOU's, which will be exchanged to the RMB at a rate set by the State of California, subject to change as the State sees fit.

4) As per the bankruptcy of GITIC in 1999, all State backed bonds and State guarantees can be considered worthless. You foreigners pays your money and takes your chances.