The conventional thinking is that free trade is good and protectionism, through higher imposed tariffs, is bad. It was the Smoot-Hawley protectionist-trade bill that is thought to have contributed the Great Depression in 1930 as trade wars then became the order of the day and economic growth slowed around the world (see:
The Economist Article).
Now the United States is contemplating imposing tariffs on certain Chinese goods in retaliation for China not allowing its currency, the yuan, to float (allowing world currency markets to determine its value as opposed to China itself pegging an artificially low yuan-to-dollar rate.) It is thought that China keeps its currency at 20-30% below fair market value in order to subsidize its exports and discourage imports. In other words, such manipulation amounts to a virtual tariff and many politicians in the United States now believe that it is time to bring things back into balance with selective U.S. tariffs on Chinese goods. A bipartisan Senate bill that so does should be voted on today ... see:
Expected Senate Vote. China has threatened to retaliate (see:
China's Threat) and this has caused some politicians, particularly John Boehner in the House, to speak out against taking such an protectionist action. President Obama is noticeably absent in this kerfuffle (see:
Wall Street Journal Article) since staking a claim on either side doesn't seem to help his reelection chances.
Whatever the results of this action against China in the U.S. Congress may be (my prediction, it will eventually pass), I believe that China's bark will be worse than its bite. One has to only look at the recent trade numbers (see:
Trade Balances with China) to see that, if a full-fledged trade war does break out, China would be far worse off than the United States in terms of its balance of payments. Yes, U.S. domestic economic activity may turn down in the short term, but, longer-term, there should be much benefit to be gained for U.S. industries. However, since the United States is the major buyer of China-made goods, an industrial production turn-down there would likely cause great social unrest ... a situation that Chinese leadership might find difficult to damp down. Already, there are predictions of such Chinese economic dislocations independent of protectionism actions on the part of the U.S. Congress ... see
CNBC Comments.
Possible investment consequences might well be: a further deflation in world-wide commodity prices, an inflation in consumer goods prices in the U.S., and an increase in interest rates on U.S. government securities (if China starts dumping its holdings). Also, holding onto the stocks of Walmart, Best Buy, etc. might not be a great idea.
