November 24, 2003
First Crack at $400 Fails

Thanks to further Japanese intervention in the FX markets the U.S. dollar found support last week just when it seemed that the strings had been cut.  To be sure, when traders discovered that net foreign purchases of U.S. securities fell to a 3-year low in September (released last Tuesday), the U.S. dollar weakened…and when George Bush announced that the U.S. would enact tariffs against Chinese textiles and apparels the dollar entered a mini free fall. Japan intervention quickly thwarted the selling tide in the dollar, and this forced gold participants to save their $400 an ounce party for another day.

As the markets enter this week last week seems like a distant memory; gold is backing away from $400 an ounce, the dollar is stronger, and the sense from traders is that speculators in each market (those that are short the dollar and/or long gold) are taking some money off of the table.  Baring terrorism/protectionist developments this trend threatens to sustain itself this holiday shortened week. 

Can Protectionism Buy Votes?

What is often not mentioned about the illegal U.S. steel tariffs is that they did what they were intended to do – buy votes. Say what you want about tariffs adding to the cost of automobiles, not really creating any new U.S. jobs, and threatening to spark a trade war, but thanks to this small act of protectionism many steel employees and, more importantly retirees, are still receiving checks and benefits today.

As for Bush’s latest tariff scheme (against Chinese bras) -- again, the point of the tariffs is not to miraculous cure a dying U.S. industry, but to buy votes. However, unlike steel tariffs – which where crafted to insulate a dying U.S. industry not attack a single importer – arguing that votes will be acquired is difficult to do. Quite frankly, U.S. apparels/textile companies have been shifting jobs abroad because U.S. labor is not competitive, and China is only one of many potential outsourcing destinations.  Take VFC Corp, which uses China for its outsourcing needs only sparingly:

“Over the last several years, the Company has shifted from primarily owned plants in the United States to lower cost offshore locations to support its domestic product needs…During 2002, approximately 85% of the products sold by the Company in the United States were obtained from international locations. Once the 2002 restructuring actions have been completed, less than 10% of the Company's United States sales will be obtained from products manufactured in the Company's domestic plants.” 2002 10K.

Suffice it to say, enacting tariffs against China will not save one any domestic VFC jobs.   Rather, Mexico and the Caribbean Basin are producing most of the product VFC needs.  Thus, the question that deserves to be asked is what is Bush really up to?

“The concern is that the U.S. might be prepared to do what it takes to boost its competitiveness, which might result in a wholesale abandonment of a strong U.S. dollar policy.” Neil Mellor, currency strategist at Bank of New York.  Reuters

Conclusion

While it is assumed that by enacting tariffs against Chinese produced bras President Bush is threatening to spark a trade war, what Bush really has in mind may be completely different than what most suspect. The U.S. is the biggest market in the world, and with global production geared to penetrate this market perhaps President Bush believes he can dictate trade policy as he deems fit? A weaker dollar – supposedly awful news – could ultimately be beneficial to the United States if jobs are saved and more import strength is developed…

Granted, it can not be roundly argued that protectionism is an astute trade policy for the U.S. government to undertake. However, if you believe that placing tariffs on Chinese bras is nonsensical – that there is no way possible that the jobs lost in China because of the tariffs will be coming to the U.S. - you have to at least wonder what is really going on.  Perhaps pummeling the dollar and/or trying to prompt an adjustment in the U.S. current account deficit is what protectionism is really all about?

Regardless of Bush’s real intentions, uncertainties surrounding the dollar are unlikely to abate for some time. Gold made its first, but not likely its last, attempt at $400 an ounce last week. 


 

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