The Chinese and US Governments have a few run-ins as of late.
While these two governments have battled from time-to-time over human rights, freedom of speech, and trade deficits, nothing has prepared them for the problems they face now.
It all started earlier this year, when problems with Chinese-made furniture triggered an FTC investigation into manufacturing practices. The FTC quickly moved to the next problem: Dog food was making animals sick. Not just any dog food, mind you, but Chinese dog food tainted with rat poison. This raised the ire of Chinese officials, but they remained relatively calm. After all, what are you to do if your food is killing animals?
After the pet food scare, the FTC hit them with two other investigations: The now-infamous tainted toothpaste and lead-laced Barbies incidents. The backlash was so bad that the owner of a Chinese plant that manufactured the Barbies committed suicide. Mattel is just left with a large black eye, and a recall of 18.5 million toys, along with a large hit to the company balance sheet.
Still, at this point, the Chinese were okay. They didn't like it, but they were holding their peace.
Enter the United Steel Workers and Titan tires. In July of 2007, they proposed a hearing before the FTC, alleging "tire dumping". Basically, USW and Titan said that the Chinese government was over-subsidizing tires that were coming into the USA. How much? Titan said that the freight to ship the tires over cost more than the labor to produce otr tires. The distilled version of the complaint is this: China is selling the tires at the cost of the raw goods.
US based tire companies are complaining that they can't compete with labor costs that are effectively free, and unions are afraid that low overseas labor will hurt their bottom line. Couple that complaint with the passenger tire recall that the US has put into effect, and suddenly, the Red Dragon is breathing fire.
Immediately after the FTC launched a full hearing, the Chinese let their full feelings out into the open.
In early August, at routine trade talks, the Chinese told the US that would consider dumping their open position in US currency onto the open market. How much US currency do the Chinese currently hold?
The answer is a staggering 1.3 trillion USD. The effect of such a measure would be catastrophic for the US and world economies. The result is not hard to imagine, as countries worldwide would drop their reserves of the plummeting USD, with world markets imploding along with US economy.
Upon hearing this, members of the US Senate drafted a resolution introducing prohibitively high tariffs on all Chinese goods. The US has also filed a complaint with the WTO, accusing the Chinese of old-fashioned currency manipulation.
How will all of this play out? For now, it's just two superpowers flexing and feinting. That could change in a matter of minutes.
Should China decide to press the "red button", we could see a financial Armageddon that goes beyond nuclear.
Kurt Hartman is a student of the free markets, and a fan of laissez-faire economics.
In his professional life he has been a cook, project manager for an AV Firm, and currently holds a position as a Web-Designer.
In his spare time, he is an active Digger, and enjoys reading business related books.
His current favorite is "The Black Swan", by Nassim Nicholas Taleb. While he does not claim to fully understand all of its implications, he does understand the gist of it.
His current role as an OTR Prognosticator, comes from involvement with a site he recently designed. You can see his work at http://www.buybigtires.com
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