Neo-protectionism puts US dollar at
risk By Axel Merk
A
new protectionist
trend has clearly appeared in the United States
- but can Americans afford it? If the US tells its
trading partners that their money is not welcome,
they should be excused if they invest elsewhere.
Because of its massive current-account deficit, the
US must attract more than US$2 billion in foreign
investments every day to keep the dollar from
falling.
To illustrate why one
should be concerned about a potential decline in
the dollar, look at inflation: just about everything in
the US has been getting more expensive, except
for the goods that
can
be imported. As the dollar falls,
inflation - and with it interest rates - may pick
up significantly.
As China sold over $200
billion more in goods to the US than it acquired,
its foreign-currency reserves swelled to more than $800
billion (though this sum was in many currencies,
not just US dollars). Foreigners have had an
incentive to keep their currencies weak to promote
exports to the US.
Rather than
merely buying US Treasury securities, foreigners
have shown an increased appetite for real assets.
At the same time, with politicians
instilling xenophobia into Americans, isolationist
sentiment has grown. With mid-term elections this
year, politicians across the political spectrum
jump at the opportunity to stir the paranoia; even
some moderate commentators have referred to the
trend as jingoism.
DP World,
the United Arab Emirates-based port operator, has
given up its quest to gain control of numerous US
port terminals. Never mind that the previous owner
was also a foreign firm; never mind that DP World
has the best reputation in the business; never
mind that, according to the Wall Street Journal,
"more than 60% of the container terminals at
the [United States'] 10 busiest ports are at least partly
managed by foreign operators, and in some cases,
companies controlled by foreign governments. That
figure rises to 80% at the biggest ports ..."
Foreigners do not vote, so why bother
stepping up for them? Labor Secretary Elaine Chow
put it bluntly in a CNBC interview early this month:
"We are, after all, a debtor nation!" Not only
that, but she also confirmed that between 22 million and
29 million jobs in the US are dependent on trade.
Rarely has the US been so vulnerable.
One
of the beauties of the US economy is that it can
adjust to new environments: a lot of businesses
facilitate trade these days. The US has already
been damaged by the manufacturing base lost
through outsourcing, and if trade barriers are
imposed now, the destruction of the jobs of those
who have been able to adapt will only add to this
damage.
Americans should have learned
lessons from the Great Depression, when
protectionism deepened the hardship on the
American people. Today, the US is just at the
beginning of an economic downturn - a downturn few
economists even acknowledge at this stage - and is
already playing the blame game.
Last
summer, the Chinese National Offshore
Oil Corp made headlines when it tried to acquire
US-based Unocal. There too the political
firestorm that resulted caused CNOOC to abandon
the deal. It should be noted that CNOOC was only
interested in non-US assets with no direct impact
on oil produced for the US market.
At
the time, we published a cynical note titled
"China: US dollar may not be worth the paper it is
printed on". The essence of this article was: if you
can't buy anything of use with your dollars, why
bother holding them? Indeed, the Chinese have
since ventured beyond the US to secure their
natural-resource needs in Canada, Latin America and
Australia. Last year, China started to partner
with India on some acquisitions. And in Africa,
China has provided development aid in return for
increased access to natural resources.
There may well be room for improvement in
the process of how international transactions are
approved. But rather than squarely blaming
foreigners, it may be helpful to start by
evaluating domestic policies that have contributed
to creating unprecedented liabilities to US
consumers, have accelerated outsourcing and made
the US dependent on foreign capital.
Protectionism is not a US
invention; indeed, there are increased calls
for protectionism globally. France is well known
to "defend" its home industries. The European
Union may impose import tariffs because Asian
shoes are "too cheap". China has been playing its
own games - most recently, it warned steel
importers not to bid up prices; steel exporters, such
as Australia, have protested. Argentina, well
known for high-quality beef exports, has announced a ban
on beef exports in an effort to contain domestic
inflation.
Some say the United States faces little
risk in alienating the rest of the world - with
huge investments in US Treasuries, foreigners have
more to lose than to gain from turning their back
on the US. We agree that it is unlikely that
foreigners would overnight sell all their US
holdings and cause a panic.
However,
the US is dependent on foreigners investing in
US assets at a rate of more than $2 billion every day to
keep the dollar from falling. Changes in
investment allocations only need to happen at the
margin to hurt the US dollar.
The US
is certainly trying very hard to encourage
foreign investors to reconsider. These efforts are
bearing fruit: on March 12, the UAE central bank said
it was looking to convert up to 10% of its
foreign-exchange reserves from dollars into euros - double
the target it had previously set. The reserves had
previously been held almost entirely in dollars.
Axel Merk is the
portfolio manager of the Merk Hard Currency Fund, a no-load mutual fund that
invests in a basket of hard currencies from
countries with strong monetary policies assembled
to protect against the depreciation of the US
dollar relative to other currencies.
(Copyright 2006 Merk Hard
Currency Fund. Used
by permission.)
