Obama Targets China’s Trade Practices

by Jim Woods | January 26, 2012 9:56 am

investorpoliticsletters2 Obama Targets China’s Trade Practices[1]President Barack Obama is getting tough on trade. In Tuesday’s State of the Union address[2], the president announced the creation of a new Trade Enforcement Unit that will be tasked with investigating unfair trade practices in countries, such as China.  The new unit will reportedly use investigators and other federal resources to combat what the administration considers the lack of fairness between countries.

Here’s the money quote from the president’s speech on this issue: “I will not stand by when our competitors don’t play by the rules…our workers are the most productive on Earth, and if the playing field is level, I promise you — America will always win.”

Of course, talking tough on China has become a favorite pastime of politicians in Washington. Republican presidential hopeful and former Massachusetts Gov. Mitt Romney has also been talking tough on China, vowing to designate the country as a “currency manipulator” and impose duties on China’s imports if the yuan isn’t allowed to float freely against the dollar.

In addition to the new Trade Enforcement Unit, the president called on Congress to create a program to provide credit to companies competing against foreign counterparts that benefit from preferential credit from their government. As part of his strategy to make U.S. companies more competitive with the so-called unfair nations, Obama called for tax cuts for U.S. manufacturers, increased tax deductions for companies manufacturing high-technology products in the U.S., and financing assistance for new plants, equipment and training.

Ironically, Apple (NASDAQ: AAPL[3]) co-founder Steve Jobs’ widow Laurene Powell was at the State of the Union speech. I say ironically, because Apple is the premier high-tech company in the world, and last year nearly all of their 70 million iPhones, 30 million iPads and 59 million other products were manufactured overseas. The company’s iPhone was assembled in China, the ultimate boogeyman nation politicians love to whip on.

A very interesting article in the The New York Times recently detailed operations in what’s informally known as Foxconn City[4]. This is the facility where the Apple iPhone is assembled. According to the article, “The facility has 230,000 employees, many working six days a week, often spending up to 12 hours a day at the plant. Over a quarter of Foxconn’s work force lives in company barracks and many workers earn less than $17 a day.”

It’s tough to see how a Trade Enforcement Unit, or increased tax deductions for tech manufacturers, are going to be able to compete with the basic economics of workers making $17 a day, but a disregard for economic reality is a trait both political parties seem to have in abundance.

While there’s likely to be little benefit to U.S. manufacturers from the president’s latest fair trade maneuver, the move could backfire on the president, as it could provide kindling to the fires of a dangerous global trade war. When one country acts in a protectionist fashion, other countries tend to retaliate by erecting trade barriers and tariffs of their own. That’s not good for U.S. businesses, investors, or consumers.

Disclosure: At the time of publication, Jim Woods held no positions in any of the stocks mentioned in this article.

The opinions contained in this column are solely those of the writer.

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Endnotes:
  1. [Image]: mailto:letters@investorplace.com
  2. State of the Union address: http://investorplace.com/investorpolitics/president-obama-state-of-the-union-address-transcript-2012
  3. AAPL: http://studio-5.financialcontent.com/investplace/quote?Symbol=AAPL
  4. recently detailed operations in what’s informally known as Foxconn City: http://www.nytimes.com/2012/01/22/business/apple-america-and-a-squeezed-middle-class.html?_r=1&pagewanted=all

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