The elections are coming, the elections are coming!

Good balanced article from Bloomberg today on the cost of pegging or floating the Chinese Yuan. The article discusses the pros and cons for both sides of the Pacific, something that you rarely see in the US press.The essence of the article is this (from the article):``After years of talk and bluster, protectionism no longer seems like an empty threat,'' says Stephen Roach, chief global economist at Morgan Stanley in New York. ``Trade sanctions against China are now all but inevitable.''If you produce goods in China, that should scare you. If you shop at Wal-Mart in the US that should scare you too.First artificial valuations of the Yuan do help keep Chinese goods cheap and force manufacturing to move to China away from more expensive places like the US. But trade sanctions on Chinese goods in the US would do the same thing for the US—they would create a temporary and artificial wage protection for specific industries in the US. This, in the short term view of Democrats trying to win the ’08 elections, is great political strategy. But long term for the US economy, China-US relations, and the specifically affected and temporarily and artificially assisted industries, it will mean a hard crash later on.Second, if you are just the average Joe-Shopper and don’t “do business with China” or are not involved in manufacturing in the US the bottom line is that the protectionist laws in the US will mean that you’ll be paying more at Wal-Mart so that someone else can keep their $22/hr union Job building whatever. If you do work in manufacturing, you’re cost of living will go up as the laws protect your job. But wages in China (right now about $0.50/hr.) are not going up as fast as these laws will go away. China knows that the US is all about 4 year political cycles. China is much more long term in their thinking than the US—they’ll weather the storm to maintain domestic social stability.Further, the hew and cry in the US that outsourcing is taking jobs is just not statistically true. The Economist, April 7th 2007, citing an IMF report shows that labors are indeed getting a smaller share of the pie ($) but it also shows that the pie as a whole is getting much bigger at the same time. Bottom line, trade is growing faster than outsourcing and the US is the best positioned economy in the world to relocate laborers that do indeed get outsourced. The US is also the largest exporting economy in the world. It’s not as bad as election year politicians would like you too believe.The point is: you should be much more scared of shortsighted politicians than of Chinese outsourcing.The scariest specter on the horizon, to me, is a politically unstable China. A 40% jump in the value of the Yuan would throw hundreds of millions of people out of work. The migrant-worker population of China is already estimated to be MORE THAN THE ENTIRE POPULATION OF THE US! The unemployment from State-owned companies closing down in China is also already MORE THAN THE SIZE OF THE ENTIRE WORKING AGED POPULATION IN THE US! Hundreds of millions of more Chinese out of work would be a catastrophe of historical proportions. In addition to that, the export markets of all those US jobs that were just saved with protectionist legislation would dry up as China as an export market would disappear.What you should be ironically grateful for though is a strong Chinese government. Why? Because there is no way on God’s green earth that they will either give into foreign pressures or actively create an environment where the ’08 Olympics could be become a world stage for hundreds of millions of dissatisfied peasants and unemployed workers.For evidence the Bloomberg article says:`…says Straszheim, who specializes in China's economy. ``They are going to take their chances and move as slowly as they possibly can.'' China's textile industry says it loses 8.2 billion Yuan ($1.1 billion) of annual profit for each percentage point rise in the currency.Now, I’m a free trader, but I’m also a Realist who likes relative peace and stability. Certainly the Yuan needs to be revalued. But calls for 10%, 15% or even 40% changes in a single year are ridiculous. They just aren’t going to happen either. Expect 4% or maybe a little more if the protectionist legislation is very strident—but not 10%. Expect this to be a huge election year topic and expect to see tons of bills and hear tons of speeches that sound good to protectionist US ears, but really mean nothing long term.