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Saturday, September 23, 2006 1:22 AM

Discussion on Zeros

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Bloomberg is reporting EU Renews WTO Complaint Over U.S. `Zeroing' Practice.

The European Union wants World Trade Organization judges to prohibit U.S. customs-duty calculations that the 25-nation bloc says illegally inflate import tariffs.

The calculation, called "zeroing," enables the U.S. to maximize import duties by selectively excluding some market price data. The U.S. used the methodology to work out whether imports of chemicals, steel and pasta from the EU were sold below cost, or dumped, on the domestic market. The WTO ruled in favor of Japan in a similar complaint in February 2005.

Today's filing renews previous complaints because while WTO arbitrators in the past have faulted the U.S.'s use of the zeroing methodology in specific instances, they haven't outlawed the practice in principle. The complaint may further sour relations between the U.S. and EU that were strained by finger- pointing after the collapse of the Doha trade talks round.

"Zeroing ignores negative margins of dumping and therefore results in an unfair increase of the dumping liability of EU exporters," the EU said in a statement today. While the WTO has ruled against the use of zeroing by the U.S. at least three times, ``these previous rulings left open a number of issues which are now covered by the new request for consultations.''

Eliminating the zeroing practice would mean makers of hot- rolled steel, stainless steel bar, ball bearings, chemical and pasta products would pay minimal import duties, or none at all, according to the EU. Most U.S. tariffs on European companies including ThyssenKrupp AG, Corus Group Plc and BASF AG are based in part on zeroing calculations, the bloc says.
Protectionist trade policies are one of the hallmarks of deflationary times so it is should be no surprise that two zeros (Senators Charles Schumer, a New York Democrat, and Lindsey Graham, a South Carolina Republican) are once again threatening to impose 27.5% tariffs on China.

The Boston Globe is reporting Senate likely to pass China tariff bill.
The Senate is likely to pass a bill aimed at forcing China to change its currency policies by threatening a 27.5 percent tariff on its exports to the United States, a top Republican senator said on Thursday.

"I would expect it to pass and I'm sorry for that," said Senate Finance Committee Chairman Charles Grassley of Iowa.

Senate leaders have promised Sens. Charles Schumer, a New York Democrat, and Lindsey Graham, a South Carolina Republican, a vote next week on their bill threatening China with punitive tariffs.

Grassley, whose committee has jurisdiction over trade legislation, said he expected the vote to occur even though it could herald a return to the Smoot-Hawley tariff policies of the 1930s that are blamed by many economists for starting or at least protracting the Great Depression.

There is currently no similar bill in the House and the Bush administration strongly opposes the legislation.

However, many business groups and trade experts warn that even a Senate vote in favor of the bill could hurt trade relations with China.

"Senate passage ... alone will have negative repercussions for U.S. farmers, manufacturers, service providers and others, while undercutting, rather than promoting, the objectives it seeks to achieve," the Emergency Committee for American Trade, which is comprised of leading U.S. exporters and importers, said in a letter to all 100 members of the Senate.

U.S. manufacturers say China's currency is undervalued by 15 percent to 40 percent against the U.S. dollar, giving Chinese competitors an unfair advantage.

The Graham-Schumer bill directs the White House to impose a 27.5 percent tariff on goods from China if Beijing does not significantly raise the value of its currency within six months. That punishment could be delayed for 12 more months if China has begun implementing a plan to revalue its currency.
I called the last two attempts to bring such legislation to the floor for a vote "big bluffs" and in both cases although China did nothing the US Senate backed down. Is the third time the charm? Does the Senate finally have the nerve (and the stupidity) to pass something as ill conceived as this? It almost seems like it. Given that there is no pending House bill it is not likely to go anywhere but if someone wanted to engineer a stock market crash this surely would be the way to do it.

By the way Smoot-Hawley did not cause the Great Depression. It did however make it worse. The cause of the Great Depression was a reckless and prolonged expansion of money and credit leading up to the 1929 crash. Yes, it really is as simple as that although the explanation as to how and why and in what timeframe that occurred is a much longer story for perhaps another time.

Bernanke for all of his supposed depression expertise does not understand that simple statement. If he did, he never would have issued his infamous "Helicopter Drop" speech, Deflation: Making Sure "It" Doesn't Happen Here.
As I have mentioned, some observers have concluded that when the central bank's policy rate falls to zero--its practical minimum--monetary policy loses its ability to further stimulate aggregate demand and the economy. At a broad conceptual level, and in my view in practice as well, this conclusion is clearly mistaken. Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.

The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.
The important point to understand is that if reckless monetary expansion was the cause of the Great Depression (and it was) then it is impossible for reckless monetary expansion to be the cure. At best, such persistent recklessness would prolong the problem making the inevitable bust all the more severe. Furthermore there is theory and there is practice. One of the consequences to purposely causing hyperinflation is that it would destroy the US$, it would destroy the banking system, and it would destroy the Fed and all their wealth and power. For practical reasons there simply will be no "helicopter drop".

As I pointed out in Inflation: What the heck is it? Ludwig von Mises understands the endgame brought on by reckless expansion of credit: "There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved."

This leads us to our final zero for the day. If one was grading the understanding of credit expansions and depressions, the result would be Ludwig von Mises:100 Bernanke:0.

Mike Shedlock / Mish

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