Could tension between China and the US hinder the global recovery: Kohler

A couple of unrelated Lehman anniversary events:

– Libor (the London interbank rate) has hit a record low.

– The US has imposed a 35% tariff on tyre imports from China.

Three month Libor is now 29 basis points (0.29%). After the collapse of Lehman Brothers last year, the rate at which banks lend to each other peaked at 4.8%. During most of 2007, leading up to the start of the credit crisis, it was around 5.5%.

It is now measured in basis points because the Federal Reserve Board continues to flood the global dollar system with liquidity.

Record low Libor, particularly the collapse to below 0.5% in the past six months, is driving the global rally in shares and other risk assets – underpinning a resurgence of risk appetite among investors.

Meanwhile, back at the ranch, President Obama has slapped a 35% tariff on Chinese tyres. China retaliated on Sunday by announcing that it was launching an investigation into US imports of cars and chickens (while saying that this wasn’t revenge for the increase in the tyre tariff).

The President’s decision came just a day after the US Commerce Department reported that America’s trade deficit with China had increased to $US20.4 billion in July, representing about two thirds of the total US trade deficit in that month.

It also comes just two weeks after US Finance Secretary Timothy Geithner signed a communiqué at the London G20 meeting which said: “We… reaffirm our commitment to fight all forms of protectionism…” Presumably Barack Obama will likewise pay lip service to free trade at the full summit in Pittsburgh in 10 days’ time.

But in the first real test of his attitude to protection, Obama has gone with the US trade unions, which have been complaining that a surge in Chinese tyre imports has cost 7,000 US jobs.

In response there has been an outpouring of anti-US sentiment in China, and warnings about a full scale trade war between the US and China, which would undoubtedly be a huge threat to global economic recovery.

Ed Harrison, writing in his blog Credit Writedowns has an arresting take on the subject: “With this trade war looming, one must wonder if Chimerica, the marriage of China and America as one economic entity, will end in murder-suicide, taking the global economy down with it.”

The coincidence of these two anniversary events – record low Libor and the ratcheting up of trade tensions between the US and China – is significant for two reasons: they are pulling the world in different directions and more fundamentally they show a widening gap between what central banks and politicians are doing.

Independent central banks are holding the course; political leaders are losing their nerve.

It started when America’s fiscal stimulus bill included a “Buy American” provision. China retaliated with a “Buy Chinese” campaign. Now Obama’s protectionism has become active, with a whopping tariff on tyres. China is retaliating with a look at cars and chickens.

And underlying all this is China’s increasing unease with its massive US dollar holdings – calling for a new international reserve currency, buying gold and criticising the US policy of “quantitative easing” (money printing).

And then yesterday Chinese authorities locked up a former Coca-Cola employee in Shanghai on bribery charges.

Maybe it’s nothing…

This article first appeared on Business Spectator.