DiligenceChina

Western managers and investors with China exposure should pay close attention to Congress next month – but it’s not the standard-issue protectionist measures that they have to worry about. General Petraeus is due to issue his State of the Surge report in September – and there are indications that it might not be all bad. There is a distinct possibility that the news coming out of Iraq may actually be positive – or at least carry a strong dose of hope for the good guys. What does that have to do with China investors and managers? More than you might think.

There are 3 big issues in American politics right now that candidates are going to try to score points on:

1) Iraq
2) Mexico and Immigration
3) China.

Democrats have been basing their campaigns on the assumption that the whole country is obsessing over a mounting death toll in an unwinnable war. Any good news on the Iraq front is going to blindside the Dems and send them scrambling for a new hot-button issue that they can use against their sworn enemy – the other Democratic contenders.

Yes, the economy is starting to look scary – but it’s a mixed bag that will be very hard for politicians to spin into an election issue in the short term. Environmentalism and global warming is hard once you get past the concerts and the celebugoguery. Mexico and immigration is divisive. It’s so murky and politically loaded that only the most courageous leaders will take a strong stand on it – so we can plan on hearing very little on that score. China was a tricky question when we were talking about currency valuations and balance of trade – but once the conversation switched to dangerous toys and poison pet food the politicians finally got an issue that looked like a true no-brainer.

China as the Back-up Bad Guy.
If you’re Hillary or Barack, you have to have a Plan B in case Iraq starts tracking less negative. They’re both looking kind of exposed on foreign policy and have invested an awful lot of capital in firm middle-class opposition to a Mid-East quagmire. If Hildy has to backtrack yet AGAIN on favoring/opposing the war effort, then she’s going to look like a complete flake. Support for Hillary tends to be very brittle – she’s not a likeable person, and once the smooth icy façade cracks it tends to shatter and fall away completely. Obama’s campaign has already suffered a bit of friendly fire after his recent loose talk (Yes to Chavez and the Axis of Evil, No to nukes, Death to Pakistan). He’s a charming, articulate guy, but he’s weak on foreign policy and his relative youth and inexperience are starting to hurt. They both need to find an issue that won’t blow up in their faces – and it could very well end up being China.

If the Republicans go with Guliani (the Hero of 9/11) and Iraq starts looking less toxic then the Democrats will have a very hard time staking out the middle ground without finding a new boogieman. And when the Dems stoke the fans of public fear and insecurity over China, Republicans aren’t gong to push back too hard. They are better on free trade then the Dems, but no one is going to win an election defending puppy-killers.

It’s steamy August right now, but we’re only a few months away from Christmas advertising season. I’m betting there’s another dangerous toy report or two in our future. If China ends up cast as ‘The Grinch Who Poisoned Christmas’ we can count on political fall-out that will be with us for a very long time. The next few months are going to be very tense for those of you on the trade-war watch. Stay tuned.