From my view, the Obama campaign last fall certainly raised the specter of increased tariffs and other protectionist moves, what with comments about the need to relook at the North American Free Trade Agreement (NAFTA) and leveling the playing field with China. None of that is surprising, in a sense, given the strong support Obama received from Labor groups, who generally have such trade issues high on their list of priorities.

Early on after his nomination, new Treasury Secretary Tim Geithner then ruffled some feathers with his comments about China’s manipulation of its currency to keep it artificially low, helping its exporters. That was followed by some “buy American” language in the recently passed stimulus bill that drew strong protests from both Europeans and Asians. The worst parts were eventually removed from the bill, though some language, more directional than specific, remained.

So, it was reasonable to expect, as many did, that we might see at least some modest moves to add some protections for US manufacturers, whether that was in the form of new tariffs on imports, regulations about labor rates and conditions, greenhouse gas emissions and other characteristics of offshore manufacturers, or other trade weapons.

In fact, we wrote a few times in the past few months about the need for procurement and supply chain managers to keep up on these developments, since whatever transpired could certainly impact sourcing and “make versus buy” decisions.

However, I now believe this is all off the table for some time. The reason is simple – the soaring US deficit associated with the recession and resulting bailout and stimulus plans means we have to keep China happy and buying our bonds.

Who knows what the numbers really are. Unless you keep good notes, I think most of us just know the numbers are in the trillions, most of which must be borrowed, at least in the medium term. The administration has shown numbers that indicate the deficit will be cut in half in the next 8-10 years, but that sounds overly optimistic to me.

We can only deficit spend like this if someone is willing to lend us the money. Some will come from ourselves (money market funds and such), but that will not be nearly enough. While the US is fortunate to still be viewed as a source of relative safety and strength, the reality is that China, with its huge favorable trade balance and enormous cash reserves, is critical to enable the US to borrow the cash it plans to spend in excess of what it takes in.

With continued strong Chinese participation in buying US debt, the US can issue bonds to fund the deficit spending, and do so at relatively attractive interest rates. If the Chinese scaled back their participation, the US might have trouble selling the bonds at all, or would be forced to dramatically raise the interest it pays on them. That would result in a much higher interest expense as a part of the budget, crowding out other areas of spending for stimulus, health care, and the like.

I remember hearing a quote from Bill Clinton, shortly after he took office in 1993, saying something like, “You mean, I am dependent on what a bunch of bond traders in New York think about my policies?” This was strange news to a guy who had spent his career in Arkansas and didn’t have to worry about the impact of financial policy on the bond and stock markets.

Well, Obama is learning the same lesson now, but globally. And the bottom line is that the current budget plan and stimulus is simply incompatible with ticking the Chinese off through enactment of any trade barriers.

If such measures were passed, China might just announce it was selling its US bonds and not buying any more, or something like that. That would kill the dollar, raise interest rates, and cause huge economic turmoil.

So, while there is much supply managers still need to pay attention to, tariffs on China or strong efforts to force China to revalue its currency are two we really don’t need to worry about much for now, in my opinion. I am not in favor of protectionism, but being in this position relative to China sure doesn’t feel very good either.

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