American businesses are setting up shop in Mexico instead of China. China, which was the number one location for manufacture of goods bound for the U.S., has fallen into third place. Mexico is now number one, followed by India.

Several factors have converged to make Mexico an attractive place for manufacture. Daniel Silva of the Mission Economic Development Authority said: "Compared to China, Mexico offers better access to North American markets with a shorter, faster and cheaper transportation route to move products and supplies by truck, rather than over thousands of miles by ship, rail and truck combined."

It all started when President Obama, under pressure from U.S. unions, slapped a 35% tariff on tire imports from China. This move angered Beijing to no end, and to the point that China is challenging the action with the World Trade Organization.

China, in retaliation, has said that it would launch an "antidumping" policy against U.S. car exports to China. U.S. car makers export only about 9,000 vehicles to China at present. However, China is now the leading auto maker in the world, and barring U.S. imports would hamper the U.S. auto export market.

The US dollar is cascading downward. This move is causing banks, especially central banks, to shift reserves out of the dollar into the euro and yen.

A Bloomberg survey reports that policy makers boosted currency holdings by $41.3 billion dollars in the last quarter. Nations reporting currency breakdowns put 63% of this new cash into euros, and yen. The dollar's share fell to 37% from 63% in 1998.

How is this affecting the dollar on the commodity futures markets? The dollar fell to 75.77 last week on the Intercontinental Exchange Inc. (ICE). This is the lowest level since March 4th, when it was at 89.62 (The dollar is traded against a basket of currencies.)

Markets throughout the world have been rallying on the expectation that the world recession is ending. Lurking underneath the surface are some disturbing events.

Japan is in a sharp deflationary spiral. The Corporate Goods Index, which measures wholesale prices, plunged 8.5%, this after a 6.7% drop in June. This is the fastest drop on record.

Let's look at other deflationary numbers. Import prices fell 33.3% in yen terms and 26.5% on a contract-currency basis. Export prices fell 15.3% in yen terms and 6.5% in contract currencies.

How can exports not rebound? Last year ended on a sour note after posting record results, and 2009 is by all accounts likely to be ugly. The tourism and travel industry is expected to shed more than 200,000 jobs this year. Fortunately, there's a light at the end of the tunnel. The U.S. Department of Commerce expects international visits to the United States to come back in 2010 – after its first forecasted year of decline (i.e., 2009) since 2003.

This year, international travel to the United States is expected to fall 8%. The following year, however, U.S. travel exports are expected to gain 5%, with 5% annual increases through the end of 2013. We'll come out ahead in all this, but it's going to take some time.

Will the influx of foreign visitors over the next four years be enough to turn the travel industry in the United States around? It's too soon to tell right now, and much will depend on the contributions made by domestic routes. Needless to say, even this glimmer of hope must be welcome to investors committed to the airline and hotel sectors.

Good morning! A New York Times article reports that cheap booze is seeing a nice sale spike as folks swap out premium or even mid-market brands for rotgut. Popov & Tonic, anyone? The Prince of Darkness over at Zero Hedge illuminates us as to the possibility that a major supplier of financing to rural electrical cooperatives could go dark, taking down dozens of utilities in the sticks with it. Maverick ratings agency Egan Jones began calling this a while back.

Many economists agree the U.S.'s pronounced recession, and the global recession, to some degree, were triggered by a series of imbalances. One of those imbalances is correcting now.

The U.S. trade deficit declined again in December 2008, by 4%, to $39.9 billion -- the lowest level since February 2003 -- on a substantial decline in imports, the U.S. Commerce Department announced Wednesday.

Further, for all of 2008, the trade deficit narrowed to $677.1 billion from $700.2 billion in 2007. In 2008, exports increased 12% to $1.84 trillion, while imports climbed 7.4% to $2.52 trillion.

The global economic slowdown is now reaching countries that once were immune from trouble. Let's take Iran, for example. Conventional thinking would be that Iran has so much oil money that their economy will not suffer. This is not true. A host of factors have converged on the Iranian economy to create an economic crisis.

First and foremost Iran's economy has suffered from a drop in the price of oil to below $50.00 per barrel. In August the International Monetary Fund warned that Iran could face a serious budget shortfall if oil prices slid below $75.00 per barrel.

Talk about a triple-whammy of bad news: The Boeing Company (NYSE: BA) announced Wednesday a modest Q4, a workforce reduction, and the cancellation of some 787 orders.

Boeing, quintessential example of American capitalism and innovation, announced Wednesday (pdf) Q4 EPS of 62 cents, excluding charges, compared with a First Call Q4 earnings consensus estimate of 78 cents per share. Including charges, Boeing lost 8 cents a share in Q4. In Q4 2007, Boeing earned $1.36 per share.

Oh, relax, it's only January.

That was one China expert's evaluation of the impact of U.S. Treasury Secretary-designate Timothy Geithner's comment that he believes China is "manipulating" its currency.

China's currency, the yuan, which China allows to trade in a tight band, and not float freely in the currency market, has long been been viewed by Congressional lawmakers, business executives, and analysts as a tactic by China to artificially depress the value of its goods, in order to increase exports sales. Critics argue China is creating an unnatural competitive advantage for its companies. The yuan closed Thursday at 6.8380 to the dollar.

China counters that it must keep its currency fixed to protect its young, immature industries and developing economy.

Taking it with a grain of salt

Further, while the Bush administration did not push the currency issue much with China, and Geithner's comments suggest otherwise, economist David H. Wang, a China expert, said China is likely to disregard Geithner's comments.

"China's leaders have developed an increasing sophistication regarding the American political system," Wang said. There is a phrase you hear a lot now in Beijing that translates roughly to 'Don't pay attention to any comments from America from November thru January.' And, for the most part, that's a good rule to follow."

China made official what most economists suspected. Its economy is becoming "normal". Its period of hyper-growth has ended, at least for now.

According to The Wall Street Journal, "China's government said the economy expanded 6.8% in the fourth quarter of 2008 from a year earlier." In better days, that figure was 10%.

What the Chinese government does not want to say out loud is that the numbers are likely to get much worse, for two reasons.

The first and most obvious cause for a greater drop in growth is the global recession. It is undermining the demand for China's cheap exports. Even items that can be sourced from the world's most populated nation are not attractive if there is a moderating market for them in nations where unemployment is rising quickly and credit is tight.

The second problem is more insidious. China built a huge middle class in just a few years. It brought people who lived on farms into big cities which were created to manufacture goods for export. This middle class become one of the largest consumers of China's own production. China had created its own consumers from the fruits of its own manufacturing. Between this "in country" demand and exports, China had a prefect GDP machine.

Unfortunately, as exports have fallen, so has the demand for jobs. China's middle class is falling apart as unemployment rises. And consumer demand inside the country is falling with it.

Douglas A. McIntyre is an editor at 24/7 Wall St.

China created a huge middle class by bringing rural workers into large cities to work in the factories that built the nation's exports. As long as that huge export machine was allowing the nation to produce tremendous trade surplus and 10% GDP increases, that system worked fine.

Now the demand for Chinese goods is falling sharply as the recession hits its trade partners. Factories are becoming idle. Workers are heading back to farms. One by-product of this is that China is not able to sell goods that it makes "in country" to its own middle class, further hurting its GDP. The other consequence is that outside nations that have been importing goods to China are beginning to see steep drops in their sales.

According to Reuters, "Department stores such as Hong Kong-based Parkson Retail are pushing discounts to regain sales, and Kingfisher, Europe's largest home improvements retailer, is closing stores ahead of the week-long Chinese New Year shopping period."

The news shows that there is no escaping a deep downturn. Even a nation like China, which has enjoyed hyper-growth for nearly a decade, is becoming less attractive to firms that have counted on the world's most populated country for a big piece of their sales.

Welcome to the global recession.

Douglas A. McIntyre is an editor at 24/7 Wall St.

There have been almost no positives in the U.S. recession that has resulted in millions of job losses, and also hurt corporate revenue and earnings, most economists agree.

But at least one metric has moved in the correct direction: the U.S. trade deficit, which declined 29% in November 2008 to $40.4 billion on a record decline in imports, the U.S. Commerce Department announced Tuesday.

Economists surveyed by Bloomberg News had expected the November 2008 trade deficit to total $51.5 billion.

Imports declined a record 12% to $183.2 billion -- the lowest level in more than two years -- pushed lower by a large drop in imported oil prices.

Exports dropped 5.8% to $142.8 billion, on declining demand for industrial supplies and capital goods. The October 2008 trade deficit was revised lower to $56.7 billion from the previously released $57.2 billion.

China is supposed to be the perfect large economy. Its GDP has been growing at 10%. Its huge export base is driven by cheap labor. Its rising middle class has become one of the world's largest groups of consumers.

Someone forgot to tell the Chinese government that a deep recession would eventually undermine its exports. The world does not need inexpensive goods when it does not need any goods at all. When Japan, the US, and EU all fall apart at once, whatever edge China has as a manufacturer evaporates.

The part of the economic problem in China that is harder to see is that a bad economy hurts its imports. That new middle class starts to break apart as workers are laid off. They stop consuming foreign goods, and, even worse, they stop consuming Chinese goods. The entire economy of the world's most populated country starts to spiral down.

According to The Wall Street Journal, "China's exports in December fell 2.8% from a year earlier to $111.16 billion, while its imports fell 21.3% to $72.18 billion, the General Administration of Customs said Tuesday."

The Chinese economic miracle is broken and it cannot be fixed while the world economy is in trouble. China believed its export base made it "too big to fail." It has not worked out that way.

Douglas A. McIntyre is an editor at 24/7 Wall St.

Novelist and journalist Pete Hamill, whose life and collection of work encapsulates the character, wisdom, grit, and tapestry of immigrant New York, and the rise of the United States, in the 20th century, speaks often of his subway commutes as a student to and from prep school Regis High School in Manhattan to his native Brooklyn.

On the ride home Hamill would frequently see the men of manufacturing and industrial New York -- the men who with their hands worked with the machines and tools that made at one point ... almost every product you could think of. Further, despite all that unpredictable New York could offer in a day, there was always a sense of calm on that subway, he notes.

"Nobody would ever mess with those guys," Hamill says.

Since the end of Hamill's subway riding days, the United States has become a post-industrial economy, but that's not to say that it can not have a manufacturing role in the global economy.