The trade war initiated by the US against China has put all economists wondering of its possible outcome. Some even predict the calibrated brinkmanship strategy of President Trump could slip out beyond control to change the situation from bad to worse. For all the blusters about the huge trade deficit with China, which stood in 2017 at $375 billion, nobody has asked why this thing happened.
When the US decoupled its currency from the gold standard in August 15, 1971, it created an artificial prosperity to the American people. Nobody questioned that unilateral decision of President Nixon to measure the value of the dollar to its GDP, which technically elevated it as the “de facto” universal medium of exchange in all foreign trade transactions.
Along that, the value of the dollar became flexible if exchanged with other currencies for the payment of exports of raw materials and imports of manufactured goods. The same US finance architects introduced the system of floating or flexible exchange rate. From there, the ledger in valuing foreign currencies was based on the current value of the dollar. Grudgingly, many countries had to scrap their anti-usury laws, much that all currencies now has to adjusting to the current value of the dollar.
Countries with scarce dollar reserve either had to secure foreign loans often on condition they devalue their currency or purchase dollars from private banks to carry out their trade obligations and developmental goals.
One pernicious effect in the decoupling of the dollar from the gold is it opened a new avenue for the trading of currencies and encouraged money market trading instead of direct investment. This saw the rise of megabanks in the US, UK and Western Europe that caused untold economic sufferings to poor and underdeveloped countries. The value of their exports suddenly dropped, thereby incurring perennial trade deficit.
To sustain the world economy that now regularly experience the cycle of depression and recession, international financial institutions offered loans on condition they adopt the system of currency exchange rate adjustment in addition to the interest rate. This means loans will be adjusted on a daily basis based on the current value of the dollar.
The appreciated value of the dollar opened the US market to an era of untrammelled buying spree. The US through the various banks virtually collected billions in service fees, charges, commission, etc. for the mere use of the dollar in their foreign trade transactions much that it has been made the unofficial medium of exchange.
To hurdle this obstacle, US corporations conceived the idea of transferring their production plants to other countries where wages for local workers remain low. Countries that suffered the ravage of floating or flexible exchange rate were in a bind. Employment was their only lifeline to economic survival.
The disparity in the valuation of the dollar against other currencies ended up with some countries accumulating more dollars, for often they enjoyed trade surplus. The US ignored the initial symptom seen in the surge of migrants to the US, all in search for better employment opportunities centered on the high value of the dollar.
Aside from competing with the homegrown workers, many were remitting billions of dollars to their country of origin. To this day, remittance is financially haemorrhaging the US economy.
The artificial prosperity was automatically whittled down by the increase in the cost of US labor and service even if there was no proportionate and visible increase in production. This accelerated the relocation of manufacturing plants abroad, and those that could not cope up with the financial onslaught simply folded up, adding more to the number of unemployed Americans.
Out of the listed 30 countries trading with the US in 2016, 23 enjoy trade surplus. This is indicative that a strong dollar is not working in its favor. China became the target of President Trump’s steep tariff hike principally because it enjoys a hefty trade surplus, yet uncannily silent that the US also represents the biggest number of companies having production plants in China with some even selling more in China than in the US.
Instead of resolving the issue of trade deficit, the US accused China of intellectual property theft. Many are wondering because intellectual property theft cannot be solved by unreasonably imposing high tariff. If the US considers the formula of certain products to be likely pirated, it should not put up a plant in China much that each country has its own rules and conditions for foreign investors to observe. Section 301 of the US Trade Act cannot apply to international trade agreements while US remains a member of the WTO, or can seek to punish member-states while positioning itself outside and above the organization.
Similarly, the US cannot object to the imposition of excise tax to US brands made in China. Trump knows that American workers would protest arguing they already lost their jobs to foreign competitors, and they cannot now allow these products to be sold in the US at cheaper price. In fact, the monetarists tried to solve this problem by liberalizing the banking system to allow US investors to freely allow the remittance of profit back to the US using the same banks as their channel.
The monetarists never anticipated that their inflation-driven economy would push the US economy deep into the sinkhole. Any suggestion to reverse the huge trade deficit to stimulate the economy would be a pipe dream. The unmitigated overvaluation of the dollar has backfired to disastrously jack up wages and cost for services in the US.
Thus, their desire to maintain their profit was more of a smokescreen to hide the truth that real wages have been constant since the 70s. Some say, even if the US would attempt to reestablish those factories to restore its old glory as the world’s leading manufacturers, that would no longer be possible because US products are no longer competitive in the world market. Its cost of production has soared to cause it to be left out of the international market.
Tariff hike will only push consumer goods in the US to increase in prices, and both labor and management would not take that gambit in the name of restoring the old glory of “America first.” This also explains why many Americans now tend to do their shopping abroad because they could buy more for their dollar. In fact, some US brands like Apple, Nike and GM cars are selling more in China.
This is telling that the US has suffered more from its own financial folly. The thought that increasing the value of the dollar would be a panacea to their financial problem has, on the contrary, driven US products away from the open market. Today, China has an accumulated foreign currency exchange reserve of $3.114 trillion against the US which has only $119.6 billion as of April 2016.
