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Sunday, May 19, 2024

Behind the trade war (Part II)

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Continued from Saturday

The prospect looks gloomy should the US lose its premier status as the world’s number-one economy. It is already hobbled by a huge trade deficit of $375 billion in 2017 for which it exported only $130 billion as against imports from China of $506 billion. There is the possibility that US could default in the payment of its external debt which has reached a critical level of $21.17 trillion with $1.71-trillion debt from China. This paradox in the US economy has been observed since it detached its currency from the gold standard. Through that same period, the dollar has unreasonably increased often as a result in the devaluation of other countries’ currencies.

The increased in trade deficit is symptomatic that the cost of production has became prohibitive. It has to either consign production abroad or import goods from countries that could produce them more cheaply. This increased the share of export of manufactured products from other countries.

But instead of scaling down importation, the US tossed the blame on China. The US treated the situation as a trade violation because of its cheap exports, and accordingly does not reflect their true value. China, on the other hand, never raised the issue against US for overvaluing its currency to obtain cheap imports. Exporters obtain less for their goods because the revaluation of the dollar automatically means a devaluation of the yuan. Rather, China defended its decision to keep the value of its currency as a matter of sovereignty.

The US failed to comprehend why China wants to maintain the current value of the yuan in relation to other currencies just as a revaluation of the dollar would cause devaluation in the currencies of countries dependent on the dollar for their foreign exchange requirements. US economists never anticipated that an overvalued dollar is gradually pushing developing countries to diversity their market to secure better prices for their exports.

How the Japanese exports declined and its economy suffered a long-drawn recession and stagnation is a bitter lesson that China learned. China has a total labor force of 774.5 million. A revaluation of the yuan could push up the prices of goods. Even if the increase would only be 5 percent, it would still have tremendous impact to its economy. Neither would that resolve the problem of trade deficit.

China’s decision to fix and maintain the value of its currency was solely guided to protect its own economy. China has a teeming population of over 1 billion with many of its manufacturing industries still at their infancy. To revalue its currency could result in the rapid increase in wages, in the prices of goods, stultify their exports and possibly disrupt the world economy.

The prosperity that China now enjoys was earned through years of gradual increase in exports made possible by the realistic pricing of their goods. Yes, the yuan was slight revalued. But it was necessary to stabilize the international monetary system and not that it finally relented to US pressure.

American trade strategists, on the other hand, believe that decoupling the US dollar from the gold standard means that the strength of the US dollar would from thereon rely on its GDP, and invariably in automatic revaluation. The IMF has to invent the “special drawing rights” (SDR) or “paper gold” because of concerns about the limitations of gold and the dollars as the sole means of settling international accounts. The SDRs augmented international liquidity by supplementing the standard reserve currencies.

The elevation of the US dollar as an international currency is now the subject of great debate. The insistence of the US to constantly keep the dollar at high value is akin to the mercantilist theory of wanting to control the gold bullions and regulating international trade by its control of the gold instead of relying on trade which is rooted on production. Spain had the enormous gold reserves but it failed to stop its decline as a world power.

The US’ decision to keep high the value of the dollar allowed it to purchase cheap imports that today is finding expression in the low valuation in the currency of other countries. Yet, despite that, nobody from among the US trade policy makers sorted out why China has grown to become the second biggest economy in the world and its number one trading partner in just a span of over three decades.

Nobody grumbled about the overvalued US dollar seen in its export of manufactured goods, and its economy. On the contrary, many developing countries that rely heavily on the export of their raw materials and to the same degree on imports of manufactured goods meekly fall in the line. Challenging the monetary valuation of the dollar is to court economic disaster. Japan, South Korea, China, Taiwan were still nowhere to challenge US exports. Equally, the United Kingdom, Germany, France enjoyed the “shared prosperity” caused by the overvaluation of their currency.

The US up to now could not understand why its trade deficit is the result of an overvalued dollar. American consumers splurged because they thought were buying cheap. But could not understand why wages at home, cost of services and prices of goods in the US are expensive. The consumer price index is disenfranchising workers of their jobs because of the high labor cost and services.

To prevent trade deficit from spiraling, US corporations instead opted to relocate their production plants overseas. It was not only US corporations that did so. Other countries followed to compete in selling their products in the US. Trade deficit with China swelled because it was the most versatile of all exporters that could sell most products in the US market at cheaper prices.

Now, the problem is that the dollar is leaving the country. This portends an ominous danger much that it revolves directly on the US dollar. This is observed in the tighter restrictions impose on the amount of dollar that Americans could bring out when traveling abroad. The great disparity in the value of the dollar has driven many to spend their money abroad for their various legitimate needs like medical treatment and hospitalization, and to purchase things they could not otherwise afford to buy in the US.

The decline in the US economy is now entering its second phase. Migrants now are remitting their hard-earned savings instead of sending goods. This is happening because the cost of living in the US is increasing beyond their reach. This is a strange phenomenon nobody would think could happen to a country that boasts itself as the most economically powerful nation on earth.

The coarse approach of US President Trump to impose additional tariff is seen by many as self-defeating. That would simply compel exporters to scout for other markets that impose no tariff. The shift in their export of steel and aluminum at prices lower than the international market is an act of self-defense. The US will lose much that it cannot export its own products without passing through the gauntlet of retaliation from countries it slapped with prohibitive tariff.

The US motorcycle manufacturer that produces the iconic Harley-Davidson already announced a cutback in its domestic production. This is a tutorial lesson to Trump that business and politics use different lens to see things beyond platitudes and demagoguery. This also amplifies the truth that restrictive tariff can even harm domestic production, putting truism to what the Chinese have been saying—that nobody gains in a trade war.

rpkapunan@gmail.com

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