The theory is that the surplus economy, as a result of the increase in foreign exchange, will have a strengthening currency which leads to a loss of export competitiveness which then gives the deficit economy a chance to compete and recover its external trade position.
This does not usually happen in the now of China and in the past of Japan where their respective currencies are being held down deliberately either by maintaining low domestic interest rates or by managed foreign exchange policy.
It is a long-held belief that an external trade surplus is indicative of good economic health.
Of course, it is better to have a trade surplus than a trade deficit.
But it is not good to always maintain a trade surplus which means than other economy or the rest of the world has to run a trade deficit forever which it clearly cannot.
(If the trade surplus economy is small, then the problem is not that serious, as in the case of Singapore.)
By maintaining a sustained trade surplus, it means that the domestic industries are deliberately keeping down the cost of production especially wages and the benefits to workers while profits are ploughed into machinery to keep increasing productivity.
A social and political policy question arises: What is the benefit of a sustainable trade surplus when the working population does the enjoy much of the fruit of the surplus? Are people meant to work the machinery and hence work like machines as well?
Of course, the trade surplus has also the effect of flooding the domestic economy with liquidity. The local banks choose to direct their new loans at real estate which seems to the practice all round the world in the last few decades. The problem with real estate is that it is also a good collateral for banks for their loans, so as real estate prices increase, asset inflation escalates new loans to real estate again, thus accelerating asset inflation.
The banks think they have good collateral so when the asset price bubble bursts, as it is happening now, the banks will end up owning the real estate themselves. In asset deflation, the banks will be loaded with bad loans enough to send them into insolvency due to lack of reserve provisions as the directors have pocketed the profits (which had encouraged them to be reckless in their lending).
Now, what should the surplus economy do when faced with tariff imposition by the deficit economy? A non-economist will think that it is war, call it economic war, and retaliate. Even at war, one probably does retaliate but possible try to defend.
To retaliate means that: since you are hurting my industries, I too will do the same to hurt your industries.
To defend means that: since you are hurting my industries, I will do my best to ensure that my industries are not hurt too much. How can you do that?
One is to provide subsidies to the hurt industries. This may not be a good move because you will be accused of further distorting fairness of trade.
Two is to negotiate to see which aspects of the trade is deemed to be unfair. It has usually got to be concerned with the (allegedly) suppressed exchange rate, the too low cost of production such as excessively low wages, poor worker welfare and all those things dealing with labour which the deficit economy has been doing to improve human welfare in society. To undertake a negotiated worker welfare programme for the labour force may be a good first step.
Of course, what has happened with the surplus economy is that it has tried to spend its surplus in third world countries to try to secure raw materials for future growth. This diversion of the trade surplus could probably have also weakened the force of adjustment for the benefit the deficit economy. This is like a three-body problem which means that there is no possible stable working equilibrium to be established between the surplus economy and deficit economy (which the conventional theory espouses) because there is a third party economy involved to which the equilibrating energy is diverted. With no equilibrium in sight, it is natural that the deficit economy wants to put a stop to its deficit run and start rebuilding its economy with a new paradigm. The same goes for the surplus economy which will now have to find its new working model without the prevailing deficit economy.
If the now surplus economy now wants to circulate around its own orbit, it will have to find another economy with a big deficit to fund its desired surplus. This is unlikely to happen firstly because of the deficit size to be replaced but because it will then have to accept a new currency for its foreign currency reserves. At the moment, there is no such single currency that could be deemed acceptable.
There has been an apparent drive to sell the US dollar for gold which can be kept as reserves. When you keep gold in your vaults, gold does nothing as it sits there collecting dust. In the end, you may try to issue your currency as a receipt to an actual amount of physical gold. It would be much better than bitcoin which is an artificial digital construct on an arbitrary basis.
The problem with a currency on the gold standard is that if you allow the gold to be redeemed, you may end up with no physical gold and lots of paper money.
There is no way in a money-using economy that you can do away with money as a unit of final settlement. It is the ability of the fractional banking system that allows money to be created through the expansion of loans, and when the new loans are properly vetted and used, that money creation helps to expand the real economy. It is a fact that the expansion of the US money supply helps to raise the China economy as new US loans were spent on investing and building factories in China and in the process built up the foreign reserves of China.
For China now to discard the US dollar as its foreign reserves by divesting into monopsony and gold, is an attempt now to play the economic game with the US. It is therefore logical that the US should stop this bilateral economic understanding and enforce a structural break even just for the sake of trying to reduce the deficit problem. Like everybody when we try to reduce our debt, we consume less output thereby causing a recession.
A tariff war ends up in recession. This is a fact.
2 comments:
When the US froze Russia's US dollar reserves, it gave proof the US could even sacrifice its most sacret dollar as trade's ubiquitous settlement - in the hope that doing so would deliver the knockout blow to Russia's economy.
It hasn't; Russia dropped its fuel export prices and found buyers, and the majority of countries saw fit not to take up the US' call to sanction Russia.
Today, all four conclusions have come home to roost against the US.
One, that its dollar is a weaponized excuse to unilaterally and arbitrarily seize sovereign reserves;
Two, that its sanctions can be direct against specific companies and countries, and indirect by coercion onto anyone that does not support the US in any of its disagreements against anyone else;
Three, that the US serves only its interest at all stages, to the extent of abandoning its allies, even that country it got into trouble in the first place for advancing its agenda by proxy, and
Four, that, if given half a chance, it would wipe out the four governments its agencies and media have wildly and without foundation labelled as its axial and existential enemies - Russia, China, Iran and North Korea - even when its hands are the most bloodied of all.
Its mask is therefore now off for it shows the US for what it has become - a toxic bully out to banish by Schumpeterian creative destruction the world order it created to which it had coaxed all and sundry to subscribe but now they are only summoned to appear at its gold-leafed imperial but unshaven court like gladiators to be sacrificed in some arena of tariffed obeisance. Morituri hails salutant!
Against that backdrop, the present stage of ITS trade war ON China is now descending into something more nefarious, possibly fatal and history books if this planet survives will later show how serendipitous are the affairs of men.
What started as a misguided attempt to achieve trade balance and thus nurse the balance sheet by using tariffs instead caused both equity and bond markets to fall which weakened the US dollar but increased bond yields and thus interest rate hence government cost of financing and the very debt it was to reduce.
Thus, subject to their individual negotiation with the said US, the delay of its reciprocal tariffs on them by 90 days for all countries, however with China still hit with 145%.
Suddenly a light bulb clicked in Pennsylvania Avenue - won't doing so isolate only China while keeping all the other countries at bay and subservient, thereby bearing ruinous pressure onto China to kowtow since all her markets are now under the thumbs of the US?
It might actually happen. The US says it wants to deal but insists China be the one buckling and asking to meet. Why should China, one hears the chorus, as she didn't start it? It's like the US wanting to tariff China 20% if she buys Venezuelan oil that the US has sanctioned; like she with Iran, she has no cause against Venezuela, for that matter with 150 countries worldwide with which she trades.
2/2
China has already faced a century at the hands of rapacious foreigners. That her surplus economy pays too low a wage for her workers? How about those foreign MNCs which run high-profit plants in her country increasing tomorrow their wage rates for her millions of workers working for them? The same reason they have offshored from their own countries is the reason they have inshored into China which has not disappointed them for four decades and would have delighted them even more if more have stayed.
That her government has provided subsidies, erected barriers and taken IP? How else could she have lifted up 700 million from poverty in much the same way they had done for theirs during their industrial ages, and enabled her industries not fall into servitude to those who profess freedom for all mankind, as had happened to her for a century?
And IP taken? Ask Motorola, Qualcomm, ASML, Intel, Toshiba, Nvidia, Tesla how much IP she has paid; in fact ask the UK today how much silver was taken from her. Moreover, the west would know each IP value falls the longer it is adopted as improvements appear. History is written by its victors; IPs are written by their writers.
https://tinyurl.com/3fcjrfh4
In sum, what China has leveraged are: scale and smarts. That the west, the von der Leyens and Vances, still think derogatory of the Chinese as was thought of the trench diggers in WW1 France and the rail workers of California, must be ascribed to both their IQ and RQ (intelligence, racism).
Yet knowing all this, the west continues to treat China shabbily. Inexorably, the world will brew up the explosive positive void coefficient of disaster (alas, nothing to do with a certain bubbly beverage).
It's all political gamesmanship leading to economic brinkmanship. What started the US down the tariff slalom? Loss of manufacturing jobs? But for one with only 4% of the world's population, the US holds the second-highest share of global manufacturing output with a 16% share. It is recognized for its advanced manufacturing techniques and high-quality manufactured goods.
So what exactly is its real gripe if not it does not want to see anyone remotely besting it, even if both can coexist and collaborate to co-earn instead.
After all it must already know its trade deficit with all the other nations is not the factor for tariffing. Their exports to the US are only 5% of world GDP in which case a 10% tariff on all US imports and exports will cause seven times and three times more loss in outputs by the US than by China and the Eurozone respectively. Not to forget doubling its inflation. In short, by tariffing others, the US tariffs itself into isolation. But it wants to isolate China first. (Combing the brilliantined hair), how come, ah?
https://tinyurl.com/2xak9sy5
Tariffs will tilt the US economy into stagflation from its hillbilly kick-a-poo juice of inflation and recession. It can't replace the instant loss of cheap imports with instant workers, materials, capital and plants. Glib-sounding press conferences and screechy signing of executive orders don't make an economy. Bullying others will only bring the bitter and hot kurma of karma.
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