Trade, tariff and the US dollar
If a dollar commands P52, ergo it could buy more goods but could sell less. This is the inverse way to measure the value of the commodity outside the law of supply and demand. One could see that it is the cost of money that dictates the value of exchange. This also explains why modern-day transactions creditors would lend borrowers with little amount of interest, yet make money.
Although this system has been going on in international trade, countries seldom feel the difference when gold is used as an independent arbiter to measure the value of the commodity. In that, both the seller and the buyer rely on the value of the gold to determine the intrinsic value of the commodity.
This mercantilist’s theory of relying on gold as medium of exchange somehow earned the trust of many countries for centuries. If some became richer, it was the result of their acquisition of the precious metal by their brisk sale of goods in the international market.
The disparity in the value of goods was not dictated by the value of the currency but by depreciating its value called “devaluation” or appreciating it called “revaluation.” The value of today’s currencies is based on how one country would measure the other’s currency, and the US being the dominant economic power would prefer to maintain a high value of its currency.
In its eagerness to dominate the world’s currencies, the US first decoupled the dollar from the gold in 1973 violating the Bretton Woods Agreement that led to the creation of the World Bank. By the sheer strength of its economy, the US made the dollar a universal foreign currency based on its GNP.
Those with low-value currency can buy less while those that enjoy high value could buy more. But as they say, human need is borne out of necessity, and those that suffer low currency value were able to compensate their inability to purchase by processing and manufacturing raw and semi-processed materials. The game remains that he who could sell the cheapest will command the market. Initially, they offered incentives like tax exemption, beginning with their opening of trade zones.
Those who subscribe to the theory of a strong dollar believe the US would be able to pay more workers to produce more to allow their consignment abroad. They reason out that cheap labor would rake in profit and treat those countries as huge factories. Those that could see the flaw objected to the granting of preferential treatment to US brands being manufactured abroad, arguing that they already lost their jobs and they cannot now enjoy the premium of reduced tariff that would favor the exporting countries to earn even by marginal profit.
The dominance of the US dollar to an almost-universal currency forced nations to adopt the floating rate system, thereby abolishing their anti-usury law or the fixing of interest rate for loans. Since the dollar was no longer denominated on the value of the gold, the US was able to manipulate its value against other currencies, while forcing countries to either devalue or revalue their currencies.
The US and many highly-developed economies overlooked the drawback in this approach. The unilateral and often arbitrary valuation of currencies drove underdeveloped countries to set their goal toward becoming a manufacturing economy. Marx was explicit that production is the one that creates wealth. Many underdeveloped economies like China initially suffered difficulties imposed through various forms of restrictions such as the export quota, subsidy, high tariff and even fines for the slightest failure to comply with the agreement.
This resulted in the unmitigated rise in the value of the US dollar. The US dollar became expensive if used to purchase good and pay services within the US. That began the migration of factories to other countries; that it is cheaper to consign production abroad than manufacture them locally. US corporations took the high value of the US dollar as an opportunity to use their surplus capital to invest abroad and intensify their campaign for globalization.
Some warned that the continued soaring in the value of the dollar could lead to the US economy’s own downfall. The situation led to unmitigated importation resulting in huge trade deficit. Because the mighty dollar was competing against the earnings of the average Americans like the increasing cost of living and rise in consumer piece index, many of the welfare programs instituted during the Roosevelt era were dismantled and real wage stagnated since 1970.
The US never anticipated that the era of currency manipulation would come to an end too soon. Notably, in the 50s, the US economy dominated the production of manufactured goods producing nearly 50 percent of the world’s export of manufactured goods, while today it barely represent 20 percent.
The greatest irony is, while the dollar commands high value, that situation has created a deep wedge between the super-rich and the poor in the US. The middle class has been wiped out. It seems the US dollar today is fighting against itself. The creation of the Eurodollar was an attempt to break from that dominance. With the US dominating the world’s currency, foreign investment became the fad in the global trade.
When direct investment soon filled up the global market because of glut in world production, they resorted to portfolio investment or the operationalization of the “casino economy.” The evolution of foreign investment to purely speculative investment came in various forms to synthesize the task of the traders, bankers and speculators all believing that there is still enough room to adjust the value of the US dollar.
Some economists say that it was the US that forced many countries to fast-track their economies to engage in manufacturing much that US companies have shifted in favor of capital-intensive and high-tech products. Today, many of the emerging economies are exporting an array of manufactured goods and slowly their currency is gaining strength, a trend that pose a serious threat to the dollar and to the US economy as a whole. The US held on to their conceited myth of maintaining their economic and technological superiority.
But as we now know, when the US suffers from serious trade deficit, it demands that countries enjoying trade surplus to revalue their currency. That decision could immediately result in the increase in the price of their exports and wages.
Countries that gave in to the pressure saw the decline of their exports. But the gap resulting from the revaluation of the currency could not be filled in by the US. Other countries such as China, South Korea, and India easily filled in their place. In fact, Japan, to resuscitate its exports from a long drawn depression had to relocate many of its factories, and China experiencing a windfall of increased production and technology transfer.