Part I
The spat between the US and China over President Trump’s unilateral decision to increased tariff by 25 percent on steel and 10 percent on aluminum could well escalate into a full-scale trade war. The US has already threatened to impose additional tariff of 10 percent on Chinese exports to reach a total of $200 billion, and the Chinese promised to impose the same amount, saying it would not stand idly to take this unilateral action that violates its national interest, the WTO agreements, and disrupt international trade. Although the similar tariff had been slapped on the European Union, Canada, Japan, South Korea and Russia, all are unanimous that trade war is not good to the world economy and nobody wins from it.
China knew that the pat-on-the-back reassurance by Trump of his “personal friendship” with President Xi Jinping was more of a cover to obliquely pursue his chauvinistic slogan of making “America first” which many observers see as rooted on their differences on trade and monetary policies. The US economy is tied to the monetary doctrine of increasing the value of the dollar which today has taken its toll on global trade; that it has to grapple to control the increasing trade deficit with other countries, particularly with China which runs to over $375.6 billion in 2017.
The decision of the US to decouple the dollar from the gold standard only gave respite to its overspending caused by the Vietnam War. The belief that allowing the US dollar to escape from the fixed value of the gold as embodied in Bretton Woods Agreement did not materialize. Aside from the financial devastation caused by the dismantling of interest rates, it has created a more pernicious problem of increased cost of living amidst continuing economic recession. The “inflation-driven economy” pushed wages to increase for which the term “real wages” became so familiar that the wage received increased in figure but not in value.
Indeed, wages and the cost of living in the US steadily increased, but slowly, production and manufacturing declined. Finance capital which was the progenitor of the neoliberal economic policy made the practice of consigning production abroad economically viable. This economic “hegira” has been principally attributed to the great disparity in the value of the US dollar and the currency of the developed economies against the currencies of the developing countries, and made capitalism without production “lucrative.”
It paved the way for the silent conversion of the US dollar as the universal medium of exchange from which the US continues to make enormous profit out of the mere use of its currency in almost all international trade transactions. The belief that aggregate demand could trigger more production to generate employment did not happen. Strictly speaking, it was not inflation, but one of increased spending through importation to take advantage of cheap imports. As the addictive vice of cheap importation continued, many of its factories withered and local production plants closed. Many say it marked the “colonization” of the US economy.
Unrestrained importation deprived not only labor of their employment but equally put at risk all their trade secrets amplified in the complaints for violation of patents and copyright laws. This has become a dilemma of choosing between the devil and the deep blue sea. But the American ingenuity that propelled the US economy to become a mighty industrial giant had to be sacrificed and put at risk their trade secrets, formulas and invention to remain competitive through the inverse method of consigning production abroad. We are not saying that it is morally and legally right, but the US cannot run against the economic laws it thought would work to its advantage.
Laws on patents and copyright are merely safeguards to prevent the unauthorized use, piracy and counterfeiting of products. There is no foolproof in situations where one consigns the manufacture and assembling of his high value products abroad. The US has to bite the bullet of producing the cheapest product which the market could offer even if those products have already been improved by foreign manufacturers. Some say patents and copyrights are the remaining outpost of imperialism. It exposes its parasitic and selfish nature; that it refuses to treat its invention as its legacy to mankind.
On the opposite side, China has opted to take the other route. Instead of pushing the prices of goods upward, it opted to take the practical approach of producing goods that would be most affordable in the international market. China saw how US exports, caused by an overvalued dollar, were insulated out of the market. The reason behind the high prices of their products is not rooted in production cost but in the increased value of its currency. The US applied the same financial strategy of pressuring Japan to revalue the yen in the 80s to reduce trade deficit.
The problem of revaluation is that it affects almost all the prices of goods. Once prices are allowed to increase, it is most difficult to push them back to their original price. The success of the US in pressuring Japan did not actually produce the desired result. Japan had to save its own exports. After determining that the value of the yen was almost at par with the dollar and so with the cost of living, it acceded to the demand to build their car production plant in the US, thus providing employment and appeasing anti-Japanese sentiment in the US.
The US pursued that policy, firmly believing that by increasing the value of its currency it would automatically substitute loss in their exports. The US was the first to take advantage of the low value of Chinese exports unmindful in the long run that would be overtaken by the closure of most of their production plants and factories. The method of increasing the value of one’s currency is hoped to maintain a favorable trade balance. But as the trade between the US and China progressed, US imports consistently edge out Chinese exports. American economists refused to concede that it is the increasing value of the dollar that is causing the volume of US exports to shrink.
Notably, US economic and trade policy is driven by the fear of a declined in economic power. The US trade policy makers equate the loss of their economic power to the possible loss of their global military power. Many do not agree to this theory. In our post war era, Germany, Japan, South Korea and China are the principal economic powers co-existing alongside with the US, although its position no long stands as overarching the rest as it was in the 50’s to the 70’s. Economic power is no longer translated to military power to enforce hegemonism, except the US.
rpkapunan@gmail.com