The WTO and the US trade war with China

"The unrelenting manipulation by the US of its currency has backfired."

Part I

When President Donald Trump imposed a prohibitive tariff of 25 percent on Chinese exports, the US committed the first act of destroying the World Trade Organization (WTO). This logically explains why US has to abandon its sponsorship of the various regional economic blocs like TransPacific Partnership agreement (TPP) for Asia-Pacific and the TransAtlantic Partnership agreement (TAPP) for Europe and North America.

Free trade and prohibitive tariff are incompatible approaches to international trade. After being able to get away with it, Trump is now targeting China. China, on the other hand, is promoting the strengthening of trade multilateralism which is an implied rejection to Trump’s protectionist policy. The strong support to China’s approach was tested when the attending delegates to the Asia-Pacific Economic Council (APEC) refused to affix their signature seeking to reform the WTO at the behest of the US.

This explains why no final communiqué was reached. US Vice President Mike Pence wanted to steal the show by imprudently wanting to insert a line calling for reforms that impliedly condemned China. It was a backdoor diplomatic maneuvering to make it appear that a number of countries are supporting the US position.

The US has become desperate that after abandoning the TPP, Japan and South Korea have shown signs of tilting in favor of China’s Belt and Road Initiative. Even India is drifting in favor of the Russian-Chinese economic partnership.

Because of this gyrating shift, the US is now feeling uneasy and isolated. It refuses to acknowledge that an economic miracle is taking place in Asia. Japan and India want to cash in on the ongoing economic transformation with South Korea giving up the Cold War recipe in favor of expanding the horizons for trade, including the possible opening of direct trade with North Korea.

Despite the orchestrated campaign by the “Amboys” to put a waged between this country and China, the US has failed to reverse the breeze of economic progress sweeping across Asia. The combined forces of the traitorous Liberal Party, the vociferous oligarchy, their controlled mainstream media, and the rabble-rousing militant Left failed to dent the popularity of President Duterte.

The people have already reached the turning point in their judgment of US policies. They are taking the opportunity of renewed friendship with China as more tangible than of the hollow US promise of democracy. Filipinos no longer have any illusion because they are seeing the rapid decline of US economic and political influence.

China now stands as the country’s number one trading partner. This means the Philippines imports more goods at cheaper prices. The income of our farmers has considerably improved, seen in their acquisition of goods made in China, and sold at prices which US products could never compete. Many have managed to improve their economic condition to enjoy the simple amenities in life that before only middle class could afford.

Some argue that trade is different from development to debunk our brisk economic ties with China. They ignore the truth that most of the products we import from China somehow contribute to increase our productivity, notwithstanding that our trade deficit is attributed to the low value of our currency which is being manipulated by the US to gain advantage.

The belief that outsourcing production to China would increase profitability has been proven to be a fallacy. The unmitigated increase in the value of the US dollar to cover its increasing trade deficit correspondingly drove upward the cost of wage and services in the US, including the cost of living.

Financial expenditures require that goods entering the US markets, even if outsourced, should pay excise or import tax, and that definitely will be measured on the current value of the dollar. Thus, whatever gain is made through outsourcing is easily wiped out.

The imposition of excise or import tax is necessary to sustain expenditures for basic services, including expenses for welfare and medical care. Without it, the US treasury will dry up fast. In fact, taxation is its remaining measure to indirectly stop the receding number employment and closure of many factories. In the end, outsourcing gained nothing. Only the big corporations and their executives manning those companies abroad profited.

All this revolve on the problem of an overvalued US dollar. At present, the value of one dollar is equivalent P52.40 as the official exchange rate, while the value of the Chinese renminbi is at P7.55. If translated to fractional equivalent, one dollar would only value slightly less than two percent to the value of the peso, while the value of one Chinese renminbi is valued at 13 percent to a peso.

Seeing this, naturally local traders would prefer to trade with China in addition to the stability of the renminbi against the peso than in the relation to the dollar. Bluntly stated, there is practically nothing one could buy for P52.40 if converted to dollar because that would only be equivalent to less than 2 cents. Beyond their fractional equivalence, our peso could buy less if the goods are priced in dollars, while it could purchase more if denominated/priced in renminbi.

On the possibility of incurring trade deficit, the US is likely to incur that because importers have been conditioned to believe they are importing goods at cheaper prices while the country suffers the same because of the decline in the value of our exports despite the increase in volume. On the other hand, the relatively high value of the peso against the Chinese renminbi means we could import more goods. If ever we incur trade deficit that would be gradual because of the relatively high value of our currency against the Chinese renminbi

The unrelenting manipulation by the US of its currency has backfired. China can produce almost anything which the industrialized manufacturing states can produce and sell them in the international market at an average price of just 1/3 of the value of goods produced in the US and in the Western World.

Instead of resolving why many countries import more goods from China, it accuses that country of undervaluing its exports, or worse, of resorting to dumping. The US refuses to accept that there is something wrong in the valuation of its currency and why it has for last three decades consistently failed to apply the classic Western economic formula of “comparative advantage” enunciated by Adam Smith.

Classic is the continued subsidy allowed by the WTO to US, European Union, Japan, Canada, Australia and New Zealand on their agricultural exports. On the other hand, the same agricultural products coming from the underdeveloped countries are prohibited entry into their market. The agricultural products are even out rightly rejected or are subjected to stringent quarantine requirement and often slapped with quota restrictions. This explains why there is great disparity in the per capita income of farmers between the developed and less-developed countries.

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Topics: Donald Trump , World Trade Organization , TransPacific Partnership , Asia-Pacific , TransAtlantic Partnership
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