"If China decides to look for a new market, the US farmers will be growling over the loss of income and subsidy."
With or without the trade war with China, US is likely to lose it principally due to the overvaluation of its currency. As one would put it, the US has been badly beaten in its own game of currency manipulation. The US is probably the only country that can fix the value of its currency. This happened after the US decoupled the dollar from the gold standard and unilaterally pegged its value based on the GNP, which nobody questioned because it then stands as the biggest and strongest industrial economy in the world.
Because of the dollar’s unique place in the world’s currency system, it became the unofficial international currency exchange. For countries to import, it must have dollars to buys goods in the international market or measure the value of their exports in dollars as having the equivalent fair value. Equivocally, all countries had to secure and use dollar as their medium of exchange to carry out their international trade obligations. The US, through its financial institutions like the World Bank and the IMF and its various megabanks, raked in so much profit in the form of interests, services, fees and other bank charges for the mere use of the dollar.
The elevation of the US dollar as universal medium of exchange unwittingly gave birth to a new system of trade, which is to trade off currency without producing a single commodity. The practice is now known as the “casino economy.” It became popular because traders are not engaged in the trading of goods for value but in the exchange of money-for-money for profit. The complexity of the money market gave rise to the new mode of business called “hedging of funds and the trading of collateralized debt obligation (CDO)”.
The abandonment of the gold standard in 1973 immediately freed interest rate, thereby spinning upward (and uncontrollably) inflation to maintain confidence in investment. This marked the beginning of finance capital. However, many economists could not decipher the paradoxical pattern in the modified economic system. First, after that brief period in the fall of the value of gold after the US withdrew from the gold standard, steadily the value of the commodity kept on rising, that today is valued at $1,240 per ounce. Second, alongside with the increase in the value of gold, the dollar kept on rising as if to adjust its value to that gold when supposedly the two should be moving in different parameters. Third, while the US has been able to maintain its GDP to lend credibility to the value of the dollar, its GDP, however, no longer enjoys the same percentage industrial level that it had in the 1960s.
China and the EU generate 33.9 percent of the world’s economic output of $127 trillion. The United States remains at third place, producing $19.4 trillion. In manufacturing, China has effectively displaced the US as leader. According to Mike Patton of Forbes Magazine: “America’s contribution to the global economy has been falling. In 1960, U.S. GDP represented 40 percent of global GDP. By 2014, America’s economic contribution had been cut in half.”
Note that the exchange value of commodities is no longer based on the classical Marxist economic formula of measuring the input of labor to measure its value, but on how the bankers are able to value the currency based on what Max Kaiser would say “on pure imagination and mumbo jumbo.” They reject the conventional economic theory that in open market economies, the one that could sell goods at the cheapest price is likely to sell all, and the buyer is always the one that has the money. In international trade, the one whose currency commands high value is the winner as the US might have thought.
Americans never anticipated that the high value of the dollar would correspondingly push upward the cost of wage and services, and correspondingly the cost of living in the US. This is one economic phenomenon they were not able to diagnose; that the high value of the dollar would in the end result in financial hemorrhage for which importers and consumers alike would instinctively take advantage to purchase commodities sold at much cheaper prices but resulting in serous trade deficit. Instead of the US devaluing the dollar, it accuses China of fixing the value of the yuan to undervalue its exports.
This is a paradoxical pattern conceived by the neoliberals headed by Milton Friedman; that it gradually eroded the status of the US as the leading manufacturing state. If other countries can produce goods cheaper, the US thought it wise to import instead of producing them locally, not knowing that as an economic vice it could metamorphose to one of need to outsource production.
The dollar that was oozing endlessly out of the US through trade deficit that was permitted to purchase treasury bills as means to secure more foreign loans, to acquire assets in the US, enact laws to liberalize investment to resuscitate the ailing US economy. Such a cycle in the long run destroyed US productivity and competitiveness. First, the US economy lost its steam to sustain its comparative advantage to produce more goods at cheaper prices. Second, factories and production plants close down one by one. Third, increased unemployment soared. The US economy on the whole precipitously went down.
It is not so much of its trade deficit with China, for even if without it, the US is bound to lose as a leading industrial and manufacturing giant. Nonetheless, the US economic planners continue to make available the US dollar to keep credit facilities going and as their easy way to import cheap goods without them knowing that the habit would result in the dismantling of their factories, causing serious economic dislocation characterized by recession and stagnation.
This kind of economic crisis is even more dangerous because it is one of never-ending cycle of fending off inflation resulting in what economist would refer to as “stagflation,” a situation when the prices of goods rise while unemployment increases and spending declines. It is considered an unnatural phenomenon since inflation should not happen when the economy is weak or there is a general slow growth in the economy.
For one, the US maintains its subsidy on agricultural products to keep its products competitive. China has specifically targeted US exports of soya for retaliatory measure because it knows that soybean farmers are paid $1.65 per bushel at 50 percent of anticipated production levels. The subsidy also pays 1 cent per bushel of corn and 14 cents per bushel of wheat. China has two options. One, to completely import from other countries. Second, to initiate a retaliatory tariff, say of 10 percent as announced.
If China decides to look for a new market, the US farmers will be growling over the loss of income and subsidy. In the second option, should China impose a 10 percent tariff, that would still represent higher loss for the US because of the indirect cost of subsidy. US farmers would possibly demand a rebate for whatever loss they incurred. The net result is that the US would be paying more to keep a highly subsidized farm industry alive.