"Trump’s trade war with China is a war against himself."
When the dollar was decoupled from the gold standard, the Special Drawing Right (SDR) was fixed by the so-called “basket of currency” of 16 countries. This proved unwieldy and was slimmed to five major currencies reflecting their importance in international trade. The IMF paid the full market rate of interest based on weighted average paid by individual constituents.
Club members limited the basket share of China’s renminbi for fear it might allocate the determined “freely usable” to make payments for international transactions excluded in the quota allocation to disturb the currency market which the US and its allies tightly regulated.
Nonetheless, the SDR lost much of its value in the export and import of goods. The rapid growth of overseas workers hired by countries and paid in by their currency broke the currency allocation. SDR has now become worthless except for loans passing through commercial banks identified as government loans.
The Philippines is one example that has enormous foreign exchange reserved and this mostly came from the remittances made by its high number of overseas workers. The increased remittance stabilized the value of the peso and helped prevent unforeseen devaluation.
Seventh, the US also assigns to accredited corporations and banks to implement the currency exchange rate adjustment. This means payment for loan will be adjusted on the current value of the dollar. If the currency is devalued, countries will have to adjust their payment to the value of the dollar.
Despite these safeguards, the US continues to suffer a trade deficit, as seen through its declining productivity. Americans were hoodwinked to believe that increasing the value of the dollar would bring prosperity to their people. Rather, this resulted in serious trade deficit. It was double whammy that caused financial haemorrhage due to the outflow of the currency while increasing the cost of wage and services.
Producing is by necessity and selling is economics. They thought that profit is controlled by the seller forgetting that it is the buyer that allows the seller to realize his profit, and one can only sell where there are buyers willing to pay. Instead, they observed the formula of allowing their currency to float not knowing its value is denominated by the demand for the market, and not by the demand by people willing to spend.
There is no factual or scientific basis to measure the value of the dollar to the value of gold. As the dollar tried to catch up with the value of gold formulated in Bretton Woods system and later using GDP as ledger, they in effect opened the Pandora’s Box to the de-industrialization of their economy.
The unabated increase in the value of the dollar pushed upward the cost of wage and services for US workers, many of whom were not even directly engaged in the production of goods. Cost of wage and services astronomically went up despite the large number of unemployed.
This resulted in stagflation, a rare situation where there is an unusual increase in the prices of goods coupled by high unemployment. The value of the US dollar did not seem to match with the cost for labor and service resulting in the unusual increase in the prices of goods that prevented the hiring of more employees demanding higher wages.
This logically explains why the need to consign production where the cost was lower. Neither could employers hire local workers to increase production without increasing wages and affecting their sales. Stagflation in economics is a dilemma on how much to pay the workers for his day’s work and how to sell the goods at the price consumers could afford.
This also explains why there has been no real wage increase since the US unilaterally based the value of the dollar to its GDP in 1973, which today no longer reflects of the truth about the US economy.
Despite outsourcing, US trade deficit continues because of the disparity in the value of the dollar to the local currency where the product is outsourced. The gap is so wide that US consumers’ importation became their easy way out.
As the value of the dollar increases, it only added fuel to the importation of consumer goods, reducing further the American workforce. This exposed the truth that the average cost per product imported to the US eroded fast their earnings and savings to automatically catch up with the cost of wage and services. This explains why Walmart and Costco now stand as the biggest retail chain of Chinese-made products in the US.
The anti-China threat of the Trump administration to relocate production to countries like India, Indonesia and Vietnam simply does not solve the problem. While their currency is very high, they tend to ignore that goods brought to the US will seek their own level like adjusting the cost to the wage and income of the average American workers. The added value is on tariff and cost of transportation. As one would say, Trump’s trade war with China is a war against himself, for ultimately the American consumers paid for them.
The Americans want to buy things cheap but don’t want to do something to put to a realistic level the value of the dollar. High production cost is only the residue of an overvalued dollar. Both the cost of living and consumer price index will rally to meet the average cost of wage and services, and they revolve on the real value of the dollar.
Investment wise, relocating companies will only bring added cost. Building the site for factories and the training of workers to run them will have to be taken into account. Second, relocating the plant outside the terminal hub will be disadvantageous in terms of smaller market, costly delivery and even reduced sales.
Outsourcing to India, Vietnam or Indonesia is more of a political decision than a wise economic move. It will not help reduce their production cost because relocation will only hasten further importation. It could result in the uncontrollable outflow currency to counties where Americans would be spending more.
Besides, the relocation is likely to offend South Korea, Japan and Taiwan which are seen as having the most productive and efficient workers in the world. It could force these countries to make their own decision on what is advantageous to them.
First, the offer to relocate appears to be addressed only to US corporations. No other leader, except Trump and India’s President Narendra Modi, are enthusiastic, which is understandable and self-serving. Countries that have heavily invested in China like Japan and South Korea remain silent and uncommitted.
Second, the US might end up spending more for the construction of new buildings, storage and warehousing facilities, new and wider roads and ports, or lease them to accommodate their relocation. And not to mention the high cost to train workers to do fabrication jobs.
Countries which the US requested to relocate are not sold to the idea of spending more for infrastructure which China has already built and completed. That could result in them being excluded in marketing their products beyond the Asian land mass using the long haul railway system.
Third, relocating outside China means getting out of the world’s biggest market. The Belt and Road Initiative is a project intended to make China the central hub in the flow of goods to countries geographically connected to Asia and Europe downward to the continent of Africa. The BRI consists of several arteries which China is the ideal site for global marketing, and this is now an incontestable reality in economics.
Fourth, if US companies and others chose to listen to the Sinophobic drumbeating of the Trump administration, they are likely to miss their two main markets - the US and China. Both the US and China are umbilically-linked, that it would be ruinous and reckless for both to take steps that would destroy their economic relationship. The realignment of marketing strategy marginalized many companies outside of the BRI roadmap.
Moreover, sales in India, Vietnam and Indonesia are likely to fill up the local market only and not of the long haul to deliver goods from Asia, Central Asia, Kazakhstan, Persian Gulf, the Adriatic Sea onward to the Mediterranean and Europe, and possibly crossing Turkey on to Egypt until they reach Cape Town, South Africa.
Fifth, US companies are thinking that relocating will only result in them taken over by other companies. The BRI is an almost completed project, and relocating outside is to forego the opportunity to expand their market share. Their loss would be a gain to others.
If ASEAN decides to join the land route offered by BRI, the bogey of freedom of navigation in the South China Sea orchestrated by the US would have less importance. The need for an alliance with the US to secure passage in the South China Sea will lose its strategic value. The bandwagon is tempting that the BRI would serve as their new and fastest gateway to transport goods passing through Central Asia, Europe and onward to Africa. As one might say, China will ultimately have the last laugh because countries will centripetally move closer to China and that includes the Philippines and Indonesia.
In other words, it would be an economic disaster for the US to take the suggestion of President Trump, knowing it is more of a political bluster to sway the electorate into re-electing him. US corporations should not be guided by politicians desperate to be elected such that demagoguery often comes out from their pronouncement than of their sincere effort to extricate the US economy from the looming recession.