Trade war backfiring on the US

By Rod P. Kapunan

Once China secures alternative markets, American producers could completely lose their exports even after tension ends

The trade tensions initiated by the US against China are getting nastier by the day. With both sides resorting to the same weapon — mutually destructive tariffs — the question is how long this can be sustained, when other countries are willing to offer their exports at comparative and even lower prices, unhampered by political conditions.

When China retaliated by imposing tariffs on US agricultural products, it signaled it would hurt the US economy most. The retaliatory tariff imposed on soybeans would surely inflict huge losses, even raising the prospect of the US losing altogether its US$20 billion soybean export industry.

The US cannot for long subsidize its soybean farmers, who send US$12 billion worth of soybean shipments to China annually. On June 15 as the trade war with China escalated, US soybean futures dropped 2.3 percent and hit their lowest price in a year as farmers braced for disruption to their shipments. Corn and wheat futures each fell less than 0.5 percent. To a lesser degree, US exports of cherries and apples would be experiencing the same debilitating effect.

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Once China manages to secure alternative markets and institutionalize its imports on the affected products, there is the greater risk the US will completely lose its exports even after the tension ends. Significantly, that would naturally dismantle the subsidy on US agricultural exports, vis-a-vis providing incentive to countries to increase their share in the world market.

In fact, China is the one doing US consumers the great favor of offering them products they can afford. The US enjoys an even greater advantage because American importers of Chinese goods are the same people doing the business of exporting US products to China.

US trade representatives focus on the trade deficit which, sad to say, is merely influenced by the unjust valuation of its currency. Wal-Mart and Costco are two giant US companies doing the importation and exportation of US and Chinese goods, and are retailing them.

Notably, the decoupling of the US dollar from the gold standard saw the soaring of its value against other currencies. It was initially good for the US because it was able to import more for a lesser amount of dollars. To the underdeveloped countries, it was a backbreaking job for exporters of raw materials, mineral ores, fuels and agricultural products that resulted in their perennial trade deficit. Yet, for decades when the US economy enjoyed a trade surplus and the high value of the dollar was anchored in its export of manufactured goods, the US never complained.

That arrangement worked well, for it was then the leading manufacturing state producing nearly 50 percent of the world’s manufactured goods. Today, the US barely represents one-sixth of the world’s total manufacturing output. This has greatly diminished its ability to enforce trade sanctions or impose tariff hikes without inviting retaliation.

Americans argue that a trade war will only compel China to scout for alternative markets. In this era of multilateralism and globalism, trade sanctions have become less and less effective. It is more about filling up what is left by others, unless an economic blockade is resorted to, which means war.

US trade representatives could not even sense that American traders doing business in China are the ones complaining.

The release of the dollar from the gold standard brought much unanticipated devastation to the US economy. It increased the cost of wages and services in the US, and the overall cost of living. This marked a shift in the US economy from one of exporter to one saddled with a trade deficit.

The US consignment of jobs offshore did not resolve the increasing trade deficit, principally because American workers object to giving any preferential treatment in excise tax on US brands made in China. They argue they already lost their jobs, and cannot now be accorded the privilege of reduced tariff. This exposed the fallacy of consigning production abroad, because the disparity in the value of the dollar against the yuan and other currencies could likely debone the US’ economy of all their factories, which is of their own making.

They myopically focused on the opportunity for cheap labor without realizing that the increased cost of labor in the US was merely reacting to the high value of the dollar — which keeps on increasing because inflation was purposely injected into the economy to attract interest rate investment, as a substitute for the manufacturing industry.

The US has to sustain the upward spiral value of its currency by heavily engaging in foreign borrowings to keep afloat an economy based on its GDP alone, since that decision by the Nixon administration in 1973.

This debilitating paradox that saw the US economy trapped in a cycle of inflation to keep interest alive and attract speculative investment, resulted instead in unprecedented trade deficits that irretrievably mired the US economy in external debt with a fast de-industrializing manufacturing plant.

The author is a columnist and political analyst based in Manila. He is also the author of several books including Labor-Only Contracting in a ‘Cabo’ Economy.

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