From naked capitalism, October 30:
By Marshall Auerback, a market analyst and commentator. Originally produced by the Independent Media Institute
Trade wars are neither easy nor costless, in spite of the insouciant
assertions of President Trump to the contrary. But it is also the case
that those who predicted that the far-sighted mandarins who guide
China’s economic policy would win this battle might be similarly guilty of misplaced confidence.
It’s early days, but so far the constellation of economic data that
has come out of both countries suggests that it is China, not the U.S.,
which is bearing the brunt of this particular skirmish. And so long as
the U.S. economy continues to grow, the corollary is that we should stop
regarding these protectionist measures as temporary aberrations in
America’s internationalist policies, especially on free trade. Rather,
this is the new normal: an expression of a rabid 19th-century-style
nationalism, reversing decades of globalization and shifting the
worldwide economy into a series of competing regional blocs and
alliances in the process. Maybe even a new Cold War (with China this
time, not Russia).
Beijing has just reported its weakest quarterly official growth figure in a decade, and its currency has recently fallen to its lowest level since 2017.
The 6.5 percent year-on-year growth reported for the third quarter is
the official figure, and Chinese officials themselves have long conceded
that many of their economic measuring sticks are doctored (which means that the unofficial, but real, number is probably much worse).
By contrast, the U.S. economy has remained relatively robust and
shows little sign of a slowdown yet. The fact that the recently imposed
tariffs in this growing trade war have not yet caused any significant
economic dislocation domestically will likely embolden Trump and his
trade team to up the ante as far as sustaining additional pressure on China, or to consider similarly aggressive action against other countries that
conduct policy in a manner Trump considers deleterious to American
trade interests. This will play well in swing states considered crucial
to the president’s ongoing political success.
In the post-World War II period, the U.S. economy has remained the
largest and most powerful in the world. Certainly it has long been the
most developed consumer market, access to which has represented the
crown jewel for any aspiring exporting nation. But until Trump, previous
administrations have been somewhat more circumspect in resorting to
aggressive protectionism to bludgeon better reciprocal terms for
American businesses. Yes, the Reagan administration demanded export
quotas from Japan’s automobile manufacturers, and George W. Bush and
Barack Obama occasionally resorted to anti-dumping measures against
China, notably after its entry into the World Trade Organization (WTO),
which wrought devastation on the American manufacturing sector (particularly
in the Rust Belt states). But these were all considered temporary
measures; the underlying ideological assumptions of globalized free
trade, and the so-called “Washington Consensus,” remained largely unchallenged as benign ends in and of themselves.
The focus of liberalization and deregulation of trade, however, began
to change in the 1990s, reflecting Washington’s changing policy
preferences, notably privileging finance over manufacturing via
increased services liberalization, in exchange for continued access to
the U.S. consumer goods market. Fighting for manufacturing interests
basically went out the window after the Plaza Accord,
under which then-Treasury Secretary James Baker managed to secure a
devaluation of the dollar in order to improve America’s export position.
By the time Robert Rubin became Treasury Secretary, he regularly articulated a strong dollar policy, evincing little concern for U.S. manufacturing interests.
Rubin espoused this belief on the grounds that a strong dollar
attracted more portfolio flows to the U.S. capital markets, thereby
sustaining the boom in American bond and equity markets, (a primary
objective of the former Goldman Sachs co-chairman). Certainly the
hardline stance adopted by “The Committee to Save the World”
at the height of the 1997–98 Asian Financial Crisis, for example, was
in part motivated to ensure that the emerging Asian markets crisis could
be exploited in order to lever open their markets to the likes of
Goldman Sachs, JPMorgan Chase, Citi, and a host of other financial
interests. Nary a word for U.S. manufacturers. Indeed, America’s Asian
Cold War allies were shocked at the manner in which the U.S. ruthlessly
exploited the crisis for the benefit of Wall Street (failing to
appreciate that the end of the Cold War had essentially eviscerated the
basis of the bargain whereby American trade policy accommodated a huge
increase of Southeast Asian exports to the U.S., to underwrite the
latter’s ongoing prosperity and ensure that its bloc remained firmly
within the U.S. sphere of interest as it fought to contain the spread of
global communism).
The substantial falls of the Asian countries’ currencies relative to
the greenback during 1997 considerably added to their dollar-based
funding requirements (which exacerbated their economic distress).
Blowback came later for U.S. manufacturers, as the greenback’s strength
significantly eroded the position of U.S. exporters, resulting in a massive increase in the American current account deficit
by the early 2000s. Furthermore, the hardline stance of the Treasury
and Fed reinforced the Asian Tigers’ mercantilist instincts. Having seen
Rubin, and then Larry Summers, hang them out to dry at the height of
the 1997–98 crisis, these countries were determined never to be put in
that position again and therefore deliberately kept their currencies
weak well after their economies had recovered, building up huge trade
surpluses and further obliterating what was left of U.S. manufacturing
competitiveness (prompting yet another commissionto examine the after-effects, but without actually implementing a change in trade policy)....
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