President Trump has upended the World Order that has existed since the end of World War II so much, no one but he really understands the strategy of adopting both the Russian and Chinese view of the world which inherently is adversarial to U.S. interests.
By James Dale Davidson
Ironically, the US under President Trump seems to be trying to destroy the vestiges of the world system of US hegemony. This is certainly a take-away from the promiscuous use of sanctions to bar international transactions of which the US disapproves. Trump’s Iran sanctions have accelerated calls to dump dollars as the international reserve currency.
One could also accurately describe Trump’s trade war as a policy to implement Zhou Xiaochuan’s agenda for a “de-Americanized World.” As you may know, Zhou was the longest-serving governor of the Peoples Bank of China who loudly advocated dethroning the dollar as the world's reserve currency, a step he described as crucial to creating a “de- Americanized world."
I doubt that is what Trump intends. But he is very badly advised by his China-phobic trade representative, Peter Navarro. Trump probably imagines that he is doing Americans a favor by implementing Navarro’s anti-China policies. Navarro spelled out the rationale for his belligerent stands in the 2011 book, Death by China: Confronting the Dragon – A Global Call to Action. Navarro’s simple-minded perspective fails to account for the fact that the United States has a great trade surplus in one special area of manufacturing.
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US Trade Surplus in $100 Bills
The United States manufactures one hundred dollar bills at a great (87%) profit. Recent figures from the US Treasury Department Bureau of Printing and Engraving show that the US spent $235 million to print $1,151.7 billion in hundred dollar bills. This means production costs for printing money were only 0.13%. We exchanged these printed bills for personal computers, solar panels, flat-screen TVs, and BMWs. A great bargain. But that apparently eludes Navarro’s understanding.
Navarro has prodded Trump to aggressively target China with tariffs in an attempt to carve $200 billion from China’s trade surplus with the US. In effect, the US, at Navarro’s suggestion, is reviving Smoot Hawley protectionist measures that infamously deepened the Great Depression, precipitating a global collapse in commodity prices. Navarro’s new tariff rates are roughly as high as those instituted in the Tariff Act of 1930; sometimes higher. The Chinese can’t possibly agree to those tariffs. If they did, it would be a very bad idea.
For one thing, overcapacity is so great in China, and profitability is so sketchy – especially among the state-owned enterprises (SOEs) – that a $200 billion reduction in China's trade surplus with the US would risk pulling the plug on the entire Chinese bubble.
Not only would Chinese firms be in no position to forgo their profits from trade with the US, but there would also be a global problem of a potential dollar shortage that could threaten the rickety gold edifice of world debt. The Federal Reserve’s program of “quantitative tightening” is draining liquidity from world markets as the Fed sells down its holdings of bonds. The banks and other investment entities that acquire those bonds give up liquidity to do so. The result, already in evidence, is liquidity stress in emerging markets.
In a world where Chinese companies are already defaulting on dollar debt, and trade war fears have trimmed $45 billion off the value of offshore dollar bonds, it is obvious that tightening liquidity further would place the whole rickety structure of global debt at risk.
And it is not as if there were other buyers for the cornucopia of goods spewed out of China’s industrial overcapacity. Chinese themselves cannot do much buying with a per capita average of only $10 a day of spending power. No one else in the world is in the position to buy Chinese products at a scale sufficient to keep the gag going. And there are not enough inhabited planets in the solar system to take off everything China can produce, much less lease its 70 million empty apartments.
China Fears Plaza Accords II
Also, note that among China's vast population are quite a few economists who recall (or have studied) the events of the1980s. In particular, they have a very vivid impression of the Plaza Accords. That agreement, fashioned in 1985 between Japan and the US along with the other leading Western economies, called for Japan to increase the exchange value of the yen in order to reduce its large trade surpluses Japan was enjoying with the US and the other Western economies. A few years later, Japan’s economy lapsed into a coma from which it has yet to awake.
Chinese state media have reminded readers of Japan's economic plight after agreeing to US trade demands in 1985. China's official Xinhua news agency opined, "it's worth learning from the lessons of the Japanese government which inappropriately handled the change in situation, leading to serious consequences for the domestic economy." Chinese officials are terrified that yielding to Trump’s trade demands could lead to politically de-stabilizing lost decades in China as the Plaza Accord seems to have triggered stagnation in Japan.
For these and other reasons, it is evident that China is in no position to yield to Trump’s demands. Even without the trade war threats, China's world-historic bubble is in danger of bursting at any moment.
An intelligent policy for the United States in these circumstances would be to proceed in every way possible to minimize the collateral damage from China's collapse. We still enjoy considerable legacy advantages from our ascent to post-World War II hegemony. The greatest of these is the so-called “exorbitant privilege” of the use of the US dollar as the world's reserve currency.
It was this that inflamed the rage of Zhou Xiaochuan when he first proposed to de-Americanize the world by dethroning the US dollar.