Lines drawn for Trump's economic war

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There is good news and bad news about US President Donald Trump. The good news is he has not initiated a military war, apart from bombing a few empty tarmacs in Syria. The bad news is he is setting the world alight with his economic war.

Chris Johnston cartoon has Donald Trump going to battle in armour.The globe is being split into two, with Australia nervously sitting between the two sides: America and China. At least we have a trade deficit with America so are not an immediate target. But we might want to consider becoming more self-sufficient and broadening our industrial base.

The list of countries Trump is targeting with sanctions, tariffs or threats is impressive. The trade war with China is intensifying. Given that a substantial slice of America's industry base is located there, this must be seriously concerning for corporate America, especially a company like Apple. The ban on the Chinese tech giant Huawei may ultimately split the world's digital infrastructure into two camps, especially if Huawei decides to develop its own operating system.

Trump has ended India's designation as a developing nation, which allowed it to export over 2000 products duty free. Japan is being threatened with tariffs on its automobile exports. Europe has been subjected to tariffs, with more coming.

That is how the allies or neutrals are being treated. The enemies are being hit with sanctions. Iran is the main target, and America is taking aim at any 'allies' who don't comply. When Europe decided to remain in the nuclear agreement with Iran after America pulled out, a new exchange, INSTEX, was established to allow transactions.

America's response? Threatening to block European access to SWIFT, the telecommunications architecture for international finance and the primary vehicle for the global domination of the US dollar. America is also demanding that Germany stop the Nord Stream 2 natural gas pipeline being laid from Russia under the Baltic Sea — to force Germany to take more expensive American gas instead. A bill to sanction any company involved in Nord Stream 2 is being prepared by the US Congress.

Another war front is America's siege of Venezuela, which is nothing more than a flagrant grab for the world's largest oil reserves. Public enemy number one, Russia, is also subject to extreme sanctions, but the effect there is mixed. According to Oliver Bullough in his book Moneyland, about half Russia's net wealth is offshore. A lot of that money is going back before it is acquired by the rampaging American 'authorities'. Russia's economy is becoming more self-sufficient as the domestic industrial base is revived.

 

"A more complete repudiation of the neoliberal ideology of free trade, free flow of capital, deregulation and intensifying cross-border commerce is hard to imagine."

 

In sum, Trump is making America an even greater bully. A more complete repudiation of the neoliberal ideology of free trade, free flow of capital, deregulation and intensifying cross-border commerce — which has reigned supreme for about four decades — is hard to imagine.

The picture is not simple, though. It may look like a repugnant standover tactic, because it is. But it is neither historically unusual, nor without domestic political logic. As has been observed, for 175 years, between 1787–1962, America used tariffs, subsidies and other barriers to trade to nurture domestic industry and protect high-paying manufacturing jobs. Britain did the same to establish its Empire. Japan rose to economic strength by running huge trade surpluses, in part based on locking foreign imports out (usually through clandestine, 'cultural' means rather than direct taxes). South Korea did likewise.

China's strategy was different, although it did lock out foreign interests in some key industries. Rather than just relying on wealth from exports, China sucked in foreign know-how and capital and unleashed internal business investment (which is an extraordinary two fifths of China's GDP, compared with less than half that level for most Western economies).

It sparked an extraordinary economic surge but has led to global imbalances. Consumption in America is about 69 per cent of GDP, double the level in China. When it is claimed that America has become the customer of last resort, it is partly correct (they are heavily indebted customers as well). It was a tale of swapped middle classes: China's expanded while America's was hollowed out. Meanwhile, the global corporations and the rich, the 'one per cent', profited handsomely from lower wages and bigger markets.

If it is common to skew trade to national interests why, for decades, did the US and other Western countries — including Australia, which has let its manufacturing base whither — open their markets? The reason was adherence to the doctrine of comparative advantage, another example of the Alice through the Looking Glass world of economic theory. This theory says countries have distinct comparative advantages, such as natural resources, climate, population, river systems and education, and should concentrate just on them. Then we get a circular argument: 'If countries transact more through trade then there will be more transactions per head and everyone wins.'

Hard to argue with a tautology, but it assumes that the comparative advantages stay fixed, which they obviously don't, and that there is no intention to create new advantages, which is plainly ridiculous. It pretends that market forces just happen; that there are no humans involved in making them. That is why Canberra bureaucrats, trained in this drivel, have for decades ridiculed industry policy.

Trump, meanwhile, is setting out to remake world markets. He is creating a divided world: the Empire and its serfs versus the rest.

 

 

David JamesDavid James is the managing editor of businessadvantagepng.com. He has a PhD in English literature and is author of the musical comedy The Bard Bites Back, which is about Shakespeare's ghost.

Topic tags: David James, Donald Trump, China

 

 

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David, China is the real aggressor here. The USA is reacting to China economically, but if you look at China's acquisitions (76 Ports in 35 countries) and their current aggressive behavior in the South China Sea, their sabre rattling over Taiwan, their unjustified and unavenged invasion of peaceful Tibet, their march in the Australian Antarctic Territory, their debt trap loans to bring Pacific Island nations to heel, then you have to wonder. What are their long term intentions? Your comment that "China's strategy was different, although it did lock out foreign interests in some key industries. Rather than just relying on wealth from exports, China sucked in foreign know-how and capital and unleashed internal business investment (which is an extraordinary two fifths of China's GDP, compared with less than half that level for most Western economies)." Place that in the context of their refusal to acknowledge International Copyright laws, their internal mistreatment of religious minorities, their refusal to let journalists attend the document signing meetings at APEC in PNG, one can only conclude they are spreading like a benign tumour in our region.
Francis Armstrong | 12 June 2019


We should be very afraid!! Someone appears to be a dictator... Perhaps the only answer to such a one, is peaceful resistance, in our millions... We might break out of our lethargy..!!!!
Bernie | 12 June 2019


All that the comparative advantage theory states amounts to this: Jack the neurosurgeon is also very good at mowing lawns, but he earns far more from neurosurgery than from mowing lawns, and so Jack pays a less-skilled lawn mower, Joe, to mow his lawns in a manner inferior to Jack’s while he, Jack, carries on with neurosurgery. It's just plain common sense, and if you think about it, all of us do this every day. ( I like to eat with my friends at a pub because it's more convenient for them and for me ... even though I much prefer the pasta I make at home to the pasta the pub serves up.) As far as I have read, nothing in that theory requires that comparative advantages at any point in time will remain frozen, or that Jack or Joe won't try to create new advantages for themselves. I mean, sure, if Jack suddenly realized that on Joe’s tragic death (he fell under the lawn mower) there was absolutely no-one in town to mow his lawn, he might shorten his surgery hours once a month to mow his own lawn. But that’s not in any way a refutation of the comparative advantage theory. Countries, as a rule, do have unique advantages, as do individuals, and municipalities, and regions, and states, etc. It makes sense to trade on them insofar – and only insofar - as those advantages persist. I have strong objections to China’s inhumane forced labour regime, and flagrant theft of intellectual property. But I’m also totally opposed to Trump’s repudiation of free trade as I am to David James’ straw-man repudiation of comparative advantage theory (if I understand him correctly).
HH | 12 June 2019


Trump is playing mercantilist because, for now, it takes him a lot of faith, as it does just about everyone else, to believe that the future holds jobs aplenty, with the caveat that nobody knows what those jobs will look like. The same difficulty afflicting religion of believing before you see applies in economics as trading on a smile and a shoeshine.
roy chen yee | 13 June 2019


For all his personality defects, Trump is unlikely to make the mistakes Chamberlain made with Hitler - hopefully!
john frawley | 13 June 2019


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