The rhetoric by the U.S. to pressure China into strengthening
the Yuan is more than a tad interesting. They are saying it is undervalued and
is causing harmful imbalances to world trade, adversely affecting the global
economy given China’s role as the world’s largest exporter. Arguably, this was
the main financial story for 2010. If you knew your history well you may well
conclude that this accusation lacks any basis in reality.
Adam Smith, the great eighteenth century economist, was a
keen observer of contemporary events with a historical perspective and of its
causes and effects on the economies of nations. In his grand work, ‘The Wealth
of Nations’, he states that “Nothing, however, can be more absurd than this
whole doctrine of the balance of trade.” (Book IV, chp III, part II). If trade
were perfectly balanced, there would be no progress, as the advantage of one
nation that creates prosperity in that nation can only come at the expense of
another. His profound statement of the invisible hand also works at the national
level as all exchange is motivated by self interest.
In today’s world, this basically means that China is selling
goods on the market cheaper and other nations are not able to compete. Since the
U.S. is the main importer of Chinese made products and the American dollar is
the reserve currency through which most international trade is denominated,
China has accumulated a huge amount of dollar reserves (2.5 trillion) that it
then recycles back to the U.S. by purchasing U.S. Treasury Bonds effectively
lending the money back so that the American consumer can continue purchasing
more goods. This summarises the commercial relationship between these two
nations and it has been going on for more than a decade.
Just like most other things in life, trade is a zero sum game
where if one nation is getting richer by selling goods and getting money in
return, another by definition is poorer, buying and consuming giving up money in
exchange. This was how England in the nineteenth century and America in the
twentieth became the wealthiest nations in the world. They simply were the
manufacturing powerhouses of the world and provided goods the people of other
nations world wanted at the most competitive rates.
The moral in this is that all nations have and will continue
to act in their own self interest and any talk of a group of nations
co-operating in a kind of idealistic utopian world for the benefit of everybody
is completely unrealistic and unsupported in history. The only motivating force
that has ever bound nations, industries, groups or individuals to co-operate
with each other was that of self interest.
Penalising Peter to give to Paul was the mantle of communism
which led to its collapse in Russia and Eastern Europe a couple of decades ago.
People also remember what led to Tiananmen Square. Profit motive or
individualism was taken away by force. At the national level this cannot be
enforced by one nation upon another except by force of arms.
In this latest battle of words the U.S. has used an old trick
of blaming currencies for its ills. Instead of looking at decades of failed
policies and tax regimes that has driven capital and jobs offshore seeking a
lower cost to make goods and services, the U.S. politician has sought to point
the finger at an easy target, in this case supposed currency manipulations by
China.
In the U.S., it now takes a husband and wife to provide the
same quality of life that a generation ago only required one. The government has
subsidized the public sector at a cost of half the national private income for
the last three decades. Since the average American consumer can now no longer
afford to buy more expensive locally made products, it is China that has
benefitted by filling the gap.
Just recently, the U.S. congress, to back up its accusations,
passed a bill through the House but is still pending Senate approval that will
impose duties on imports deemed given unfair subsidies by foreign governments.
If the bill becomes law this will effectively make goods even more expensive for
the average American rendering their condition all the more intolerable with
real un-employment above 15% and over 40 million people on food stamps.
It is not a wise strategy for America to antagonize the
Chinese, with its huge spending and lending power and ability to produce cheap
goods, given the fragile state of the U.S. economy. In retaliation and possibly
as a prudent investment strategy China can sell its holdings of U.S. Treasuries,
given the policies coming out of Washington and the Federal Reserve, to further
weaken the dollar, and to align China’s long term strategy of evolving to a
consumption based economy relying on regional and other emerging market
economies for trade that is surely to decline from the U.S. and other developed
economies. Asia is already exporting within itself and this will only increase.
For the Americans to take the strategy they are pursuing is probably about as
sensible as sensible as Napoleon invading Russia.
The above data and research was compiled from sources
believed to be reliable. However, neither MBMG International Ltd nor its
officers can accept any liability for any errors or omissions in the above
article nor bear any responsibility for any losses achieved as a result of any
actions taken or not taken as a consequence of reading the above article. For
more information please contact Graham Macdonald on [email protected]
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