Don't Blame Trump for Confronting China

By Colin Twiggs
June 23, 2017 4:00 a.m. EDT (6:00 p.m. AEST)

First, please read the Disclaimer.

It is difficult to separate the wheat from the chaff, with the constant media barrage of negative commentary on Donald Trump's latest trade sortie. From The Economist:

"It is becoming increasingly likely that the phoney trade war between America and China will develop into the real thing......China regards the first round of American tariffs as a unilateral violation of global trading rules. It has lodged a complaint at the World Trade Organisation (WTO). But Mr Trump's team maintains that China started the conflict, by stealing America's intellectual property and engaging in unfair industrial policy. Once tariffs have been imposed, the rights and wrongs—and even the role of the WTO itself in the dispute—could be forgotten."

But in this Bloomberg interview Lloyd Blankfein from Goldman Sachs says there is a lot of frustration with China and hints that, while aggressive threats are not his style, it does make sense to confront China.

Apart from the theft of intellectual property and unfair trade practices, some of the basic give-and-take fundamentals of international trade have been abused by China and others. How this was allowed to continue unhindered under the previous three presidencies beggars belief.

First massive international investment in US Treasuries over the last two decades distorted currency flows between the US and its major trading partners, creating an over-strong Dollar and undermining the competitiveness of US-based manufacturers.

International Investment in US Federal Debt

Second, an unforeseen consequence of the foreign inflow into US Treasuries was the dramatic fall in real long-term interest rates — illustrated by 10-year Treasury yields minus CPI on the above graph. Real long-term yields fell from a band of 3.0% to 4.5% during the 1990s to a band of 0.0% to 1.5% in the current era, distorting asset prices and threatening the very survival of financial markets during the 2008 financial crisis.

Third, the current account deficit ballooned as a direct consequence of efforts to undermine US manufacturing competitiveness.

US Current Account Deficit

Cries of unfair trade practices from China and other long-term abusers are unlikely to receive much sympathy behind closed doors in US boardrooms.

What is needed is another Bretton-Woods-style international accord encompassing trade and currency exchange rates. In the current hostile environment that may be difficult to achieve. But there is no real alternative. Other than an international trade war.

It is time to recognize that financial markets are inherently unstable. Imposing market discipline means imposing instability, and how much instability can society take? .... To put it bluntly, the choice confronting us is whether we will regulate global financial markets internationally or leave it to each individual state to protect its interests as best it can. The latter course will surely lead to the breakdown of the gigantic circulatory system, which goes under the name of global capitalism.

~ George Soros: The Crisis of Global Capitalism (1998)



Colin Twiggs is director of The Patient Investor Pty Ltd, an Authorised Representative (no. 1256439) of MoneySherpa Pty Limited which holds Australian Financial Services Licence No. 451289.

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