The China Trade War And The End Of Globalization

(The mooted China-US trade war to me was going to cause millions of tragedies at the bottom of the social spectrum where I also reside and struggle. There are millions of Chinese migrant workers whose families’ livelihoods and children’s education depend on the manufacturing industry. That’s the reason why I Wrote to President Obama to dissuade him from initiating an all-out trade war with China.)

Dear Mr. President:

I am a huge admirer of your politics of hope. Hereby I pluck up my courage to put my commentary on the currency war before your eyes. I dare to ask for your counsel on my humble research findings.

Recently the currency conflict between the US and China has brought the world to the edge of a global trade war. I have done many researches on this subject only to realise that many of the opinions and commentaries on the international economic and financial medias are merely the repetition of previous politically motivated arguments and nationalist sentiments. It’s a conversation with only one side of the story. There’s little wonder that right now the consensus of China as the major culprit for the US’s trade deficit and unemployment is coming to a boiling point. If there’s only one side of the story in a conversation, the conversation will head toward a wrong direction, which serves no purposes of communication but confrontation. The conclusion based on that kind of conversation will be irrational and detrimental to both sides. This conclusion right now is a China–US currency/trade war. As a life-long Economics learner, it is my responsibility to tell the story from another angle and base the debate purely on the economic theory, merits and observation (facts and data) but not on inflammatory sentiments. That is true to the integrity upon which Economics and other social sciences are built and that is the moral and academic objective I should establish for my students. That’s why I come to write this commentary.

Mr President, in June this year People’s Bank of China(PROC) has issued a statement to promise a more flexible Yuan.We can see China is determined to gradually allow RMB to appreciate with lessened state intervention. Failing to do so in such frail global recovery will seriously isolate China on the world stage and won’t do much good to China’s export-orientated economy in the long run. That is a risk Beijing won’t take. That’s why even though many commentators are sceptical about this, we still should take PROC’s statement at its face value.

RMB will definitely appreciate at a pace deemed appropriate by Chinese policy makers but patience is not politician’s virtue when an election is approaching, employment situation is bleak, and White House and Fed are running out of ammunition of fiscal and monetary tools to tune up shaky recovery. “RMB should appreciate substantially and drastically.” You can coin that into many fear-mongering campaign sound bites which are used only to buy failed politicians’ more time and votes.

But the problem is “will it greatly reduced trade deficit and create jobs as politicians promise?” . What Pandora box will this patriotic currency war open for the US? Will it be a mirage of unrealistic prosperity based on false foundation or a genie in the bottle of entrenched recession?

First, regardless of RMB’s value, the huge trade deficit the US registers every year won’t be significantly reduced if the US doesn’t appropriately boost its deep-rooted chronic low saving rate and defuse the disincentive to strong and competitive manufacturing. That disincentive is derived from the dollar’s status as the global currency. Trade-surplus nations such as Japan, Germany and China all need to strengthen their respective comparative advantages to gain in manufacturing and trade, all the US needs is printing more greenbacks: Buy commodities and goods denominated in dollar with dollar and debt, Service the debt denominated in dollar with more debt and dollar. There’s little wonder why manufacturing is dying in the US whilst Wall Street is prospering. It’s no coincidence that Germany produces the robust machinery, the US produces dazzling financial derivatives. If these issues aren’t properly dealt with, National Export Initiative will only bear wishful thinking. Sure, they can force the trade surplus out of China’s hands only to hand over to other trade partners. Many items in Wal-Mart are made in China, but trade deficit are 100% made in USA.

Second, before The US properly addresses its colossal fiscal deficit problem; The US can’t afford the non-stop dollar depreciation, because the only thing standing between the US and a Greek style sovereign debt crisis is dollar’s status as the global currency. A weaker dollar would threaten that status. According to Congressional Budget Office “The public debt of the US is projected to equal 140 per cent of GDP within two decades. Add that doesn’t even include the budget troubles of state governments. Greece’s debt, by comparison, equals about 115 per cent of its G.D.P. today. “For now, Fed can absorb any future blows by quantitative easing, cause unlike Greece, America’s public debt is denominated in its own currency: dollar. What if this is not the case one day? Many countries have already started to seek refuge in reserve currencies other than dollar. “As of December 2006, the euro surpassed the dollar in the combined value of cash in circulation. ” The collapse of dollar as a global currency is not an impossibility anymore. Betting “short” on the demise of global currency dollar is going to be the biggest financial windfall speculative luminaries have yet to make.

Third, a strong RMB will substantially reduce the debt-financed demand in the US and derail the fragile recovery. A strong RMB will exacerbate the inflation problems in the US and reduce the household’s real income. A weak demand is already a chief problem plaguing US recovery and job creation. Before strong RMB creates any jobs in manufacturing, people working in Wal-Mart will lose their jobs and many service jobs created around Chinese imports will go. There will be less Chinese trade surplus recycled in dollar assets and securities to finance the US growth and subsidise the US’s low interest rate. Without low interest rate and accessible capital, many companies will go bust, especially those small businesses—-the key drivers of job creation.

Fourth, a strong RMB will disrupt China’s rapid growth and gradual transition from export-oriented economy to consumption-oriented one. And that will severely dampen its present and future demand for the US exports. The majority of the US exports to China are capital goods which facilitate China’s export-focused investment. Also in the US, Capital goods are the major driver of job creation in the manufacturing sector. That is very bad news for Nation Export initiative since according to Timothy Geithner China now is the major growth engine of the US export:’ In the second half of 2009, the U.S. exports to China increased by 15 per cent on a year-over-year basis, while the U.S. exports to the rest of the world fell by 13 per cent. In the first quarter of 2010, U.S. goods exports to China rose by more than 40 per cent compared to the same period the year before, while U.S. exports to the rest of the world rose by less than 20 per cent.’

Fifth, drastic RMB appreciation is against the sacred bottom-line of Chinese central government: building a harmonious society. Many companies are geared towards export, and they account substantially for GDP and job creation in China. And they will be put out of business by a strong RMB. Yes, strong RMB will help the Chinese economy be less labour intensive and more capital intensive, which would move China up the international economic food chain.Why can’t they just grab the opportunity presented by the strong RMB with both hands? Because they can’t. They haven’t found a production model more effective to absorb their abundance of employment seekers than labour-intensive production. To China building a harmonious society is the most important thing to ensure the stability of the government’s rule. Massive structural unemployment caused by drastic RMB appreciation will mount the unthinkable possibility of a regime change the ruling party worries the most. Once a Chinese can make a living, he rarely challenges authority. That’s why there’s a bottom line the US can’t cross on the currency issue with China. Don’t ever underestimate Chinese central government’s determination to fiercely defend its scared bottom line, which they already fearlessly demonstrated during Korea War and Vietnam War. A trade war between world no.1 and no.2 economies will be equally brutal and bloodthirsty.

Truth, vision, wisdom and righteousness won’t necessarily prevail in the multilateral conversation in the globalization setting unless one understands, respects and addresses the respective nation’s characteristics and bottom line. A true nationalist must be somewhat an internationalist because leastways a nation’s prosperity won’t be built on the destruction and crumbling of one of its major trading partners and financiers. What’s good for politics, nationalism and consensus may not be good for the long term economic stability and prosperity of the nation. The true extraordinariness of a great leadership lies within the brave sacrifice of one’s own political capital for the sustainable welfare of the nation. And a great leader often suffers the isolation and loneliness because of that sacrifice. An economist’s job is to provide objective observation and unprepossessed analytic conclusion of highest integrity for that great sacrifice. While the whole world’s edging toward a currency war triggered by the nationalist survival instinct in a economic-crisis-stricken world, isolation of China will destruct a lot and achieve little. and now it’s time for the US to rise up above all to lead the international coordination to defend the free trade and the dollar’s status as the global currency upon which decades of world’s prosperity is built. That’s the aspiration the US gives the world as the beacon of free market, free trade and great capitalism in previous crises. That’s the foundation for the US’s status as the superpower and world leader. An US-led trade-plus countries’ coordinative currency appreciation will leave China with no choice but to cooperate and help address grievous global imbalance.Or they will suffer serious isolaton.

Thanks!

Best regards!

Yours

Sincerely

Dee Woo

NOW WATCH: Money & Markets videos

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.