Sputnik: On Monday, Chinese officials allowed the country’s currency to drop below the psychologically important point of seven to the dollar. Many experts have argued that weakening China’s currency undercuts American producers. What countermeasures could the US adopt in order to keep the pressure on the Chinese economy?
Dr Judd Patton: Recently the United States labelled China a “currency manipulator.” They are indeed! The People’s Bank of China operates with a philosophy of dirty floating the Yuan, rather than permitting world market demand to set the exchange rates of the Yuan to the Dollar and other currencies. Therein lies is the fundamental economic problem that President Trump wants to end. Of course, he also wants to end the theft of US business secrets and technology. That issue only be resolved by getting President Xi Jinping to put an abrupt stop to this state-sponsored practice.
On the currency manipulator issue, Chinese leaders do understand correctly that purposely depreciating the Yuan, as their Central bank did recently, reduces the impact of US tariffs. That is, a weaker Yuan makes their exports cheaper and more attractive, while imports from the US become more expensive and less attractive to the Chinese people. That helps to maintain a supposed “favourable balance of trade,” i.e., exports greater than imports. But this is a huge economic fallacy! What any nation desires, from its production sold abroad, is the foreign goods and services, its imports, it has earned by its exports. By continually keeping a currency below its real-world market exchange rate (dirty floating), the People’s Bank of China is harming the Chinese people. Apparently, their leaders do not understand this economic truth. Until they do, I suspect they will continue to be a currency manipulator.
With that background, yes, a weaker Yuan gives American consumers lower prices but in the process undercuts demand for American production. The latter producers are harmed. That is why Mr Trump is providing subsidies to American farmers, in particular, to the tune of $16 billion. Of course the “unseen effect,” is that other Americans have to pay the $16 billion! So Mr Trump's options are to ratchet up the tariff “war,” or to send negotiators who can articulate the economic principles of free-market exchange rates in a convincing and logical manner!
Sputnik: It has been reported that China is planning to cancel their plans to purchase US agricultural products (Soybeans). How might this affect the US farming industry? What is going to happen with Trump’s subsidy program?
Dr Judd Patton: Yes, the Chinese have ended their purchases of Soybeans and a few other crops to counter Mr Trump threat of higher tariffs. The trade war is on! Many US Soybean farmers will surely be affected negatively. Their only long-run option is to convert their farm lands to other appropriate crops ASAP. In the meantime, many will sign up for the government subsidy, better-labelled welfare. If the trade war persists, the subsidies will likely grow much bigger, especially since the 2020 election is less than 15 months away. Mr Trump heeds the agriculture vote.
Sputnik: On Monday, the US financial markets suffered from a new round of tariffs that were implemented by the Trump administration. Do you think this financial instability could result in a new financial crisis?
Dr Judd Patton: Well, as long as the trade war continues with threats and actual policy changes, global stock markets will react, perhaps violently. By its very nature trade wars are disruptive. Mr Trump knows this but believes the time has come to face the dual threat of stealing US intellectual property and ending Chinese currency manipulation. The instability and negative GDP effects on the US and many other nations is a “small price to pay,” in President Trump’s mind, to cause China to compete fairly in the world division of labour within a free-market floating exchange rate system. As to a new worldwide financial crisis, the greatest threat is not from the US-Chinese trade war (though it is a threat), but from Central banks like the Federal Reserve and the People’s Bank of China, etc. who are guided by fallacious Keynesian economic ideas to expand money and credit (inflation) in the face of slowing economic activity. Such actions generate inevitable economic busts by falsifying interest rates and business decisions.
Sputnik: How do you see the next phase of trade negotiations between China and the US? Do you think both sides are willing to find a compromise? What is going to happen with the August deadline?
Dr Judd Patton: I believe both nations will come “to their senses” eventually. But working against an agreement to end the trade war is the 70th Anniversary of the People’s Republic on October 4, 2019. Mr Xi Jinping and Chinese leadership need positive international face to support their core socialist values at home. Caving to Mr Trump does not seem to be an option. On the other hand, Mr Trump is involved in the 2020 election bid for a new four-year term. Caving into the Chinese would harm his political base support. Deadlines to new tariffs will come and go. We have to hope the negotiations can somehow bring resolution and compromise. I don’t have a crystal ball. No one does.
Sputnik: What other retaliatory measures could the two actors be willing to use in case of an escalation?
Dr Judd Patton: Retaliatory measures will only harden the resolve of both nations in this trade war dispute. It’s the wrong approach in my assessment! The Smoot-Hawley Tariff Act in 1930 initiated, along with the inflationary policy of the Fed, the first phase of the 1930s Great Depression. We don’t need history to repeat itself, do we, on a much bigger scale? “Cool heads” need to prevail! Mr Trump knows that tariff and trade wars are not the means to economic prosperity. He is using them as a “temporary” stick. So he is not committed to them. That’s good! Now, if only the Chinese can grasp the simple economic logic that theft of US business secrets and technology is immoral and that currency manipulation is also not a means to economic betterment. Surely there is someone on the US negotiation team that can raise the Economic IQ of President Xi Jinping concerning these economic truths. If not, I volunteer. Send me to Beijing, Mr President!
The views expressed in this article are those of the speaker and do not necessarily reflect those of Sputnik.
