May 11, 2019 | Trade War With China – Can It Improve with Trump Tariffs?

Currently, the Trump administration is negotiating with China to lower the U.S. trade deficit (goods) and this may help temporarily but not over the longer-term. Why? The big issue with trade is the currency exchange rate. As trade slows with the U.S. (currently happening) the Yuan tends to increase (get weaker). This policy of letting the Yuan get weaker as trade slows helps China maintain its growing exports to U.S. and the West. It’s a game of FX (currency exchange rates).

Let’s look at a few numbers to discern what has happened over the years with our trade situation. Back in 1980 the entire U.S. trade deficit was only $27 billion. By 2000 it grew to 367 billion. In 2008 the trade deficit (goods) was $811 billion. It then dropped to $735 billion in 2014 only to grow since to the current level of $870 billion. What causes this situation? What has been the deficit with China? See the numbers here:

http://www.usdebtclock.org  (look under trade section and then adjust the years at the top to witness the change in trade)

In 2000 we had a deficit (goods) with China of only $74 billion. In 2008 in grew to $262 billion. In 2014 it had grown to $319 billion. Currently in 2019 we are at $412 billion. Why this change over the years? I would summit that a key factor in trade is the currency exchange ratio between countries. Both Jim Rickards (a monetary expert) and Judy Shelton (economist) have understood this factor in our trade with other countries. Why so few?

The currency exchange ratio with China was over 8.0 to 1 (yuan to dollar)  back in 2000. This currency ratio gradually went down (meaning our dollar/china ratio favored the U.S. in relative terms) until 2014. In 2014 the exchange ratio was 6.04 to 1. Currently the China Yuan is at 6.8217 to 1 (yuan to dollar) meaning that China is allowing its currency to get weaker (relative to our dollar). What happens when the currency ratio (China) changes like this (gets weaker in relative terms)?

As the dollar gets stronger exports tend to decline (say with China). As the yuan gets stronger imports tend to decline (from China). As the yuan gets weaker imports from China tend to grow. The U.S. can buy more products with the same outlays. The game of currency exchange ratios affects trade (often very subtly). Countries can play with the exchange ratio daily so as to affect trade with a country. It’s a financial FX game!

As I write, China seems to be allowing the Yuan to get weaker. Tariffs may not work longer-term when China can manipulate its currency to off-set a tariff situation. Mr. Trump needs to do more than add tariffs to a country like China. The core problem is the virtual currency (yuan to dollar ratio) which gets manipulated daily by the Peoples Bank of China. The current yuan sits at 6.8217 to the dollar. It’s been going up (meaning it is getting weaker relative to the dollar).

A weaker Yuan means that imports from China could go up even as more tariffs are imposed. America’s strong dollar means that exports to China could go down. There is less advantage (for China) to import from the U.S.A. when the dollar currency ratio is getting stronger (relative to the yuan). Economist, Judy Shelton, has addressed this issue in her book, Fixing the Dollar Now. Maybe Mr. Trump should add her to the Federal Reserve Board of Governors. She seems more knowledgeable than many IMO.

America has essentially become addicted to goods from China. Our current trade deficit of $412 billion (and growing) reveals this reality. America’s overall trade deficit is now at $870 billion (and growing). Can this problem be solved with the Trump policy of using tariffs to change behavior? Personally, I don’t think so! The REAL problem are the virtual currencies which can now be manipulated daily by all the central banks.

To solve the trade issues, America needs to get to the core of the problem. The core is our virtual (fluctuating) trade currencies. We have an FX problem which allows each country to manipulate trade via their currency. Personally, I do not expect any real solution to the current China/USA trade talks. They are not focusing on the real (core) problem. Tit for tat tariffs will not solve anything longer-term.

Expect that the current trade talks will solve nothing meaningful longer-term. Mr. Trump’s ‘tweets’ may boost our virtual index stock markets (temporarily) but his policies will not solve anything longer-term. Yesterday a Trump ‘tweet’ created euphoria among the algo traders and the Dow Index went up some 550 points from its low (25,469.86 – 26,019.32). What does this reveal?

The Dow ended the day some 473 points UP from its low. Virtual money can go UP even as the economy goes DOWN. What a corrupt system we live with (and few discern the corruption). Our real problem is our ‘virtual’ (imaginary) currencies. Think on this. Our money is now VIRTUAL and it gets created and destroyed with the click of a computer key. I call this money from ‘heaven’. Virtual money means inner (spiritual) money! What a farce.

Personally, I do not expect any real (meaningful) change in our trade relationship with China that will solve our trade issues. Trade is likely to remain in a deficit and it is likely to grow over time. We need new thinking at the top. Personally, I would vote for Judy Shelton for the Fed Board. She might add some meaningful dialogue to their discussions. Think for  yourself to discern what is happening. A huge crash is likely at some point down the road. When is impossible to predict! Have a good day!

This lady has some ideas which our policy-makers might consider!

I am: https://kingdomecon.wordpress.com.

Don Swenson May 11th, 2019

Posted In: Kingdom Economics

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