Here is an interesting article produced by Mr. Eric Roseman from The Sovereign Society (By the way, I recommend you sign-up for their free newsletter). As you can tell by the title, it builds on my previous coverage of the “dollar collapse” unfolding itself before our very eyes. I hope you find it informative and I must say I completely agree with Mr. Roseman’s assessment of the situation – protectionism is never the answer!
The winds of change are blowing across the Pacific.
In a dramatic shift of trade flows this decade, Pacific economies now export more to Europe and other markets across Asia than to America.
This dynamic trend is not a recent phenomenon. Intercontinental trade between the U.S. and Asia has been slipping since 1990. U.S. trade has suffered at the expense of booming interregional trade in Asia.
For the first time in history, the U.S. was not Asia’s largest export partner last month. Instead, the European Union overtook the United States as Asia’s primary destination for exports. And China and other regional markets logged record trade surpluses with the European Union (EU).
Congressional Bashing: Japan in the 1980s,
China in the 2000s
In the 1980s and 1990s, Congress targeted Japan with their rising protectionist sentiment as imports flooded the United States. For years, Japan continued to record massive trade surpluses with America while Japanese imports declined.
Today, the winds of protectionist sentiment have changed. But unlike 20 years ago when Japan was the hot target, the United States is now directing their protectionist sentiment toward China. The U.S. government vehemently accuses China of unfair trade practices to maintain a cheap and undervalued yuan currency.
Last week, Japan confirmed this rising trend. Japan authorities announced that despite a record trade surplus in September, Japan’s exports to the United States tumbled. This underscores the growing importance of regional trade and rising exports to Europe.
In 1990, Japan was the United States’ dominant trading partner in the Pacific. Asia accounted for 38% of all American imports. Since 1990, Japan’s trade with the United States has risen 1,200%. But the Asian share of American imports slipped to 36%.
Japan’s trade surplus with the United States shrank by a hefty 13% last month. U.S. exports fell 9.2% – the first decline in five months. But Japan’s exports to the rest of Asia surged 59% while Europe’s exports climbed 26%.
Indeed, as the Pacific continues to accumulate wealth this decade, the region is relying less on the United States for its exports. This is a marked shift based on historical trends in the post-WWII period.
China Rules with Cheap and Abundant Labor
From 1990 to 2005, a manufacturing revolution swept through Asia. China led the revolution as China transformed into an export powerhouse, mainly to the world’s developed economies. Since 2005, China has been U.S.’s major trading partner.
Asian wages are only a fraction compared to those in the expensive developed economies. China and other Asian exporters increasingly commanded a greater share of the world’s business.
The United States, Germany and Italy, for example, still manufacture excellent high-end goods, namely machinery. But China can produce virtually every low-end item for just pennies on the dollar.
Trade Envy and the War of Words
Like the 1980s, the threat of trade sanctions continues to simmer. The United States and the European Union continue to increase pressure on China to revalue the yuan and make her currency fully convertible. The U.S. dollar has been in a virtual freefall since 2002. Meanwhile China’s currency – still semi-pegged to the dollar since 2005 – has benefited enormously from their cheap currency.
The problem is this war of words to pressure China to revalue her currency is a vain and flawed effort. In reality, a sharply revalued Chinese yuan won’t cure chronic and irreversible trade imbalances.
Global multinationals (MNCs) continue to build major manufacturing presences in China because unit production costs are simply much cheaper compared to factories in the West. This secular event will last for decades to come until China and other regional manufacturing centers eventually lose their export competitiveness.
Currency Revaluations not the Cure
Instead of targeting and relentlessly blaming China, the United States and the EU should focus the blame on multinationals earning gargantuan profits in Mainland China.
Governments have distorted the facts. Revaluing currencies is not the cure. Rather, the problem lies with major American, European and Japanese MNCs. These powerhouses have established major manufacturing operations in China. And they’ve also created the distortion in trade imbalances.
But can you really blame them? Companies exist for one reason: profits. Any CEO worth his salt will continue to manufacture their goods where labor costs are competitive. That means China.
Until China becomes a mature and expensive manufacturing hub later this century – similar to the United States and Germany, capital will continue to flow into Asian countries – where big companies can find a high return on equity and low input costs.
Trade should remain free. Currencies should float. And big business should seek the highest return on equity regardless of trade imbalances.