Despite Trump backing off from implementing his bizarre reciprocal tariffs imposed on every country in the world (including the penguin-only inhabited islands of Heard and McDonald), two thousand miles south west of Australia, the tariff war is by no means over. The ratcheting-up of tariffs on China still leaves the US total effective tariff rate higher than it was before Trump flinched. According to Stephen Brown at Capital Economics, Trump’s promise of 125 per cent tariffs on China puts the US’s effective tariff rate at 27 per cent.
Trump backed down because the bond market was showing signs of severe stress that could lead to a credit squeeze particularly for hedge funds that own a siginifcant stock of US bonds. If bonds dived there might well be bankruptcies for many companies, especially the heavily indebted so-called ‘zombie’ companies that constitute about 20% of all companies in the US. Bankruptcies could then ricochet through the economy, leading to a financial crash and slump.
That was not only problem for Trump. The 125% tariff hike on imports from China potentially priced out exports of hi-tech consumer goods by American companies based in China. American companies like Apple who are the main exporters of i-phones etc. out of China, would have been hit hard. Roughly 90% of Apple’s iPhone production and assembly is based in China. If you take an iPhone for instance, less than 2% of its costs go to Chinese workers making the phone, while Apple makes an estimated 58.5% gross margin on its phones. Disrupting that supply chain would hit the US more than China. American companies screamed and so Trump had to back down again. Now all consumer tech products imported from China, which are 22% of all US imports from China, are exempt.
The illogic of Trump tariff tantrums is also revealed by the fact the components going into i-phones and ipads are still subject to the tariff hike, just not final product. According to the US National Association of Manufacturers, 56% of goods imported to the US are actually manufacturing inputs with a lot of that coming from China. Price rises there will feed through to many final products. The exemptions offered to consumer technology goods apply only to reciprocal tariffs. All imports from China, including goods exempt from reciprocal levies, are still subject to an extra 20 per cent tariff. Moreover, Trump plans tariff hikes on semi-conductor imports which will hit the likes of Apple etc.
The US imports a lot of basic goods from China: 24 per cent of its textile and apparels imports ($45bn worth), 28 per cent of furniture imports ($19bn) and 21 per cent of electronics and machinery imports ($206bn) in 2024. A 100 percentage-point increase in tariffs seems certain to show up in higher prices for businesses and consumers. So instead of hurting China, Trump’s tariffs will hit the US economy even harder. China actually has very little dependence on exports to the US. They make up the equivalent of less than 3% of its GDP. American consumers and manufacturers will suffer sharp rises in prices – and indeed, that is the experience of previous tariff programs. Furceri et al. (2020) found that a country’s GDP tends to go down after imposing a big tariff hike on imports. And the magnitude of the output decline increases as the years go by — the long-term pain is worse than the short-term pain.
In the current US case, the significant drop in crude oil prices is already putting the profitability of US oil production in jeopardy. American farmers are losing badly in world markets as China switches its food and grain purchases to Brazil. Already, the US share of China’s food imports has collapsed from 20.7 per cent in 2016 to 13.5 per cent in 2023, while Brazil’s grew from 17.2 per cent to 25.2 per cent in the same period. Now Brazil’s beef sales to China climbed a third in the first quarter of 2025, compared with a year earlier while US agricultural shipments to China sank 54 per cent.
China accounts for 7 per cent of US goods exports, or 0.5 per cent of US GDP. According to Pantheon Macroeconomics, the hit to US exports from aggressive Chinese retaliation will outweigh any boost to GDP from the cancellation of “reciprocal” tariffs. Trump and his maga advisers argue that the tariffs revenues will be used to cut taxes to corporations and so boost investment. But according to the latest estimates, from the Tax Foundation thinktank – before Trump raised the stakes with a 104% tax on Chinese imports – would raise about $300bn a year on average, significantly short of Trump’s $2bn a day claim – basically peanuts compared to the loss of real incomes from the tariff measures.
Financial markets remain nervous and uncertain with little sign of recovery after the huge losses recorded in the last few weeks. This has led to many analysts arguing that perhaps the days of dollar dominance are over and Trump has engineered a permanent fall in the dollar compared to other currencies and the end of the ‘exorbitant privilege’ that America has had in being able to issue dollars at will to pay for trade and investment.
Back in 1959, Belgian-American economist Robert Triffin predicted that the US could not go on running trade deficits with other countries and export capital to invest abroad and also maintain a strong dollar: “if the United States continued to run deficits, its foreign liabilities would come to exceed by far its ability to convert dollars into gold on demand and would bring about a “gold and dollar crisis.” Triffin argued that a country whose currency is the global reserve currency held by other nations as foreign exchange (FX) reserves to support international trade, is forced to supply the world with its currency in order to fulfill world demand for these FX reserves and that leads to running a permanent trade deficit.
Triffin’s so-called dilemma of a country providing the international currency losing out in trade has been taken up by Steve Miran, Trump’s White House economic advisor. Miran concludes all the countries running a trade surplus with the US must compensate the US for its ‘sacrifice’ in providing the dollar for trade and investment. But as Keynesian guru, Larry Summers, retorted: “If China wants to sell us things at really low prices and the transaction is we get solar collectors or we get batteries that we can put in electric cars and we send them pieces of paper that we print. Do you think that’s a good deal for us or a bad deal for us?” At the end of the day, Summers went on, who’s more “cheated”: the party doing the hard work of producing goods at very low prices on razor-thin margins, or the party that simply prints a virtually infinite amount of fiat money to pay for all this stuff?
Both Triffin and Miran have the story back to front. The US has been able to get cheap imports for decades and run a trade deficit to do so because countries exporting to the US have been prepared to take dollars in payment and indeed invest back those dollars into US government bonds or other dollar instruments. The trade surplus countries are not ‘forcing’ deficits on the US; it’s just that US exporters cannot compete at least in goods trade (the US runs a large surplus in services trade). Luckily for US companies and consumers, the surplus countries will take dollars in payment, up to now. If they did not do so, then US economy would be in real difficulty – just like many poor countries of the world without an internationally accepted currency are – and be forced to devalue the dollar and/or borrow at higher interest rates.
Under capitalism, there are always trade and capital imbalances among economies, not because the more efficient producer is ‘forcing’ a deficit on the less efficient, but because capitalism is a system of uneven and combined development, where national economies with lower costs can gain value in international trade from those less efficient. What really worries the US capitalists is not that surplus countries are forcing them to issue dollars; it is that China is closing the gap on productivity and technology with the US and thus threatens the economic dominance of the US.
Nevertheless, some mainstream economists accept Miran’s ludicrous argument and the Triffin fallacy. The Chinese-based economist, very much in vogue, Michael Pettis is one. Pettis argues that the likes of China have established trade surpluses because they have “suppressed domestic demand in order to subsidise its own manufacturing”, and so forcing the resulting the manufacturing trade surplus “to be absorbed by those of its partners who exert much less control over their trade and capital accounts.” So it is China’s (or until recently Germany’s) fault that there are trade imbalances, not the inability of US manufacturing to compete in world markets compared to Asia and even Europe.
Assuming no world governance and international cooperation on currencies, Pettis agrees with Miran: “the US is justified in acting unilaterally to reverse its role in accommodating policy distortions abroad, as it is doing now. The most effective way is likely to be by imposing controls on the US capital account that limit the ability of surplus countries to balance their surpluses by acquiring US assets.” So not tariffs on China’s imports, but controls on their purchases of dollar assets.
In essence, this is just another way of devaluing the dollar in order to weaken China’s export advantage and boost the US – a ‘beggar-thy-neighbour’ policy in disguise. Miran-Pettis offer a policy to lower the value of the dollar in the same way that Nixon did in 1971 in taking the dollar off the gold standard (the US reserve currency role encouraged the then US Treasury Secretary John Connally, when he announced the end of the dollar-gold standard in 1971 to tell EU finance ministers “the dollar is our currency, but it is your problem.”); and the US did similarly with the so-called Plaza accord in 1985, which forced surplus nations like Japan to hike interest rates and boost the yen, thus reducing Japanese exports. Now the answer to China’s export and manufacturing success is apparently to wipe out its dollar assets and weaken the dollar.
Unfortunately this policy won’t work. It did not save the US manufacturing sector in the 1970s or in the 1980s. As profitability fell sharply, US manufacturers located abroad to find better profitability in cheap labour economies. And this time, if the dollar is weakened, domestic inflation will rise even more (as it did in the 1970s) and US manufacturers far from returning home to invest will try to find other locations abroad, tariffs or no tariffs. If the dollar falls in value against other currencies, dollar holders like China, Japan and Europe will look for alternative currency assets.
Does this mean dollar dominance is over and we are in a multi-polar, multi currency world? Some on the left promote this trend. But there is a long way to go before the dollar’s international role will be trashed. Alternative currencies don’t look a safe bet either as all economies try to keep their currencies cheap to compete – that’s why there has been a rush to gold in financial markets.
The so-called BRICS are in no position to take over from the US dollar. This is a loose grouping of diverse economies and political institutions, with little in common, except for some resistance to the objectives of US imperialism. And contrary to all the talk of the dollar collapsing, the reality is that the dollar is still historically strong against other trading currencies, despite Trump’s zig zags.
What will end the US trade deficit is not tariffs on US imports or controls on foreign investment into the US, but a slump. A slump would mean a sharp fall in consumer and producer purchases and investment and thus engender a fall in imports. Whenever the US economy has been in a slump (grey areas in graph below), the trade deficit narrows or disappears as imports fall sharply, while the dollar strengthens.
And the US economy is heading downwards as we go into the second quarter of 2025. Excluding gold purchases, the Atlanta Fed now predicts a 0.3% fall in real GDP in Q1 2025, but with domestic demand still growing slowly at 2% a year. But this is before the tariffs hit prices and production. The investment bank Goldman Sachs sees 45% chance of a US recession this year following the tariffs (with a GDP growth forecast of 0.5% for the whole year). Previously, before the tariff madness, GS was predicting“another solid year” of economic growth for the U.S. at 2.5% GDP growth. US inflation fell in March as the economy slowed and consumers reduced their purchases. But more than likely, inflation will turn up in the second half of this year while the economy slips further. Stagflation to slumpflation.
No comments:
Post a Comment