The problem with winning a race to the bottom is that you end up at the bottom.
President Donald Trump’s idiotically conceived and incompetently executed trade war with China shows no signs of abating — the president himself said this week that he’d be happy to see negotiations drag on throughout the coming year — and now Trump has decided to expand the theater to Brazil and Argentina.
Trump says he is imposing tariffs on steel and aluminum from Brazil and Argentina because those two countries have engaged in a policy of competitive currency devaluation, i.e., they have artificially driven down the value of the real and the peso, respectively, in order to gain an unfair advantage for their exports. Trump charges that this has hurt U.S. farmers and says he is imposing these sanctions on their behalf. The Commerce Department, Treasury, the U.S. Trade Representative, and the governments of Brazil and Argentina learned about this on Twitter in the wee hours, because that is how the Trump administration makes policy.
Like a great deal of what comes out of this White House, the new tariffs and the rationale undergirding them exhibit a very fine blend of dishonesty and stupidity.
It is true that the real and the peso have declined in value of late. But this is not programmatic devaluation; rather, both Brazil and Argentina are in the midst of severe self-imposed crises in their national economies (when are these South American giants not in the midst or on the verge of economic crises?) caused by excessive public debt and misgovernment, afflictions with which the United States is increasingly familiar but as yet resistant to, owing to the sheer size and dynamism of our economy. When a nation’s finances tank, its currency tends to fall in value as investors scurry off rodentially from the keeling schooner that is the ailing nation’s economy. Your people get poorer, and so do your businesses, particularly those with debt denominated in foreign currencies and those that buy a lot of imported goods or inputs. But your exports do get cheaper. That’s the one real upside.
Another way of putting that is that as the economy collapses and the cratering national currency immiserates the people, they become more like the people in poor developing countries who must capitalize on the only asset they have: their poverty. A low standard of living makes labor cheap, and it makes locally produced commodities and finished goods relatively cheap in export markets.
Being poor is the worst kind of competitive advantage to have, and only two kinds of people pursue that advantage as a matter of national policy. The first kind is tyrants, such as the ones in Beijing, who for years artificially lowered the standard of living of the Chinese people on the theory that the Communist bosses could play a long game in which economic development would happen on their terms and under their control, without much real economic power accruing outside of the state. Keeping people unnecessarily poor in order to consolidate the party’s political power and to maintain a firm nationalist whip hand over politically sensitive industries is a monstrous policy but one that has its admirers in managerial nationalists in the United States both left and right.
This policy also appeals to a second kind of people: idiots.
That would be us.
Americans are so selfish that we even envy foreigners their poverty. Americans — President Trump and his advisers are hardly alone in this — look at the situation of Argentina, Brazil, China, India, etc., and say to themselves: “That’s not fair! We need some of that, too!” We believe, without quite putting it that way or understanding what we are advocating, that we would be better off if we were more like the poor, low-wage, backward countries with troubled currencies. And so President Trump has taken a break from labeling other countries’ “currency manipulators” to demand that the Federal Reserve engage in a new policy of more robust currency manipulation. Fed chairman Jerome Powell, to his credit, so far has refused to comply. Devaluing the U.S. dollar would make American consumers and businesses poorer. It would be equivalent to a tax on savings far hungrier than the one Elizabeth Warren contemplates. It would ruin businesses that import components and raw materials: We already have seen this ironically manifested in the ruination of a few domestic steel businesses by the Trump administration’s tax on imported steel, which was enacted without anybody apparently giving a second’s thought to the fact that many U.S. steel companies make a lot of their money processing imported scrap. The tariffs are a tax on one class of goods; devaluing the dollar is a tax on everything, especially on savings and investment.
Our friend Larry Kudlow is a partisan of “King Dollar.” The guy he works for advocates regicide.
What’s particularly idiotic and dishonest here is that none of this was necessary, and none of it has anything to do with monetary policy in Argentina or Brazil. U.S. farmers have lost market share to the South Americans not because of crafty decisions made in Buenos Aires or Brasilia but because of dumb ones made in Washington by the Trump administration, i.e., by the same cabal of backward, slavering incompetents who now are rolling out this new policy.
When the Trump administration enacted tariffs on China, Beijing enacted retaliatory tariffs, some of which targeted American soybean farmers. The Chinese import a lot of U.S.-grown soybeans: The Chinese like pork, and pigs like soybeans. (Most Chinese soy imports are used for animal feed, not tofu.) Soon, U.S. soybean producers, who had spent decades and a considerable amount of money building their Chinese export market, found themselves essentially shut out of China. But the Chinese didn’t stop importing soybeans. They just turned to new producers. As dumb luck would have it — emphasis on the dumb — this trade war coincided with a glut in the worldwide soybean market. When beans are scarce, Northern Hemisphere producers and Southern Hemisphere producers in effect alternate as providers for big export markets. But with lots of beans on the market, and a whole lot more beans in storage, Beijing had the option of simply shutting out U.S. producers with only modest effects on domestic prices. The outbreak of swine fever in China also resulted in the death of 100 million pigs, which took some of the edge off demand.
The American Soybean Association had an office in Beijing for a quarter century before U.S.-grown beans started hitting Chinese feed troughs. Export markets don’t just organize themselves — that enormous and enormously profitable export operation took time and money to build. It took only a few strokes of a politician’s pen to destroy it. The U.S. position in China almost certainly has been permanently diminished — President Trump can sign whatever trade deal he manages to negotiate (bear in mind that the Great Negotiator couldn’t even make a deal on his beloved wall when his own party controlled both houses of Congress), but the damage is done and will not easily be undone. That’s the cost of political incompetence and ignorant adventuring: The productive value of an entire sector of U.S. agribusiness has been permanently diminished because a politician who couldn’t tell a soybean from a hairy coconut let a fit of nationalist pique run away with him — and didn’t have anybody around to tell him: “Hey, dummy — don’t do that.”
Now President Trump proposes to mitigate the effects of his incompetently executed trade war by expanding that incompetently executed trade war. He is trying to cure arsenic poisoning with cyanide.
Who is poorer? American farmers, for one, and others involved in agriculture. (It never seems to occur to anybody that most farmers’ biggest asset, their land, is worth less when its products are cut off from major overseas markets. And the bankers who have accepted that land as collateral have diminished assets, too, as do people invested in those banks, and so on and so forth, throughout the economy in subtle connective tendrils.) If the president is successful in devaluing the dollar, then Americans as a whole will be worse off, too: And if we should happen to devalue our currency to the extent that it falls as fast as the Argentine peso has? Argentina’s inflation rate was above 50 percent in October. Does that sound like the road to victory to you?
But at least we are sticking it to the Chinese, right? Don’t be too sure. Xi Jinping is doing fine, and China’s economy in the third quarter grew at three times the U.S. rate.
Funny kind of “winning” for the Trump administration.
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