The futility of Donald Trump: seeking balance while threatening a trade war with China

The world has moved on (and in some ways backwards) from the currency wars of the 1980s to the threatened trade wars of today, which in turn are a throwback to the 1930s.

Currency wars, like trade wars, usually stem from the misguided belief that bilateral trade between countries must “balance” – in terms of value (not volume) of the goods and services they trade. But that value in turn depends on the worth of their respective currencies.

The fact that currencies continually fluctuate against each other in value means it is almost as meaningless trying to “balance” trade in value terms as it would be to insist that equivalent volumes of goods be traded.

This is not an attempt to embark on an economic dissertation, but to point out that under balanced or “managed” trade of the kind that United States President Donald Trump appears in intent on securing with his trade wars, the incentive to manipulate currency values to achieve balance can only increase.

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Previous US presidents have cherished the ignorant notion that if the country is continually buying more from trading partners than it is selling to them, then something must be wrong somewhere. They are taking unfair advantage of America’s generosity or “cheating” somehow.

This does not make sense for a large number of reasons, and not just because Americans like to spend more than they save and invest – and therefore consume more than they produce, thus relying on borrowing and imports of capital to close the financing gap.

American leaders, especially those of a populist hue like Trump, often see it as politically advantageous to drum up domestic support against cheating or “freeriding” foreign partners through trade conflicts.

They ought to know better even if, like Trump, their knowledge of economics is rudimentary – to put it at its politest. Trade frictions generate resentment, and if they evolve into trade wars, they can lead to much worse – an economic recession, the Depression or even a real war.

Trump needs urgent tutoring in the complexities of a global economy where bilateral trade cannot always balance. But we have been here before. Back in the early 1980s, when Japan was running hefty trade surpluses with the US and others, an agreement was made among the US, Britain, France and Germany to depreciate the dollar severely so the US could cut its deficits.

This was known as the Plaza Accord, and many have argued that its impact in appreciating the yen led indirectly to Japan’s economic bubble and bust and the “lost decade” for its economy.

US deficits, especially with Japan, continued despite the accord, and so Washington turned to other non-currency-war devices such as the structural impediments initiative, through which it sought to hobble Japan’s economy by reconstructing it in the US’ free-market image.

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Now, China has vaulted over Japan to become the world’s second largest economy behind the US, and again America finds itself unable to compete and get rid of its pesky trade deficits.

Enter Trump’s tariffs war. The problem is that he has no real allies because he is clobbering them with tariffs too. And China is far more capable of hitting back against the US globally than was the case with Japan in the 1980s.

One way that Beijing could hit back is by dumping part of its US$1.2 trillion of US Treasury securities, and President Xi Jinping has hinted just such a tactic. Such divestment could hurt a US that depends critically on foreign capital to finance its trade and current account deficits.

But Xi may be playing a clever double game, since the resulting dollar depreciation would help boost the dollar value of US exports and thus provide a face-saving way of allowing Trump to go easy on China over deficits.

It all comes back to the futility of trying to balance external accounts. It would be a tragedy if presidential naivety or stupidity leads the world into a disastrous, unwinnable trade war.

Anthony Rowley is a veteran journalist specialising in Asian economic and financial affairs