Basically because the world is full of group thinkers like Jason Murphy at Crikey:
The Australian dollar has made a significant move, falling below 70 US cents. This is unusual. As the chart below shows, the Aussie dollar has spent some time below 70 US cents in the past, but much more time above that level.
In the period since Keating floated the Australian dollar, it has dwelled lengthily below 70 cents only once, in the early 2000s. Is this most recent dip likely to be a transient move, or should we get ready to adapt to a new normal?
The person to thank for our lower currency is the US President Donald Trump, who believes trade wars “are good and easy to win”.
His entirely optional conflict with China is escalating to become a serious threat to global economic growth, affecting markets all around the world. Among them, the market for the Aussie dollar.
They retaliated. It is difficult to see who will yield first. Neither side in this battle is famous for being willing to lose face.
Can Trump, the man who wrote The Art of The Deal, come out of this one with his dignity intact? Part of the problem is that Trump apparently sees trade as a zero-sum game where if one side benefits another must suffer. In this way of thinking, America’s trade deficit with China is tantamount to theft, and he is understandably upset about it.
The problem is that trade is not a zero-sum game. Being able to buy enormous quantities of things from China cheaply is a benefit to the USA, not a cost. Until Donald Trump realises this, it is hard to understand whether he will back down. One way out may be for China to hold its line until the end of next year when a new, more rational US president might occupy the White House.
Poor little China, which has cheated and gamed and rorted fair trading for two decades under the false heading for free trade. China is not the leader of the free world, Mr Murphy, it is fire-breathing dictatorship intent on stealing the production base of every developed nation, and it has damn nearly succeeded. Until Donald Trump.
Let’s hose Murphy’s thinly-sliced platitudes with a little Jim Rickards for Daily Reckoning, who actually knows some history:
Listening to hysterical commentary from the mainstream media about President Trump’s tariffs, one would think his policies were in violation of the US Constitution. Nothing could be further from the truth.
America grew rich and powerful from 1787-1962 — a period of 175 years — using tariffs, subsidies and other barriers to trade in order to nurture domestic industry and protect high-paying manufacturing jobs.
In fact, tariffs are as American as apple pie.
Trump is using the same basic playbook that predominated in US policy from George Washington onward. Washington’s Secretary of the Treasury, Alexander Hamilton, drafted a report to Congress called the ‘Report on Manufactures’, presented in 1791. Hamilton proposed that in order to have a strong country, America needed a strong manufacturing base with jobs that taught skills and offered income security.
To achieve this, Hamilton proposed subsidies to US businesses so they could compete successfully against more established UK and European businesses.
These subsidies might include grants of government land or rights of way, purchase orders from the government itself or outright payments. This was a mercantilist system that encouraged a trade surplus and the accumulation of gold reserves.
Hamilton’s plan was later proposed on a broader scale by Kentucky Senator Henry Clay. This new plan began with the Tariff of 1816. Clay’s plan was called the American System. Abraham Lincoln adopted the American System as his platform in the election of 1860, and it became a bedrock principle of the new Republican Party.
The 19th and early 20th centuries were a heyday of the American System. This period was characterised by enormous economic growth and population expansion by the US. The American System was also accompanied mostly by low inflation or even deflation (which increases the purchasing power of everyday citizens), despite occasional financial panics and some inflation during the Civil War.
Trump is simply returning to that tradition.
Against this mercantilist system was a theory of free trade based on comparative advantage, as advocated by British economist David Ricardo in the early 19th century. Ricardo’s theory said that trading nations are endowed with attributes that gave them a relative advantage in producing certain goods versus others.
These attributes could consist of natural resources, climate, population, river systems, education, ports, financial capacity or any other factor of production. Nations should produce those goods as to which they have a natural advantage and trade with other nations for goods where the advantage was not so great.
Countries should specialise in what they do best, and let others also specialise in what they do best. Then countries could simply trade the goods they make for the goods made by others. All sides would be better off because prices would be lower as a result of specialisation in those goods where you have a natural advantage.
It’s a nice theory, often summed up in the idea that American football star Tom Brady should not mow his own lawn because it makes more sense to pay a landscaper while he practices football.
For example, if the UK had an advantage in textile production and Portugal had an advantage in wine production, then the UK and Portugal should trade wool for wine.
But if the theory of comparative advantage were true, Japan would still be exporting tuna fish instead of cars, computers, TVs, steel and much more.
The same can be said of the globalists’ view that capital should flow freely across borders. That might be advantageous in theory, but market manipulation by central banks and rogue actors like Goldman Sachs and big hedge funds make it a treacherous proposition.
The problem with this theory of comparative advantage is that the factors of production are not permanent and they are not immobile.
If labour moves from the countryside to the city in China, then suddenly China has a comparative advantage in cheap labour. If finance capital moves from New York banks to direct foreign investment in Chinese factories, then China has the comparative advantage in capital also.
Before long, China has the advantage in labour and capital, and is running huge trade surpluses with the US, putting Americans out of work and shutting down US factories in the process.
Worse yet, countries such as China can pull comparative advantage out of thin air with government subsidies, exactly as Hamilton proposed 227 years ago. The most famous example of this is Taiwan Semiconductor.
In the 1970s, Taiwan had no comparative advantage in semiconductor production. But with government subsidies to a national champion, today Taiwan Semiconductor is the largest supplier of semiconductors in the world.
When did the US abandon the system that worked so well for so long?
Beginning in 1962, the US turned its back on a successful legacy of protecting its jobs and industry, and embraced the free trade theory. This was done first through the General Agreement on Tariffs and Trade, or GATT, one of the original Bretton Woods institutions in addition to the World Bank and IMF.
Beginning in 1995, the World Trade Organization (WTO) displaced GATT and has been the main venue for US free trade policy ever since. China became a member of WTO on 11 December 2001, but has notoriously broken many WTO rules since joining.
The globalist approach might work if everyone were a free trader and no one resorted to tariffs, subsidies, non-tariff barriers to trade, and theft of intellectual property. Unfortunately, that’s not the world we live in.
We live in a world where the US is a free trade sucker and everyone else breaks the rules. In a world where a few parties are free traders but most are mercantilists, the mercantilists win every time. They are like parasites sucking the free traders dry.
If open trade and open capital flows are flawed ideas, why do elites support them?
The switch in US policy from quasi-mercantilism to free trade was driven partly by academics who embrace the simple version of free trade without understanding the flaws (exemplified by China and Taiwan).
Others understand the flaws in free trade well enough, but value the world at large over the US. Their agenda is to diminish the power of the United States, and the US dollar, in world affairs and to enhance the power of rising nations, especially China.
If several hundred million Chinese can be pulled from poverty by leaving the US market open while China subsidises its companies, imposes its own tariffs, steals intellectual property and limits US foreign direct investment, then that’s fine. If US workers lose their jobs in the process, that’s fine too.
The globalists consider that a form of progress towards their ‘one world’ utopia. They don’t care about the US; they only care about their ‘one world’ vision.
Globalists are often supported by major international firms in the pharmaceutical and other industries that profit from global supply chains even as Americans lose their jobs.
But Trump is a thorn in the globalists’ side. Trump focuses on restoring lost US jobs, even if the cost to China is high. That’s China’s problem, not America’s. Trump’s policy is ‘America First’ and he means it.
Now the battle is heating up again. Whoever wins the war of the globalists versus the nationalists could decide the world system for decades to come.
The only crisis we have in the West is our own loss of confidence in the liberal democratic tradition, exemplified today by Mr Murphy. China has exploited and distorted that freedom for too long and needs to be pushed back back lest it slides into hegemonic power while we busily stare at our own navels.
Do I agree with Trump on tax policy? No. Do I agree with Trump on social policy? No. Do I agree with Trump’s wall? No. Do I agree on anything Donald Trump does? Very little.
But there is one area that supersedes all else. Trump is warring with China to protect the liberal democratic system itself, as it is formulated and enforced under the umbrella of the US liberal empire. He may be obnoxious and and rudely demanding of allies, and his tariffs be a blunt tool, but they have pushed the Chinese Communist Party into a very difficult corner. It now faces a stark choice: to trade fairly or sink into a long stagnation as the Chinese economy is cut off from higher-productivity and higher-income growth. Either way, Australia is better off than were the CCP allowed to become Australian overlord via Mr Murphy’s globalism.
As far as I can see, the only way that China wins from here is if like-minded liberal democracies worldwide peel off and let it.