The US President’s populist pandering in terms of tariff threats may yet result in catastrophe unless he receives urgent tutoring in the complexities of a global economy
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.
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.
