Trump’s Trade War: American Consumers Will Feel The Pain Long before China Does
$1.2 Trillion in US debt owned by China weighs a lot more than Trump’s trade policy.
According to Politico, Senator Lindsey Graham says we need to stand up to China and stand by Trump, and that we’re going to feel some pain in this trade war. Graham says we’re going to have to accept some pain in order to prevail in Trump’s trade war. I don’t know about you, but I didn’t wake up this morning feeling great about a trade war. I didn’t ask Trump to engage in his trade war, either.
Trump’s trade war with China is ill-conceived on many fronts, but the one front that he seems unwilling to discuss is one of the pillars of China’s trade surplus with America: Their gigantic hoard of US Treasury Bonds.
Trump has accused China of currency manipulation, but nothing China has been doing with their currency is in secret and as far as I can tell, its a matter of public record. Trump supposedly has hired some of the best trade negotiators he can find. Did they negotiate with China in good faith? I think so. If China attempted to slide something past them, Trump’s negotiating team would call the Chinese out on any perceived foul play.
But I can’t help but have this foreboding sense, that no matter how much legislation is passed, no matter how our trade representatives work with China, no matter how punitive our tariffs are on Chinese products, there is still an elephant in the room that almost no one is talking about: The US debt owned by China.
China owns $1.2 Trillion in US debt. China is using US debt as a reserve currency, just like many Asian countries were “told” to do, by the International Monetary Fund and the World Bank. See, back in 1997, there was a huge banking crisis in Asia, and deep in debt to the 1st World, the Asian community sought assistance from their creditors. The IMF and the World Bank coaxed painful concessions from the Asian countries affected by their banking crisis.
Anxious to avoid that kind of pain again, most Asian countries, primarily China and Japan, accumulated securities denominated in US Dollars as a reserve currency. Remember that Bill Clinton was in office in 1997, and the Democrats fairly well dominated the politics of the day. They played a large part in creating the conditions that we seek to remedy now.
It was a happy coincidence then, that the Asian countries laboring under the lash of the IMF and the World Bank discovered that as they accumulated dollars as currency reserves, the value of the dollar increased. As the value of the dollar increased, so too did the value of the trade deficit that the United States had with China. And US manufacturers took notice. Elite individuals sporting MBAs were only too happy to send engineering talent to China to train them on how to make products that were once “Made In USA”. Guess who made out like bandits since then? Was it the average American? Probably not.
In 2018, the trade deficit in goods with the rest of the world soared to almost $900 billion a year. That is, nearly half of the total trade deficit was with China with a trade surplus with the United State of $419 billion. So far this year, the total trade deficit is already greater than $315 billion as of June this year, and at this rate, we will see a $600 billion trade deficit for the year.
So the trade deficit is on track to decline from the previous year, but that is still a huge chunk of demand. I’d say it’s pretty likely that the Asian countries we trade with, including China, will continue to pick up part of the tab known as the federal budget deficit just to maintain their currency advantage.
Our huge trade deficit represents economic demand that is sailing out to China and all the other countries we trade with, and that is why the American economy is slowing. That lost demand must be made up somewhere and at the moment, there isn’t enough political will in Congress to institute policies that will help to make up for it.
Conservative deficit hawks will not spend enough money to make up for the lost demand. The wealthy donor class, both Democrats and Republicans, will never permit Congress to spend enough money to overcome the lost demand. The liberals in Congress will not allow the economy to grow on tax cuts alone. They know that we’ve tried that before it and how it failed miserably.
The political will I speak of was very much in evidence at the start of the Great Recession. Instead of allowing the big banks to fail and let capitalism work as intended, Democrats and Republicans in Congress passed legislation signed by Barack Obama, to bail the big banks out. That gave the banks the space they needed to hold onto their asses…I mean…assets, and wait for the market conditions to improve before selling them off. Meanwhile, many Americans were “underwater”, the value of their homes was less than the value of their home loans.
Back then, there was no discussion of how we got to the point of a near-complete economic collapse because many economists didn’t want to admit that they missed the housing bubble. There was no discussion of bailouts for homeowners who struggled to make enough money to buy or keep a house in a market where home prices were rising at a rate well above inflation. There was no discussion of how those conditions were engineered by CEOs and boards of directors at the biggest banks.
There was little discussion of the public policy decisions and outcomes that gave rise to the escalating housing costs the average consumer was responding to. But you can bet that the wealthy CEOs and board directors of the big banks were better cared for than the consumers they were supposed to serve.
Sad to say, those deficit hawks we now see in Congress are shedding crocodile tears over the US budget deficit. The same kind of people who fomented and cheered on the Reagan Revolution, the same people who promoted public policies that expand the federal budget deficit in the hopes of “starving the beast” — the welfare state, still had to sell that debt to someone. China was only too happy to oblige, and now here we are, with China sitting on a pile of our debt to keep our dollar strong. But according to Trump, “China is the Enemy”.
Now some of you are old enough to recall that President Bill Clinton was able to turn a large federal budget deficit into a surplus. And during that time, we had social security (we still do), Medicare (we still have that, too) and numerous other popular social welfare programs that are a target for the “starve the beast” crowd. It is entirely possible that if we had continued the economic trajectory that Clinton had started, we might well have paid off a good chunk of the debt that China now owns. If there is no debt to buy, China has much less leverage on the exchange rate between its currency and ours.
But then, those “deficit hawks” would lose the leverage they have on the average American worker. Remember, most of the members of Congress are multi-millionaire businessmen and women. They made their fortunes off of the conditions that prevail now. The trade deficit puts owners of large American businesses in a superior position to the worker by depressing wages, discouraging union employment, and enlarging CEO salaries at the expense of American workers.
It is important to also note that Trump has openly admitted to making campaign contributions to both Democrats and Republicans over the last several decades because “that’s how you get things done.” That means that Trump is complicit in bringing about the conditions that American workers experience now. Trump is complicit in exacting the pain on the American consumer that Lindsay Graham says we must endure.
So the next time you see or hear Trump flagellating and excoriating China, just remember that Trump doesn’t have clean hands. Neither does the contingent of conservative Republican deficit hawks in the Senate who helped create the conditions giving rise to the federal budget deficit. The budget deficit requires the United States to sell the bonds that the Chinese buy from us, the same bonds that the Chinese use to “manipulate” their currency for a trade surplus that grows the Chinese economy.
Only now have the deficit hawks come to their senses to say that they want to balance trade. Well, they say that they want China to play fair. Whether they are sincere in their efforts is still a matter of controversy.