What a great arrangement it had been. And it went on for so many years. Frankly, I’m amazed we were able to get away with it for so long. But all good things must come to an end, as they say. And so has this sweet deal — thanks to Donald Trump and a handful of his advisors.
It went like this:
We would send the Chinese our dollars, in its various guises, from assorted Treasury securities to the good old greenback itself. For simplicity, let’s call this outflow our “paper.”
And, in return, the Chinese would ship us all sorts of goodies, from clothes (like my boxer shorts with the Brooks Brothers label) to my golf clubs (with which I played only last week).
One beauty of the deal was that the paper was a lot easier to produce and send off than the stuff we were getting in exchange, which tended to last (my clubs are going on 20 years). Chronic inflation, meanwhile, keeps reducing the dollar’s worth.
How did this lovely setup come to be? And why in the world would the Trump people want to scuttle it?
The first question is easier to address. After World War II, labor’s cost in the United States, along with the living standard, was much higher than in such places as China. Our paper was sought far and wide. In brief, the dollar was king.
No wonder stuff made elsewhere seemed a bargain. Our paper gave us an easy, painless means of payment. We acquired all sorts of nice things on the cheap with our easy-to-print Treasuries and such.
If we had bothered to look far down the road, we might have spotted a time when the Chinese, among others, would decide that the paper, spinning from our presses, no longer would suffice. But who, other than perhaps the Chinese, spends much time looking far down the road?
Though less sought-after than years ago, our paper still appears to be in considerable demand. So why not just continue to kick the can down the road?
But the Trump people seem no longer to favor this game. The result is a predicament, self-inflicted. A front-page report in The Wall Street Journal of June 17 describes one early indication of what unpleasantries may be ahead. The headline: “Firms Struggle to Find U.S.-Made Goods.”
The problem isn’t that our paper no longer is accepted in exchange for all that stuff. It’s that the Trump people appear determined to stop paying in this way. Their idea is to level the playing field, to borrow a phrase, and buy from abroad not just with paper, as we’ve been doing, but through what we would presumably earn selling stuff made here. And, to achieve this goal, the Trump team has chosen an ancient battle-ax called tariffs.
Talk about shooting yourself in the foot.
To believe that our production costs would compete anytime soon with those where the pool of labor remains vast and still relatively cheap, and plant efficiency is briskly on the rise, is, I fear, fanciful.
One can only speculate about the reasoning that underlies the battle-ax strategy.
Is it to achieve a balance sufficient for our stuff to become fully competitive with their stuff, boxer shorts and all? If you believe that can readily be done, I have a bridge to Brooklyn you might like to buy.
Is it a shrewd effort to gain favor with elements here that perennially seek greater protection? In this regard, note the thunderous silence of Washington’s union-friendly left on the matter of tariff warfare.
Or are we finally witnessing — mirabile dictu — a political first: a courageous White House bravely deciding that the can-kicking must stop, that the playing field can soon be made level through fairer trade arrangements, that they will want our stuff just as badly as we want theirs? And there is a bonus: No longer a need to worry about them tiring of our paper.
Whatever the intention, it’s possible to envision scenarios if the ax-swinging continues — and a level playing field isn’t one of them:
The overseas supply of our paper diminishes. As a consequence, our Brobdingnagian debt load grows harder to support. Economic activity diminishes. A recent International Monetary Fund report finds global growth already “sluggish and precarious” for reasons that are “self-inflicted.” Costly and painful plant relocations become necessary and more frequent. Add to all of this the constrictive impact of aforementioned shortages.
What to do?
One large truth I learned covering our economy for a major newspaper over several decades is that significant contractions of business activity often follow what economists call exogenous shocks, those occasional barriers to continued growth that unexpectedly arise. What we witness now may well prove, if it persists, to be just such a shock.
We haven’t erected a bona-fide tariff wall, only the beginnings of a low fence. Mercifully, it’s not yet the reincarnation of Smoot-Hawley, the tariff-hiking legislation that severely deepened the Great Depression nine decades ago.
Within the White House, will wiser heads prevail? What we have there now is not encouraging: a lawyer whose resume includes serving the steel business, an economist whose writings make plain a deep dislike of China, and an economic adviser whose determination to play along with the team apparently outweighs an aversion to trade restraints.
All may turn out better than feared if, in this game of chicken, China blinks first. Already there are signs that new fees have inflicted some discomfort there, as well as here. But is it sensible to imagine that the first blink will occur where an authoritarian regime holds powerful sway and, with no polls or serious elections to concern it, will surely continue to do so?
The wisest choice, notwithstanding drawbacks, may well be to resume kicking the can, though perhaps less vigorously. The day may arrive when our paper no longer suffices. But let’s not hurry it along. Things do occasionally change in surprising ways, and even the Chinese, I suspect, can’t always see what may lie very far ahead.
In the meantime, a consideration for the Trump team: Your chance of remaining in the White House beyond next year seems far brighter if the game resumes than if you keep wielding that battle-ax.
Alfred L. Malabre Jr., who is summering in Quogue, is a retired Wall Street Journal editor and columnist, and the prize-winning author of seven books on the economy.
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