“The real issue should be monetary inflation: back in the day of the gold-exchange standard, a trade deficit usually meant that gold was seeping out of a country because of domestic monetary inflation. But in the current monetary system, as domestic inflation is masked through dirty floating exchange rates, trade deficits no longer fully reflect reckless domestic monetary policies. Thus, trying to fix them won’t fix the unsound monetary system.”—Carmen Elena Dorobăt
In this issue
Trade Walls Will NOT Fix the US Trade Deficits Forged By the US Dollar Standard; The Philippines is Not Most at Risk
-Was Friday’s Selloff Prompted by a Bloomberg article on the Philippines? Incredible Pumps to Save the Phisix
-The Battle For the Control of Trade Flows Between US and China Worsens; a Misleading Report on the Philippines
-Protectionism is About Politics Over Economics
-Fixation on China; Trade Control Standoff: The Philippines Is Not the Most at Risk
-Since US Trade Deficits are Products of the US Dollar Standard’s Deficits Without Tears, Trade Walls Won’t Fix it
Trade Walls Will NOT Fix the US Trade Deficits Forged By the US Dollar Standard; The Philippines is Not Most at Risk
Was Friday’s Selloff Prompted by a Bloomberg article on the Philippines? Incredible Pumps to Save the Phisix
If I am not mistaken, a Bloomberg article triggered the souring of sentiment at the Philippine Stock Exchange and incited Friday’s selloff in the PSEi 30.
While the headline index drifted mostly at neutral levels from the opening bell through the early afternoon, the publication of the article which came about right after the resumption of the trading session, coincided with the sharp downturn in the PSEi 30.
The headline index plunged to a low of 1.5% with only a few minutes left to the close. Nevertheless, the index managers came into rescue to deliver a magical reduction of Friday deficit to only -.95% at the close.
While the PSEi 30 closed down by only 34.17 points or by .43% this week, such outcome was a result of the cosmetic adornment from the incredible end session pumps, which tallied to a net additional 89.67 points or 1.12%. Yes, absent these manipulations the headline index would have been vastly below 7,900!
And about forty percent of SM’s fantastic 6.43% weekly gain and a staggering 476% of SMPH’s weekly returns were from such egregious maneuvers!
Even in the days where the Phisix closed higher, bulls were hardly in command as trading sessions were mostly adrift flat.
These notorious mark-the-close pumps wonderfully depict on the proverbial “putting a lipstick on a pig”. Such represents evidence of the massive distortions brought about by the systematic falsification of the PSE’s pricing system.
The likely role or influence of the Bloomberg article was to alter the dominant noncommittal position to a marginal sell. Put differently, a dithering market looked for an excuse to undertake an action and found one.
The Battle For the Control of Trade Flows Between US and China Worsens; a Misleading Report on the Philippines
The Bloomberg article entitled “Philippines Most at Risk in Asean From China-U.S. Trade War” suggested since the Philippines had been most exposed to China’s supply chain through exports, she was the most vulnerable in the region.
Here is an excerpt: “The Philippines could be the most at risk in Southeast Asia from the worsening trade conflict between China and the U.S. About 16.9 percent of the Philippines’ shipments abroad are part of China’s value chain; goods that serve as inputs to China’s exports, according to RHB Bank Bhd. That compares with 11.4 percent for Malaysia and just 2.2 percent for Vietnam.”
First the back story.
The pushback on globalization has intensified with 2 of the biggest economies attempting to control trade.
US President Donald Trump unveiled $50 billion worth of tariffs against many Chinese goods on Tuesday. The following day the Chinese government retaliated by announcing that it would impose levies on a myriad of US exports worth $50 billion.
Ostensibly irked by the tenacity of the Chinese government, the next day Mr. Trump escalated on the protectionist rhetoric by doubling down; an additional array of Chinese goods worth $100 billion would be subject to tariffs.
On Friday, the Chinese government steadfastly responded that they “will follow suit to the end and at any cost, and will firmly attack, using new comprehensive countermeasures, to firmly defend the interest of the nation and its people”.
Back to the article’s patently misleading premises.
Protectionism Isn’t About Statistics
The first fatal flaw of the article is the misunderstanding of how protectionism works.
It fixates exclusively on statistics and disregards the international markets functioning as a process.
A full-blown oxymoronic “trade war” wouldn’t be confined to China. That’s because exemptions to tariffs would lead to substantial leakages.
By the way, it is Mr. Trump who launched such populist political offensive against trade and not China.
For instance, through the diversion of exports to tariff exempt countries which re-exports to the US, tariffs against Chinese goods may be circumvented. America’s trade deficits would merely move from China to other nations.
Thus, to strictly control Chinese goods from entry, this would likewise entail restraining indirect channels of trade flows to the US.
And unless the favored trade partners of the US government equally imposes similar trade barriers against Chinese goods, such measures will fail.
Will the US be forging trade blocs to control China’s potential trade channels? Recently appointed Head of National Economic Council Larry Kudlow said that they are recruiting other major economies to support the U.S. position: “I call it a trade coalition of the willing. I think everybody in the world knows that China has not played by the rules for many years.”
The other option would be for Mr. Trump to impose trade barriers on all.
Since America maintains a trade deficit with 102 nations (as noted by Yale’s Stephen Roach), will Mr. Trump put a wall against them all?
And if other countries will reciprocate, global trade will plunge!
The other outcome is that the US will become isolated.
By this account, not only will exports matter but imports too. In the modern global supply chain, imports serve as vital inputs to exports. Therefore, countries with the most significant share of merchandise trade to GDP would be the most fragile. Here, the Philippines ranked 115th based on 2016 data. Singapore (2nd), Vietnam (3rd) and Malaysia (12th) would be the most vulnerable in the Asean region.
Protectionism is About Politics Over Economics
The second fatal flaw of the article is for it to insulate economics from politics.
Imposing tariffs or taxing trade is a political act against commerce.
Since America maintains a trade deficit with 102 nations, why focus on China? Because China is the poster child of US trade deficit? Or could Mr. Trump’s action have been more than just about merchandise trade?
Could the assault on the economic front have been about China’s rise as a rival superpower?
Could it have been part of a comprehensive defense strategy, known as the Wolfowitz Doctrine, designed to “prevent the re-emergence of a new rival” from dominating a region whose resources would be under consolidated control which would be sufficient to generate a global power?
Are we thus witnessing the unfolding of what American political scientist and Harvard Professor Graham T. Allison coined the “Thucydides Trap”? Named after the Athenian General and Historian Thucydides, the theory is anchored on the perceived threat to the established power by the emergence of competition as to escalate the risks of war
Carried to its logical conclusion, Mr. Trump’s tariffs which are supposedly part of the “art of the deal” will most likely incorporate geopolitical concerns such as territorial disputes, North Korea, the grand Belt and Road project, ties with Russia, the introduction of China’s petroyuan trade and others.
Fixation on China; Trade Control Standoff: The Philippines Is Not the Most at Risk
The third fatal flaw of the article is to fixate on China.
Since protectionism works to include many national economic agents, the fixation on a single factor would account for a grave error.
The economic sensitivity of ASEAN nations manifested through the data of export share to China may instead apply to the analysis covering the likelihood of a material slowdown of the Chinese economy, to possible changes in preferences of Chinese consumers, a makeover of China’s production structure and to other political-economic factors.
And if a China economic slowdown would be in the cards, the impact on the Philippines won’t be just through the export and import nexus but would include investments, credit flows, and business confidence.
For instance, the marginal demand for projects of major property developers has emanated from the mainland Chinese. Yes, China’s bubble is being exported here. I will deal with this soon.
Hence, the entrenchment the geopolitics of protectionism, which should cause material dislocations from drastic changes in the structure of production and distribution, would affect the global economy.
And though external linkages may incite downside changes in economic performance, it is the underlying structure of the domestic political economy that will matter most.
How resilient will the country be when faced with such shocks? Has the country been exposed to too much leverage? Or, has there been significant amounts of malinvestments which may surface when such disruption occur?
In that context, though the degree of impact from a prospective China economic downturn won’t be the same for Asean nations, the Philippines will not be the most sensitive.
The same premise should apply to the present thrust of deglobalization through the imposition of trade walls.
But such analysis doesn’t say that the Philippines will be immune from shocks.
To the contrary, even outside the risks of protectionism or a China slowdown, economic and financial risks have been accreting internally.
Only Philippine treasuries (ROPs) have experienced a significant in selloffs (rising yields).
The current generation has been ingrained to see interest rate fall in perpetuity. That’s about to change.
Since US Trade Deficits are Products of the US Dollar Standard’s Deficits Without Tears, Trade Walls Won’t Fix it
What most people dismiss is that US trade and current account imbalances have been a product of the shift in the monetary system from the Bretton Woods to present US dollar standard.
The late Mr. Jacques Rueff, a French economist and adviser to French President Charles de Gaulle famously called the US dollar seignorage privilege “deficits without tears” where the “possession of a currency benefiting from international prestige” allows its issuer “to give without taking, to lend without borrowing, and to acquire without paying.” (Rueff, Jacques; Monetary Sins of the West)
American investment banker and politician Lewis E. Lehrman in an address to the French Parliament on the centennial birth anniversary of Jacques Rueff presciently noted the US dollar as reserve currency “almost automatically financed by the Federal Reserve and the reserve-currency system -- through the voluntary (or coerced) buildup of dollar balances in the official reserves of foreign governments”.
The point of which is that the US government issued its currency and credit in exchange for products and services from the world. The US economy transformed into a financial economy (financialization) while it hollowed out its production which it sent overseas.
With such transformation, the Fed serially inflated domestic bubbles, which have also been exported to the world.
And those massive stashes of reserve currencies by US trading partners have not been signs of ‘safety’, but rather, are manifestations of excess money creation by the US, as well as by its trade partners, such as the China and the Philippines.
On the other hand, in return for exports, countries bought US Treasuries, thus financing the US government’s spending. Being the largest holder of US Treasuries, the Chinese government essentially helped finance the US military.
The US dollar standard signified free money for the US politicians…until now
Ironically, partly financed by Chinese money, the US government embraced an encirclement strategy against the Chinese government by surrounding her with military bases.
Now the Chinese government has used US free money, as well, to appropriate for herself islands in South China seas for her defense from US encirclement.
And for insurance purposes, the Chinese government has been strategically rebuilding a land-based trade ‘silk road’ route through the grand One Belt and One Road project to bypass and reduce risks from a naval economic blockade on her trade routes by the more superior US navy.
Globalization helped amplified the transmission of credit, investment and financial flows. And the swelling global debt to a whopping $233 trillion as of 3Q 2017 equivalent to 315% of the US$ 74 trillion global economy is a manifestation of the “deficit without tears” or US dollar seignorage privilege.
Because the root of the problem has been disregarded, which is the US dollar standard, the Trump’s antagonistic mercantilist solutions of building walls against trade will only backfire.
The effects of such policies will reduce trade. And the reduction of trade will resonate on global liquidity conditions as credit, investment and financial flows should reflect on the decline of trading activities. Tighter liquidity conditions should induce liquidations to service existing debt.
The mounting friction from dealing with the US government will likely induce more countries to explore the adaption of commerce and a monetary system outside the present system. The recent proliferation of bitcoin is a symptom of the latter.
Whatever “art of the deal” Mr. Trump hopes to accomplish by forcing a “managed (fair) trade” with China will likewise entail a substantial rearrangement of economic activities.
The proposed changes in commercial rules entail a shift in entrepreneurial activities. Because there will be costs from such changes, the transition won’t be seamless. There will be dislocations.
Should Mr. Trump push through with his derring-do activities, the second half of 2018 should be very interesting. Trump’s tariffs will have to undergo public consultation and would take effect on June.
I am reminded of 1997. A fresh record high in stocks in late January. Faltering stocks until the third week of May. A sharp rally until its peak in the third week of June. Then a collapse. The surfacing of Asian Crisis in July.
Will history repeat?
Nevertheless, the current episode of trade frictions reveals how the US dollar standard is a train wreck in the making.
