Source: FT Chinese website

Since he was elected president, Trump has once again declared that he will use the big stick of tariffs to solve the trade deficit problem that "robs American jobs"; and Many American politicians also responded politely, saying that tariffs will only bring inflation.

The U.S. trade deficit problem is no longer a problem, and successive presidents have provided different solutions. Economic theory tells us that in order to reduce imports, boost exports, and reduce the trade deficit, the best way is often to devalue the currency - which will increase the price of imported goods and services calculated in domestic currency, and increase the price of exported goods calculated in foreign currency. and service prices fall, thereby discouraging imports and encouraging exports.

As the theory goes, many American presidents have considered devaluing the dollar as the only way to solve the trade deficit problem - this story has already been played out as early as the Reagan era. In the 1980s, when Reagan was first elected president, the U.S. economy was suffering from severe inflation. In order to alleviate inflation, Reagan supported Federal Reserve Chairman Volcker's plan to significantly raise interest rates by double digits to recycle currency, and reduce the burden on small and medium-sized enterprises through tax cuts.

Although substantial interest rate hikes have reduced inflation, they have also caused the dollar to appreciate significantly. When Reagan first took office in January 1981, 1 U.S. dollar could be exchanged for more than 200 yen; by the peak of interest rate hikes in November 1982, 1 U.S. dollar could be exchanged for more than 270 yen. Although the interest rate hikes ended in 1983, the exchange rate of the U.S. dollar against the Japanese yen remained at a high of more than 260 yen until January 1985, the end of President Reagan's first term.

High interest rates have burdened the U.S. manufacturing industry with heavy capital costs, greatly affecting its competitiveness. The sharp international appreciation has also caused Western European and Japanese manufacturing industries, represented by automobiles, to conquer cities in the United States. The combination of the two has caused American automobile and other manufacturing industries to be completely defeated, and workers' anger is rampant. In 1982, this anger finally reached its climax with a tragedy - in June 1982, Chen Guoren, a Chinese American living in Detroit, was beaten to death by two unemployed auto workers.

Reagan, who fixed the inflation problem in his first term, will fix the trade deficit problem in his second term. Therefore, at the beginning of Reagan's second term in 1985, when the United States was dealing with the export surpluses of Japan, Germany, France and other countries to the United States, it launched the "Plaza Accord" to allow the Japanese yen, pound sterling, franc and German mark to appreciate significantly against the US dollar. , which greatly stimulated U.S. exports to Europe and saved the life of U.S. industry.

Since then, the method of adjusting interest rates has been frequently used by the United States, establishing a business model of “low interest rates, low exchange rates, and low tariffs”. Because the federal funds rate is low, the interest expense corresponding to the national debt is low, which allows us to control expenditures; and the controlled expenditures allow us to reduce taxes, thereby reducing the burden on businesses. On the other hand, it was able to borrow money to build infrastructure, while low interest rates lowered the dollar exchange rate, thereby promotingexports, curbing imports and generally stimulating demand. Combining the two, a two-pronged approach, the situation of manufacturing companies will be improved to a certain extent.

It is said that the earth comes around every twenty years. In the past two decades, the economy has developed rapidly, gradually replacing Japan, Germany, France and Britain in the manufacturing industry. Naturally, the RMB is no exception - since 2005, the RMB exchange rate against the US dollar has been appreciating all the way, from 8.3 in 2005 to 6.3 in 2013, steadily following the US dollar interest rate cut and the RMB exchange rate reform. The sharp appreciation of the RMB against the U.S. dollar has greatly improved the U.S. trade deficit: on the one hand, people have begun to travel and study in the U.S., and service trade exports have become one of the important commodities "exported" by the U.S. to China.

However, Trump discovered a problem after taking office. The depreciation of the U.S. dollar used to alleviate trade deficits during the Reagan and Obama eras actually resulted in uneven development among U.S. states. For example, inbound tourism, which has developed due to the depreciation of the U.S. dollar, will naturally benefit from states with more scenic spots and more developed tourism industries; studying in the United States will benefit from states with developed education; purchasing agricultural products will benefit from China. Western agricultural state. In the end, it was found that industrial products such as automobiles in the “rust states” of the Midwest found it difficult to benefit from them.

As for why the manufacturing industry cannot be built up with mud and rotten wood cannot be carved, this is closely related to the Galapagosization of American industry. Lowering the exchange rate is good for international development, but international development first requires the industry itself to have the ability to internationalize. Galapagosization exactly describes the situation where products are uncompetitive in the international arena under the background of trade protectionism.

We are more familiar with the Galapagosization of Japanese society, but similar problems also exist in the United States. For example, the domestic automobile industry in the United States has already abandoned the sedan industry under the trade protection for small trucks, and instead engaged in the production of small commercial vehicles. However, the "small" commercial vehicles in the United States are still too big for Europe, Japan, and other countries - the smallest pickup trucks in the United States are often five meters long and two meters wide, but the narrow and densely populated European, Japanese and eastern , vehicles that are often four and a half meters long and one and six meters wide are used. Against this background, the U.S. automobile industry has long been Galapagos-like and has become a customized product that can only satisfy the market and be sold casually in foreign markets.

However, staying in the country does not mean that you are immune to foreign competition - even in the Galapagos market, foreign competitors can survive and develop through imitation. For example, even in the traditional "pickup truck" industry in the United States, Japanese companies have developed products such as the Toyota Tacoma, challenging the status of American companies; as for other fields, competition from companies is countless, needless to say.

At the same time, even if the demand is Galapagosized, the raw material supply chain is often still globalized. Even for "locally produced" products like pickup trucks, there are often a large number of foreign parts in the industry. In this context, significant problems arise with exchange rates—- Under the depreciation of the US dollar, the costs of industries that rely on foreign supplies without the support of domestic upstream industries will naturally rise.

In this context, the exchange rate does not play a role. Therefore, the Trump team can only turn to tariff barriers - unlike the exchange rate, which floods the country with a flood of water, and everyone is affected by the exchange rate, in the view of American politicians represented by Trump, tariffs can be "targeted attacks" on final goods without affecting parts. import.

But there is no such good thing on earth. Sooner or later, you will have to pay it back. As a trade protection tariff, its essence is to raise the price of imported goods to be consistent with domestic goods - after all, if foreign traders reduce prices and the price with tariffs is still lower than domestic goods, then people will still not buy domestic goods. . At the same time, for domestic product manufacturers, after tariffs are added, the best game strategy is actually to maintain existing production capacity: once production capacity is expanded and market share increases, the problem will be considered to have been solved, and tariffs will be stopped or reduced. subsidy.

Under the logic of "business-oriented", instead of improving products and improving product competitiveness, domestic product manufacturers should directly manage upwards, first increase the price of domestic products, and then lobby for additional tariffs to earn money. The additional profit margins brought about by tariff increases are better than that.

Therefore, under the "left foot stepping on the right foot" logic of "adding tariffs - increasing prices of imported goods - rising prices of domestic goods - market share first rises and then falls - lobbying for further increases in tariffs" , eventually leading to a general increase in social commodity prices. This creates a rare spectacle in the world called "tariff inflation" - all the tariffs are imposed on consumers.

In order to reduce inflation, the Federal Reserve will accordingly raise high interest rates in an attempt to alleviate inflation by recycling currency. Interest rates began to rise as early as the end of the Obama administration; and during the Trump administration, interest rates continued to rise until 2019. If it weren't for the epidemic, interest rates would probably have risen.

However, there is a big problem with high interest rates - the profit rate of the real economy is not that high.

Normally speaking, it is necessary to improve the situation of voters as industrial workers, actively introduce foreign investment, and encourage direct investment of domestic capital. More investment increases the supply of local factories and “bosses”, thereby giving industrial workers an advantage in the game with their bosses and improving the situation of workers. This is something that everyone in the world has experienced - even in the United States, port workers have reaped real dividends due to the expansion of port trade.

But the current situation in the United States is completely the opposite: high interest rates have greatly dampened the willingness to invest in American manufacturing. Therefore, taking foreign capital as an example, although U.S. FDI has been soaring, the funds invested in the United States are indirect investments (such as securities investments), and the actual direct investment in manufacturing has been declining year by year. This is already the case with foreign funds, and it is even more undeniable about funds. Since there is less direct investment in the manufacturing industry and the number of companies has not increased, workers’ bargaining power and situation are difficult to obtain.improve.

At the same time, the high U.S. dollar exchange rate and severe inflation have caused Americans to start traveling abroad and spend money abroad. We often hear in the news that Hong Kong people go north to Shenzhen to spend money. This is largely due to the fact that the Hong Kong dollar is pegged to the US dollar and appreciates against the RMB, plus everything in Hong Kong is so expensive. Of course, the United States, as its main body, does not hesitate to make concessions: if you look at the number of U.S. passports issued, you can see that Americans’ enthusiasm for outbound travel has soared with the increase in U.S. dollar interest rates in 2015. Now, 2,500 will be issued in 2024. Thousands of American passports.

At the same time, the appreciation of the U.S. dollar brought about by U.S. interest rate hikes has largely offset the effect of tariffs on “increasing prices for foreign products,” making the tariffs not fully implemented. Although American politicians have often talked about "currency manipulators" before, in fact, even if they are not imported from other countries, goods will be imported from other sources (even the well-known "Vietnam and Mexico") , U.S. manufacturers have not benefited from tariffs. On the contrary, they have suffered from high capital costs caused by rising interest rates and demand outflows caused by rising exchange rates.

Looking back, this has become a rare spectacle in the world - high tariffs, high inflation, high interest rates, and high exchange rates. It is really amazing that the above four factors can coexist in one country. , an eye-opener. The beneficiaries are probably only the rich who rely on savings to survive.