07 Abr The Day of Ruin

In the second part of the fifteenth century, Ming dynamism, which governed China’s destinations for almost 300 years, had to take a decision that marked the long immersion of the ‘Middle Kingdom’ in human history: he deshioned his entire imperial fleet, even burned all documentation of previous sea journeys, and even banned the construction of large ships. The maritime exploration of the Great Zheng He then became a thing of the past, and China shaken on itself, from where it would not leave until the end of the 20th century.

On Wednesday, the day on which we became aware of the United States’ renewed tariff strategy, it could well be a similar turning point, with also calamitose effects. ‘Liberation Day’, according to Donald Trump on that day, may end up being remembered as the turning point of another submersion, in this case that of the United States, opening up a new world in which Europeans must find better accommodation.

Trump’s reasons for this decision are well known: The United States has a structural trade deficit that would be desertification of local industrial production, tariffs make imports more expensive and their imposition would have just regenerated domestic production. This equation which seems simple to explain, however, has notable shortcomings which I hope to help break down in this article.

The trade balance, i.e. the difference between exports and imports, incorporating not only goods but also services and something else, which I will not specify for simplicity, is the ‘current account’ of an economy’s balance of payments, the result of which is exactly the same, is an accounting identity, with the difference between the total savings of that country and the total volume of investment, a difference which is explained by the exit or entry of foreign capital. In other words, if a country has a current account deficit, the investment will be higher than the saving in the same amount as the net flow of capital to the rest of the world. Thus, it is impossible to talk about correcting trade balances without assuming that that correction will affect the relationship between investment and savings in the same way. Thus, if an economy wants to reduce its current account deficit, it needs to increase local savings or bring down international funding to reduce investment.

The next question would be what determines to a greater extent these balances, whether the import and export decisions of economic agents, or the flows of capital movements of financial actors. We could say that this result is the result of decisions taken by all of them, economic and financial actors, taken in a decentralised manner and at the same time, but in today’s world there is a clear dominance of financial movements. With this, I want to say that American and international financial actors make their savings and investment decisions, and the resulting balance is what determines the trade balance. This is explained by the Economist Richard Baldwin in a ‘paper’ published last year, to which Martin Wolf referred to a few months ago, in his always weekly magistrate column in ‘Financial Times’.

Thus, by setting tariffs to reduce its trade deficit vis a vis with surplus countries against them, the United States will end up importing more from those countries with lower or no tariffs, or exporting less to the rest of the world, because the overall balance of trade is determined by international capital flows, the movements of which are not essentially explained by the tariff policy of the goods or services markets, but by other more complex criteria on which I will not extend.

It is surprising to call ‘liberation’ what is just ruin; Trump’s tariff policy is called for failure, and could be even worse if it decides to put in place capital controls to strengthen it

Trump’s objective with its tariff policy is therefore called to fail, unless it complements its ‘Liberation Day’ decisions with other, even worse, executive orders affecting the flow of capital, i.e. imposing, for example, ‘tariffs’ on the entry of foreign investment into its economy. This would mean regaining old capital controls that would have a stratospheric impact worldwide, beyond trade issues, and could lead to an end to dollar dominance as an international reserve currency. The shock on the global economy would be very profound, and would require a reorganisation of international finances, in which the euro should play an important role, although it departs from the aim of this article to shed some light on this change.

But in addition, digital currencies, which have long been ‘warming’ in sporting terms, could come to play, especially stable coins, without any regulation in the United States, bringing us back to the world prior to the existence of public money. In other words, we talk about a scenario that would bring us back in history until the end of the 18th century and early 19th century, in which the circulation of money issued by private commercial banks was the norm and on which a more or less stable financial framework could not be established. It is surprising to name ‘release’ to what is only ruin.

Finally, the roles of the current Chairman of the Board of Economic Advisers of the White House, Stephen Miran, capture these and other similar circumferences, all threatening the American economy, the effects of which will be felt beyond its borders, and as always, with more suffering among the least developed countries, whether or not they are friends of Donald Trump. Attention to Argentina, for example.

On the other hand, the relative decline in industrial activity in the United States is not larger than in other advanced economies with trade surpluses. In other words, US trade deficits have little to do with deindustrialisation, which is almost universal in the richest countries, with trade surpluses or deficits. Causes and remedies are elsewhere and do not go through tariffs, the ultimate logic of which will ultimately cause enormous damage.

Europe must therefore be aware of the destructive ambitions of the Trump administration, without calling us to deceive, or reverting back to more sweet moments. The security challenges Trump is driving for Europeans are similar to economic challenges. This is not a temporary shock, but a paradigm shift, and I have not seen the EU’s executives fully aware of the situation. It is humane not to want to see it, but the reality stops us.

Finally, on Sunday, Japan, South Korea and China signed a free trade agreement. Our agreement with Mercosur is urgent. The seas do not expect and we must stabilise the house. We learn from each other’s mistakes.