the Blog Papers of Dr. Michael Sakbani; Economics, Finance and Politics: May 2025

the Blog Papers of Dr. Michael Sakbani; Economics, Finance and Politics

Michael Sakbani, Ph.D., is a former professor of Economics and Finance at the Geneva campus of Webster and Thunderbird. He is a senior international consultant to the UN system, European Union and Swiss banks. His career began at the State university of NY at Stoney Brook, then the Federal Reserve Bank of New York followed by UNCTAD where he was Director of the divisions of Economic Cooperation, Poverty Alleviation, and Special Programs. Michael has published over 150 professional papers.

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Trade War on the World

Dr. Michael Sakbani

The Emperor and his Obeisant Courtesans

On the second of April, one day after fools` day, President Trump declared trade war on the world. He called it liberation day; perhaps another adjective closer on the calender would be more appropriate. At any rate, President Trump has finally arrived at the position of the emperor whose court has no naysayers. The courtesans even see genius in the emperor’s chaos.

Economists learn in the second week of macroeconomics that GNP- ((I-S)+(G-T))= current account. If, for any reason, I is larger than S or G is larger than T, then, certainly the Current account will be in deficit(definitions)^[i] Why and on what do Americans spend more than their income on foreign goods is not to him the question; it is the deficit in the merchandise trade balance and the resultant loss of manufacturing jobs that blights the rust belt that has kept Mr. Trump hot under the collar since the 1980s. His remedy is simple: tariffs. He thinks that tariffs punish foreign countries even though they are paid almost entirely by the US consumers!

To him, the guilty are the wicked Chinese, the conniving Europeans, and the rest of unfair exporters; all the world, allies and non-allies have been taking advantage of the US.

Why has the US been for decades running a merchandise trade deficit with its major trading partners is a question that can only be fully explained by looking at three things: why has manufacturing moved out of the USA, what is the relative competitiveness of the US`trade exports, and how have the imports been financed.

In the Bretton-Woods Conference held in New-Hampshire in 1946, the US imposed its proposal of tying all currencies to the US dollar which in turn was tied to the price of gold in 1934 at $ 35.5 per ounce. The US gold exchange rate can move 1.5 percent up and down, while other currencies can move the same percentage against the US `dollar.

This system enabled the USA to use checks written upon itself to pay for its budgetary expenditures as well as for US imports. For the rest of the world, the dollar was needed to finance rebuilding the devastation of the war (sakbani,(2005)^[ii]. However, ten years later, Germany, Japan, and the rest the devastated countries recovered and started becoming exporters. The US started to import from those countries and its businesses started to invest all over the world and finance both by issuing Dollars. What did the exporters do with the Dollars they earned; they placed them in the US` Treasury bond- market. This market became the safest and the most trusted investment locus of the world. However, countries like France and the UK started to ask for converting their accumulated official reserves into gold which was permitted under the Bretton Woods agreement. But the US gold reserves were not enough to meet this obligation; the US `gold stock amounted to only 10 percent of official US dollar holdings by other countries. Realizing this mounting problem, President Nixon ordered Treasury Secretary Connally to announce on July 14,1971 that hence forth, the US would not convert official dollar holdings at the official Bretton-Woods price. The price of Gold immediately jumped up in the gold market to $180 per ounce and continued to climb up after that to several hundred Dollars per ounce.

This meant in effect a major dollar devaluation and it ushered in a period of free floating against a variety of pegging baskets, including the US dollar. No viable alternative to the US dollar emerged in the two years during the discussions of the C20. Thus, the US dollar along with its Treasury bond- market continued to be the locus of the system reserves after 1974. Several attempts to reform the system failed over 15 years of proposals and conferences. (sakbani,2005; Williamson)^[iii].

As the world got into Globalization of trade and finance in the late eighties and early nineties, American businesses started to move its manufacturing into countries with cheaper labor, relaxed tax-havens, and little environmental restrictions. Mexico, China, and other Asian countries became favored replacement locales. At the same time, automated digital technology started to replace human-labor with robots. The result was a large devastation of the old industrial bases, rampant unemployment, therein and more deficit in the merchandise-trade balance especially with China.

The Rise of China as a Manufacturing Powerhouse

In 1979, premiere Xao Xi Peng announced the opening of China on the world on the condition that firms doing business with China should give up their technology and know-how to China without compensation. The greedy international firms flocked en mass to. China `s huge domestic market to amass huge profits.

At the same time, China embarked on a massive education and vocational training. The Chinese government sent tens of thousands of students to western universities and technical colleges. FDI also played a major role in training the Chinese workforce.

The Chinese Government set up numerous state enterprises with privileged market controls and endowed them with lavish subsidies and all kinds of help as a part of its industrial policy model. In addition, private enterprises were all required to accept government appointed representatives on their managing boards, thereby keeping them in line.

China became a world factory producing every possible good. The natural outlet was the foreign import markets, especially in the US and Europe. In just a few years, China became a surplus trade balance addict with all regions except Asia.

Today, China exports every conceivable type of good: household equipment, children-toys and wherewithal, tools and machines, chemicals, heavy industrial equipment, locomotives, and electric autos, engineering products, an increasing number of digital products, and as of late, high speed 5 -G data transfer devices , Nano technology, EV batteries, and new green -technology, all endogenously developed.

Table 1

PERCENTAGE OF CHINA IN THE EXPORTS OF GOODS IN WORLD EXPORTS: 2007-2017.

Year Amount Percentage

2007 1,553.93 11.16

2008 1,774.06 11.03

2009 1,513.70 12.22

2010 1,941.71 12.81

2011 2,226.73 12.34

2012 2,308.21 12.78

2013 2,405.96 13.05

2014 2,536.84 13.73

2015 2,448.55 15.15

2016 2,235.96 14.28

2017 2,346.10 14.55

Source: WITS

As a result of this tremendous expansion of China`s export base, the country started running chronic surpluses with the USA, the EU, Latin America, and Africa.

The following tables demonstrate these surpluses.

A Statistical Picture of China`s Balance of Payment Surplus With the world

Table 2

BALANCE OF TRADE AND SERVICES OF CHINA OVER 1997-2017 WITH USA.

Year China United States

Trade in goods & Services Trade in goods and services

1997 42.824 -108.288

1998 43.837 -160.13

1999 30.641 -258.619

2000 28.873 -372.522

2001 28.084 -361.516

2002 37.383 -418.956

2003 35.821 -493.893

2004 51.174 -609.884

2005 124.626 -714.252

2006 208.918 -761.715

2007 308.036 -705.372

2008 348.832 -708.728

2009 220.13 -383.778

2010 223.023 -494.659

2011 181.903 -548.629

2012 231.844 -536.773

2013 235.379 -461.875

2014 221.299 -490.179

2015 357.87 -500.354

2016 249.913 -500.561

2017 0 0

Source: IMF

Table 3

BALANCE OF TRADE AND SERVICES OF CHINA OVER 1997-2017 WITH EU.

(Billions of U.S. dollars)

China with Europe

Year China EU

1997 36.963 99.962

1998 31.471 53.542

1999 21.114 -2.972

2000 20.432 -64.901

2001 17.405 -18.314

2002 35.422 15.85

2003 43.052 5.507

2004 68.941 59.345

2005 132.378 -3.535

2006 231.843 -42.629

2007 353.183 -116.975

2008 420.569 -263.272

2009 243.257 -28.527

2010 237.81 -9.385

2011 136.097 76.954

2012 215.392 206.568

2013 148.204 287.057

2014 236.047 304.405

2015 304.164 310.758

2016 202.203 324.939

2017 164.887 433.257

Source: IMF

Table 4

Balance of Trade and Services of China Over 1997-2017 with Latin America.

Year China Latin America

Trade in goods & Services Trade in goods and service

1997 42.824 -32.94

1998 43.837 -55.171

1999 30.641 -23.943

2000 28.873 -15.83

2001 28.084 -24.048

2002 37.383 8.225

2003 35.821 31.312

2004 51.174 46.425

2005 124.626 64.404

2006 208.918 80.796

2007 308.036 42.214

2008 348.832 5.832

2009 220.13 14.486

2010 223.023 -7.048

2011 181.903 -2.519

2012 231.844 -33.201

2013 235.379 -76.453

2014 221.299 -93.454

2015 357.87 -109.074

2016 249.913 -39.294

2017 0 -25.006

Source: IMF

Summary

· The balance of trade shows surplus with the US in every year,

· Surplus with Latin America all years,

· Surplus with Europe in all years except 2001, and 2013-2014.

· The merchandise account is where China`s trading muscle is the strongest.

On the other hand, examining the statistics of the current account, one finds that unilateral transfers are also important; many more Chinese work abroad than foreigners work in China. The country is the second-largest receiver of remittances in the world. Thus, the current account statistics show the following facts:

ï China had a surplus with the US every year under study

ï China had a surplus with Europe all years till 2012.

ï China had a surplus with Latin America all years

ï China had a deficit with Asia all years.

The statistical picture presented above plainly shows that China has succeeded in becoming the World production factory.

Trump`s Tariffs

President Trump had his staff make a list of calculations in which each country is shown with its respective merchandise -trade balances with the US. These calculations subtracted the US exports to these countries from their exports to the USA. The percentage difference would be the percentage tariff that President Trump wants to impose. In those calculation so many developing countries who have been trying to grow by exporting, like China did, were caught in the net. Many of them face 30-50 percent tariffs. The peculiar thing about these bilateral calculations, is that they would not be valid trade balance deficits if services were added to them. For example, the US has a deficit with Canada in the merchandise- balance but a surplus in the service balance. If other elements of the Current Account were included, one would arrive at a different balance rersults. Moreover, if the US `multilateral trade balances were summed up, the sum numbers would not be the same.at the same time,

President Trump imposed 25 % tariff across the board on the EU, Mexico, and Canada and he started with 50% against China, which he later raised to 145%.

The reaction of the financial markets to these tariffs was brutal. The US stock exchanges lost 4 trillion dollars by the 10^th of April ( www.ndttv. com)^[iv] , whereas total losses on all world stock exchanges according to Reuters amounted to $ 10 trillion (Rueters)^[v] Where did this sum go? The answer is simple: since trade has been growing for decades at more than twice the world income its ,anticipated shrinkage has just wiped out the credit built upon the value of expected trade.

In the bond market, the Treasury did not sell its offer at the issuing discount; the discount had to be increased to make it attractive to institutional savers:(pension funds, insurance companies, hedge funds, investment banks, investment companies, and sovereign funds). That meant that their bond holdings on which they purchased future contracts had to be revised. So, they sold their base bond-holdings. This immediately triggered winding down by institutional savers of their future contract of bonds, which were based on leveraging the real bond base. In other words, it was a spiral of liquidating of the gearing leverages in the future market. Added to a significant dollar devaluation in the foreign exchange market, the Financial Markets were in effect telling the President that his action was a harbinger of economic disaster.

The target of the President was clearly China. President Trump thinks that the damage to China, that exported in 2024, $ 450 billion to the US while it imported only $125 billion, will be so grave that it will sue for agreement and make concessions.

The question legitimately arises, was China`s success in running persistent surpluses due only to its export production base and low prices or there were as well restrictive trade practices and exploitation of the world trading system. The record shows that China has various restrictions on imports in the forms of quotas, tariffs, and non-tariffs barriers. For example, cloths imports are virtually banned. Food products are subject to massive amounts of regulations and restrictions imposed by the Chinese Food and Drug Administration. There are quotas on 40 categories of goods. On South Korea alone, there are 26 quotas (Economic help, 2019)^[vi][vii]. Moreover, political considerations, as in the case of South Korea, are involved in the treatments of various countries. It should be added, however, that there has been a gradual reduction of barriers in the last few years.

Illicit industrial spying on digital technology and copyright theft of entertainment products are widely practiced by China (Intrepid sourcing, 2018)^[vii]. The country has lax environmental standards that confer a competitive cost edge. Coupled with low wagesfor domerstic migrant underempeloyed workers from rural China. and a fixed Yuan exchange rate for at least ten years,

it is evident that the country does not play a straight game.

The President, however, is not likely to win his wager for several reasons.

1. China has a larger economic space of maneuvering than the US. The Chinese economy is now larger than the US economy in purchasing- power terms. China is ahead in life sciences, in green technology, in EV technology & production, and is tied in Nano technology, and in AI.

2. Although China losses a great deal of exports, it can find alternative markets for

them and channel the rest into its domestic market.

3. It should be recalled that President Xi runs a totalitarian state in which he controls every-thing. That is unlike President Trump who runs a democratic state with strong institutions he cannot all control.

4. Furthermore, the Chinese public is likely to consider President Trump`s action a national insult. It would not surprise anybody that they will likely rally around the flag.

5. President Trump is mistaken in thinking that the US can easily do without the Chinese exports. Many of China`s exports are intermediate products whose absence will increase the supply-chain problems of the US. Some are crucial pharmaceutical and rare metal products. The elasticity of demand for such prodiucts is very low.

Thus, it looks that President Xi is not likely to blink first.

Seeing the earthquake of the financial markets, President Trump 12 days later suspended for 90 days, the tariffs application on all countries except China.

The Impact of the Tariffs on the US Economy

The US action triggered retaliatory action by the affected countries. US exports of soybeans, corn and other agricultural products to China will be hard hit. The US has already lost $1.1 billion after China cancelled its imports of soybeans. More billions will certainly be under the axe. Just a few days ago, China halted purchasing hundreds of Boeing airplanes worth billions of US dollars.So did Ryan Air, a leading European low fare airline which stopped purchases of $ billions of Boeing airplanes.

The tariffs will increase import prices from the EU, Mexico and Canada. These countries are the biggest trade partners of the US. The increase in the price of imports from them will hit the agricultural products, energy and electricity imports, imports of Canadian aluminum, lumber and steel, and imports of car accessories. It is estimated that the price of a car will increase by $ 5000-$ 7000 (various news outlets)^[viii]. And the delays in car deliveries will be quite considerable. Canada has embarked on completing its trans- mountain pipeline to export its gas and oil to Asia. It also signed long term contracts with the EU and China for gas and oil deliveries.

Similarly, the EU signed a long -term contracts with Qatar and Canada to import gas instead of US`gas. Thus, there is a structural shift in the trade pattern which will not be temporary and restorable. (Newsweek, April, 2025)^[ix].

US` NATO Allies now question the reliability of the US as a supplier of weapons. Canada, for example, cancelled a transaction to import 100 US F. 35 planes. This is certainly not the last of such actions.

Considering that the US supply of arms to Ukraine will diminish by $ 65 billion, and European arms imports will also go down, and the lavish $ 24 billion granted to Israel will disappears, these numbers in addition to the decline in US exports will decrease the US aggregate demand. Added to that, because of both the decline in purchasing power and the negative wealth effect, US` consumer demand, which is about 80 % of aggregate demand, will all add up to a decline of aggregate demand of at least $ 400 billion and is likely to go up beyond that (Wharton edu)^[x].

A substantial part of the extra taxes levied by the US `treasury from Tariffs will likely be spent on subsidizing affected Americans. This means the tax cuts that Trump wants to do for business will not be compensated by the Treasury extra revenues from the tariffs. So, the under-taxed US economy will continue running a budget deficit. All the above means we will see increase in prices of domestic consumption products, increase in fuel and car prices and a decline in aggregate demand. Anticipating an increase in inflation, the Fed. will therefore not cut interest rates from the present 4.25 %-4.50 % rates; it is likely to increase interest rates to cope with the resultant inflation. The result will be that President trump will find himself where President Biden was in 2023: high inflation, high interest rates, and low housing construction, but unlike President Biden, a weak economy.

Will President Trump get the concessions he wants? An educated guess is: unlikely with large- economy countries, but it depends in the case of small- economy countries. But the numbers we saw will not be resurrected after the suspension.

Undermining the System Which the US Built

After WWII, the US built with the cooperation of its allies an international system of rules and institutions. Although the US placed itself at the head of the system, it was a hegemon with benign intentions. This system worked well for 70 years and kept the peace and prosperity for 69 years. When the Soviet Union disappeared in 1990, the US tried unsuccessfully to exploit the new unipolar system to reshape the Middle East in its own interests and in those of Israel. But this resulted in the messes it created in Iraq and Afghanistan.

As of 2008, the US has had difficulties accepting the rise of the others (Zakaria)^[xi] . In particular, the rise of China as a serious competitor, has threatened the hegemonic status of the US. China`s collectivistic system excels in execution, though lags in freedom and openness. But with all its blemishes, China challenges the US position at the top. The US is still the greater military power, it has more than 750 military bases all around the world while China has none. But the US lives with the realization that China is pushing against its place on the top in all domains.

What can the US do? There are only two choices. Either go towards a military confrontation that destroys the world or find a modus-vivendi with China. The latter is the only reasonable choice, but the US supremacists do not like it.

President Trump Dollar Policies

The President wants to effect an appreciation of the foreign currencies against the US dollar in order to adjust the merchandise trade balance, while he aims at keeping the dollar system at the heart of the International Payments System. These are contradictory aims. The devaluation of the Dollar might help the US `merchandise trade balance, but will undermine the Dollar reserve status. The merchandise-trade balance deterioration is not because the dollar is overvalued. Rather, it is because US manufacturing is not competitive. Moreover, the technological replacement of labor by robots and the unstoppable US business incentive to move jobs to cheaper cost countries, mean that manufacturing jobs are not going to return because of Trump`s tariffs. All advanced industrial countries have been moving into services. It is rather incomprehensible that 80 % of the US population should subsides 8 % of the economy, which employs 4 % of the labor force in manufacturing. Most service jobs are better than the old manufacturing jobs. The US government should do the necessary structural reforms like jobs retraining, retooling skills and technical educational for new jobs to aid the technological transition taking place.

What President Trump is doing is similar to what the Smoot-Hawley Act of the 1930s tried; it did not increase agricultural jobs; it depressed the US `economy.

At the present, the dollar payment system is surviving only because of lack of a viable alternative. The decline in Petro- Dollar transactions, which started when Saudi Arabia signed in 2022 with China a no dollar agreement plus adopting the same mode by Venezuela, Iran and perhaps others, tolls the end of the Petro-dollar era. The emergence of BRICS will also diminish the use of the dollar by a portion of these countries volume of their intra-trade. One is talking about a potential 42 country membership (sakbani, 2023)^[xii] . To all countries holding US dollar assets, the annual Republican threats to shut down the Government and refuse increasing the debt ceiling, amounts to a potential possible defaulting on US`public- debt. Inevitably, that will harm the status of the US dollar.

Already, the US has weaponized the use of the dollar system by its wide use of sanctions against dozens of countries. And this crisis is already increasing the unreliability of the US as the center of the financial system, and of the dollar as a viable world currency. That is a gift to China.

Concluding remarks

Tariffs and trade protectionism has had no winners since David Ricardo`s theory of comparative advantages and international division of labor. Mr. Trump wants to be an Agent provocateur who disturbs the system to get results. But in al his attempts he has proved to be without a a follow up of suggestions and pragmatic offers to transform his disruption into a joint action program with his counterparties. So, we are left with the noise and the provocations in a hopeless search for results. This time there is no reason to believe otherwise.

(Geneva; April 29,2025)

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Notes

^[i] The equation says: gross national product (GNP) – ((government(G)- taxes(T)- (investment(I)- savings(S)) = current account(CA).

^[ii] See michael sakbani, a Reconsideration of the International economic System in a Global Setting , in UNCTAD, reaserch paper no. 181,2005. Published in michaelsakbani, blogspot.com.

^[iii] John Williamson, The Failure of International Monetary Reform, 1979.

^[iv] https//www.ndttv. com

^[v] Rueter,s 10 April.

^[vi] Economic help, 2019

^[vii] Intrepid sourcing, 2018)^[vii][vii]

^[viii] Vaious News Outlets, April 2025.

^[ix] Newsweek, April, 2025.

^[x] Wharton edu

^[xi] See Fareed Zakaria, The Post American World and the Rise of the Rest, Simon Schuster, New York 2013.

^[xii] Michael Sakbani, The Prospects of the US `Dollar Continuing as the Prime International Reserve Currency, in michaelsakbani.plugspot.com, 2023.

the Blog Papers of Dr. Michael Sakbani; Economics, Finance and Politics

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Friday, May 02, 2025

Trade War on The World