The source of trade
anxiety is a broken global monetary system that distorts price signals with
sharp currency moves.
The surest way to become alienated from
Donald Trump supporters is to invoke the word “global” with regard to trade or
economic interests. Even if you embrace the Trump economic agenda for enhancing
U.S. competitiveness by lowering taxes and easing regulation, even if you support
an “America First” approach for tackling domestic shortcomings from education
to infrastructure – there is still a negative stigma attached to proposing
any kind of global economic initiative.
Yet by insisting that the U.S. Treasury
label China a “currency manipulator” and by promoting trade that is both free
and “fair, ”Mr. Trump may be laying the groundwork for a significant
breakthrough in international monetary relations – one that could
ultimately validate the rationale for an open global marketplace and restore
genuine free trade as a vital component of economic growth.
The notion that something good might come
out of a Trump policy elicits guffaws in certain economic circles. And questioning whether today’s exchange-rate regime
serves the cause of beneficial cross-border commerce is tantamount to
advocating protectionism.
Nevertheless, Mr. Trump’s emphasis on currency
manipulation brings into focus the shortcomings of our present international
monetary system—volatility, persistent imbalances, currency mismatches—which
testify to its dysfunction. Indeed, today’s hodgepodge of exchange-rate
mechanisms is routinely described as a “non-system.” Or, as former
International Monetary Fund chief Jacques de Larosière termed it at a Vienna
conference in February 2014, an “anti-system.”
If monetary scholars once diligently sought
to explain the relative virtues of fixed-versus-flexible exchange rates on
global economic performance, they have largely abdicated any responsibility for
the escalating political backlash against the trade that blames currency
manipulation for lost business.
No serious economist would claim today that
the “dirty float” intervention tactics practiced by numerous countries would be
remotely acceptable within the freely flexible exchange-rate system envisaged
by Nobel Laureate Milton Friedman. Nor would anyone suggest that any coherent
mechanism exists comparable with the fixed-rate system anchored by a
gold-convertible dollar that reigned in the decades following World War II.
Nobel Laureate Robert Mundell has
consistently argued for the restoration of a system of formally maintained
exchange rates to reduce uncertainty and promote growth. Yet the lack of
willingness among the great majority of economists to recognize the imperative
for global monetary reform to avoid a breakdown in global trade relations has
left policy makers in the lurch. Faced with mounting demands to address
currency manipulation through “strong and enforceable provisions”—i.e.,
tariffs—those who support free trade are being forced to consider the broader
implications of a sluggish world economy that has become overly reliant on
central banks.
Is it more egregious when
governments deliberately intervene in foreign-exchange markets to manipulate
currencies to gain an export advantage—or when central banks seek to accomplish
the same thing through monetary policy?
The
point is that today’s free-for-all approach to international monetary relations
permits nations to pursue any exchange-rate policy they wish. Relative
currency values are thus vulnerable not only to the manipulative tactics of
government authorities but also to the speculative maneuvering of
foreign-exchange traders—the most active of which, in a market that averages $4.9
trillion in daily volume, are the world’s largest banks.
No
wonder so many workers employed by U.S. companies that manufacture products
requiring substantial capital investment—automobiles and tractors, computer and
electronic equipment—have become disenchanted with the supposed long-term
benefits of free trade. It is one thing to lose sales to a foreign
competitor whose product delivers the best quality for the money; it’s another
to lose sales as a consequence of an unforeseen exchange-rate slide that
distorts the comparative prices of competing goods.
To brand trade skeptics as sore losers is
to malign them unfairly. To resent being victimized by currency movements is
not the same as being opposed to free trade, nor does it signal an eagerness to
engage in protectionist retaliation. It’s simply an honest response to
incongruity: We need to reconcile global monetary arrangements with global
trade aspirations.
As former Federal Reserve Chairman Paul Volcker
has observed:
“Trade flows are affected
more by ten minutes of movement in the currency markets than by ten years of
(even successful) negotiations.”
Mr. Trump’s forceful rhetoric may help put
an end to the politically correct attitude so prevalent among economists that
breezily dismisses what was once accepted as a truism: Stable exchange rates foster long-term prosperity by
maximizing the productive use of economic resources and financial capital. Why continue to passively accept the negative economic
consequences of global monetary disorder? Why permit legitimately earned
profits from business operations and investments in foreign countries to be
wiped out by unpredictable currency losses? Why hold global economic growth
prospects hostage to antiquated exchange-rate arrangements?
It’s
time to end the intellectual vacuum and focus on serious initiatives for global
monetary reform. The goal is to maximize prosperity by harnessing the
power of free-market signals across borders. Monetary clarity is the key to
reconciling the principles of free trade with the promised benefits of an open
global marketplace.
By focusing on currency manipulation as an unfair trade
practice, Mr. Trump has not only identified the crux of the economic dilemma,
he has also spotlighted the social and political tensions its consequences have
fostered.
Reprinted from Zero Hedge.