The Currency War…….we’re losing!

Several Republicans at this year’s CPAC conference called for the Republican Party to return to Reagan policies and principles.  There is one Reagan policy that our nation sorely needs.

Even cursory evaluation of economic data and the substance of recent “free trade agreements” should raise grave doubt about the effectiveness of these treaties as a viable route to economic recovery.  After ten years of trade agreements foisted on U.S. workers and businesses, we have a declining middle class, 8 million manufacturing jobs have been lost and 56,000 manufacturing businesses are gone. This production capacity has been reinvested off shore because of flawed policies in Washington, DC.

Japan devalued the Yen by 20% in 1980 and pegged it at this artificially low value to the U.S. dollar. This protectionist practice by Japan generated large deficits in the U.S. trade balance and weakened U.S. economic performance.

In 1985, President Reagan acted to counter Japan’s mercantilism, asserting that “when governments assist their exporters in ways that violate international laws, then the playing field is no longer level, and there is no longer free trade.”  President Reagan told Japan in 1985 to cease their protectionist practices and, to make his point abundantly clear, imposed a 40% tariff on Japanese motorcycles. He warned Japan that autos would be next if they continued to act unfairly in trade matters.  Japan got the message. They revalued their currency, began building plants in America, and hiring American workers on American land using American materials to serve their American consumers. This restored balance to international trade.  What followed was 15 years of relative prosperity for America and economic stability for the world.

In 1994, after gaining MFN and WTO membership, China did the same thing: they immediately devalued their currency by 40% and pegged it to the U.S. dollar.  This “peg” has been in place since 1994 and is a main reason there are not enough jobs to be found in America to sustain today’s economy.

It has now been 20 years since China began this currency war; the nation still waits for U.S. action to counter China’s economic aggression.

This is not a partisan problem; trade deficits accelerated through successive Republican and Democrat administrations. Free Trade Agreements negotiated by the executive branch, particularly with up or down / no amendment votes related to “Fast Track Authority” are the largest contributors to trade deficits.  Note that the U.S. Constitution, Article I, Section 8, reserves responsibility “to regulate Commerce with foreign Nations” to the Congress.  Since Congress passed Fast Track Authority, giving this constitutional power to the executive branch, every free trade agreement has resulted in much larger U.S. trade and budget deficits along with severe domestic job losses.

Current laissez faire/free trade policies, advocated by U.S. financial elites, have really led to mercantilism (see note) dominating international trade at the expense of true free trade. True free trade and mercantilism/protectionism cannot co-exist.  By definition, one must dominate and ultimately destroy the other.  Currently, the U.S. is practicing free trade in a protectionist world.

In a previous article, we stated that the lack of a U.S. Value Added Tax (VAT) was one major reason for the record low employment participation rate and a stubbornly weak American economy.  Currency Manipulation by foreign nations, particularly China, is the other major reason.

 

We need political leadership to stand up to China today as Reagan did with Japan in 1985 by restoring Reagan’s trade policies.  The U.S. has ceded authority for enforcement of trade agreements to the WTO, which has been feckless in enforcing free trade agreements made by the U.S. and has proven to not have U.S. interests at heart.  These bureaucrats are beyond the reach of the American voter, which means we have lost some of our national sovereignty.

Renewing Reagan’s trade policies will neutralize trade imbalances, create millions of the good-paying jobs and provide sustainable U.S. economy. Doing so would reduce or even eliminate the Federal deficit as well as provide revenues to balance many state and local budgets.  Smarter policies will balance international trade and restore the American dream for our grandchildren.

Note: “Mercantilism” is an economic policy aiming at transferring wealth to one’s own nation by maximizing trade surpluses. This is achieved through exchange rate manipulation, customs duties, subsidies, and regulations favoring exports over imports.

Frank Shannon served in the U.S. Army, was an engineering/operations manager for AT&T for 27 years, was the owner of a small manufacturing business for 23 years, served as Colorado Chair of the Coalition for a Prosperous America and moved to Mesquite in 2013.

Comments

  1. Charles Blum says:

    Reagan’s greatest strength was that he grasped the essence of issues and didn’t get lost in the details. The essence of today’s problem is that the 20 or so countries with persistent current account surpluses refuse to live up to their obligations to reverse those surpluses. That’s mercantilism. The only way that modern mercantilism can continue is for the US — the one deficit country — to run up trade and financial deficits ad nauseum. We make the difference by printing money and transferring dollars (purchasing power) to the surplus countries. That’s how mercantilism threatens our prosperity. Shame on Washington for not acting in accordance in our best national interests.

  2. Rebecca says:

    Thank you for this article, Frank. Hope you write some more. You explain things so clearly. Needs to be reprinted elsewhere.

  3. Thank you Frank for another great article. Your approach is educational and factual. A “must read” for all!

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