The one subject, which became a headline issue last year, and even divides experts is trade. It will become increasingly important in 2018 as the US develops her trade policy, particularly with respect to China, and as the UK negotiates her Brexit terms with the EU.
Ignorance dominates this subject. Surely, people say, industry should be protected from unfair trade practices, such as goods manufactured in foreign sweat-shops, or unfair dumping of commodities, such as steel. If President Trump can protect American business from unfair competition, it would be good for the American economy. Then there’s the business of currency rates. Doesn’t a lower currency help restore the trade balance, by making exports cheap, and imports expensive? And surely, Britain leaving the EU risks trade tariffs being set up against British business. This means sterling must fall against the euro to rebalance trade.
These are all misconceptions, disproved by verifiable history. Why was it that before the euro, German export surpluses persisted, despite a rising mark, and why is it that after joining a weaker euro, her surpluses have not increased significantly further? And why did Japan, like Germany, also have a strong currency from the 1960s onwards and a persistent trade surplus? Why did Britain in the post-war years have a continual trade deficit despite a falling currency? And why was it that American trade protectionism intensified the depression in the 1930s?
The answers to these questions are relevant today to the development of both US trade policy and post-Brexit trade policy. It is no coincidence that trade imbalances have only become a significant feature since fiat currencies replaced the sound money disciplines of gold.
The purpose of this article is to tell the truth about trade, by addressing the relationship between trade imbalances and exchange rates, and to expose the harm caused by the imposition of tariffs.
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