Unfair Competition with Exchange Rates

On September 15, 2015 I wrote about exchange rates and said they were wild and crazy, like Steve Martin. I looked back over my previous posts and I have quite a few aimed at exchange rates and exchange rate policy. So for those of who are retired or simply bored I encourage you to spend a day or two memorizing all that stuff. My main reason for mentioning those past pieces is that they have a lot of background about exchange rates that I will avoid today as I focus on exchange rate data. 

My reason for writing about the data is that the word data sounds cool. Data this data that. Data is almost as cool as heteroscedasticity. But nevermind all that. Data is full of stories. Data without good statistical analysis means little but it can make you think. 

One thing we hear over and over these days is how China and many other countries take advantage of the USA when they depreciate their currencies. When other countries depreciate their currency that action appreciates the dollar and makes our exported goods less competitive. The story goes on that we have to shut down factories, fire workers, and make widows sew undergarments for Donald Trump.  Of course, the impacts of an appreciating currency are not that simple, but politicians like simplicity.

Today, instead, I share some data on this story about the appreciation of the US dollar. First, I will describe the data. I am using six key exchange rates for this analysis. The first five are well-known and are expressed as how many of the following currencies one can get with one dollar – European euro, Japanese yen, Canadian loonie, Mexican peso, and Chinese yuan. No offense to the Swiss or Brits, but I wanted to keep this manageable and I think the currencies I chose are the main ones for the dollar. A sixth exchange rate is a trade weighted index of the dollar evaluating it against a very broad group of currencies. Think of  TW as indicating how the dollar is doing against the currencies of nearly all our global trading partners.

So one decision I made was to choose these six exchange rates. A second decision related to examining changes over time. Did the dollar appreciate? The answer depends on the time period for the comparison. So here is what I decided. First, my data starts in 1999 – the starting year for the euro currency. Second, I eyeballed the data and decided that there were turning points in many of these currencies at or near the beginnings of 2005, 2008, and 2015. I agree, the results might have turned out somewhat different if I had chosen different dates. Third, I chose to use the data in January of those years. My table compares the April values of the exchange rates in 2016 to the January values in 1999, 2005, 2008, and 2015. All the data came from  https://research.stlouisfed.org/fred2/graph/

Check out the table below. The top half of the table has the actual exchange rates. Reading across the first line you can see the value of the dollar in January of 1999. In January of 1999 one dollar could purchase 86 euro cents. That dollar could also get 113 yens, 1.52 loonies, 10.13 pesos, or 8.28 yuans. The index number for what a dollar could buy in terms of a large number of currencies was 114.47. The second line shows you what the dollar could buy in January 2005. The fifth line shows you similar information for April 2016.

Let’s now use that information to see how the dollar has fared. Take the long haul first. Let’s look at the last column which contains information about the TW, the trade weighted value of the dollar. It was 114.47 in 1999 – 17 years ago. Some of you were mere children 17 years ago. In those 17  years the TW dollar value went to 119.5. In those 17 years the dollar appreciated by 4.4%.

This 4.4% increase in the value of the dollar against most of the world’s currencies supports the notion that the dollar appreciated. The question is what you make of that information. If we divide 6.6% by 17 years we could say that the dollar appreciated by an average of 0.3% per year. If we compare that 4.4% change over 17 years to changes in GDP or inflation or your waistline, you would conclude that 4.4% is not a huge issue. Or think about how much US firms might be impacted by the 4.4% increase in the dollar. Suppose those firms raised their prices by a total of 4.4% over the course of 17 years. Is that enough to convince you that those firms became less competitive? Were they forced to shut down because of this 4.4%? Is this a red herring so that politicians can protect us against evil beasts lurking in dark forests?

So you ask – Larry what in the Hades is this TW thing? Let’s instead talk about that evil monster China. Hmmm – how much did the dollar appreciate against the Chinese currency? The chart shows that a dollar could get you 8.28 yuan in 1999 and 6.5 yuan in 2016. That is NOT an appreciation of the dollar. The dollar fell against the yuan by 21% since 1999. Looking down the China column in the bottom half of the chart shows that the dollar has fallen against the yuan since 1999, since 2005, and since 2008. Only if you measure over the last 15 months can you see the dollar rising against the yuan – by less than 5%.

One more calculation -- how the dollar fared during the 11 year period between 2005 and 2016. The dollar appreciated at roughly a 5% to 9% clip against the Yen, the Loonie, and against our major trading partners. It is up 16% against the Euro, up 58% against the Peso, but down 21% against the Yuan. Much of that occurred after it became known that the financial crisis was spreading from the US to the rest of the world. As those countries are recovering and showing more stability today there is less need for the dollar to provide cover.  

Since I am running out of JD and your patience, I will end with this. The dollar is not greatly appreciating against anything in general. It is clearly rising in the last 15 months, except against the yen. But that increase is smaller than the increases that occurred right after the global recession spread. Further, if you look at the value of the dollar today you see some very different stories from country to country. 

The dollar has appreciated greatly against the Mexican peso while mostly depreciating against the Chinese yuan. If you want to find stories explaining subpar US growth and employment I suggest you look beyond exchange rates. There is no clear story here. More than likely the dollar strength reflects the weaknesses in other countries.  If and when the rest of the world stabilizes the dollar will return to a lower level. I doubt that political attacks on our trading partners will do much to normalize the dollar. 

Table. US Dollar Value Relative to Selected Currencies, 1999 to 2016

Date Euro  Yen Loonie Peso China TW 1999 0.86 113.29 1.52 10.13 8.28 114.47 2005 0.76 103.34 1.22 11.26 8.28 109.58 2008 0.68 107.82 1.01 10.91 7.24 98.65 2015 0.86 118.25 1.21 14.70 6.22 112.77 2016 0.88 108.07 1.30 17.76 6.50 119.50 Percent Change  to 2016 since 99 2.0 -4.6 -14.4 75.4 -21.5 4.4 since 2005 15.5 4.6 6.1 57.7 -21.5 9.1 since 2008 29.6 0.2 28.7 62.9 -10.2 21.1 siunce 2015 2.3 -8.6 7.2 20.9 4.5 6.0 Note: Exchange rates are foreign currency units per dollar in January of each year The quote for 2016 is April of 2016.

Lesson 10 The Value of the Dollar is the Steve Martin of EconoWorld

Steve Martin is a wild and crazy guy. So is the value of the dollar. There is much being said about the value of the dollar of late. So I thought I would look at it a little more.  My conclusion is that it is wild and crazy. That means that undo concern about recent highs in the value of the dollar could be misplaced. Here today gone tomorrow might be apt.  Let’s see what you think.

But first, let’s admit that the value of the dollar is an elusive concept. You have a dollar in your hot little hand. What is its value? In buying a JD, one measly dollar is worth a drip or two. Or a dollar might get you a really large handful of red jelly beans. Point – the value of the dollar depends on what you are buying. When it comes to domestic spending we have something called the Consumer Price Index. We use it to judge how much a dollar will buy in terms of all the goods and services consumers usually buy. No Charlie – it does not include pole dancing.

When the prices of things you usually buy rise quickly you lament that the value of your dollar is going down. When prices fall, you are happy that your dollar stretched further.

The above is all correct but it mostly pertains to spending on domestic goods and services in the US. There is an international aspect of the value of the dollar because in order to buy things abroad, you first have to buy foreign currency. So we talk about the value of the dollar as it relates to buying euros, yens, or loonies. If today I can get more euros or yens or loonies with my pretty green dollar – then today I say that the dollar strengthened – the value increased.

Since we trade with many nations, we are concerned with how the dollar’s value is changing with respect to an average of the currencies of our main trading partners. Those main trading partners include Mexico, Canada, China, the UK, the Bermuda Triangle and more. The Trade Weighted U.S. dollar measures how the dollar is faring against the currency values of our main trading partners.

So let’s call the value of the dollar – TWMTP. If you want to say it out loud – say TwaMooTooPoo. But have at least one JD before you try to say that. Below is what I learned about the value of dollar by looking at the data from 1973 to 2014. In 1973 I was starting my PhD program at UNC and my son Jason was born. But that is a whole other story.

In January of 1973 TWMTP had a value of 108. As of July 2015 it was 92. A lot of JD has gone under the bridge during those 42 years. I will say more about some of those years – but my first point is that at 92 – the dollar fell by about 15%  relative to 1973. So if someone tells you that the dollar is very strong right now you can look her in the eye and say – compared to when Jason was born, the dollar weakened by 15%. No offense meant to Jason. 

There must be more to the story. In April of 2011, TWMTP was 68. That was pretty low. In the past four years the dollar recovered to 92. So you could say --  okay smarty pants the dollar appreciated by 35% in the past four years so the dollar is strengthening. The dollar is clearly high and strengthening during the past four years. This is behavior that has some people bothered. A 35% appreciation seems bad to them – but where is it going to go from here?

Future exchange rates are not easy to predict.  The annual mean change of TWMTP over the last 42 years was -0.4%. If you use the past mean as a predictor of the future, then it says you predict no change next year – or zero percent. In those years since 1973, the dollar increased in 19 years and it decreased 22 times. The annual standard deviation was approximately 6%. That’s pretty wild and crazy. And the range of those annual changes was impressive. TWMTP rose by a high of 10.5% in 1982. It fell the most in 1986 when it depreciated by 18%. Now that is a roller coaster. So if our worry and consternation is about a high and rising value of the dollar in the future – our recent bout of appreciating dollars may or may not have much staying power.

But that isn’t the whole story. Within that 42 year span, there have been some long waves of exchange rate change.  Check out these waves (please don't get sea-sick):

            Jan 1973 to June 1980       -14%

            June 1980 to Feb 1985      +56%

            Feb 1985 to March 1995   -44%

            March 1995 to Jan 2002   +36%

            Jan 2002 to April 2011     -62%

            April 2011 to July 2015    +35%

These long waves of change lasted as long as a decade! Of course during any of these longer time periods the value of the dollar wriggled up and down often.

This background helps us phrase the question about the future. Yes the dollar has increased in value during the last four years. Does that mean we are on a long wave of dollar appreciation? The dollar is 35% higher than in 2011. But notice at 92 it is still well below the 110 that prevailed in January of 2002 and the 108 that existed in 1973. In fact the current reading of 92 is lower than approximately half of the years between 1973 and 2015.

Since the statistics give us little to bet on in the way of future changes in the value of the dollar – that leaves us with theory.  So long as our trading partners struggle and we look like an attractive investment location – it's hard to imagine the dollar falling in value very much. But how long can that continue? Is US policy that good and foreign policy so terrible that global investments will keep flowing to dollars and US investments? It seems not so long ago that the reverse was happening. We were worried that the yuan and the euro would steal the dollar's thunder. 

The Dollar Will Continue to Soar

There is probably nothing as widely quoted and least understood as the value of the dollar. It is sort of like your cell phone. Even children and grandparents have cell phones but most of us think there is a little Genie inside the plastic cover that makes calls by plugging little wires into large circuit boards.

Those of you who are not on a JD binge might have noticed that the value of the dollar has being soaring like Al Roker on Adderall. So let’s step back and try to understand what all that means.

The value of the dollar means nothing until we say – relative to what. A dollar has value as something beyond wall paper when you can trade it for something. You could trade your dollar for a Bo Jackson baseball card. $202 will buy one of those on the Internet right now. Or you could use your dollars to buy gold. An ounce will set you back about $1100 recently. You often use your dollars to buy JD, bread, toilet paper and other essentials of life. That cost is indexed by the Consumer Price Index whose value is 235.

Whenever the cost of the CPI, gold, or baseball cards rises - it takes more dollars to buy one of those things. Alternatively, a single dollar buys less – or it has less value.  Main point – the value of the dollar rests in its potential to buy things. When prices increase the value of the dollar falls – when prices decrease the value of the dollar rises. With oil and other prices falling in the US – you could say the value of the dollar has been rising relative to many goods  and services.

But there is more to this mystery. Another and equally frequent comparison is how the dollar trades for another foreign currency. We all know that most countries have a currency. We have the dollar but other countries use pulas, pesos, yens, wons, euros and so on. We can track how many dollars trade for these and other currencies. 

Recently a dollar could buy 121 yen. A year ago it could buy only 103. Thus we say the dollar increased in value over the past year because it now buys 18 more yen. That’s an appreciation of the dollar relative to the yen of 17%. The dollar rose in value against the euro by more than 20% in the past year.

A 20% change in the value of the currency if continued could cause major changes in the economic environment. When the dollar is stronger…

           

             It buys more euros and yens

            Thus if prices in Europe are quoted in euros and in Japanese prices are in yen and those prices remain unchanged, then a rising dollar is able to buy more European and Japanese goods.

            Likewise, Euros and yens can buy fewer dollars and so that means that Europeans and Japanese citizens find US goods and services more expensive.

            A 20% increase in the value of the dollar (decrease in the value of other currencies) thus tilts the incentives for buyers around the world. The tilt of a stronger dollar is to buy more of the cheaper goods in other countries and fewer of the more expensive US goods.

The above is the main reason why US policymakers face several dilemmas. US firms and labor unions will complain that the strong dollar is hurting their foreign sales. If this trend keeps up you can bet that more will be known about how US firms are losing competitiveness against global companies. Some will worry that all this will be enough to slow overall national economic growth. Thus policymakers will have to pay attention.

The value of the dollar – like any value – cuts in many directions. When the price of eggs rise, consumer hate it but you have to admit that egg sellers love it. A more powerful dollar means that US consumers, including companies, will be paying less for goods they import from other countries. So if you are used to buying electronics or clothing from abroad, it is likely that the prices of these items will be reduced. Companies that buy materials and equipment from abroad will also pay lower dollar prices. They will enjoy the ability to either expand sales at lower prices or increase profits. Like the price of eggs example – the rise in the value of the dollar helps some folks while it creates challenges for others.

            

Speaking of challenges it is important to keep in mind that US exporters do have options. The price a foreigner pays for US produced goods is also determined by the local price in dollars. So US firms harmed by a rising value of the dollar can recapture foreign customers by lowering the domestic price. This could harm revenue and profits but it does minimize the loss of global competitiveness.

I see it is nearing time for my JD break though there is much more to this story. So let me try to condense it. The rising value of the dollar is mostly the result of a redirection of world demand toward US assets. When the globe buys more US bonds, stocks, and bank accounts, this increases the demand for the dollar and its value. This geographical tilt in purchases of assets is caused by two key factors: monetary policy and economic growth. World investors are pretty sure that two things are happening and will continue to happen for a while. First, central banks in the EU, China, and Japan are determined to lower interest rates in those places – while the US Fed is recognizing that rates will have to rise in the USA. Second, the rest of the world is struggling with economic growth as the US economy improves.

The point of all this is that the value of the dollar is not going to reverse its upward trajectory any time soon because asset return opportunities favor the US. So we better get used to a rising dollar. One of my equally elderly colleagues told me at lunch this week over a lovely bowl of prunes that he could easily see dollar parity with the Euro in the near term – meaning the dollar may rise even more before it stabilizes. 

Taming the Deflation Dragon

The Deflation Dragon is roaring and Keynesians are licking their chops. Like those who promote fad diets and weight loss pills, Keynesians are appealing to your inner anxiety and love of easy solutions rather than telling you the truth about what ails the world economy. A typical article on this topic is one that appeared at Bloomberg.com last week --  http://www.bloomberg.com/news/2014-10-22/currency-wars-evolve-with-goal-of-avoiding-deflation.html

This Bloomberg article does a few things. First it does a nice job of reporting deflation changes in various spots around the world. There is plenty of it. I have no argument there. Second, it connects exchange rate depreciation wars with these deflation occurrences. Finally the article concludes that if exchange rate depreciations will not successfully end deadly deflations, then we should deal with it with “whatever means is necessary.”

Clearly more people are coming to the conclusion that widespread deflation needs to be reckoned with and that typical Keynesian approaches that boost aggregate demand must be administered. These approaches include depreciating your exchange rate, goosing money and credit, and having larger government deficits and debt.

The intuition is simple but deceptive. Draw a supply and demand curve diagram. Shift the demand curve downward. Notice the resulting lower equilibrium price. Now shift the demand curve rightward. Viola – the equilibrium price rises back to normal. Furthermore, equilibrium output (and presumably employment) increases. QED. Demand is the problem. The problem is evidenced by deflation or falling prices. The problem is rectified by increasing demand. Don’t you just love economics! Now I can drink my JD and spend the rest of the day watching leaves fall.

I agree with the whole Supply and Demand story but disagree with how the world can best push that lagging Demand Curve back to a better position.  Conventional Keynesian wisdom reflexively wants the government to manage the Demand Curve through exchange rate, monetary, and fiscal policies. But in 2015 world economic problems require a very different potion. Even the master of all this theory – J.M. Keynes, if alive today would have looked at today’s situation and balked at the traditional Keynesian remedies.

Why would Keynes balk with Keynesianisms? Because Keynes lucidly and powerfully expressed the idea that confidence and fear were important motivators. When writing about the Great Depression it was Keynes who explained that monetary policy would be like “pushing on a string.” This meant you could push money into the system but because of lacking confidence, banks or firms or households would simply hold onto the money. They would save or hoard it. They would not spend it. He called that “the liquidity trap.”

So Keynes established why fear made monetary policy ineffective. Living today and seeing how governments have backed themselves into huge debt corners, he might also conclude that fiscal policy won't work in an environment where governments were defaulting on debt. I am not sure what Keynes would say today about exchange rate policy but such policy is not one that every country can employ. This is a zero-sum game. If one country depreciates its currency to stimulate demand for its products, then another country has to endure an appreciation and a reduction in demand for its goods and services. Already the US is getting unhappy with Japan and other countries that are making gains at US expense.

Larry you are so depressing! I am not. I am fun! There is a solution to deflation but it involves not calling the 800 number for another fast acting pill. Think about what most countries have been through in the last years. Think about the real credit and financial problems faced by household, firms, and governments. It might sound humane and nice to tell US families that they can now borrow 97% of the price of a new house with less stringent income requirements. But surely all those stories about under-water mortgages are still fresh enough to make potential home buyers know that this is not an attractive option.  Basically it is snake oil.

The solution is the same one the doctor gives to the patient undergoing rehab. Keep at it. Keep doing those exercises and someday you will regain better use of that limb. There is no easy way. There is no pill or diet. Just keep sweating and grunting and pushing to get stronger.

Today the sweating and grunting has a lot to do with reducing previous levels of debt among households, firms and governments. Either under- or over-regulation of what the IMF calls legacy problems are also part of the problem of uncertainty and insufficient demand. Under-regulation means that governments should do more to clear up financial, housing, and other problems. Over-regulation means they have done too much and have handicapped the very patients doing the rehab. Do those exercises with a 100 pound sack of potatoes on your back!

Nutshell. Deflation does exist and is a challenge. Aggregate demand is deficient in many places and needs to be prodded upward. Aggregate demand will only be worsened by policies that do not address fundamental problems. Most Keynesian remedies fall into that category. Policies that are tough but will make us stronger are what we need. We need to cleanup debt. We need to give workers and companies stronger incentives and remove impediments to work, innovate, and produce. The IMF pays lip service to such “restructuring” policies but alas in the real world the snake oil salesman seems to have more influence. 

Guest Blog by Buck Klemkosky*: As the World Turns

Intro by Larry Davidson

I was in the process of writing something about recent global events when Buck beat me to it. I still have plans to write about the recent IMF World Economic Outlook report that was released last week. But in the meantime Buck brings up two very recent and potentially threatening global trends. The first one finds that the value of the dollar is rising lately and is creating new challenges for a still fragile US economy. Buck explains why dollar value changes are not that simple, however. The other interesting issue concerns global commodity prices. Most of us worry when prices of energy, steel, copper, aluminum, and various other commodities rise too much. But what happens when international prices of these items begin to decline?  I hope you enjoy Buck's take on these things.

The Dollar is Back

In the last year, the U.S. dollar has appreciated (strengthened) 10 percent against the euro and 15 percent against the Japanese yen. Most of the decline in the euro has been in the last six months, while the yen has fallen almost 40 percent in the last two years. It is not just the euro or yen either. The U.S. Dollar Index, which measures the value of the dollar again a basket of currencies, has climbed to its highest level in more than four years. Even the venerable Swiss franc has fallen 9 percent against the dollar since June, as well as emerging market currencies. About the only currency that hasn’t changed is the Chinese yuan, which is controlled by the government and unofficially pegged to the U.S. dollar.

Why do we care about the value of the dollar relative to other currencies? A strong dollar makes foreign goods cheaper and thus helps control inflation. However, a strong dollar also makes exports more costly and thus less competitive, resulting in slower economic growth. It has been estimated that a strengthening of the dollar by 10 percent reduces economic growth by 1 percent. It always pays to invest in a country with a strong currency, so a strong dollar had made U.S. financial assets more attractive to foreign investors; it has helped lower bond yields and other interest rates and supported stock prices.

Why is the dollar so strong? The U.S. has experienced better economic growth than either Europe or Japan. Both are on the verge of recession and have lower inflation or deflation and lower interest rates. The European Central Bank has initiated a bond purchase program, and Japan has an ongoing one just as the U.S. Fed will stop its program this month. Plus the Fed has already given guidance that U.S. interest rates will be increased in the future, while Europe and Japan have given no such guidance. In a broader context, the dollar remains the world’s primary reserve currency and a safe harbor in terms of crisis and geopolitical risks. The dollar will continue to anchor the world’s financial system in the foreseeable future. In the shorter term, one will not notice the effects of a stronger dollar unless traveling abroad; things will be cheaper.

Commodity Prices Tank

The closely watched Bloomberg Commodity Index, which tracks 20 commodity prices, has fallen in recent weeks to a four-year low. And the fall has been broad-based, including agricultural, energy and metal prices. How things have changed; between 2000 and 2011 commodity prices tripled, referred to as the commodity super-cycle, and there was talk of eventual shortages of almost all commodities. Since then commodity prices have fallen by about 25 percent, and 11 percent since June alone. The only commodities not to experience price declines have been cocoa, coffee, cattle and hogs.

Commodity prices are a function of supply and demand and both have had an impact this year. On the demand side, annual global economic growth has slowed from 5 percent to 3 percent this year. Global growth may not improve much in the short term as the Eurozone, Japan and other emerging countries are teetering on the brink of recession. China, the largest user of most commodities in recent year, is struggling to achieve annual growth of 7 percent. Christine Lagarde, head of the International Monetary Fund, recently declared that the global economic recovery was “brittle, uneven and beset by risks” and slow global growth may be the norm for a long time.

The supply side may be summarized by two words: “supply glut.” Agricultural commodities have benefited from good growing weather, record acreage planted and high yields, resulting in bumper crops and the lowest prices in seven years. The oversupply of most metals can be blamed on the huge investments made at peak prices to satisfy China’s appetite for raw materials and recovering global economic growth. Oil prices have fallen 16 percent since June and are at the lowest level since 2012. Much of this decline can be attributed to the shale boom in the U.S. as it replaces Saudi Arabia as the largest oil producer in the world. The U.S. imports less oil today – 3 million barrels daily – then it did two years ago. Oil prices would be lower if countries such as Libya, Iraq, Iran and Venezuela could produce at full capacity.

What are the positive and negatives of falling commodity prices? It depends on whether a country is a net importer of commodities or a net exporter. Producing countries that export suffer when prices drop and could be a drag on global economic growth. For the net importing countries, falling commodity prices are like a tax cut, leaving households with more disposable income. Since many commodities, such as oil, are priced in dollars, the stronger dollar helps the U.S. but hurts other countries where currencies have weakened again the dollar. In general, falling commodity prices are probably signaling slower global economic growth.


*Buck is Market Strategist at Wallington Asset Management.

Exports Are Cool but Geographically Challenged

Exports are cool. Not cool enough to be in the lyrics of any rock song I know of but definitely cool enough that President Obama declared in 2010 his goal was to double USA exports to the world. I wrote about that in this blog space a while ago. It looks even less doable now than it did a while ago. So here I go again! I have some new data that shines a light on why it is next to impossible to make large gains in exports now.

It also suggests that attacking the EX-IM bank right now would be highly counter-productive. 

Before I get to that data it helps to see why the President and others think exports are so cool.  An export exists when a business firm on US soil produces a good or service and sells it to someone living outside of US soil. These people might be Canadians buying auto parts from Kokomo Indiana, Mexicans buying industrial equipment from Columbus Indiana, or UK citizens purchasing an Amtrak ticket that will take them from Indianapolis’ Union Station to the Grand Canyon.  You might say that such sales amount to the same thing as when the buyer lives on US soil – but you would be only partially right.

The important difference is the impact that exports have on our national ability to grow. USA buyer purchases are ultimately limited by what they earn. Let’s suppose you can earn $100 and you spend locally $80. The rest goes into saving or to goods and services produced abroad.  From time to time you can spend more than $80 but it can't last. The “equilibrium” spending for income of $100 is $80.  Now let’s imagine that a foreigner decides to buy from us and we are able to hire more people to produce these extra goods and services. The foreigner, therefore, expands how much our nation produces and how much income we earn.

So long as foreigners want our goods and services, this export sale permanently increases national output beyond what our own citizens earn. It raises our incomes as well. The increased income means we can buy more domestic and foreign goods. This is what is so cool about exports.

Trace the steps…more exports…more output…more income…more domestic spending…even more output.

If a country like Germany or Japan or the USA is able to win the global competition for goods and services, it can use this ongoing competitiveness as a way of permanently increasing its output and economic growth.  If you are still reading and are somewhat awake you might say something like – hold on fella. Whoa Nellie. Won’t other less competitive countries get a little irritated and make unhappy noises? The answer is yes. We have a term “beggar they neighbor” to characterize countries like China who are notorious for playing the export game. But the truth is that while the others feel jilted they can always reduce the unwanted impacts by raising the competitiveness of their own products and services. And while China is well-known for using exports for growth, there are many countries that use this strategy to a lesser degree and therefore are not as notorious. The game goes on.

So exports are cool and we in the USA would like to beggar our neighbors. But the data have not been kind to the President’s goals for expansion. Notice that before the recession hit, US exports were exploding. Between 2003 and 2008 USA exports of goods and services in current dollars increased by 81%. In the five years after the recession started, from 2008 to 2013, exports increased by only 24%. That is quite a slowdown. While it is true that exports declined in 2009, they have increased in every other year and totaled $2.28 trillion in 2013. They have, however, been growing slowly.

If your horse is running too slowly you give it more JD. Right? Or you do something to speed it up. In past blogs I have pooh poohed efforts to reduce the value of the dollar among other policy remedies. In this blog my focus is geography. Before you come up with a solution for exports it might be a good idea to see which countries are buying more or less from the USA. Luckily the Bureau of Economic Analysis has data on USA exports by country destination.

It might surprise you but Canada and Mexico are the largest purchasers of US products. Apparently closeness counts when it comes to kissing and international trade. In the table below I list some key export destinations – countries and world regions. The table order is in terms of how much each destination bought from the USA in 2008 (because I inter-mix countries with regions the totals do not add).

The table below has three columns. The first column tells you export sales from the USA in 2008. The second tells you the percentage change in exports for two different time periods: between 2008 and 2013/ and 2003 to 2008. The final column tells you how much higher USA exports would have been “if” they had grown at the rate from 2003 to 2008. It shows you how much dollar exports we lost because of the slowdown in the past five years.

Some takeaways from the table:

·       

The 28 countries of the European Union accounted for the largest share of US exports in 2008. After growing by 86% between 2003 and 2008, the EU barely increased its purchases from the USA in the next five years.

·        You can understand the overall EU changes by looking down the table at the UK and Germany. Those countries were buying less USA goods and services in 2013 than they bought in 2008. That performance came after very strong increases in the previous five years of 67% and 81% respectively.

·        Nafta partners, Canada and Mexico, were the largest country destinations of USA goods and services in 2008. They bought more from the USA in the time period from 2008 to 2013, but the decline in growth was much less pronounced than for Europe. Similarly S. Korea and the Newly Industrialized Countries (NICs) slowed in their USA purchases but had relatively strong rates.

·        OPEC and China had the fastest purchases from the USA in 2003 to 2008, 153% and 233% respectively. During the next five years OPEC’s purchases of USA goods and services fell off dramatically while China’s continued growing at 84%.

·        Japan had the slowest growth of USA purchases in first five year period (31%) which fell to growth of only 6% in the last five years.

·        The final column shows what the USA lost because of these slower growth rates of exports. For example, if USA exports to these regions or countries had maintained the pace from 2003 to 2008, exports to the EU and NAFTA between 2008 and 2013 would have been much higher: $404 billion and $129 billion higher, respectively.

Between 2008 and 2013 total USA exports of goods and services to the world rose by about $440 billion. This table shows that a repeat of the growth during 2003 to 2008 would have added another $434 billion just from the EU and NAFTA in 2008 to 2013.

USA Export growth fell during the global recession but then grew slowly thereafter. While we might want to discuss national competitiveness or the overall value of the dollar or unfair trade practices – this little exercise today says that our export challenge is very much geographically oriented. Europe struggles with post crisis economic growth. OPEC is trying to adapt to new competition. Other countries, including S. Korea and China are not growing like they used to. Japan languishes.

This little exercise suggests that raising US exports will be neither easy nor global. It won’t be easy because most of our main trading partners continue to be weak. It will not be easy or global because the problems or issues in each country are not the same. Mexico is not Germany and Canada is not the UK. Discussions about the US EX-IM bank suggest old-style thinking. Europe has demonstrated its importance to US exports – but without some US financial assistance to EU buyers of USA products, it is hard to see why or how they can afford to buy even what they are buying now. We won’t double USA exports in the near future but our policies should realistically address a country/regional set of issues.

          Table. USA Export Destination

                      2008           %

                    Exports      Chg*    Higher?

        Billions                     billions

EU                   471          1/86          404

Canada            308        19/56           114

Mexico            178        44/53             15

NICs               147        34/56             32

UK                  114         -5/67             81

Japan               107          6/31             27

OPEC               92        22/233          192

China                87        84/153            59

Germany           83         -9/81              75

S. Korea           50        28/57               15

Brazil                45        56/183             56

% Chg column has two numbers. Both are percentage 

changes over a five year period. The first is from 

2008 to 2013. The second is from 2003 to 2008. 

Doubling US Exports

Cartoon by Jim Gibson

While everyone is so focused on the beginning of fall sitcoms and American football it might be time to revisit the hopeful goal of the President to double US exports. He stated that goal in 2010 as he announced a five-pronged program to increase America’s focus on selling goods and services abroad. It sounded like a neat idea at the time because people who live outside the US just can’t get enough US produced goods like Kentucky bourbon and Mississippi River cruises. It sounded good to the President because when these foreign folks buy more of our stuff it should increase employment in the US. Of course the President never mentioned an import policy to go with the export policy because I guess when American’s buy Samsung ovens and phones that does not have a negative impact on jobs in the US. But I get ahead of myself.

The President is a clever guy. He knows that it is always much easier to reach a goal if you never exactly define it. Try as I might, I cannot find any clear cut definition of what the president was going to double in five years between 2010 and 2015. As it happens exports can be defined many ways. The balance of payments statistics (BOP) define exports in terms of current prices. The National Income Accounts (NIA) defines them two ways: in current prices and constant prices (Real, or chained).  As you might imagine these measures that include current price change can make a big difference. If we are interested in a version of exports, however that correlates to employment – then it is usually better to use the NIA constant price version. 

Another issue regards whether or not you want to focus on exports of goods and services or goods alone. The President never made it clear which one of these two variants was in his sights. This measurement issue implies that we can never be sure how to determine if the goal has been met. Maybe he was thinking of exports of Chevy Volts?

But semantic issues will not deter us. Let’s focus on NIA’s version of real US exports of goods and services. In the first quarter of 2010, US exports of goods and services reached $1.7 trillion. A doubling by 2015 would imply an increase of $1.7 trillion.  As of the second quarter of 2013 – much more than halfway through the five year period, real exports of G&S reached $1.986 trillion. That is an increase of $286 billion. In three and one half years we have managed to move 16% towards the target. To put that into some perspective, if we were well on target to meet the goal, exports of G&S should have increased by about $1.2 trillion.  Clearly we are way behind schedule if exports of G&S are going to double by 2015.

During this same time period imports of G&S into the US were not standing still. In the last 3.5 years imports of G&S rose from $2.1 trillion to $2.4 trillion – the increase was $324 billion. Exports rose by $286 billion while imports increased by $324 billion. Thus real net exports of goods and services decreased by $38 billion. If exports increase employment and imports decrease it – then in the last 3.5 years the President’s Export plan has worsened the employment situation in the US. We are moving away from the stated goal.

Perhaps you say, we should focus instead on goods. Perhaps the services numbers are not helpful. In that case exports of goods increased by $190 billion in those 3.5 years while imports increased by $277 billion. Net real exports of goods declined by $87 billion. Focusing on goods instead of the broader aggregate of goods and services makes the situation look even worse.

We are now 14 quarters into the plan – 70% on our way to 2015 and only about 16% closer to the export goal. 

Perhaps the apparent failure is because the value of the dollar increased more than expected. A rising dollar would hurt US exports and raise imports. But the dollar has been on a downward trend for quite a while. It is true that the dollar has fluctuated but between 2009 and 2012 the dollar depreciated 8% against the euro, 15% against the yen, and 8% against the Chinese renminbi. In those same years the dollar depreciated by 5% against our major trading partners. It was down 31% against our main trading partners between 2002 and 2012. The dollar is not the problem.

The real problem is that the policy was mainly wishful thinking.  Despite being barely one year out of a world recession in 2010, the administration believed we would believe that it could wave a magic wand and make exports grow at a rate that was almost historically impossible. We would have to go back to about 1995 to get a doubling to today’s figure. That is it took 18 years for real exports of goods and services to double. President Obama thought we could double them again in the five years following a world economic recession. Really?

Exports are not the issue. Net exports makes a little more sense because it admits that trade is a two-way street both creating and destroying jobs. But even net exports are not the point. The US needs a vibrant competitive economy. Making up silly plans is not the way to make that happen. 

Pointing a Finger at Currency Manipulators

President Obama famously said that he wanted to increase the export sales of the US  -- he said he wanted to double their value between 2010 and 2015. In July of 2010 I wrote about this and among other things I likened this doubling to something like the US basketball team scoring 200 points per game in an international competition. I will show below that based on two years of experience, it appears to be even less likely the US will double exports. I bring this up not so much to gloat but so as to head off what appears to be right around the corner – a vigorous attempt by Obama’s administration to paint other countries as exchange rate manipulators and international cheats. It is no secret that the dollar has been rising against the yen and euro – and that portends the usual finger pointing. I try to explain why that approach won’t help matters at all and could make the international trade situation worse. What our government won’t say is that the dollar has been depreciating for many years now and remains a shadow of its former self. If any country has used currency depreciation to its advantage, it is the USA.

Let’s get to the trade data first. I used standard GDP data from the US Bureau of Economic Analysis. http://bea.gov/iTable/iTable.cfm?ReqID=9&step=1#reqid=9&step=3&isuri=1&910=X&911=0&903=128&904=1999&905=2012&906=A

As in my last post on this subject, I use trade data that is in the real terms – that is, the figures have filtered out any price change. In 2010 US exports of goods and services in real terms equaled about $1.67 trillion. In 2012 they had increased to $1.84 trillion, an increase of about 10%. But to put it into a longer term perspective, US exports were $1.19 trillion in 2000. This means that despite a weakening currency it took 12 years for exports of goods and services measured in real terms to increase by 55%. If we ignore the exports of services and just focus on merchandise, the story is similar. US exports of goods in 2012 were $1.54 trillion increasing by about 20% since 2010 and by about 96% since 2000. Exports of goods took 12 years to almost double and increased by about 20% in the last two years. So how can Obama expect to double them again in five years? It is not possible.

Let’s not hold the President to a 100% gain in five years – let’s just see what it might take to keep the champagne flowing for a while. During the last two years the US dollar fell. It fell against the currencies of Canada, China, and Japan but it rose against the euro. The trade-weighted value of the dollar fell by about 10% in those years. Thus, the large improvement in US exports of the last two years seems to have been aided by a depreciating dollar against many foreign currencies (except the euro).

But that information does not in any way establish a strong link between exchange rates and trade results. A look back at the dollar since 1999 shows the dollar has depreciated even more. The trade weighted dollar continuously declined against the world’s major currencies during the time from 2002 to 2012. It declined in those 10 years by more than 20%.  The dollar declined even more against the Japanese yen, Chinese renminbi, and Canadian dollar. The dollar fell against the euro by approximately 50% during those 10 years and despite some recent appreciation of the dollar against the euro, the dollar is still almost 20% below the euro’s beginning value and some 30% below its value in 2002.

As our government starts pointing its finger at China and other countries as currency manipulators, it will do well to understand a few further points. What matters to a country is its net exports – not it exports. Net exports are defined as exports minus imports. For example, if exports double next year while imports triple, the net impact of exports AND imports on spending and employment would be negative. So while we are doing cheers for export growth, what do we know about imports? If we measure from 2010 we find that US goods and services imports measured in real terms increased by 7% and since 2000 by 37%. As a result the US net export balance improved modestly from $-451 billion in 2000 to -$420 billion in 2010 and to -$402 billion in 2012.  So while this key balance has improved we could say it improved by about 4% in two years and by about 11% in 12 years. That’s not much improvement given all the currency depreciation we have witnessed.

Why didn’t we do better than that? What can the President do to make exports AND net exports improve more quickly in this country? The answer is that it isn’t easy. Lasting trade improvements come from durable and real improvements in global competitiveness. Exports will rise and imports will fall if the people of the world increasingly want US goods and services. What makes our goods attractive beyond the current exchange rate? For one thing it helps if our trading partners are strong and growing. We should hope that Europe, China, Japan and other key trading partners find good ways to exit the world slowdown and grow more rapidly. The more they grow, the more they will buy from us. 

But we also must have the best goods and services at the best prices. We need an economic environment that makes firms freer to compete globally. While that involves breaking down foreign barriers it also means having clearer and more supportive regulations as they relate to business activities and costs. The current environment in the US is not conducive to major industry investments in competitiveness. Policy uncertainty is rife with respect to national debt, Fed stimulus, energy, banking, health, and much more. "Depreciating" government regulations would do much more right now for our trade balance than would depreciating our currency!

President Obama could greatly improve our trade performance and that would be an important source of economic growth. But he needs it to be a major and clear objective –not just a talking point. Free trade agreements with Pacific and European counterparts would help but are no more than hot air given the President’s clearly expressed desires to support environmental and union demands. Clearing up uncertainty about federal government business regulation sounds good but there is little evidence of any real focus there. It will be a lot easier for Obama to point his finger at currency manipulators and shift the blame elsewhere. Does that sounds familiar?

Exchange rates, my bicycle pump, and a rubber crutch

My front bicycle tire went flat. So I took out my trusty bicycle pump and put more air into the tire. Each day my tire would go flat overnight. I kept putting more air into it. It was getting flatter sooner and sooner and so in desperation I decided to get a new pump. Guess what – that didn’t make any difference. The tire kept getting flat. Why? Because the tire had a hole it that kept getting bigger and bigger. The problem was not the pump. The problem was the tire.

Some of you are saying. Davidson – you don’t even have a bicycle. But the truth is that I do though it does not have a hole in its tire. Some of you are saying – where is the macro? So here it is. I believe that exchange rates are like my bicycle pump. The pump might be the remedy for some minor adjustments in tire pressure but it is no match for a fundamental problem like a hole in the tire. A bicycle pump is not a solution to a hole in a tire and the exchange rate has nothing to do with a country’s competitiveness. If you want to fix a country or fix the international trade of a country you should not try to do it with a bicycle pump or with a change in the exchange rate.

This point has some relevance to us all because many people prefer to believe the opposite. Some folks would love to see Greece leave the Eurozone so it could have its wonderful drachma back. Depreciating the drachma, the story goes, will restore Greece’s competitiveness and it again will be the world’s greatest exporter of gyros and historic buildings. Other people would love to see China appreciate its renminbi so that the US dollar would depreciate – and restore US company’s competitiveness in exporting Playboy Magazines and slot machines. Brazil wants the US to stop printing money and thereby making the dollar depreciate and hurting Brazil’s ability to export caiparinhas and topless beaches.

There is some rationale for using an exchange rate to help offset short-term and relatively minor changes in a country’s competitiveness. An exchange rate tells you how much your currency is worth in terms of other currencies. So when the dollar goes from obtaining 1300 Korean won one day to getting 1400 the next day, we say the dollar appreciated against the won (and the won depreciated against the dollar). In this case someone with dollars can now get with $1 the 1300 won creampuff they usually get on the way to the bus stop on Monday and Wednesday mornings at Anguk Station plus have another 100 won left over. With the new exchange rate (1400 instead of 1300) that $1 can buy even more Korean stuff. That is, you can now get the usual cream puff and a new Equus. Okay – a new Equus costs more than 100 won but hopefully you get the point here. Big rule –

o   If your currency depreciates, your goods and services can be obtained with fewer amounts of foreign currency. Thus your stuff looks cheaper to the rest of the world.

o   If your currency appreciates, your goods and services can be obtained only with more foreign currency. Thus your stuff looks more expensive to the rest of the world.

o   Many governments are driven by the fact that they want their goods and services to appear more competitive to foreigners – so they often favor depreciating the currency.

These three facts help us to explain why (1) the Greeks might want to have a drachma that they can depreciate, (2) why the US wants China to let its renminbi appreciate, and (3) why the Brazilians want the dollar to appreciate. Like the bicycle pump and the tire, these desires are founded by short-sighted and incomplete analysis. And therefore, they are probably not going to lead to the results they want.

For example, let’s explore why these ideas could be self-defeating. Let’s suppose Brazil gets its wish and the US manipulates foreign exchange markets in a way that the value of the dollar rises and the value of Brazil’s currency, the real, falls. The governments could accomplish this by selling reals and buying more dollars in foreign exchange markets – that is the US or Brazil buys enough dollars to significantly appreciate the dollar (depreciate the real). This tends to help Brazil’s exports. But the story doesn’t end there. In doing this action, dollars move out of the economic system and reals move in. That is – the US money supply decreases and the Brazilian money supply increases. Left in place, these monetary changes should tend to increase inflation in Brazil and reduce it in the USA. Thus while the exchange rate manipulation seems to favor Brazilian goods – the implied monetary changes tend to do just the opposite. And to make things worse – both countries may not enjoy the fact that an international action has caused them to change their monetary policy. It is like each country loses control over its own monetary policy whenever it tries to manipulate its exchange rate.

If you are still following me (yawn) you might say that if the country doesn’t like the loss of control over their money, they can always offset or neutralize the international impact described above with a domestic monetary policy operation. In the above case the US money supply is decreasing so the Fed can use its usual tools to increase the money supply. The Brazilian Central Bank can absorb some of the excess reals by a domestic operation that decreases its money supply. This has some merit but notice that this too is temporary. The tire has a hole in it. That is, whatever caused the trade imbalance between the US and Brazil will continue. What appears to be a one-time event becomes a more continuous one with the US constantly encountering disinflation and increasing its money supply and Brazil facing inflation and then tightening its money supply. If you are still awake you can see how crazy all this is.

This is because there is a hole in the tire with respect to trade. Brazil says that their trade problem is caused because of a highly accommodative US monetary policy that causes a global depreciation of the dollar. If this is correct, then the solution is for the US economy to return to normal monetary growth and interest rates. Of course, Brazil might consider that at least part of their loss in competitiveness comes from a world slowdown that has reduced the global demand for the commodities that Brazil exports. The hole in Brazil’s tire is, therefore pretty big. It may take some time for the US and the world to return to strong growth In the meantime, Brazil can work harder at internal factors that might promote its global competitiveness. But simply manipulating exchange rates is going to do very little and most likely will lead to reduced competitiveness as monetary effects increase Brazilian inflation and worsen their situation.

The same can be said of the issues with respect to Greece and the Eurozone and the issues between the US and China. Greece needs a currency depreciation like it needs a hole in the head. If Greece wants to be in the EU then it needs to try to be more like other EU countries. When Greece gets is labor and product markets as well as its government wages and pensions a little closer to the average EU country, then perhaps it has a chance of overcoming imbalances in its dual deficits in trade and government accounts. If Greece even pretends a tiny bit like it is going along with the prescription, both the EU and the IMF will likely continue to help them. That will buy them time to get fixed. The drachma and a depreciation might also give them time but notice that they still would need to fix their problems. And in the meantime all hell would break loose in Greece when they left the Eurozone.

The same can be said about the US and China. In this case there is a 16-wheeler full of tire holes. No one REALLY believes that a further depreciation of the dollar against the renminbi is going to succeed in restoring the trade balance. The US has had global trade deficits for decades despite a trade-weighted dollar that has done nothing but decline. Most economists believe the US saves too little and China saves too much. Neither of these tendencies is going to change anytime soon. Depreciating the dollar will likely do nothing but cause inflation in the US as we pump even more dollars all over the world. The US needs to pay attention to saving and to the other adjustments that could make us more productive, innovative, and competitive. China needs to rebalance its economy away from saving toward more consumption. Only when these savings imbalances are corrected in the US and China will headway be made with the trade balance with China and the world.

The exchange rate is a rubber crutch. Countries need to tend to their knitting or tire mending. 

Currency Manipulation and the Wrong Super Hero

This week our US Senate is taking up the issue of China’s currency manipulation. It appears that we have an almost bi-partisan attempt to create even dumber international trade policy. The stock market hasn’t fallen enough – so our Senate has decided it can do even more to impoverish Americans. Way to go Reid! The Republicans who normally wouldn’t go along with this kind of stupidity (since they have their own kind of stupidity) seem to be worried that they need to play this populist card too.  Let’s blame everything on China. China– you bad. US Congress – we good.  So much for intelligent representation and policy!

What do these guys want to do? While the exact legislation is changing each day, the basic idea is that China depreciates its currency to create a competitive advantage for its exports. So we have legislation that would ask someone to calculate the degree of advantage China gets from currency manipulation and that would be fed into a Robot that would spit out the size of a tariff to apply to some or all of China’s imports into America. Sounds easy, right? Sounds fair, right? Sounds like it will save American jobs, right? Sounds like it will make 65 year old men more potent and attractive, right?

This reminds me of that cold day back in the 1970s when a car-full of Indiana University economists slid off a snowy highway between Terre Haute and Indianapolis and found themselves in a ditch wishing that a truck driver would stop and help them. We had a lot of PhDs in that car but no one who actually could figure out which end of the car to push. Luckily a truck driver did stop and offered some advice. He suggested that we push the car down further into the ditch and then floor it enough to drive out of the ditch. We concluded that this particular truck driver must have gotten his license from Purdue University and that there was no way in H___ that we were going to push the car down further into the ditch.  That was really stupid advice and even a bunch of professors knew it. We convinced the brawny driver to help us push the car upward and we were soon out of the ditch and on our way to Indianapolis. 

The point is that sometimes you really want to be rescued but sometimes you get a super-hero who just isn’t up for the task. In the case of China we in America feel threatened. We worry about China taking away our jobs and companies. So it is not wrong that we worry about how to better compete with China.  But this idea to tie US import tariffs to an estimate of Chinese currency manipulation is impossible to implement, will not increase US jobs and competitiveness, and will more than likely than not be counter-productive.

First, it is impossible to do. While we may have lots of theoretical models that might tell us how much China’s currency is under-valued, there are so many different ways to calculate this number that even a robot named Curly-Larry & Moe might sputter around in endless loops of break dancing. Then there is the small issue that implementing increased tariffs based on this number is not only novel but is illegal within the rules of the WTO. There is no precedent for this. While it sounds like a desirable thing to treat currency manipulation as a trade barrier worthy of reacting against, the WTO has not sanctioned this kind of retaliation. 

Then there is the question of other countries that routinely depreciate against the dollar to gain competitive advantage. Would it be proper and fair to only single out the Chinese? So are we really going to work Curly, Larry & Moe overtime on Brazil, and the others too? Do we really want to risk a global trade war right now?  In short it is really hard to find any way to actually implement this policy. It’s like making it illegal for Martians to own homes in Nevada. It sounds good to try to keep them out of Nevada – but I am not sure we have a good way to do this.

Second, this policy is not going to work. Notice that over the last years the Chinese currency has appreciated against the dollar. While it might have appreciated somewhat more, it is not the case that Chinese policy has been to reduce the value of yuan.  Other developing countries have done more.  Note also that these increases in the value of the yuan have not worked to reduce the US-China trade imbalance. So why would more work?

The answer is that it won’t work and it is because there are more fundamental factors at work causing the US to have a large trade deficit with China. Simply put, we in the USA make Miss Piggy look anorexic. We don’t save. We consume. The trade deficit is an expression of this imbalance. We buy from China and what we don’t buy from China we buy from other countries to meet our ever growing appetite for goods. If somehow we reduced our trade deficit with China, the spending would show up as a deficit with another country or countries. Of course China has a similar but opposite imbalance – they consume less and save more. This is perfect for us. We want to buy and they want to sell. Currency manipulation has very little to do with this. The problem is saving/spending and not currency values.  Altering fundamental attitudes and habits with respect to saving and spending is not something that can be done easily or quickly. Thus, our politicians would rather grasp at populist policies that do not work instead of doing the hard work of focusing on the real problems and solutions.

Finally is the recognition that it is counterproductive to focus our policy so strongly on currency manipulation and trade protection. Rome is burning and we throw gasoline on the fire. If this legislation were actually to be passed and signed by president Obama, we would not only be not addressing the real problems but we would be inflaming China and other countries. They know about our imbalances and they fully recognize protectionism when they see it. Other countries will not sit around and wait for us to focus on them next. Other countries are experiencing the continuing painful global slowdown and there is much populist demand for more protectionism in countries all over the world. 

Of course China has plenty of weapons beyond a simple trade war. How will we have served our own interests when China reacts by buying fewer US government bonds as the US government is trying to sell another $1.5 trillion of them? Or what happens if China aggressively sells the government bonds it already holds. W should not stir up trouble if there is nothing to gain. We should not stir up trouble if there is so much to lose! Instead, we should be the leader. We should be the leader for the right policies. We should not be the leader of a downward spiral of devastating protectionism.  If there are any real leaders in Congress we can only hope they will quickly step forward and put a quick end to this very harmful legislation.