The Chinese yuan has already plummeted to the historic lows of the last seven months as against the dollar and nothing prevents us from thinking that the Chinese government is organizing a real devaluation of the yuan-renmimbi.
In fact, on June 27 last, the Chinese central bank set the parity as against the dollar at 6.596, by also cutting additional 391 points compared to the levels of the previous day.
A move that could largely expand the already significant size of China’s foreign trade, as well as avoid further tension with the USA on trade tariffs, and finally increase and differentiate Chinese exports.
This does not necessarily mean, however, that China really wants to significantly and clearly devalue the yuan. We rather fear that this threat is a sword of Damocles to be placed right on President Trump’s head.
The problem is, above all, of a geopolitical rather than of a financial nature.
As early as the 1990s, the US ruling classes have ridden their project of globalization, which has inevitably been matched by universal financialization.
On the one hand, this has created a new power – that of the major international regulators (the World Bank, the Basel Bank for International Settlements, the Monetary Fund, etc.), which have largely changed the course of US geo-financial interests since the USSR collapse – while, in the meantime, the advanced technologies have migrated to Asia and partly to the European Union.
Asia is currently a US global competitor, while Europe is now perceived by the United States as a useless buffer vis-à-vis the pan-Russian region and, above all, the pleasant geopolitical region that believes it has a currency, namely the euro, preventing the dollar from fully developing.
By all accounts, on July 15 next, Trump and Putin could just decide to stop the escalation between Russia and the USA, thus together weakening the European region.
The region that has so far followed the new American Cold War blindly and even against its own clear interests.
Hence currently China wants to direct the whole globalization and financialization process of the world economies.
According to China’s decision-makers, the United States can no longer afford it, considering that – based on 2017 data – its trade deficit amounts to 567 billion dollars and its public debt is equal to 21.5 trillion dollars.
It should be recalled that this is the real bone of contention.
Moreover, despite President Trump’s tax reforms, the US companies still have 2.7 billion dollars held in tax havens.
All global tax havens hold 21-35 billion US dollars of private funds. Resolving this tension means becoming global leaders, both financially and industrially.
This holds true also for corruption.
For example, the African nations alone lost at least 1 billion US dollars in 2017 due to the capital flight, while the sum of these African countries’ foreign debt is currently only 200 million dollars.
This year Switzerland ranks first in the list of tax havens, but followed by the United States and the notorious Cayman Islands.
Hence while the capital market is grey and inelastic, as shown by most tax havens, when the public revenue stemming from corporate income decreases, personal income taxes can only increase. This is certainly not a formula for economic development, neither driven by exports nor by other operations.
Not surprisingly, over the last ten years the US public debt has grown at the rate of 1.23 billion dollars, but it has recently doubled, rising from 8.9 trillion dollars in 2007 to 20.1 trillion dollars in December 2017.
Hence, while currently the US globalization trick mainly favours China, military pressure and protectionism are the main and inevitable models of behaviour and protection of the US interests in the world.
Furthermore, protectionism is worth as much as manufacturing, considering that finance is already globalized everywhere: nowadays the US industry, including the energy system, produces only 21% of GDP, while the rest is produced by the service sector.
President Trump’s new proposals, however, i.e. the mix of FED’s “moderate” monetary policy, of trade deficit reduction and of tariff protection through the buy American policy, are worth approximately 1 billion dollars of increase in federal spending, with support to some new infrastructure, but with additional 4.4 trillion dollars relating to tax reform.
The reduction of personal income and corporate income taxes from 35 to 20% – the focus of President Trump’s new tax policy – as well as the reduction of taxes on repatriated capital and the other corporate tax cuts, are all operations leading to a depreciation of capital income and hence, according to neoclassical models – to a corresponding investment increase which, however, never really materialize.
Therefore President Trump’s tax reform could certainly stimulate domestic demand and hence the GDP growth rate, thus resulting in greater household spending, but above all enabling companies to deduct new investment from taxes until 2022.
However, the amount of recently-issued US debt securities can raise interest rates significantly.
Hence short-term investment expands in the USA, while the market is well aware that, as from 2025, the public deficit and hence interest rates will fall significantly.
There could therefore be the corporations’ temptation to postpone investments for a few years. Nevertheless, in the short term, the tax rebate policy is a drain on public revenues, which are expected to decrease by 11 trillion dollars until 2027.
Corporations can stand it.
Currently the US debt-to-GDP ratio is equal to 105%, but in 2027 it is expected to reach 110% with a foreseen 3-3.5% yearly annual growth rate.
The US Congress calculates that the tax losses caused by President Trump’s reform should be 414 trillion dollars staggered over ten years.
Over the same period, the reduction in revenues is expected to be 1,633 trillion dollars.
Moreover, the increase in direct household income is supposed to be 8%, with a clear increase in taxable income.
Nevertheless, this obviously does not offset the primary decrease in revenues – otherwise we would have discovered the perpetual motion.
Hence US corporations could save 1.2-1.3 trillion dollars, which previously went on taxes while, if all goes well, President Trump’s reform could stimulate a further 9% GDP growth in the medium to long-term.
However, the US domestic market’s dependence on foreign markets is very high, even with a population of 320 million inhabitants and a high average consumption rate.
Hence if a policy is implemented to substitute imports from abroad to the USA, where the labour cost and taxes are comparatively higher, this willy imply an obvious increase in inflation.
It should be recalled that currently the Russian Federation has already put in place as many as 780 projects of import substitution, while last March Chinese imports rose by 14.4% – a higher rate than expected – but with a corresponding 2.7% yearly fall in Chinese exports denominated in dollars.
For the time being, China aims mainly at import diversion, not so much at import substitution.
As we all know, another piece of President Trump’s tax and economic domino is the dismantling of Obamacare.
A substantial cut would be a dangerous political mistake on such an important issue from an electoral viewpoint.
Probably President Trump’s cuts will be mainly focused on education and research, considering that under President Obama’s Administration the social spending for income support had reached 66% compared to 15% of the previous Presidencies, including the Democratic ones.
The United States is not good at implementing Socialism – this is a specialty of the best Europe, as is also the case with social Catholicism.
The welfare Catholicism was certainly not born only to take away votes from the Left, but also resulted from a long and elaborate analysis that the Catholic Church made on capitalism, from the French Revolution until the Encyclical Rerum Novarum, with the refined philosophy of Mounier’s personalism and, in Italy, with the extraordinary season of the Code of Camaldoli.
Within the framework of US typical capitalism, however, high social spending is a danger to the economic system and to domestic financial markets.
The US friends can afford neither democratic Socialism nor the social Catholicism of the Code of Camaldoli.
Furthermore, President Trump’s idea to repeal the Dodd-Frank Act – which, after the 2007-2008 crisis, redesigned the clear separation between investment banks and savings banks, invented by the Fascist legislation on the State holding IRI and later revived by President Roosevelt in the Glass-Steagall Act of 1933, repealed in 1999 – is not entirely wrong.
If anything, President Trump wants to revive the 1933 Act, with an eye to the new “21st century” Glass-Steagall Act proposed by John McCain and Senator Elizabeth Warren – a new Act specifically banning the current dual role played by banks, both as institutional investors on behalf of corporate clients and as classic collectors of savings from small clients.
President Trump probably agrees with the lines of a new Glass-Steagall Act that, according to the US President’s economic advisors, should favour the control and management of bank credit and the mass of credit liquidity.
The ring fence currently required of US banks is certainly not enough to regulate the cycle, but nowadays it is hard to well define the different types of financial investment.
Moreover, duration is not the only index to assess its dangerousness or not. We will talk about it at a later stage.
It is also worth recalling, however, that private consumption in the USA amounts to 70% of GDP, while the US citizens’ private debts are currently worth as many as 18.94 trillion dollars, equivalent to 96% of current GDP.
Hence either private debts are rescued or also the GDP is jeopardized, with ripple effects which are hard to foresee.
In our opinion, the policy line supported by President Trump, who wants a federal law regulating current and future financial markets, goes in the right direction.
This means that, as already happens, President Trump will do everything to provide stable employment to the Americans (158 million employees) by curbing the foreign manpower who carries out direct wage dumping against US citizens, thus competing with them at a minimum wage level.
Domestic wage dumping will no longer be allowed in President’s Trump era and investment in manufacturing will be aimed at turning temporary jobs for Americans into stable jobs.
The President wants to do exactly the opposite of what the European Union is doing – and he will succeed.
During President Obama’s Administration, legal and illegal migrants totalled 27 million people.
Hence the three goals of what has been defined as Trumponomics are essentially the expansion of national production; the increase of the US labour market in terms of size and income, as well as the repatriation of the huge amount of US capital held abroad.
Nevertheless, with specific reference to trade regulations, rebalancing the US market is a complex process: in the USA there is no VAT for imported goods, except for a sales tax which, however, is applied only in some States of the Federation.
The solution would be to manipulate taxation on imports in such a way as to remove the difference between the external taxation levels of the various countries exporting to the USA and hence abolish the comparative advantages of the various countries selling in the US market.
Let us now analyse, however, the overall policy line and, above all, the energy tax policy that President Trump wants to implement.
The USA is still the first energy consumer in the world since it uses as much as 25% of all energy produced globally, with a share that is more or less equivalent to the US share of global economy.
The United States currently uses 19.7 million oil barrels a day.
Nowadays, based on March 2018 data, the North American autonomous oil production amounts to 10.4 million barrels a day – a share which, however, is worth only 52% of US consumption.
Nevertheless, it should be recalled that 68% of oil imports into the USA are duty-free.
It is also worth recalling that, based on the most reliable predictions on shale oil and gas, by the end of 2022 the Americans expect to produce two-thirds of their own energy needs autonomously – hence it is extremely probable that NAFTA exporters to the USA, especially Mexico, shall accept an unexpected share of taxation on oil barrels exported to the United States.
This, however, could lead to a price war between NAFTA producers and competitors in the Gulf or other areas.
Obviously the taxes and duties on energy imports would mainly favour the US domestic production, thus allowing the massive internal consumption of US oil and gas and the re-exporting of the taxed ones coming from the NAFTA regions.
With specific reference to natural gas, the US situation is equally rosy. Since 2009 the United States has gradually become the world’s largest producer of natural gas, with proven reserves in North America equal to Saudi Arabia’s, but 5.5 times less than Russia’s and 3.7 times less than Iran’s.
This will explain many things in the future.
In 2017, the USA produced 73.6 billion cubic feet of natural gas per day, especially in the Appalachian regions, while the North American government agencies expect that gas – as long as it lasts – will not only saturate all domestic consumption, but will also enable the USA to become a net exporter of liquefied petroleum gas (LPG), with facilities in Louisiana and Maryland, which are now on the point of being completed.
This new US presence in the energy sector will be a powerful lever to deal with the new tariff balances from a strong bargaining position.
With specific reference to infrastructure, there is a “Roosevelt-style” plan that, not surprisingly, President Trump is putting in place, by using a bill – originally submitted by the Congress – which provides for investment to the tune of 1.5 trillion dollars to stimulate private individuals and entities to further invest in this sector that is usually unattractive for US capitalists.
Only 200 billion dollars would be direct federal funds, while the remaining 1.3 billion dollars would, in fact, come from private individuals or entities or from States of the Union.
The goal is to modernize the railway network, motorways, airports and sea ports, as well as waterworks and hydroelectric dams.
Additional 50 billion dollars will be allocated to agricultural infrastructure and irrigation.
The States of the Federation will be responsible for the entire infrastructural operation, but we do not see how the necessary external investment can come to the USA – an investment that will be unavoidable, considering the amounts at stake.
Hence, with Trump’s Presidency, the United States will basically tend to become an economic organization virtually impervious to external shocks. It will make all the companies which are essential for both military or economic national security go back into the Federation’s perimeter. It will finally expand the manufacturing sector to the detriment of the service and financial sectors.
Along with these geo-economic prospects, Trump’s Presidency will try to foster peripheral and marginal tensions in the world arena, above all to sell arms and later create the flow of high-tech investments which, as usual, starts from the military sector and then affects also the civilian sector.
Trumponomics has so far worked well and has reached some good results.
In 2017 domestic demand rose by 4.6%, the fastest growth in the last three years.
Consumer spending, which is worth two-thirds of all US domestic trade, grew by 3.8% in late 2017, but families also benefited from the steady increase in stock market indices, as well as from the increase in property and real estate prices and in wages – which is certainly not a negligible fact.
Most of the growth in consumption, however, was directed to imports, which grew by 13.8% in the last quarter of 2017. In terms of balance of payments, this offsets the increase in US exports deriving from the relative weakness of the dollar.
The diversification of the North American economy has increased by 19% and the USA are collectively less dependent on the results of the various productive sectors.
Unemployment is falling also for the “Latinos” and the black people, with the lowest unemployment rate of the last 40 years, as well as the return of Chrysler-FIAT to the USA, for example, through a new factory for 2,500 workers in Michigan, while the opinion polls show that 70% of the US population believe that the economy is “excellent” or good”.
In 35% of cases, temporary jobs are turned into stable jobs – without particular racial differentiation.
According to Moody’s, since 2014 the US economy has produced over 2 million new jobs a year, while the unemployment rate is currently lower than 4%.
Nevertheless, imports obviously continue to be the Achilles’ heel of President Trump’s project.
The more the US economy grows, the more the share of imports increases.
In 2017 the USA imported 2.79 billion dollars of goods and services with a related export share of 2.32 billion dollars alone, resulting in a trade deficit equal to 566 billion dollars.
The imbalance between imports and exports, however, always leads to a 1.13% decrease of GDP.
The sectors that contribute most to this imbalance are the automotive and consumer goods sectors.
In 2017 the USA imported drugs, cars, clothes and other goods to the tune of 602 billion dollars, while it exported 198 billion dollars of consumer goods only.
The United States imported 359 billion cars, but exported only 158 billion ones.
In this sector the real US competitor is still China. In late 2017, however, the USA recorded a 375 billion dollar balance of payments deficit vis-à-vis China; a 71 billion dollar deficit with Mexico and a 69 billion dollar one with Japan, as well as a 65 billion dollar deficit with Germany.
Nevertheless the trade wars – which, as President Trump maintains, are “easy to win” – are not so much so.
The introduction of a single tariff on goods imported from China, as well as a 45% duty – 35% for Mexican goods – would increase the cost of all imports, from any country, by 15%, with a 3% average price increase resulting in a 85 billion fall of US exports compared to the initial data.
Furthermore, the EU could easily increase its duties within two months.
Finally, China could respond by increasing customs rights and duties on as many as 128 types of imports from the USA, in addition to imposing a further 25% duty on cars, aircraft, oil and food from the USA.
In short, for a President very focused on the economy like Donald J. Trump, the prospect of protectionism will be less likely than we can currently anticipate and, however, the slow reconstruction of the US manufacturing and internal market – which are President Trump’s electoral and geopolitical goals – will continue.
GIANCARLO ELIA VALORI
Honorable de l’Académie des Sciences de l’Institut de France