Current Affairs

America is in a tiny bit of a mess, however hard it tries the deficit will not lessen and it is the idea of tariffs pushed by Trump during the election, which is meant to manage the deficit. But the idea that tariffs themselves are the b-all to the management of the US economy is a bit of a fallacy. Joe Biden this week locked the door on Nippon Steel taking over US Steel mills, (part of the legacy he leaves), “signifying American protectionism is its core asset.” But ultimately the message to the US government from the steel mills was that they do not have the finance to manage in the short term and are likely to face bankruptcy in the coming weeks.

There is a voice among American’s that primary and secondary jobs are on the line. The idea that the world could invest in primary and secondary industries while the US build protectionist walls is also an argument of where the global economy stands. But as America builds walls to protect its industries there is a realisation that the key components of these industries are hamstrung by the protectionist policies of the government.

There are questions that need to be asked, especially as Trump in the interim has pushed his policies and arguments before being inaugurated. But the arguments that Trump has put forward are isolating the US economy from exporting into international markets. These companies are finding the US dollar too expensive and though the US dollar is strong and tariffs focussed on Asia, which has managed to export into the US, there is a realisation that primary and secondary industries in the US will continue to struggle.

Yanis Varoufakis in a pod-cast argued that the US was in a stage where the economy is overheating. And as the economy has attracted more investment because of the privileged position of the US dollar: (the US economy is attracting more investors with the promise of tax cuts in the coming Trump presidency) this has led to a bull run. But it is this argument that is quite confusing at the moment as a strong US dollar brings down inflation and at the same time affects the ability of the nation to export their way out of the deficit that is so concerning the incoming president.

It is Trump’s wish to shrink the trade deficit and increase exports, he believes he can do this with tariffs and reappraising world currencies, which he believes are undervalued, especially the Yuan and the Euro. This has happened before when America was in financial difficulty; the Plaza Accord brought together the United Kingdom, Japan, Germany and the US in 1986 to discuss the revaluation of the Yen and Deutchmark. Though this led to the US economy booming, there has been an argument that Japan lost a generation to an economy that did not grow and Industry, land and property were affected by a recession that lasted twenty years. Germany and Japan suffered low growth (single digit) after the Plaza Accord and though America remained the foremost currency internationally, there is a realisation that it could not compete industrially on the world stage, then and now…

It is very unlikely that the Plaza Accord agreement could be repeated with tariffs in place. The Chinese Yuan is heavily managed by the CCP and though China’s economy has slowed, there is growth in the export sector, which China would be loathe to lose in an accord with the US. The internal market has been spooked since the Covid pandemic and the property market affected by a bubble. China could argue that it cannot revalue the Yuan because the market is not flexible as the core elements of the Chinese market has technical difficulties which challenges internal growth.

Germany and Europe are in a period of reinvestment. Germany is in an election cycle and politicians are contemplating breaking the fiscal brake (Schuldenbremse). Most of the political parties believes Germany needs internal reinvestment, but the fiscal brake only allows 0.35 percent to be added onto government debt. However the investment needed in the economy is 15 percent of GDP, which is 600 billion Euro. Furthermore the 15 percent figure does not take into account the amount Germany needs to invest to reach its 2 percent of GDP commitment to NATO.  

Europe is expected to grow by 1 percent and it is likely that Germany and France would struggle to afford the revaluation of the Euro, but what is worrying for the continent is the idea that there could be another Plaza Accord when living standards in Europe are 20 percent below those in the US. It just does not make sense when economies across Europe have different structures in industry and agriculture. Some European nations are debt heavy, which challenges the ability of these economies to manage future growth if the Euro is structured in such a way that it cannot compete against the dollar, Yuan or any of the other currencies.

The Plaza Accord was meant to reorientate the economies of Japan and Germany and push investment into domestic consumption. Though initially these economies boomed studies suggest that the monetary policy easing may have been excessive. Studies by Jinushi Kuroki and Miyao (2000) and Leigh (2010) argue that the policy rate was below what had been expected, but the aim of Plaza was to manage internal growth. While there would be a reappraisal of internal markets the export market would stagnate. Though this happened, the markets in Asia and Europe realised a bubble, which was land and property. Japan made the problem worst by trying to micro manage its way out of the problems that the state was facing and up until the 2000’s companies that were not profitable (ghost companies), were fed a source of income by the Japanese government.

The danger for economies to revalue their currency is not lost on the governments of the states involved. The US trade deficit has been made worse by a strong dollar and tariffs, and it is at a stage where the US government is questioning whether it is the relative weakness of the world currencies that has led to US primary and secondary industries struggling. The likelihood of the US rust belt to continue to struggle is dependent on government policy and whether the structures are manageable. But because of the strong dollar investors are willing to invest in core industries in the US. A reappraisal of the Plaza Accord realises that Japan came out of the agreement poorly and it’s economy is still suffering from the revaluation of the Yen. Whether countries such as China or regions such as Europe would agree to revaluing their currency is also dependent on whether the US will continue to argue that it remains in a privileged position both fiscally (with a strong dollar) and industrially.