Long before the first warning shots were fired in the current China-US trade skirmish, the United States was consistently pressuring China to revalue its currency. The US claims such a currency reboot could reduce its trade deficit by as much as a third, enough to create jobs and ease unemployment at home. However, Washington’s stand speaks to only half the truth — the difference in the value of the dollar against other currencies was the result of the greenback’s decoupling from gold reserves in the 1970s to automatically allow it to follow natural market forces.

Many years ago, Americans were happy to see the dollar suddenly appreciate against all currencies, which they measured on the strength of GNP at a time when the US was the biggest producer of manufactured goods, commanding almost 55 percent of total world production. Countries that were heavily dependent on the export of raw materials and imports of manufactured goods grudgingly accepted the US-initiated economic arrangement.

Initially, decoupling the dollar from gold reduced US debt, which was swelling due to the Vietnam War. The US thought it had discovered the magic cure for currency revaluation that would allow it to purchase more goods and its workers to earn more while others worked and spent more for fewer goods. Most Americans thought it was real prosperity and the new monetary mechanism would always work to their advantage.

But barely 20 years after the so-called Nixon shock was introduced, the US economy begun to move on a downward trajectory. It was soon overtaken by other countries in the export of manufactured goods, selling them at far lower prices to effectively deprive the US of its traditional markets. The US suffered huge trade deficits and its economy was increasingly sustained by foreign borrowings. Today, the US stands as the biggest debtor nation on Earth.

As it continued to revalue its currency, it paradoxically pushed upward the cost of everything, which according to some economists is good for minimizing interest rates. It became a vicious cycle because credit has to be made available to keep the economy going. It has to release more money even if done out of thin air. The monetarists call this “quantitative easing”. They say it is necessary to give adrenaline to an anaemic economy. The US, as of 2017, incurred a $375 billion deficit with China, a single-year record in the history of trade between the two economic juggernauts.

When the US decoupled its currency from gold on Aug 15, 1971, it indeed created an artificial prosperity. Nobody questioned that unilateral decision by Richard Nixon, which technically elevated the dollar to the de facto universal medium of exchange in nearly all foreign trade transactions.

The value of the dollar became flexible if exchanged with other currencies for the payment of exports of raw materials and imports of manufactured goods. The same US finance architects introduced the system of a “floating or flexible exchange rate”. From there, the ledger in valuing foreign currencies was based on the current value of the dollar. Countries had to scrap their anti-usury laws, much the same way that all currencies now have to adjust to the current value of the dollar.

Countries with scarce dollar reserves either had to secure foreign loans — often on condition they devalue their currency — or purchase dollars from private banks to carry out their trade obligations and developmental goals.

Decoupling the dollar from gold opened a new avenue for the trading of currencies and encouraged money market trading, but discouraged direct investment. This saw the rise of megabanks in the US, Europe and Japan that caused hardships for poor and underdeveloped countries. The value of their exports dropped, thereby cutting into their profits from overseas sales.

To sustain the world economy that began regularly experiencing sharp up and down cycles, international financial institutions offered loans on condition they adopt the system of currency exchange rate adjustments in addition to interest rate tinkering. This means loans will be adjusted on a daily basis based on the current value of the dollar.

The US, through various international banks, collected billions in service fees, charges and commissions for the mere use of the dollar in their foreign trade transactions after it became the unofficial medium of exchange. Countries that suffered the ravage of floating or flexible exchange rates were in a bind. Employment was their only lifeline to economic survival.

The disparity in the valuation of the dollar against other currencies resulted in the erosion of the US market until gradually some countries accumulated more dollars consequent to their trade surplus, notwithstanding the diaspora of the dollar by overseas workers.

The US ignored the initial symptom seen in the surge of migrants to the US, all in search of better employment opportunities revolving around on the relative high value of the dollar. Aside from competing with homegrown workers, many were remitting billions of dollars to their country of origin. To this day, remittance is financially haemorrhaging the US economy.

The artificial prosperity was automatically whittled down by the corresponding increase in the cost of labor and services in the US even if there was no proportionate and visible increase in production. The relocation of manufacturing plants abroad exacerbated unemployment. As Americans would now say, the dollar is strong but woefully hard to get.

Out of the 30 top US trading partners in 2016, 23 enjoyed a trade surplus with the world’s biggest economy. This is indicative that a strong dollar is not working in its favor. China became the target of US President Donald Trump’s steep tariff hike proposal principally because it enjoys a hefty trade surplus, yet Washington is uncannily silent about the fact that the US also represents the biggest number of companies having production plants in China, with some even selling more of their goods in China than in the US.

Instead of resolving head-on the issue of the trade deficit, the US also accused China of rampant intellectual property theft. Many are wondering about this because theft of intellectual property cannot be solved by imposing higher tariffs alone. If the US considers the formula of certain products most likely to be pirated, it should not allow those products to be processed in China much that each country has its own rules and conditions that foreign investors have to observe. Section 301 of the US Trade Act cannot apply to international trade agreements while the US remains a member of the World Trade Organization, nor can it seek to punish member states while positioning itself outside and above the organization.

The monetarists never anticipated that their inflation-driven economy would push the US economy into deep trouble. The unmitigated overvaluation of the dollar has backfired to disastrously jack up wages and costs for goods and services in the US. Real wages have been relatively constant since the 1970s. Some say that even if the US attempts to re-establish its lost factories and restore its old glory, it would no longer be possible.  Its cost of production has soared too much.

More Americans now do their shopping abroad because they can buy more for their dollar. In fact, some US brands like Apple, Nike and GM are selling better in China than at home.

The thought that increasing the value of the dollar would be a panacea to financial problems has only driven US products away from the international market. Today, China has an accumulated foreign currency exchange reserves of $3.114 trillion. Meanwhile, the US had only $119.6 billion as of April 2016.

The author is a writer and commentator on international affairs based in the Philippines. The views do not necessarily reflect those of China Watch.

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