Beggar thy neighbor

The war did not just erupt a few weeks ago. What happened recently, the deliberate devaluation by as much as 2 percent of the yuan was merely the latest skirmish in festering hostilities between protagonists battling for global supremacy; two titans whose military strength applied against each other remain essentially untested, superiority, undecided. In that, the rest of the world remains fortunate. 

But there are other battlefields. In one, where international trillion-dollar debts and obligations are ordnance, China has the upper hand over the United States.

To climb out of the recession that the US had inadvertently gotten itself into, including a controversial bailout of its banking system following the subprime crisis’s post-2008 aftermath, the US has had to sell its sovereign papers overseas and, of its diversified buyers, China currently holds about a fifth of all US debt papers; outstanding US debt as of last week totaled $18,151,237,646,318.35.

By purchasing a fifth of those US debt papers, China has kept its yuan from soaring, thus, purposely keeping its currency in a relatively devalued state, a deliberate mercantile strategy continuing from a long-pursued gambit to keep its currency lower than the American dollar.

Now holding as much as $1271.2 billion in US debt, China is now easily the US’s biggest creditor.

This did not happen overnight.

Long before the US shot itself in the foot by issuing below prime papers and infecting the global financial markets by exporting these to unwitting investors, the US virtually weakened itself. By outsourcing and transferring its manufacturing capacity to China, thinking that the margins from the cheap labor against the higher prices on finished products was sustainable, the US is partly to blame. In effect, when one economy outsources, it eventually repurchases and thus, imports. In a sense, the US imports Chinese labor adding to its outstanding liabilities already in the hands of the Chinese.

The effect was an imbalance. Chinese goods, from the perspective of the Americans, were cheaper as the dollar was stronger. On the other hand American goods were more expensive.

Unfortunately the Americans bought more than they sold to China. That did not bode well for US-based manufacturers, food producers and its agriculture sector that collectively imagines China, with its ever-increasing population of consumers, as a viable market for American-made goods.

It is amazing how myopic American economic managers were. And how inept they are at fighting a currency war.

The ongoing currency war is a throwback to the days of European mercantilism, the spice routes and the old discredited doctrine where nation-states competed and the spoils included the control of trade, trade routes and currencies. The paradigm is based on the idea that states and economies must compete rather than cooperate. It implies protectionism and high tariffs. It implies captive markets and colonies as supply sources.

Today, China still wages the same type of mercantilism. Aptly labeled “Beggar thy neighbor,” China’s warring involves the deliberate devaluation of its currency to force the cost of its exports down and render importation difficult and prohibitive.

Unfortunately the strategy inflicts debilitating collateral damage to neighboring economies inside its blast radius. For the Philippines, it weakened the peso to a five-year low, making our foreign-denominated debt more expensive. Note that the yuan devalued by only 2 percent, yet the peso fell by over 4.0 percent.

The weak peso also exerts upward pressures on aggregate prices thus, aggravating our non-inclusive growth. Corporate assets likewise fell by 6.7 percent erasing all gains since the start of the year. Some corporate incomes fell by over 8 percent while FOREX losses hit over P1.1 billion.

To gain a deeper perspective, mull over these over as you watch in awe at China’s televised arms parade where over 80 percent of its weaponry had never been seen by the Western world.