In the previous column on the topic of the “trade war,” I outlined some of the consensus views regarding the potential impact. In the short and medium terms, we can expect few winners but many more losers. I also presented a more nuanced view of free trade. The conventional wisdom often ignores the de-industrialization free trade caused in most of the developing world after the rise of China. The Caribbean, Africa and most Latin American countries cannot compete with Chinese manufacturing. The multinational corporations are these days integrating Vietnam and Bangladesh, but continue to largely ignore much of the developing world. American and Mexican sugar subsidies hurt small economies like Guyana. Therefore, I implied that small economies need some form of protection for shaping their policy space. Free trade works best among equals.
There has been much speculation about whether China or United States will win the trade war. The ephemeral stock market indexes are saying China is on the ropes. Some investors, like Mohamed El-Erian, think the United States is winning. I see it differently. I expect this trade spat will lead to major long-term realignments that would weaken the US dollar’s place as the main international reserve currency. Guyana and the Caribbean should keep a close eye on this development over the coming decade since the Region has exchange rates anchored against the US dollar.
A few notable economic historians, like Barry Eichengreen, have been predicting the relative decline of the US dollar as the main global reserve currency for some time. I never agreed for various reasons. For example, the euro possibly has already reached its upper limit of around 18% of foreign exchange reserves around the world. One limiting factor relates to the fact that there is not a combination of federal European level bonds and Treasury bills. This relates to the Chartalist idea that Europe needed a unified taxing and debt mechanism first before a unified central bank. As an aside, a few years ago, I applied this Chartalist principle in two Development Watch columns arguing that the Caribbean integration process has the cart in front of the donkey; first, there should have been a unified taxation and debt system before free labour movement, competition commission and such.
