MADISON, Wisconsin: US President Donald Trump’s embrace of tariffs has been met with considerable criticism, and for sound reasons. But Trump’s diagnosis of the global trading system – and, specifically, its impact on US manufacturing – may not be entirely wrong.
The problem, instead, is the treatment: rather than using a chainsaw, which would probably kill the patient, he should reach for a scalpel.
The existing international order, including the global trading system and the dollar-based monetary system, were established in Bretton Woods, New Hampshire, near the end of World War II. With Europe in ruins, the United States enjoyed undisputed economic dominance, including in manufacturing: in 1948, four years after the Bretton Woods conference, the US accounted for more than half of all goods produced worldwide.
But one product of that conference – fixed exchange rates – turned out not to be all that good for the US, as it contributed to the precipitous decline of America’s share of global manufacturing value-added, from 55 per cent in 1953 to 24 per cent in 1970.
US president Richard Nixon’s 1971 decision to delink the US dollar from gold mostly stabilised this share, which then remained roughly consistent for three decades. But it also turned the US from a surplus country into the world’s largest deficit country, as it fuelled the rise of Japanese manufacturing.
THE DRAWBACKS FROM WEAKENING THE DOLLAR
The 1985 Plaza Accord – whereby the US convinced the rest of the G5 (Japan, West Germany, France and the United Kingdom) to help weaken the dollar – succeeded in shrinking America’s external trade deficit. But these gains were eroded in 1994, when the North American Free Trade Agreement (NAFTA) went into effect, and obliterated after 2001, when China’s accession to the World Trade Organisation opened the floodgates for Chinese goods to pour into the US market.
From 2001 to 2021, the ratio of US manufacturing exports to imports plummeted from 65 per cent to 45 per cent, and America’s share of global manufacturing value-added declined from 25 per cent to 16 per cent.
