How trade imbalances led to the rise of Trump and MAGA

A lot of the MAGA movement, and the rise of Trump, was created by US trade imbalances. Many countries have a kind of resource curse, for example Saudi Arabia. The oil exports push up the value of their currency, this makes it too expensive for their export industries to survive. The result is they have an oil industry and not much else.

This also happened to Russia to some degree, they exported so much oil and wheat etc that their Rouble was too high to build an export industry. By contrast Japan, China, South Korea and Taiwan had no significant natural resources to export. This kept their currencies lower, along with some currency manipulation, so they crushed US and European manufacturing.

Germany was able to resist the rise of their exchange rate by the Euro common currency. Normally their strong exports, and trade surplus, would have raised their currency. This would eventually price their goods out of the market. Instead the Euro as a whole does not rise since many of the Euro countries have trade deficits. This allowed Germany to avoid the problems associated with a strong export industry, so Germany got rich with this cheaper Euro currency.

The other side to this is that some European countries have an internal trade deficit. So they are constantly being drained of money to Germany, buying German exports but not having much to export to Germany. This was the cause of the 2008 financial crisis there. The Germans would lend out the money from their trade surplus to Spain, Italy, Greece, etc.

But eventually these countries could not repay the loans and this caused massive defaults and economic collapses there. The money to repay the loans was being drained out of the country back to Germany as well.

The banks thought they were avoiding this problem, by reselling the loans as subprime bonds to investors. They could hide the chances of eventual default, take their profits, and lend more money out to their trade deficit areas. The investors, often banks holding subprime bonds instead of liquid reserves, lost their money which caused a worldwide banking crisis. All of this came from trade imbalances.

The US is in a similar situation to the UK. Both have large financial industries that bring in massive profits as a trade surplus. This pushes up their currencies and makes their export industries fail. That caused the UK to try Brexit, many exporting areas resented the trade surplus of London and the financial industry. However the UK had kept its own currency, its problems were caused by their financial sector having a trade surplus. It was not from being in the European union, so Brexit did not help.

The US has the same problem with Wall Street and its huge profits creating a trade surplus pushing up the dollar. It also has a huge trade surplus with software businesses, such as social media and search companies. This is the real reason why so many US manufacturing industries went bust.

The dollar was propped up by these sectors with a trade surplus, just like Saudi Arabia with its oil. That priced its other industries out of the market, and manufacturing higher paying jobs collapsed. This impoverished large areas of America, who became politically active looking for a saviour. They believed they found him in Trump.

That set up the political divide between the impoverished group Trump represented, and those benefitting from the cheap Asian imports. The cities could afford to pay for these because they had their trade surplus from the financial and tech sectors. The rural and manufacturing areas were decimated because of their trade deficits.

Typically with issues like this, there developed a political divide as well. The Democrats went from supporting the workers, who could no longer pay campaign donations when their unions collapsed, to money from the tech and business sectors. They became a new kind of party supporting these new elites.

The Republicans historically had represented Capital and the Democrats represented Labor. Now the Republicans switched, supporting the more rural areas impoverished by the trade deficits. However they were uncomfortable with Trump and MAGA, as these were formerly the Democratic base. Trump was also formerly a Democrat.

In some ways Trump’s tariffs against China did help with disadvantaged US manufacturing, but many of these export industries are being automated so manufacturing jobs are being lost in Asia as well. To Trump’s credit, this showed some focus on the real problems his supporters had.

The real problem however is the successful industries in America raise the dollar too much, that kills the other industries. This creates a digital divide seen in most advanced economies. Some workers benefit from this trade surplus and buy cheap imports.

Others lost their competitive advantage from manufacturing jobs, and can’t afford to buy the cheap imports. Political attacks on the elites benefitting from their trade surpluses don’t address this fundamental problem. So Trump’s supporters have largely gotten nothing from him.

The previous manufacturing areas have a trade imbalance with the successful parts of America, as well as Asian countries, and so are constantly being drained of money. So welfare might go in and straight back out again.

These people realize they need jobs not welfare, so they support Republicans even though they would traditionally have been Democrats. They try to overcome the trade imbalances by reducing environmental protections and reducing wages.

They also try to retain some exporting industries, along with higher paying jobs, such as from coal and oil. The financial and tech areas want to shut down coal and oil exports because they want to protect the environment more. They want to have higher environmental protection in America, to export the dirty industries to Asia because they benefit from the cheaper imports.

Another factor was the US trying to make some Asian countries an economic success. This was intended to make China envious enough to give up communism. So South Korea, Japan, Taiwan, etc were allowed to destroy US manufacturing industries to appear as successful examples of the capitalist system.

Currency manipulation by the Asians makes this worse. In the 1980s Japan made so much money from its trade surplus that it created an internal property bubble. Tokyo was at one stage worth more than all the real estate and all the stock markets in America. That led to a huge market collapse eventually. At that time dumping of cheap imports was not well policed, Intel for example nearly went bankrupt from the cheap Asian chip manufacturers.

So what the trade surplus economies do now is borrow the excess money back out of their countries, then lend it to America by buying US treasuries. That keeps their currencies cheap, reduces their local real estate bubbles, and keeps them being able to bankrupt US manufacturing industries. China does this by having a separate internal currency that is not directly exchangeable into other currencies like the dollar. This is less serious now owing to pressure from the American government, something else Trump deserves some credit for.

The huge amounts of cash loaned to America in the 1990s and 2000s led to the carry trade, banks would borrow from Japan at low interest rates and relend to home buyers. They had so much to lend that they gave it to nearly anyone, that led to liar loans. These mortgages collapsed because they could not be repaid.

It was later shown they were lending millions to gardeners, hairdressers, even the unemployed. They were buying houses to resell in a growing property bubble. When the prices stopped going up they defaulted on their loans.

The reason they defaulted was that the high-paying manufacturing jobs had disappeared, because of the trade imbalance. With no high paying jobs to repay the liar loans, people instead worked in construction building more houses for speculation until it all collapsed.

This collapse was in part because Japan suddenly withdrew a lot of money to deal with earthquake damage. Americans could not repay their liar loans, just like the Greeks etc could not repay Germany the loans they got from the German trade surplus.

So the trade deficit countries all collapsed together in the Great Recession. The reason these collapses coincided was each country had the same trade imbalance problems, their higher paying manufacturing jobs were lost. These were caused by successful financial sectors with huge trade surpluses.

They were also caused by the newly constructed money grid, the computer and software sectors created a new monetary transfer system allowing for more speculation with this trade surplus money. It also created the new financial instruments called derivatives and subprime loans. They increased the trade imbalances by making the financial sectors, and the computer sectors, even more money.

Eventually it had to collapse because they were lending money to people and countries that had trade deficits. They hollowed out their countries selling off assets to trade surplus countries, and borrowed money with no way to repay it once they ran out of assets.

Virtually all the political tensions in America, and most advanced economies, are caused by these trade imbalances. It’s likely only wealth transfers from taxes and welfare can help to restore these balances, because of the single currency advanced economies have. The problem then is the same countries like Saudi Arabia have, a single export dominates and sends the other export industries bankrupt.