Trade. It’s one of the most topical subjects in global economics these days given Donald Trump’s apparent partiality to so-called trade wars. Economists on both sides of the political divide seem to agree that tariffs and other trade barriers are bad, and that free-trade is better for everyone.

In theory, this is true. However, the theory is largely based on ideas promoted in Adam Smith’s The Wealth of Nations (1776) and David Ricardo’s theory of comparative advantage (1817). Smith challenged the prevailing economic theory of the time, mercantilism, by asserting that all countries could improve their wealth through free trade, as opposed to the reigning belief that trade necessitated winners and losers. Ricardo took this one step further by demonstrating that even countries without an absolute advantage in producing anything, could gain form trade by producing whatever they had a comparative advantage in manufacturing.

While there is nothing fundamentally wrong with these theories, there is a subtle but significant difference between the economic conditions of their time, and those of today. Namely, Smith and Ricardo lived in a world absent of central banking and the soon-to-fail dollar standard (yes, I said “soon-to-fail” dollar standard, the reason for this will hopefully be clear very soon). What does this have to do with trade? Quite a lot.

In Smith and Ricardo’s time, the monetary system was based on gold, the quantity of which was relatively fixed and stable. Goods were priced and traded relative to gold, so if a country’s imports exceeded its exports, its gold reserves would deplete until it could no longer sustain excess imports. This didn’t mean it couldn’t trade and gain from trade, but rather that the extent to which it could trade (import) was limited to the value of its exports. Today, no such stabilization mechanism exists. The entire monetary system is based on a con – the biggest ponzi scheme known to mankind – central banking.

Under the central banking system, currency is borrowed into existence, meaning central banks simply whip up dollars out of thin air, buy some government bonds, and presto, there is now more currency floating around the economy. Where does the currency come from to pay interest on this new debt? From the creation of more debt, of course! In effect, new currency is perpetually created to repay old currency in the same way a ponzi scheme uses funds attracted from new investors to pay off the old ones…

What does all this have to do with trade? Let’s take a look, starting with a simple fact: at present, the US owes China more or less $1.2 trillion. How did this happen? Well, China sold a bunch of stuff to the US and the US sold a bunch of stuff back to China (e.g. they engaged in trade). However, the value of stuff China sold to the US was far greater than the value of stuff the US sold to China. Under normal circumstances, this deficit would cause the value of the US Dollar to depreciate against the Chinese Yuan, making imports from China more expensive for US companies and vice versa for Chinese companies importing products from the US. Thus, US exports would increase relative to imports until the net value of imports and exports equalize.

But that isn’t what has happened. Instead of buying stuff (actual goods or services) from the US, China made up the difference in its net exports by purchasing US government bonds. At this point let’s remember that it’s the central banking ponzi scheme that allows this to occur – in the absence of any constraint (such as gold), The Fed is able to perpetually print more currency, allowing the Treasury to issue bonds to its heart’s content. In doing so, the Yuan is artificially supressed, so China can maintain its net export position with the US.

Most economists will tell you there is no problem with this picture and that it’s simply “free trade” in action: China is better off because US demand creates jobs for millions of factory workers, and the US is better off because its corporations can supply cheaper and more abundant products to US consumers. Win-win! Sure at the superficial level, everything looks fine and dandy, but the elephant in the room is the $1.2 trillion debt owed to China. Let’s put that into context: the US workforce is around 230 million, so every working man, woman and whatever other gender classification you subscribe to, is in the hock over $5,200 each to China. And China isn’t the only problem – the US owes $5 trillion to other countries so the total debt owed to “aliens” is over $26,000 per worker!

Of course, the US doesn’t actually have to “repay” the debt as long as it can service the interest, but at the current treasury rate of around 2% that’s still $520 per worker per year, or $43 per worker per month. And that’s just interest owed on alien debt. The US also has around $15 trillion in local debt payable mainly to banks, pension funds, insurance funds and other financial institutions, so total debt is a bit over $150 per worker per month. In other words, $150 of every worker’s monthly taxes is used to fund US government debt, not to build schools, hospitals, roads or to upgrade depleting infrastructure, but to repay interest to the financiers of government debt.

This raises two important questions:

1) Why would China keep buying treasuries knowing the US doesn’t have a hope in hell of paying them back?

2) How did the US get themselves into this mess in the first place?

The short answer to the first question is that it’s all been part of a long-term plan, in which China has well and truly out-smarted the US (and most of “the West” for that matter) with a profoundly simple 4-step strategy: 1. attract foreign manufacturers with an abundant supply of cheap labour 2. steal as much intellectual property and know-how as possible 3. (this is the key part) enable foreigners to manufacture locally for export but block them from supplying to the local market. 4. Use stolen technology acquired in step 2, to supply local market internally.

This strategy has enabled China to grow into the behemoth economy it’s become today. But it didn’t happen overnight. China started at the low end of the consumer-goods value chain, producing t-shirts, dresses, shoes and other textile products, then they got more sophisticated and started producing white-goods, consumer electronics, telecommunication devices and equipment, pharmaceuticals, chemical products, and so on. Today, China are building a lot of their own military equipment, and stealthily developing the ability to produce international standard commercial aircraft, motor vehicles, and other sophisticated products.

Meanwhile, the US have gone the other way. It’s largest export to China is civilian aircraft, engines and spare parts, followed by soybeans. Soybeans? That’s right, SOYBEANS! The 2nd most valuable product China buys from the US, is Soybeans. That’s the extent to which America’s manufacturing sector has been absolutely decimated by China. It’s now been reduced to little more than just a farm to feed hungry Chinese workers.

Reality is that China doesn’t care that the US can’t repay it’s $1.2 trillion debt – they’ve accumulated far more than that value of intellectual property over the years and gained the economic upper hand against the US, with their ability to bring America to it’s knees by dumping treasuries. Sure, the US could simply print another $1.2 trillion to buy back all those bonds, but that would cause rates to go through the roof and likely seize their debt-ridden economy overnight. And aside from that, what would China do with all that cash? They can’t spend it in China so they’d need to buy stuff from the US… but the US makes f*ck all that China wants to buy… oh, except for civilian aircraft and soybeans… $1.2 trillion would buy a lot of shares in Boeing and Monsanto!

That brings us to the second question of how the US managed to get itself into this mess in the first place? To answer that, we need to look at the winners and losers in this horrifically awful “trade” deal. On the winner’s side, we have the corporations that have benefitted immensely from outsourcing production to China. Their executives boast record profits and get big fat bonuses to boot. A good chunk of those profits also got pumped into the corrupt lobbying industry to bribe politicians into keeping import tariffs low and turn a blind eye to the human rights abuses that occur at many Chinese factories. But what really makes this story compelling is that US consumers are all winners as they benefit from cheaper products!

Therein lies the great deception. On the face of it, US consumers are better off as they get cheaper stuff, but on the other hand, they’re in debt over $5,200 each to China! Then there are the consumers that no longer have jobs as they factories they worked at are now in China – they are undoubtedly worse off. As are all the small businesses that supported these factories. Over the last 15-20 years, US labour participation has dropped over 5%. That’s more than 10 million people out of work and unable to find alternative employment (a.k.a. structural unemployment).

Taking all elements of the big picture into account, it seems that Trump is right after all. US trade deals have done nothing but give China the upper-hand while simultaneously widening the wealth gap domestically. Not exactly a successful formula! Yet many economists continue to tout the virtues of free trade and warn that placing tariffs on Chinese imports will make goods more expensive for US consumers. So what? This is a good thing! The US needs higher prices, it needs to consume less and produce more, it needs to reduce its foreign debt. Unfortunately, Trump is about 5 president’s too late. Decades of inept trade policy enabled by corrupt politicians and an equally corrupt banking system cannot be reversed over a four year team, or even eight years should he make it that far.

The uncomfortable reality is that China now has the economic upper hand over the US.  Reversing its trade position would hand economic power back to the US so why on earth would they do that? They have enough Treasuries to send the Dollar down the same path as the Continentals before it, at the drop of a hat. On the other hand, the US has a far superior military, one that could wipe China off the face of the planet, at the drop of a hat. That’s a pretty messed up stalemate.

Yet, while China is working feverishly to upgrade is military capabilities to negate the US’s upper hand, the US has continued its obsession with the “free trade” that got them into this mess in the first place!  Why? Because as described above, trade largely benefits the politicians, corporates and lobbyists that promote it, at the expense of the wider population, who seemingly benefit through lower prices, but ultimately pay indirectly through taxes.