I received several questions concerning the subject matter of my last column, wherein I introduced the Triffin Dilemma, so I'm going to expand on those issues here.
Because of the rhetoric being used by Donald Trump and his economic team concerning the need to renegotiate new trade agreements and threatening domestic companies with penalties for taking advantage of existing agreements, it is important to understand the logic for doing so and the issues that may arise as a result.
The process of globalization, in its current form, has been ongoing ever since the end of World War II with the implementation of the Marshall Plan to rebuild Europe and the creation of the General Agreement on Tariffs and Trade (GATT). It's largely been the process through which the export of U.S. economic, financial, political and even social systems has been achieved.
It's been more about getting the rest of the world to adopt U.S. systems that would facilitate a more efficient flow of capital, goods, services and people, and less about what is actually flowing.
The process was accelerated and made truly global following President Nixon's decision to pursue trade relations with China.
As trade with China and many other countries increased and these countries increased the process of creating trade agreements among themselves, the need for a global set of universal guidelines for such agreements led to GATT being replaced by the establishment of the World Trade Organization (WTO) in 1995.
The principal rationale for pursuing free trade agreements between countries is that the economic benefits of increased trade and reduced or eliminated tariffs are essentially self-financing, accrue to the world as a whole, each country individually and to the individual citizens of each country.
That, of course, includes human labor in the U.S. As I pointed out in the previous column, though, that hasn't occurred.
There's nothing new about that issue. Real personal incomes in the U.S. have been declining since the early 1970s, with the ending of the dollar's convertibility to gold, the opening of trade with the People's Republic of China, and the acceleration of globalization generally.
Even as there has been a huge increase in the number of free trade agreements pursued by the U.S. and other countries throughout this period, the promised benefits have not accrued to U.S. labor.
The general response by the owners of capital and government leaders in the U.S. has been that it would eventually occur.
However, even the WTO leadership has been aware that the benefits of free trade have not been received by U.S. labor, as is evident in the organization's 2009 World Trade Report, in which it discussed the tradeoffs between commitments and flexibility in trade agreements.
Trump's assertion that the trade agreements need to be renegotiated is simply a public acknowledgment of this fact and that the economic environment in which those trade agreements were initiated is no longer applicable, but the agreements are too rigid to allow for the changed economic relationship between the signatories.
When a developed country enters into a trade agreement with a developing country, it will, by necessity, handicap the developed country in order to advantage the developing country.
Once the developing country has moved far enough along in that process, though, those handicaps need to be altered.
That is accomplished either by designing the original agreement to be dynamic and flexible or by negotiating a new agreement later.
Trump's message to the world is simply that existing agreements must be renegotiated and any agreement with China will have to take into account that the country is already the second-largest economy in the world and handicapping the U.S. in order to achieve a trade agreement is not acceptable.
Although the media discussions about how this will impact the existing North American Free Trade Agreement or the work-in-progress Trans-Pacific Partnership have been the subject of most debate, I think the issue for investors to follow is the U.S.-China Bilateral Investment Treaty.
Trump's message to China concerning bilateral trade and investment is essentially that China needs the deal more than the U.S. does.
On that score, Trump is right.
As I discussed in the column "China Leaps to Avoid Middle Income Trap," China desperately needs U.S. foreign direct investment (FDI) to continue to grow and more importantly to preclude a financial, economic, political and perhaps social crisis in China.
These are high-stakes negotiations for both countries and for multinational U.S.-based companies.
I don't know how it's going to unfold but I don't think we'll have to wait long after the inauguration to get an idea. I'll address the issue again as more is known.