The Almighty Dollar E-Book

Dharshini David

• Herausgeber: Elliott & Thompson
• Kategorie: Fachliteratur
• Sprache: Englisch
• Veröffentlichungsjahr: 2018

Seitenzahl: 401

Beschreibung

'A brilliant book' Iain Dale, LBCHave you ever wondered why we can afford to buy far more clothes than our grandparents ever could ... but may be less likely to own a home in which to keep them all? Why your petrol bill can double in a matter of months, but it never falls as fast?Behind all of this lies economics.It's not always easy to grasp the complex forces that are shaping our lives. But by following a dollar on its journey around the globe, we can start to piece it all together.The dollar is the lifeblood of globalisation. Greenbacks, singles, bucks or dead presidents: call them what you will, they are keeping the global economy going. Half of the notes in circulation are actually outside of the USA - and many of the world's dollars are owned by China.But what is really happening as our cash moves around the world every day, and how does it affect our lives? By following $1 from a shopping trip in suburban Texas, via China's central bank, Nigerian railroads, the oilfields of Iraq and beyond, The Almighty Dollar reveals the economic truths behind what we see on the news every day. Why is China the world's biggest manufacturer - and the USA its biggest customer? Is free trade really a good thing? Why would a nation build a bridge on the other side of the planet?In this illuminating read, economist Dharshini David lays bare these complex relationships to get to the heart of how our new globalised world works, showing who really holds the power, and what that means for us all.

Leseprobe

For Sophia & Livia

Contents

Introduction

1   Worshipping at the temple of low prices and endless offers

The USA to China

2    Making – and working – the global red carpet

China

3   Finding love in the Niger Delta

China to Nigeria

4   Spicing up the recipe for success

Nigeria to India

5   The dark price of black gold

India to Iraq

6   Funding the means of destruction

Iraq to Russia

7   The trials of a blended family

Russia to Germany

8   A bad day at work for the Masters of the Universe

Germany to the UK

9   Feeding the addiction

The UK to the USA

Further reading

Acknowledgements

Index

Introduction

Have you ever wondered why we can afford to buy far more clothes than our grandparents ever could but are less likely to own a home in which to keep them all? Why your petrol bill can double in a matter of months, but never falls as fast? Why our governments ignore some atrocities around the world, but don’t hesitate to wade into other conflicts?

Reading the news these days might lead you to wonder whether any of us can really afford to get old any more, or whether there can ever be enough jobs to go round in a time of mass migration.

Behind all of this lies economics. These days it’s a dirty word, especially since the crash of 2008. It’s become shorthand for a baffling system in which many of us have lost faith. Economists – the financial weather forecasters – have suffered a bad press. They failed to see the storm coming, and when it hit they couldn’t work out what needed to be done to repair the damage. Those pulling the strings – the politicians, the faceless corporations – often seem either clueless or, worse, full of dark intent.

Economics is sometimes called the dismal science, but it could also be the distant science. The World Economic Forum holds its annual invitation-only gathering of top business and government leaders in Davos, a remote town in the Swiss Alps. The delegates jet in from all over, with the odd Hollywood actor such as Angelina Jolie or Leonardo DiCaprio roped in to add a little stardust. The term ‘Davos man’ (and they’re still predominantly men) has become slang for a member of the global elite. It’s their conversations – held in conference halls, in corridors or over drinks – that underpin the decisions that control all our fates.

The chances of most of us receiving an invitation to Davos are slim but, even if we aren’t in the room, we can still understand those conversations – and we do need to understand them. The ‘Davos men’ might be pulling the strings but knowing how the system works can give us all a little more power. We can exert that power not only by choosing the politicians we vote for, but also through the tiny decisions that we all make every day, wherever we are in the world.

It was a desire to tell people about the strange world of economics, and its implications for us all, that led me to swap a career on a City trading floor for a newsroom. (On a personal level, that’s perhaps not the most rational economic decision.) Now, with the fallout of the financial crisis still clouding the picture, I wanted to provide a clearer view of how economic forces shape the world we live in. And so this book was born.

Meet Dennis Grainger. Don’t let his mild-mannered appearance fool you: greying, eloquent and smartly turned out, Dennis looks and sounds every inch a retired bank manager from the north-east of England. To look at him you wouldn’t guess that he’s spent over a decade waging a bitter war on the murky world of finance.

In 1998 Dennis landed a new job at the Sunderland office of British bank Northern Rock. Planning diligently for his future, he saved every penny, hoping to retire within a decade. He didn’t qualify for a company pension, so instead he bought shares in his employer’s business: for a local lad, what could be safer than a solid local bank? From humble origins in the nineteenth century, Northern Rock had grown to become a national provider of savings accounts and mortgages to millions in the UK. It was trusted; it was part of the establishment.

Dennis’s wife might have been concerned when the price of the bank’s shares dipped somewhat in 2007, threatening their retirement plans, but Dennis remained confident. That trust was betrayed on 14 September, when Northern Rock admitted it was running low on funds and had to seek an emergency bailout from the Bank of England. Panic ensued. Savers rushed to its seventy-two branches to rescue their life savings. Queues wrapped around the block; the phone lines were jammed. Politicians offered reassurances about the future of the bank, but the queues just kept getting longer, including at a branch just yards from the Bank of England. The first run on a British bank in 150 years was under way. It was an unbelievable sight in the world’s financial capital. Behind the scenes, embarrassed politicians and bankers feverishly explored rescue options for what they surreally called Project Elvis.

Within months, the government had taken over the bank, and Dennis’s shares, once worth more than £110,000, were worthless. He’d done what too few of us manage to do: he’d saved diligently to provide for his future. But it was all for nothing.

Northern Rock has now become synonymous with the financial crash of 2008 that taught us to expect the unexpected. From the first early signs, most people didn’t recognise that disaster was coming – and on an unprecedented global scale. When the crisis imploded, prudent Dennis was among those paying a steep price for the misbehaviour of others, and he continues to fight for compensation from the UK government. It’s not just for him; he’s spearheaded a campaign on behalf of many former shareholders. A world away from the fat cats pilloried in the press in the wake of the crisis, many of those seeking compensation are the widows or children of former employees who thought Northern Rock was as safe as the houses it financed.

Who is to blame for such a catastrophe? The UK government is the first port of call for redress, but the blame for the crisis that claimed these ordinary people’s savings may lie further afield. We might look to the bankers who sidestepped the rules and were relying on dubious funds to bolster their profits. Or we might look to those lenders who approved loans to American consumers who couldn’t afford to pay them back. We might wonder how the actions of individuals have contributed to something so enormous, and so seemingly out of anyone’s control.

To understand fully what happened to Dennis and the millions of others whose prosperity was dented in 2008, we need to look at how the global economy works.

The world as we know it is becoming both smaller and more complex. Seven billion of us live and work on this earth, and we are all vying for the same items in limited supply: food or oil or even smartphones. It’s an increasingly interconnected system in which a word from a banker in Washington or Berlin can lead to pensioners in Greece going hungry, or a young man leaving his family to trek across sub-Saharan Africa in search of a better life. This shrinking of the world, or globalisation, often seems like a vast impersonal force – and, it seems, we can’t escape it.

Eight time zones away in Beijing, Wang Jianlin’s experience has been very different from that of Dennis Grainger. Born in Sichuan province in 1954, Wang Jianlin followed his father into the People’s Liberation Army, but that family tradition wasn’t enough to satisfy him. Instead, within a few decades, he became a property mogul worth billions of dollars, and has gone on to amass a global portfolio including the world’s largest movie-theatre chain and priceless Picassos. Not many former Chinese border guards get compared to a James Bond villain, but this erstwhile communist foot soldier has an empire that Blofeld would envy. Wang spent his fortune on Odeon and AMC theatres, enabling Europeans and Americans to enjoy the Hollywood blockbusters that were banned in China. He spent $45 million on a 20 per cent stake in the leading Spanish football club Atlético Madrid, when €1,000 would have bought him a season ticket. It was his purchase of the yacht supplier to the Bond films that led to press comparisons with Fleming’s evil super-tycoons. The Economist magazine hailed his ‘Napoleonic ambition’ and his still-trim figure mirrors the ‘iron discipline’ with which he manages his ventures. For all his upright military bearing, his main aim is to entertain millions around the globe every week. He’s not a sportsman, or a film star; he is China’s richest man.

Wang is skilled as an entrepreneur and businessperson, but it isn’t enough simply to take advantage of the right opportunity. His success has come from riding the tidal wave of global economic changes that we’ve seen over the past thirty years. As a major manufacturer, investor and, more recently, a mega-consumer, Wang has made the most of those changes, from developing the commercial properties that underpinned China’s industrial transformation to backing karaoke centres for its booming urban middle classes. The rise of China is also one of the major political stories of our era. It’s a gripping tale – and, as we’ll see, in many ways it’s linked to what happened to Dennis Grainger.

These are just the stories of two of the billions of people on our planet but they show how we can rise or fall by the vagaries of the global economy. We might think of the global economy as all of the transactions, interactions, purchases and agreements that we understand as trade. Over time, the flow of income generated by those trade relationships accumulates as wealth. The economy, and the forces it contains, are shaped by the actions of individuals – whether at Davos or in a street market in Kolkata – in ways they might not intend.

One thing is certain, however: we are all subject to these forces and, whether we can control them or not, it’s important to know how they work, and how they affect our lives.

In London and New York, in Paris and Milan, and even in Beijing, Fashion Week is big business, but we no longer need a couture-sized budget to buy the hottest looks from the catwalk. Within weeks, the designs will be popping up on the racks of our local Primark or Zara. As we browse the aisles, we might notice how many garments are made in the Far East. When we buy from retailers such as these, we’re not just scratching our personal fast-fashion itch. The transaction makes us part of a far bigger global story. As we chase low prices and the latest trends, we’re transferring income to the other side of the world, to the benefit of others. It’s no secret that clothing manufacturers are tapping into cheap labour in Asia. But the story is more complex, because by buying these items we might have contributed to the forces that triggered a financial crisis at home, hurting our own livelihoods and those of our loved ones.

Behind every transaction there is a story. Every pound, euro or yen that we spend tells a tale. With the constant international flux of people, cash and ideas, it can be hard to get a sense of how it all fits together. But we can do so, by unpicking the decisions and the logic behind the transactions – even the seemingly insignificant ones – and tracing their impact and how they are linked.

Imagine all the billions of transactions that take place every day – a housewife in America or Nigeria buying groceries, a French businesswoman banking her profits, an Indian father paying for his daughter’s wedding or an Australian buying beer for a barbecue. When we go shopping, if we’re outside the USA, the chances are that we’re not spending dollars. We might think that the dollar is just one among many currencies; that it’s a piece of paper or an electronic transaction that allows us to buy or sell goods in the USA. But we’d be wrong. It’s not just another currency. First and foremost, it’s the face of American economic power. Like all currencies, the dollar can be seen as the measure of a country’s fortunes. We hear politicians and commentators talking about the strength of a nation in terms of its currency: ‘the pound fell today’; ‘the yen soared’. Of course the dollar is powerful; it represents the most powerful nation on earth. For those on American soil, it also represents the strength of the American dream.

The dollar is also the face of American might, and American interests. A dollar doesn’t just bring spending power; it brings influence. Having a dollar – or not having a dollar – can dictate the way people live on the other side of the world. Dollar diplomacy – the use of American investment or loans to influence policy overseas and access foreign markets – has famously been deployed across Latin America, but it’s made its presence felt across the world for as long as America has been independent.

The dollar is even more than just a symbol of power and influence, though: it’s also one of the most trusted stores of value in the world. Aid workers might find flashing dollars to be the quickest way of securing equipment to ease a humanitarian crisis in areas of great instability. As prices soared in Argentina in 2001–2002 and pesos were rapidly devalued, some wealthier people decided their life savings would be safest stashed under the mattress in dollars. The dollar is secure, and it’s therefore a popular substitute currency. Equally, it is a favourite of corrupt businesspeople and politicians everywhere; easily understood, easily spent.

And there’s more. The dollar is also the world’s ‘reserve currency’ – we’ll find out more about what this means later. Essentially, it’s about trust. The dollar is the most trusted currency everywhere, whether it’s Japanese banks hoarding their wealth or a market trader bartering in Panama. Even in Soviet Russia, many people preferred the dollar to their own rouble.

Because the dollar is the most trusted currency on earth, it has become a powerful tool in the creation of the global economy. Globalisation works because we have found ways of linking people together – and the dollar is a key part of that. It’s the face of global financial stability (and instability); the bedrock for our survival (or not). It’s the financial language that underpins all our lives, regardless of the notes and coins we use every day. It signifies how interlinked all our fortunes are. In short, we might view the dollar as the agent of globalisation, doling out prosperity – but not to all.

As the offspring of globetrotting parents, I was conscious of the dollar’s omnipresence early on. After all, it’s the common language of hotel bills from Brunei to Barbados. Today, the dollar may be best known for keeping the wheels of fortune spinning across the USA, but the name isn’t even American. Thalers – or dalers as they were also known – were silver coins first used in sixteenth-century Bohemia. The name evolved into an English version – ‘dollars’ – which even made an appearance in Shakespeare’s Macbeth in 1606. Dollars were used widely, including in Spain and Portugal, and thus made their way to the New World where Spanish conquerors plundered Mexico’s silver mines to produce dollar coins. Some of these crept north of the border into British territory, facilitating business where British pounds (or alternative currencies, including tobacco) weren’t available. Come independence, the Americans sent the pound the way of tea, and the dollar was fully embraced as the official currency of the USA in 1792.

The rise and rise of the dollar in the twentieth century reflects the rise of the current global order and has coincided with the pre-eminence of the USA. How it gained pole position in the first place appears to have been as much by luck as by design. In the 1930s the Great Depression had weakened the USA and its currency, but then came the Second World War and, as Europe and Japan nursed their wounds, America was poised to broker lasting peace. It set the dollar as the currency of international trade and stability.

The influence of the dollar has grown as globalisation has gathered pace. The Cold War and its aftermath might have offered a chance to challenge it but the collapse of communism and break-up of the USSR created a vacuum, and we can all guess which currency was poised to take advantage of the resulting chaos. Although America’s economy makes up less than a quarter of the world’s economy, the dollar now crops up in 87 per cent of all transactions involving foreign currencies.

When this book was first published its title, The Almighty Dollar, prompted a phone call a from an excited TV producer who thought it might be about a certain American president’s blueprint to ‘Make America Great Again’. It isn’t; rather, the title is intended to draw attention to how that country has used its currency to engineer economic dominance – primarily through various trade and political accords. And how, today, citizens, businesses and countries around the world are harnessing the power of that currency to secure their own fortunes and power.

These days, George Washington’s face is probably the most reproduced on the planet. It’s on the 17 million $1 notes printed every day. ‘Dead president’ is just one of the many names a dollar bill answers to. Singles, bucks or greenbacks, call them what you will, more than 11.7 billion of them are floating around right now, in wallets, in ATMs, under mattresses or in shop tills – not to mention all the dollars held electronically in banks. Given the dollar’s global preeminence, perhaps it’s not surprising that half the dollar notes in circulation are outside the USA.

It has not been uncommon to hear economists and politicians – particularly America’s foes – predicting the decline of the dollar, especially following the crash of 2008. However, the sheer magnitude of the dollar’s might remains. It first hit me after I’d been posted to New York in 2006 to present the BBC’s financial coverage of Wall Street. That year, an economist shared his predictions for the American housing market on my show. After bubbling comfortably upwards for the past couple of decades, the line on the graph plunged sharply. That was his prediction based on iron-clad evidence and well-tested formulae. It was scary, almost the stuff of conspiracy theory. It was tempting to dismiss it as scaremongering and move on.

But he was right. Millions of Americans had been given mortgages that they couldn’t hope to repay. The initial fear was that this might hurt the fortunes of banks on Wall Street, and spending on Main Street, USA, but even as I explained this on the airwaves, the global domino effect was becoming clear. The queues were building up outside Northern Rock and banks from Frankfurt to Beijing were feeling the burn. The quest for profits that had driven an insatiable financial system underpinned the contagion. Governments – or rather taxpayers – had to foot the bill for the damage. International trade collapsed. The scars remain.

A decade on, America is still dominant, and its currency is as popular internationally as ever. The dollar is a safe haven, and every geopolitical storm seems only to reinforce that reputation. China has seen meteoric expansion, but as a superpower it’s still hovering in the wings. The dollar remains untainted; in fact, by 2017 it was about 35 per cent stronger against the pound than it had been in 2008. In many ways, a strong dollar is good for America’s image. (Although, as we’ll see, it can also weaken both the US economy and the economies of other countries.) The currency is the ultimate expression of America’s political and economic supremacy – and, as we’ll see, the ubiquitous dollar also helps to spread the long arm of American law well beyond its borders.

The global crisis underlined how money transcends boundaries; transactions in one country can have repercussions everywhere. Money is both the lubrication that keeps the system running and the glue that binds us together. Like any currency, the dollar’s strength is based on faith – some might say blind faith. But without that trust – if no one had confidence in it – the system, and with it society, would collapse.

It is time, then, to follow a dollar around the globe. Our journey will involve more currencies than just the dollar: euros, rupees and pounds, for example, all come into it. And let’s not forget the feisty new kids on the block: digital currencies such as Bitcoin, whose fortunes are never far from the headlines. But I hope that by following our money as it changes hands, either physically or electronically, we can shed some light on the nexus of transactions that shapes every aspect of our world. Each scenario is a crucial part of a jigsaw that will reveal exactly how our world works: who really holds the power, and how that affects us all.

We start in suburban Texas: a run-of-the-mill trip to Walmart, one of the world’s largest retailers, that keeps Americans fed, clothed and satisfied. One person’s impulse buy of a bargain-priced radio sets off an intricate chain reaction, taking a dollar to China, where the radio was made. How can China produce these goods so cheaply, and who benefits? We’ll see how dollars fit into China’s ambitions in one of the major global stories of our era.

And where is China stashing all its money? Sometimes in the most unlikely of places, including Nigeria, where we head next, to find out why some countries are so interested in splashing their cash overseas, and whether that arises from altruism or greed.

In Nigeria we see how the world’s wealth can flow through some countries without benefiting most of their people. Following the dollar in search of a plate of rice to feed Nigeria’s booming population, we uncover a similar story in India. India has the fastest-growing major economy of all. So why is the farmer who grew the rice not enjoying those spoils? India has developed in a different way from most other countries and spiced things up, with interesting results.

Powering this economic dynamo requires fuel, and for that, India is sending its dollars off to Iraq, where we’ll examine the murky world of black gold. Crude oil is crucial to our survival, and to the supremacy of the dollar. It represents a global order in which all eyes are on Saudi Arabia and the Middle East, but that could change in the coming century. World peace is bad news for Russia, the dollar’s next destination. An arms manufacturer can tell a tale or two about his homeland’s dysfunctional – but important – dance with the dollar: this is power play on a global scale.

From Russia we head to Berlin, the heart of the EU. The dollar might unite the fifty states of the USA, but Germany, the grande dame of Europe, has had a wholly different experience in Euroland. What makes a currency union work? Why has the euro not overtaken the dollar? And is the UK right to turn its back on the EU? For all the dollar’s supremacy, it’s still London that’s the financial capital of the world, though it might not be substantially different from a casino, with its myriad opportunities to make and lose money. How did those gambles tip us into the biggest financial crisis ever? As the UK puts its future at stake with Brexit, we head back west, where a dollar will once again settle in the pocket of an American, showing how the prosperity of even the world’s most powerful nation, one that often stands alone, is inextricably linked with the prosperity of the rest of the world.

The characters and transactions we’ll come across are fictitious. But their stories are typical of billions around the globe whose interactions and decisions underpin our fates. The dollar has been on a journey that’s revealed how the global economy really works, and how Dennis’s and Wang’s fates are interlinked with that of the rest of us. It’s a story of money and of power – but, fundamentally, it’s the story of us.

1

Worshipping at the temple of low prices and endless offers

The USA to China

Diapers, bread, milk, juice, apples, chicken . . . the supermarket conveyor belt is a roll-call of Lauren Miller’s weekly essentials. It’s the family shopping list familiar across suburban America. And tagged on to the end on this occasion: a brand new radio. As the items are scanned by one assistant and packed into paper sacks by another, Lauren reaches into her bag and pulls out a bundle of the most instantly recognisable currency on the planet: the almighty dollar bill. Lauren’s grocery shop is a weekly ritual, as is making the most of her budget. Pay rises aren’t what they used to be but she still squeezes in the odd luxury. Today, that’s a new radio for the kitchen. The price is almost unbelievably low. Everywhere she looks, more bargains vie for her attention in the packed aisles of this cavernous Walmart. As the cashier tells her to have a nice day, she navigates her cart around the squabbling families and lone browsers, out to the parking lot, away from the cacophony of shoppers and the urge to spend.

Every week, close to 100 million Americans undertake a pilgrimage to a similar cathedral of consumption. The item they are most likely to put in their trolley? The humble banana. Not that there’s any lack of choice. Pop into the nearest Walmart Supercenter (and with 3,504 dotted across the USA there’s likely to be one within a fifteen-minute drive) and up to 142,000 different items – some edible, some not – will line the shelves. It would take some time to browse them all. The biggest Walmart is in Albany, New York. It clocks in at 24,000 square metres: that’s four football pitches. Pass the trademark greeters at the door (‘Hi, how you doin’?’) and the shelves are piled high with food, toys, electronics, tools, clothes, items for the car . . .

It’s the ultimate one-stop bargain basement shop. Signs promising EVERYDAY LOW PRICES pepper the brightly lit aisles and temptation is everywhere. The price tags make the products irresistible, promising untold satisfaction, an easier life – all in return for just a few of those dollar bills.

To Walmart and its customers, price is everything. The household income of the typical Walmart shopper is slightly below the American average. One in five shopping in the store might be paying with food stamps, issued by the government to those with the lowest earnings. Walmart’s pricing allows the budget of shoppers such as Lauren Miller (women outnumber men in the aisles three to one) to stretch further.

This is the American dream on the cheap. Those low prices equal big bucks for Walmart. Around $1 billion flow through its tills across America every day. Its offshoots around the globe earn a further $250 million or so. That added up to sales worth $481 billion in 2016. It’s the equivalent of $900,000 every minute of every day (assuming they’re open all hours). The price tags may be small but being everywhere and selling everything conceivable in large numbers pays off. And everyone needs to eat. Walmart is the biggest supermarket chain right now, but there are others vying for those food dollars. The biggest threat comes from Amazon. A relative newcomer, the one-stop internet marketplace has further blurred the line between online retailing and bricks-and-mortar specialists with its purchase of upmarket grocers, Whole Foods.

Online or instore, in the temple of low prices and endless offers, it’s all too easy to slip a couple of extra items into the trolley while doing that weekly grocery shop. How about a cute $2 rubber duck for the bath? A pair of $6 headphones? A radio for under $20? It’s the non-food purchases that bump up Walmart’s profits. But most of those dollars aren’t destined to reach Walmart’s coffers, or its shareholders. Lauren Miller’s new radio has only a few miles to travel to its new home but her money has many thousands more miles to travel, to a factory on the other side of the globe that churns out radios by the thousand.

Sam Walton founded Walmart, his ‘pile ’em high, sell it cheap’ empire, in Arkansas in 1962 under the banner ALWAYS LOW PRICES. ALWAYS. For each dollar it takes at the till, Walmart skims off about three cents in profit. So the pressure’s always on to seek low costs. It’s an ethos Sam maintained in every area of his life. Even after he had made his fortune, he drove a pick-up truck and shared cheap hotel rooms on business trips. Crucially, this allowed him to understand what motivated shoppers across America: the quest for a bargain. For many, that was born of desire rather than necessity. Half a century on, his strategy still has the faithful, like Lauren Miller, trekking religiously to his stores.

In Sam Walton’s words, ‘A lot of America-made goods simply aren’t competitive, either in price, or quality, or both.’ Ironically, this ultimately led to the company built by the ultra-capitalist, God-fearing Mr Walton relying heavily on an alliance with the People’s Republic of China – which is where the factory that produced Lauren Miller’s radio is most likely to be. Walmart disclosed it had ordered $18 billion worth of goods from China in 2004. That marked a massive jump of 40 per cent in just two years, justifying Walmart’s decision to move its global sourcing headquarters to Shenzhen in 2002.

Since 2004, the company has been pretty quiet on the subject. But by counting shipping containers and looking at other data, it has been estimated that, in the decade or so since, Walmart’s annual spending on Chinese-made goods has almost tripled to $50 billion. That bargain radio is a minute drop in a boundless ocean of goods reaching America’s shores and shop shelves. Plants have sprung up the length of China’s east coast and beyond. Ships that can transport 15,000 containers across the Pacific in just five days have been built. All to meet the insatiable appetite of Walmart shoppers. In total, China flogs as much to that one retailer – via some 20,000 suppliers – as it does to the whole of Germany or the UK. Much of every $1 spent on a toy, electrical gadget or T-shirt at a Walmart checkout in the USA is likely to end up in the coffers of a Chinese manufacturer.

Walmart is far from China’s only American customer but it accounts for more than one in every ten dollars spent by the USA on Chinese-made goods. By parting with her hardearned dollar, Lauren Miller is entering into a global contract: cheap electronics in exchange for the most important currency on earth. In 2017, goods worth almost $506 billion were shipped from China to the USA, with goods worth $130 billion going the other way. The $375 billion difference between the two – the trade gap or deficit – was the largest in history, and has swelled this century, partly due to Walmart’s buying habits.

Lauren Miller is just echoing the humdrum daily routine of millions of Americans: spending a dollar at Walmart. But that humble, solitary dollar is part of an immense, global story. It is more, even, than just a cog in the thunderous machinery of the highest consuming nation on earth; it’s a crucial part of the explosion in global trade that’s become the economic and political story of our age, a process that’s shifted not just wealth, jobs and well-being but the very centres of power too.

One study estimates that Walmart has ‘cost’ the USA some 400,000 manufacturing jobs over the last twelve years by opting to import goods from China. Walmart denies this. What about the jobs, in distribution and logistics for example, that trade creates? And keeping shopping bills down might allow that customer to spend more money eating out or going to the cinema, boosting takings and jobs elsewhere. But it’s true, they might not be the same type of jobs, or pay as well.

There’s no denying that this change in employment patterns in the West has become problematic for policymakers across the developed world, and painful for workers and businesses. The irony is that the trade boom might suit Lauren Miller very well as a customer but it might be not so good for her as an American employee or business owner – in fact, it could mean no work for her at all. Back in 1985, Sam Walton’s company took out full-page ads in major newspapers to announce the store’s new ‘Buy American’ programme. As with the decision to relocate some production from the Far East to a failing Arkansas clothing factory the previous year (at the behest of Bill Clinton, then state senator), it was a move designed to appeal to Walmart’s core clientele. And yet, as we know, imports from China have continued to increase.

Since the early 1990s, more than 4.5 million manufacturing jobs have disappeared in the USA. The Rust Belt – America’s industrial heartland – sweeps from New York State, Pennsylvania, Ohio and Michigan, to north Indiana, Illinois and Wisconsin. As they have struggled to compete with cheaper competitors overseas, factories there have fallen silent. Flint in Michigan was the birthplace of both General Motors and filmmaker Michael Moore. Consequently, the city was the star of his documentary Roger & Me, which told the story of how General Motors’ production took to the road. At its peak, the company employed 80,000 in Flint; now – with factories shifted elsewhere, including Mexico – that’s slumped to 5,000. The population has halved to 100,000. Two out of every five of those left in Flint live in poverty. Even before a recent water-contamination scandal, the price of the average home in Flint had dropped to under $20,000.

It’s an immense headache for families in towns such as Flint and their political representatives. There’s huge pressure to prop up these ageing industries to enable them to compete with younger, more agile competitors from the East. Ironically, it’s the very same kind of nurturing that allowed American manufacturing to thrive when it was in its infancy. Between 1816 and 1945, the USA slapped some of the highest charges anywhere in the world on the foreign goods reaching its shores. Behind that virtual wall, nascent domestic industry thrived, without the risk of being throttled by competition before the USA could emerge as a global leader.

So why wouldn’t America simply choose to make everything in America, and buy only American? Being patriotic might make good political sense but it can come with a big price tag. Sam Walton chose instead to stock his shelves with goods from far away, in line with an ethos he’d also shipped in from abroad – an ethos made in Britain by the eighteenthcentury economists Adam Smith and David Ricardo.

Adam Smith made his name by pondering how the humble pin was made, a process involving eighteen different stages. He argued that if a single worker were to craft each pin from start to finish, he wouldn’t make many of them. However, assign each stage to a different specialist worker and the process becomes more efficient. You could make far, far more, and so earn more. If you made more than you needed to supply the local market, you could trade the excess for something else. The theory of specialisation was born.

How does this explain what a country chooses to specialise in, and to what extent it trades? The work of Smith and one of his followers, David Ricardo, looks at this in detail. It boils down to this: a country that trades for products that it can get more cheaply from another country is better off than if it had made the products at home. It should produce the goods it has an ‘absolute advantage’ in. If it can produce everything more efficiently, it may still benefit from focusing on the goods it’s relatively best at – what it has a ‘comparative advantage’ in.

It hinges on how much it costs to produce something in a particular place. What influences those costs? Many factors are at play: the availability of natural resources, climate, land, size of workforce, wages, rent, regulations, skills, machinery and transport. China has a plentiful, young workforce and relatively few regulations. For every dollar a company has to spend employing a Chinese factory worker, it would have to fork out roughly five times as much for an equivalent American worker. Walmart can source goods more cheaply in China because the Chinese have become specialists in low-tech manufacturing. Plants in Shenzhen can churn out toys and electronics at a fraction of the cost of a factory in Michigan. For the Chinese manufacturer – and everyone else – selling goods to the USA is a no-brainer. American consumers account for one in every five dollars spent around the globe; it’s still the largest market in the world.

But the traffic is not all in one direction. Years of specialist cultivation, a temperate climate and the right kind of soil mean that the USA has been able to carve out a niche in the production of soybeans, something that China, blighted by soil erosion and an erratic water supply, has failed to do. America accounts for one-third of the world’s output of soy, which is used in cooking products and animal feed. Naturally, its biggest customer is the world’s most populous country. As China gets richer, so does its appetite for meat, and therefore for livestock feed. Just over half of the $22 billion worth of soybeans exported by the USA in 2017 reached Chinese shores, and those imports have tripled in the last decade.

At the other end of the spectrum, the USA dominates in the sale of high-spec, high-tech machinery and equipment. For example, China bought $8 billion worth of aircraft from America last year. US aerospace giant Boeing says one out of every four planes it makes is heading that way, and excitedly forecast that China could order over $1 trillion worth in total over the next twenty years. It envisages retaining the lion’s share of the market.

Why does China not plan to invest more in its own aerospace industry, and America focus more on the needs of its own people?

Imagine if all the factory workers in the USA and China made either aircraft or radios. Let’s assume these are very adept workforces, there are minimal transport costs and no trading obstacles, such as tariffs. For every aeroplane China produces, let’s say it could make 100,000 radios. And that for every two planes the USA produces, it could make 100,000 radios. If both countries decided to make both radios and planes, in the same period of time they could produce in total three planes and 200,000 radios.

What if both countries specialised in making planes? The USA would make the smaller sacrifice, forgoing fewer radios (50,000) than China (100,000) to make each extra plane. So the USA might decide to leave radio production to China and focus all its attention on planes, and vice versa. In that case, we would end up with four planes from the USA, and 200,000 radios from China. Using the same resources across the two countries, the end result is greater overall.

What if China could manufacture everything, including planes (which it can’t at the moment), more cheaply and efficiently in the future? It would still make sense for the USA to specialise in the production of aircraft if it can make them more efficiently (compared to radios) than China can. Imagine if, for example, with the same resources the USA can make two planes or 50,000 radios, while China could make three planes or 150,000 radios. The USA has to sacrifice 25,000 radios for each plane it makes, while China has to forego 50,000. That sacrifice is the way economists measure the ‘cost’ of making that plane. The USA sacrifices less, which means it has a comparative advantage in making planes. And if they each specialise, the end result is still greater overall.

So specialisation and free trade mean more goods and lower costs. And lower costs mean lower price tags. China has the planes it needs to satisfy the wanderlust of its increasingly prosperous population and Lauren Miller saves money by buying a Chinese radio at Walmart. As a consequence she has more to spend on other items, such as taking her kids to the bowling alley at the weekend.

Lower prices mean a lower cost of living. As inflation equals the rate at which the cost of living rises, there’s less of that too. Keeping a lid on inflation, thus ensuring economic and financial stability, is the main task of the central banks, which are responsible for managing the money supply, interest rates and hence overall economies of their respective countries. They have a target rate of inflation. If prices are rising faster than this, the banks normally raise interest rates, to deter borrowing and reduce spending, making it harder for retailers to raise prices. Those Chinese low-priced goods help to keep the US interest rates low too, and that in turn keeps the cost of borrowing down for households and businesses. Cheap Chinese imports help Lauren Miller afford the mortgage on her home and the things she wants to put in it.

In short, free trade promises a higher standard of living all round. Or does it?

The reality is that the world doesn’t work like the one described above, nor has it ever done. For a start, transport, even in the age of containerisation, does have a cost, both financial and environmental. It’s one reason why China’s domestic car production is growing all the time, and is greater than that of the USA and Japan combined.

Also, workers simply aren’t that versatile. Someone adept at assembling radios might not be equipped to design an aircraft. The skills are very different and are not easily acquired, which can spell mass job losses that can be catastrophic for towns such as Flint. Forking out on a new Chinese-made radio might seem to be a decision that makes financial sense on a personal level, but on a national scale, the political and economic implications are enormous.

Lauren Miller’s weekly visit to Walmart is repeated in countries around the globe. The dollars, euros, yen and other currencies those shoppers spend have fired up prosperity in developing countries by making them the workshops of the world. Giant retailers such as Walmart now sell cheap radios to communities in the Rust Belt, communities that once made such goods themselves. Now that those industries have been priced out of existence, the people who once worked in them may find themselves more dependent on low-cost retailers such as Walmart to make ends meet. And, ironically, this is due partly to Walmart’s preference for chasing bargains in other countries. Those who argue that it’s the factory workers in the West who have paid the price for cheaper goods have become ever more vocal.

In theory, globalisation and free trade are in the interest of consumers and countries as a whole. In theory. But the citizens of Guangzhou or Tijuana don’t have a vote in American elections. Those who’ve lost their livelihoods in Flint do. What’s good for the world at large – or even America as a whole, if it benefits from a lower cost of living – isn’t necessarily good for the neighbourhood economy, or for the statesmen and women who are accountable to its residents. Some, not just in America, feel the rewards of globalisation have passed them by. Because of the outcry from the ‘losers’ in the game, the tide is turning back towards nationalism and isolation – or, rather, smaller trade pacts with your nearest and/or dearest, rather than a free (trade) for all. It’s perceived as a re-levelling of the playing field; Donald Trump’s election as president in 2016 came on the back of a promise to ‘Make America Great Again’ and tackle China’s ‘unfair’ trading practices. It was music to the ears of those worn down by despair, dereliction and a frustrating sense of injustice. After eighty years of trade liberalisation, domestic politics and the global economy were on a collision course. What can governments do to protect failing industries or regions against the perils of free trade – maybe even reduce that trade gap? They can limit our choices, for a start. They can make that Chinese radio less attractive, or make it disappear altogether. Want people to buy American? Then make imports relatively expensive or hard to get hold of. Try slapping a tariff on things entering the country, or enforce a quota on the amount allowed in.

In fact, truly free trade rarely exists. From customs officers checking suitcases for contraband to the surcharges that double the price of goods entering Bhutan, there are barriers to commerce everywhere. They take many forms.

On occasion, countries even impose a charge on goods leaving their shores, making them more expensive for overseas buyers. That might sound strange when usually the battle’s on to undercut your neighbour; it’s even stranger when the perpetrator is China. But, at one time, it did just that. High international grain prices were tempting Chinese farmers to sell abroad, leading to a domestic shortage. To shift the balance, the government effectively taxed exports, such was its concern about feeding its own people. China has one-fifth of the world’s population but only 7 per cent of its arable land.

Equally, a government could slip a failing industry some cash via a direct subsidy – as has happened with some European airlines – or by cutting its tax bill. Even more bluntly, a country can try to control its exchange rate. The lower the value of its currency, the cheaper and more alluring its exports. It’s something China has been accused of repeatedly.

The steel industry provides a fascinating example of all this – and it’s making headlines internationally. China’s meteoric rise to become the world’s factory – and a decision to build its way out of the 2008 global financial crisis – meant a boom in construction, which prompted a huge appetite for steel. By 2015, China was producing half of the world’s steel, with most of it destined for domestic use. The government subsidised both the energy used in the manufacture of steel and the steel producers themselves. That meant China could sell the stuff for less than it should cost to manufacture anywhere in the world: a process that goes by the inelegant term of ‘dumping’. It drove down the price of steel around the globe.

Established steel producers struggled to stay in business while crying foul. Then China’s construction boom eased off, leading to a glut of steel. China offloaded more onto the world market and the price fell even further. Elsewhere, steelmakers were forced to throw in the towel, closing plants and cutting jobs. In 2016, steel production in the USA was roughly half the level seen in 1973.

The implications of the collapse of the steel industry spread way beyond the Rust Belt. For a country to safeguard its security, it needs to ensure that it can go it alone in producing food, water and weapons. These industries are often dubbed ‘strategic’ and shielding them is considered vital by most, if not all, countries. Some nations put the steel industry in the same bracket.

There are several ways in which the USA (or any other country) can protect its industries, and at the same time reap additional benefits. If importing becomes unattractive, retailers