July 28, 2017 at 5:00 am ET
There’s little doubt that the United States has suffered a manufacturing crisis over the past 15 years. With millions of factory jobs lost, and tens of thousands of factories having closed their doors, it’s clear that the global market has tilted unfavorably against U.S. industry. But the root causes of this decline extend far beyond the simple notion of “low-wage competition.” And while the Trump administration is beginning to address overseas mercantilism, it’s important to recognize that an underlying currency problem continues to hamper U.S. manufacturing competitiveness.
Undoubtedly, dumping, subsidies and intellectual property theft have fundamentally harmed U.S. producers. And the new administration is correct to bring trade cases — particularly in industries like steel — where America’s manufacturers face competition from nations that violate the rules of world trade.
But trade cases will only nibble around the margins of a much larger problem. What President Donald Trump must confront is a situation where the U.S. dollar has become significantly overvalued in the world market. And this overvaluation is driving up the cost of U.S. exports and reducing America’s industrial competitiveness.
Currently, traders and private investors are investing hundreds of billions of dollars annually in the purchase of U.S. currency, bonds and stocks. In fact, the dollar investments of private investors now far outweigh the transactions of government investors, with roughly $5 trillion of daily turnover in currency trading. While it’s flattering that the world continues to see the dollar as its primary currency, the net effect of this favoritism is to continue driving up dollar demand, increasing its value.
Research by the Coalition for a Prosperous America suggests that the dollar may be overvalued by as much as 25.5 percent, compared to its “Fundamental Equilibrium Exchange Rate.” And not only is the dollar overhyped, but the currencies of key competitors like Japan and Germany are actually significantly undervalued at the same time.
In the arena of global trade, this dollar overvaluation continues to hurt America’s manufacturing competitiveness while driving up the U.S. trade deficit. As the Peterson Institute’s Fred Bergsten and William Cline have noted, “every 10 percent rise in the dollar adds about $350 billion to the trade deficit…with a corresponding loss of about 1.5 million jobs.”
Manufacturing matters, though. And if the Trump administration hopes to reboot domestic industry, a dollar fix is urgently needed.
One way to bring greater parity for the dollar would be a “Market Access Charge” proposed by John Hansen, a 30-year veteran of the World Bank. Hansen’s MAC would apply a 0.5 percent charge on any dollar purchases by a foreign individual or entity. Such a fee would help to discourage the kind of short-term dollar investments that drive much of the current market, with investors briefly holding dollars and dollar-denominated securities for a quick profit. Such a MAC could be imposed on a sliding scale, and adjusted to address subsequent changes in America’s trade deficit.
Many nations have adopted similar policies to address pressures on their own currencies. And notably, a MAC could be implemented unilaterally by the U.S. government, since it doesn’t violate either International Monetary Fund or Word Trade Organization rules.
There is certainly a precedent for such action. In 1985, the Reagan administration negotiated the Plaza Accord to address the dollar’s overvaluation against both the Japanese Yen and the West German Deutsche Mark. Such a coordinated intervention helped reduce the dollar’s value, boosting U.S. competitiveness for a number of years.
While the Plaza Accord worked 30 years ago, the more recent explosion of financial trading has generated a situation where the dollar is once again significantly overvalued. And until such a distortion is addressed, America’s manufacturers will continue to struggle in the global arena.
If the Trump administration is serious about rebuilding America’s factories — and putting Main Street ahead of Wall Street — a MAC approach could generate the dollar competitiveness needed to rebalance trade flows. Otherwise, America’s trade deficits will persist, and domestic manufacturers will continue to struggle.
Michael Stumo is chief executive officer of the Coalition for a Prosperous America.
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