Trade wars and the over-valued dollar
President Trump and China are at it again—and both just upped the ante. Currency manipulation and an overvalued U.S. dollar have taken center stage in the news, thanks to Beijing devaluing its currency on Monday.
Trump’s Treasury Department has countered by naming China a “currency manipulator.” But boiling the problem down to currency manipulation means the administration is fighting a previous war. And that highlights why the president lacks the strategic vision needed to keep up with newer global challenges.
America’s trade problems have grown far more broad in recent years. Chronic global trade imbalances threaten the stability of the world economy. And that holds true whether these disruptions are caused by currency manipulation, trade barriers or global capital flows.
Designating China as a “currency manipulator” is long overdue. But it’s hardly a cure-all. It merely initiates consultations with the International Monetary Fund. And it doesn’t necessarily provide leverage to solve core trade issues. What’s needed is an approach that addresses the fundamental causes of current trade imbalances.
The problem does start with China, however, since Beijing just weakened its currency, the yuan, to its lowest level since 2008. This will likely neutralize the impact of new tariffs that the president announced in a tweet last week. China allowed its currency to fall by 2 percent in a mere 24 hours. That’s a significant drop, following an overall 11.4 percent decline since March of 2018.
Weakening the value of the yuan lowers the cost of Chinese goods in the U.S. market. And so, even though the president is attempting to raise the cost of imports through his new tariffs, their sticker price could still shrink.
In the wider picture, Trump’s condo-selling mindset – in which he simply imposes more tariffs until Beijing agrees to a “deal” – is a poor means to address global trade imbalances. It’s not China’s intransigence that is overwhelming U.S. manufacturers; it’s an overvalued U.S dollar.
There’s no doubt that China has long used predatory trade practices, such as dumping and illegal subsidies, to undercut U.S. manufacturers. And Beijing has repeatedly intervened in currency markets to suppress the value of its currency—all to continue its job-killing trade surpluses with the United States.
But China isn’t the only country that has played the currency game. Over the past two decades, Japan, South Korea and nearly 20 other countries in Asia and Europe have also bid up the price of the U.S. dollar to subsidize their own exports. And that has made U.S. goods increasingly uncompetitive in global markets—with the United States shedding five million manufacturing jobs and nearly 90,000 domestic factories in that time.
In truth, official, government-backed currency manipulation has been on the wane in recent years. Since 2014, China and other countries have actually been reducing their central bank purchases of U.S. securities. But the dollar is still rising in value, thanks to overseas investors continuing to pour huge amounts of private capital into bonds, stocks, and other U.S. financial assets. These purchases have already driven up the dollar by nearly 20 percent since mid-2014. And that has continued the trend of making American-made goods less competitive globally. In fact, the U.S. goods trade deficit –dominated by manufacturing imports – reached $875 billion in 2018, an increase of 10 percent in the past year alone, despite the president’s tariffs.
To realistically help America’s factories and farms compete in the global marketplace, Washington must tackle the dollar’s overvaluation. In a fortunate stroke of timing, Senators Tammy Baldwin (D-Wis.) and Josh Hawley (R-Mo.) have just introduced bipartisan legislation to address the twin problems of an overvalued dollar and growing trade imbalances. Their bill would empower the Federal Reserve to tax foreign purchases of U.S. stocks, bonds and other assets. And that could return the dollar to a competitive, trade-balancing level.
Taxing foreign purchases of U.S. financial assets could gradually lower the dollar’s value by 25 to 30 percent—eliminating the present distortions caused by currency manipulation and excessive capital inflows. The goal would be to slow the growth of imports, generate a surge in U.S. exports and rebalance U.S. trade within the next two to four years. That could help to create several million high-wage jobs, particularly in manufacturing.
For more than two decades, members of Congress and presidents of both parties have complained about overseas currency manipulation and excess capital inflows driving up America’s trade deficit. President Trump has reacted by piling on the tariffs—and yet the trade deficit keeps growing. Designating China as a currency manipulator is a mere start against the currency misalignment hurting U.S. economic growth. To achieve meaningful action, the president and both parties should consider the Baldwin–Hawley bill, and start directly tackling the overvalued dollar.
Robert E. Scott is a senior economist with the Economic Policy Institute Policy Center.
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