President Biden has made reviving American manufacturing a top priority, and has set a goal of creating 5 million new manufacturing jobs. To deliver on his promises, he is going to have to deal with the trade deficit and the overvalued dollar.
In December of 2022, the total goods trade deficit reached $1.18 trillion. The root cause of the trade deficit is that the U.S. is not price-competitive, primarily because the dollar is overvalued by 20 to 40%.
In February 2022, a study by the Coalition for a Prosperous America shows why America is not competitive: currency imbalances. U.S. producers are trying to compete with countries operating at a disadvantage of 20 to 40%, so the obvious conclusion is that unless we can do something to reduce the value of the dollar, American efforts to reshore manufacturing might be doomed to fail. The high value of the dollar since the 1990s has acted like a massive tax on U.S. exports, and a huge subsidy to U.S. imports.
The inconvenient truth is that we will never be able to grow our exports, stop the slow erosion of manufacturing, or employ a policy of reindustrialization as long as we allow the dollar to be artificially inflated. During his campaign for the presidency, Biden talked a lot about enforcement actions against China or any other country that was undercutting American manufacturing through unfair practices. But after he became president, his administration has sent mixed messages about currency manipulation and the dollar valuation.
The leading cause of U.S. trade deficits is currency manipulation and misalignment by China and 15 other trading countries. Currency manipulation happens when one of our trading partners buys U.S. assets, such as U.S. Treasury notes and bonds. This artificially inflates the value of the dollar. By raising the value of the dollar, our exports become more expensive and foreign countries’ products become cheaper. Currency manipulation is illegal under the rules of the International Monetary Fund and the World Trade Organization, but enforcement is lacking.
According to economic theory, running deficits over many years is supposed to weaken our currency and eventually reduce both the value of the dollar and our deficit. The thinking goes like this: a trade deficit creates downward pressure on a country's currency under a floating exchange rate regime. With a cheaper domestic currency, imports become more expensive, thus reducing the trade deficit. But this isn’t happening in America because our competitors game the system by manipulating currencies to artificially keep the dollar value high.
Who Supports a Strong Dollar?
Every treasury secretary since Robert Rubin in the Clinton administration has supported the strong dollar policy. In 2006, Hank Paulson, treasury secretary for President George W. Bush, said the benefits of a strong dollar are lower interest rates, more liquid financial markets, cheaper funding for American banks, and the ability to run large trade deficits. Treasury Secretary Janet Yellen has fallen in line with all previous Treasury officials and said she believed “markets should set the value of currencies and that we should not seek a weaker currency to gain a comparative advantage”.
Wall Street also supports a strong dollar and running trade deficits because they get to finance the deficit and sell stocks and bonds. Academic economists also support a strong dollar, and most of them seem to be ambivalent about the growing threat of trade deficits. They are willing to throw non-financial industries under the bus to maintain a strong dollar, which is a commitment to deindustrialization and ever-increasing debt.
On the other hand, it is also undeniable that the overvalued dollar:
- Increases imports and decreases exports.
- Erodes manufacturing and causes deindustrialization of the economy.
- Has cost the economy four million jobs.
- Reduces agricultural prices.
- Has depressed cities and towns in the heartland.
- The policies that prop up the dollar is a war on the working class of America.
In his book, The Great Reckoning, Michael Pettis said, ”Any policy that does not clearly result in a reversal of the deep debt, trade and capital imbalances of the past decade is a policy that cannot be sustained."
There Is a Solution
The answer could be the Market Access Charge (MAC) proposed by U.S. Sens. Tammy Baldwin, D-Wis., and Josh Hawley, R-Mo., as the Competitive Dollar for Jobs and Prosperity Act (S.2357). Using a market access charge for all foreign investors buying U.S. assets would begin to lower the value of the dollar to a trade balancing price.
The plan would require the Federal Reserve to impose a “market access charge ”on foreign investments in the United States. This tax would cover asset purchases including stocks, bonds, real estate or intellectual property – pretty much everything foreigners might want to buy, except for goods to be exported. The stated objective is to achieve a current account balance within five years
According to a model developed by the Coalition for a Prosperous America, a Market Access Charge would:
- Boost GDP by $1.62 trillion over five years.
- Realign the dollar by 26.4%, which would balance trade.
- Create 3.9 million new jobs, including 1.3 million manufacturing jobs.
- Generate $3 trillion of additional revenue for the U.S. Treasury.
What it gets down to is a titanic struggle between two completely different ideologies: the big importers, Wall Street and the Treasury Department, who favor the strong dollar and trade deficits, vs. the supporters of domestic manufacturing, reshoring, exports, and those who favor reindustrialization.
My argument is that the importing of cheap products don’t seem to be helping most of the middle class, and if we look at the longer term and how America can remain competitive, I don’t see any alternative but to steadily reduce the value of the U.S. dollar. If the Biden administration wants to ensure the “Future Is Really Made In All America,” they are going to have to do something about currency manipulation and the strong dollar.
Michael Collins is the author of a new book, Dismantling the American Dream: How Multinational Corporations Undermine American Prosperity. He can be reached at mpcmgt.net.