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2-25-2019 -A Non-competitive Dollar Could Negate President Trump’s Tariffs.

Monday, February 25, 2019 - 11:00am
Michael Stumo

Despite a lot of handwringing from globalists, President Trump’s tariffs are working. One year after the first tariffs were imposed, US manufacturing employment is up by 261,000 jobs. The US is outperforming all other major economies. And new investments have been announced in key sectors covered by the tariffs, including steelmaking and solar panels.

 

There’s a clear justification for the tariffs. Countries like China have spent the past two decades flouting the rules of global trade in an effort to erode America’s economic, military, and geopolitical strength. And Beijing’s use of massive subsidies, dumping, and cyber hacking has cost the United States millions of manufacturing jobs and more than 60,000 factories.

 

Finally, the United States is rethinking its support for unrestricted free trade. But it’s also time to rethink a “strong dollar” policy that has contributed to 40 years of US trade deficits—all because it makes America’s goods, services, and labor too expensive in global markets.

 

How overvalued is this strong dollar? In 2017, former World Bank economist John Hansen estimated the dollar was 25 percent overvalued. And in the second half of 2018, Federal Reserve data showed the dollar jumping an additional 7.15 percent.

 

That keeps driving up America’s trade deficits. Despite President Trump’s aggressive trade intervention, the 2018 US trade deficit with China is still projected to climb 11 percent above 2017’s record $375 billion. And the International Monetary Fund (IMF) is warning that America’s trade deficits will get even worse.

 

The Coalition for a Prosperous America (CPA) recently studied the effects of the dollar’s overvaluation on the US economy. According to CPA’s research, if the dollar’s exchange value was gradually lowered by 27 percent over a six-year period, the United States could create as many as 6.7 million new jobs, including 1.4 million in manufacturing alone. And the US economy would grow by an extra 4.8 percent, meaning our economy would be nearly $1 trillion larger than currently projected by 2024.

 

Manufacturing exports would grow by 12 percent per year. And the availability of good full-time jobs for non-college educated workers would surge. 

 

The Trump administration should pay particular attention. If the dollar keeps rising, it could simply negate much of the gains the president is now achieving from his tariff strategy. 

 

The IMF certainly sees it that way. In a report last year, it said that America’s “persistent excess imbalances may become unsustainable, putting the global economy at risk and aggravating trade tensions." 

 

While Wall Street champions an overvalued dollar, Main Street suffers weaker exports, fewer jobs, and lower incomes. There’s a clear precedent for action, though. In 1985, the Reagan administration negotiated the Plaza Accord with Japan, West Germany, France, and the United Kingdom. The agreement lowered the dollar’s exchange value, causing America’s annual trade deficits to disappear within a few years.

 

At present, the United States keeps absorbing other countries’ overproduction, and at a cost of hundreds of billions of dollars annually. This is unsustainable, and it’s time to get the nation’s economic house in order. Adjusting the dollar is an essential remedy that would create millions of new jobs along with almost a trillion dollars in added economic growth. Washington needs to take action before the dollar causes America to lose its position as a global economic leader.

 

Michael Stumo is CEO of the Coalition for a Prosperous America (CPA).