WASHINGTON, D.C. – In response to a quote by President Trump on Friday regarding the dollar, the Coalition for a Prosperous America is calling on the administration and Congress to take steps to curb dollar overvaluation if it really wants balanced trade. There are two ways this can be achieved. One will depend on the Executive Branch. The other depends on Congress.
“Realigning the dollar to a more competitive level would deliver a huge benefit to U.S. manufacturers and farmers who compete today against artificially cheap imports,” said CPA President Jon Toomey.
Trump showed his thoughtful side in today’s comments to the press. He suggested that a strong dollar has an emotional appeal, but a weaker dollar has definite economic and job benefits.
“I will never say I like a low currency,” Trump told reporters in response to questions about a slightly weakening dollar. “I like a strong dollar, but a weak dollar makes you a hell of a lot more money.”
Trump is likely focused here on exporting U.S. goods. But a strong dollar not only makes it harder for exporters to compete; it also makes it cheaper for American companies to invest abroad, and import goods.
Economists have been noting that the dollar’s “exorbitant privilege” has its consequences.
In a June 24 Financial Times op-ed, columnist Martin Wolf toyed with the idea of the U.S. taxing foreign capital inflows. “If the U.S. wants to accelerate a worldwide discussion with a policy intervention, the obvious one would be a tax on capital inflows,” Wolf writes, warming people up to the possibility of such a tax.
Sen. Tammy Baldwin (D-WI) and Sen. Josh Hawley (R-MO) introduced in 2019 a congressional bill, the Competitive Dollar for Jobs and Prosperity Act, which called for taxes on capital inflows. Bipartisan support on this issue is not hard to find.
The Coalition for a Prosperous America supports a Market Access Charge (MAC) as the right surgical tool to tax capital inflows. A MAC needs legislative approval.
The other avenue is a currency accord with key trading partners. Some have referred to this as the Mar-a-Lago accord. This action is up to the White House. Both actions should be considered if Trump wants to inoculate the America First trade agenda from dollar overvaluation.
“Realigning the dollar would be the most comprehensive and effective move to address the U.S. competitive disadvantage,” says CPA’s Chief Economist Emeritus, Jeff Ferry. “It can be done either by a multilateral intervention agreement, or a MAC, which would be a federal tool to moderate foreign investment in dollar financial assets.”
The advantage of an intervention accord is it could happen quickly. In the best case scenario, the President could get major exporters that have large trade surpluses with the U.S. to agree to strengthen their currencies in exchange for other provisions as part of an agreement. But this depends on allies willing to go along with the administration.
The MAC is a unilateral move.
“Taxing capital inflows by foreign investors is a long term systemic solution to the problem of dollar overvaluation,” Ferry says.
Some say our trade deficit gets balanced out by foreign investment of dollars back into the United States. The bulk of this reinvestment is going into U.S. securities rather than the productive investment the Trump administration says it wants. These investments drive up the value of the dollar.
“When we have a strong dollar…you don’t do any tourism. You can’t (build) factories, you can’t sell trucks, you can’t sell anything,” Trump said.
Currency misalignments keep trade imbalances in place. The U.S. currency misalignment is caused largely by private investors buying U.S. securities. These investments lead to undervalued foreign currencies and an overvalued dollar. An overvalued dollar makes it hard for many American products to compete domestically versus imports, or internationally via exports. As a result, the U.S. has accumulated trillions of dollars of national and foreign debts that must be paid either by shrinking government services, including social security and healthcare benefits, or by raising taxes.
Exporting countries like China want their currencies undervalued against the dollar because that makes their exports more attractive in foreign markets. .
“The steady rise of the dollar not only makes America’s exports more expensive, but it also artificially cheapens the cost of imports,” writes Toomey in an op-ed published on Friday in DC Journal. “America’s manufacturers continue to lose ground because of it. And that leads to more offshoring — and the hollowing out of U.S. industry. What’s needed is a fee on foreign purchases of U.S. financial assets,” Toomey said.
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