GM cutbacks a result of overvalued dollar

Editor’s note:  It is very important to fix the noncompetitive dollar. The economic surge for farmers, ranchers, workers and manufacturers would be very large. 

It made for heavy news this week. General Motors announced plans to cease production at five plants that could lead to roughly 14,700 layoffs by the end of 2019. GM shutdowns will hit hardest in industrial states like Ohio and Michigan, including key plants in Detroit-Hamtramck, Lordstown, and Warren.

[ Robert E. Scott | Dec. 1, 2018 | Detroit News]

But General Motors’ restructuring also has wider implications for American industry — and not just the machine shops and fabricators that produce rubber, steel, and glass components for auto assembly.

America’s manufacturers are all struggling with the same issue — an overvalued dollar that puts them at risk from rising trade deficits. And it all derives from flawed Trump administration economic policies.

To see why, start with GM. Why is the company taking such a drastic step? CEO Mary Barra says the company is trying to make itself leaner, and shifting resources toward newer electric vehicles and self-driving cars.

But that’s not the entire issue. The U.S. dollar is now substantially overvalued — which keeps making imports cheaper and U.S. exports more expensive.

The dollar’s overvaluation stems from a rather grievous irony. The United States is the epicenter of the world’s financial markets, with overseas investors continually purchasing dollar-denominated assets and securities. That’s certainly good for Wall Street. But it invites a downside.

A continuing influx of foreign capital is driving up demand for the dollar. And the resulting rise in the dollar is making America’s exports — including the cars built by General Motors — more expensive for overseas consumers. It also makes imported goods cheaper in the U.S. market.

The situation has gotten worse because President Trump’s economic policies have actually reinforced the dollar’s rise. Just as textbooks predict, increased federal borrowing is driving up short- and long-term interest rates, attracting even more foreign capital — and further strengthening the dollar.  

The president’s policies are now backfiring on GM and domestic manufacturers because the dollar has increased 5.4 percent in value in the past year alone. And China has devalued its currency, the yuan, by 10 percent this year — more than offsetting the impact of the president’s tariffs.

Because the dollar keeps rising, the International Monetary Fund foresees a perfect storm: Rising imports will drive America’s current account deficit up from $449 billion in 2017 to $810 billion in 2022. Concurrently, the U.S. goods trade deficit could double in the next four years, rising from $807 billion in 2017 to between $1.2 trillion and $2 trillion. Such a massive increase could potentially tip the nation into a new recession.

There’s still time to sort through the mess, however. Washington can take coordinated action to lower the value of the dollar by at least 25-30 percent. The last time the U.S. undertook a major currency realignment was with the Reagan administration in 1985. Treasury Secretary James Baker negotiated the Plaza Accord with Japan, France, Germany and the United Kingdom — achieving a 30 percent depreciation in the U.S. dollar. The U.S. trade deficit subsequently fell from $121 billion in 1985 to $31 billion in 1991.

President Trump campaigned on rebuilding American manufacturing, and delivering more jobs and higher wages. Instead, it could be the newly Democratic House that actually achieves this — by pressing 1980s-style trade legislation as the impetus to revalue the dollar in the same way the Reagan administration wisely did, 30 years ago.

Robert E. Scott is a senior economist and the director of trade and manufacturing policy research at the Economic Policy Institute.

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