By John R. Hansen, CPA Advisory Board
Executive Summary
America’s trade deficits, which are caused primarily by America’s overvalued dollar, are eroding the American Dream of sustainably growing and equitably shared prosperity for all. By making American goods too expensive to compete with foreign goods in domestic and export markets, the overvalued dollar kills jobs, reduces wages, closes factories, sends farms into bankruptcy, and endangers our national security. These problems, which cannot be solved by traditional tariffs, can be solved by attacking their monetary cause – the excessive flow of foreign capital into America’s financial markets that overvalues the dollar, effectively creating a 27 percent tax on our exports and a 27 percent subsidy to foreigners today on all U.S. imports.
The Competitive Dollar for Jobs and Prosperity Act, known as the Baldwin-Hawley bill (S. 2357), includes two strong policy measures specifically designed to reduce these damaging capital inflows – a Market Access Charge (MAC) and Countervailing Currency Intervention (CCI), both of which are legal under IMF and WTO rules. The bill should be passed as soon as possible because it is the only policy package capable of increasing America’s international competitiveness and ending US trade deficits in an efficient, cost-effective and timely, market-friendly manner. By making America more competitive, the bill will also support the other legislative initiatives required to restore the American Dream for all Americans.
America is suffering because we have lost our international competitiveness
For the past 40 years, America has been spending more money importing foreign goods than it has been earning by exporting American goods. Consequently:
- millions of Americans have lost their well-paying middle class jobs in factories that can no longer compete with foreign-made goods as they did until the mid-1970s;
- record-breaking numbers of farms in the American heartland are going bankrupt each year, unable to survive on commodity prices that have been driven down by a dollar now overvalued by 27 percent compared to the exchange rate that would balance U.S. trade;
- government deficits rise because slower economic growth reduces tax revenues and increases the need for government expenditures to support workers and businesses no longer able to compete internationally;
- U.S. productivity growth slows with reductions in government support for productivity-enhancing investments in infrastructure, skills training, R&D, green energy, environmental quality, national security, regional economic development, and efficient health care;
- the financial sector, regularly faced with sharp swings in asset prices and occasional financial disasters like the Crash of 2008, finds it increasingly hard to focus on fulfilling its primary reason for being – to connect savers with real investors as efficiently as possible; and
- the debt that we owe to foreigners – and that our children must ultimately repay – grows daily;
America’s biggest competitiveness problem today is the overvalued dollar
These serious problems, which show that America is no longer as competitive internationally as it was up to the middle of the 1970s, are caused largely by the overvalued dollar.
When we talk about American competitiveness and productivity, we normally think about things like the widgets per minute that a factory worker can produce or the bushels of wheat that a farmer can grow on an acre of land. But when it comes to America’s loss of international competitiveness, the overvaluation of the dollar’s exchange rate compared to the rate at which total U.S. trade would be balanced is a far more serious problem than shortfalls in physical productivity.
Take this simple example. If Stanley can make and sell a hammer in the US for $23 and China can make a comparable one that sells here for $20, Stanley’s made-in-America hammers will not be able to compete without losing money. Consequently, American stores will import hammers from China, and our trade deficit with China will increase. But when the 27 percent overvaluation of the dollar is fixed by implementing the Baldwin-Hawley bill, the Chinese hammer price will rise from $20 to $25 while the US hammer remains at $23. Fixing the dollar would make U.S. hammers – and thousands of other U.S. products – fully competitive with imports not just from China, but from all countries.
A trade-balancing exchange rate eliminates trade deficits
This hammer example shows that, without any investment in plant, equipment, R&D, staff training, etc. – an appropriate exchange rate can make our made-in-America hammer competitive with foreign-made hammers. Far more important, this is true for all made-in-America products that use made-in-America inputs such as steel and that are being produced at costs that do not exceed the price of competing imports by more than the dollar’s overvaluation – currently 27 percent. Even if imported inputs are used, the dollar’s realignment will still help America greatly.
Furthermore, if we fix our competitiveness problem by moving the dollar to a trade-balancing exchange rate, we will eliminate our total $500 billion current account deficit – something that country-specific tariffs cannot do because they simply divert our trade deficits to countries not subject to those tariffs in most cases.
Also, using currency realignment rather than product-specific tariffs to balance US trade avoids the risk of diverting imports from one product to another – for example, from the steel rods and angle irons needed to fabricate steel joists to the joists themselves if the inputs are subject to tariffs and the fabricated joists are not. Such trade diversion is particularly costly because the fabrication value added goes to a foreign rather than a domestic fabricator, increasing U.S. import expenditures.
Balanced trade with the world as a whole will mean that Americans once again can earn as much producing exports as they spend on imports. Moving the US dollar to a fully competitive level will lead to 3-5 million new jobs, higher wages, smaller deficits, more investment in infrastructure and other services best provided by the government, less need for the government to bail out failing industries, and less need for it to get involved in decisions best left to the private sector.
Exchange rate markets have been failing America for over forty years.
Up to the 1970s, exchange rates were driven primarily by trade deficits. When America spent more on imports than it earned with exports, excess dollars would flood global foreign exchange markets, driving the dollar’s value down. A cheaper dollar would make American goods cheaper and thus more competitive with foreign-made goods in both U.S. and foreign markets. This process, which worked well for centuries, was based on a firm link between exchange rates and balanced trade that kept America’s trade in balance, preventing the loss of American jobs, factories, farms, and communities depending on U.S. production.
Beginning in the mid-1970s, however, the linkage in global currency markets between exchange rates and balanced trade began to break down. Global financial flows started to expand far faster than global trade, and exchange rates became determined more by financial trade than by trade in real goods and services.
For the United States, this quickly became a disaster. By the 1970s, the dollar was already the world’s premier currency for international trade and international reserves. This status, plus the depth and breadth of U.S. financial markets, created an extraordinary global demand for dollars and dollar-based assets.
This demand drove the dollar’s exchange rate so high that it was increasingly difficult for made-in-America goods to compete with those made abroad, and the growing dominance of financial flows over trade in goods and services destroyed the link between exchange rates and balanced trade. Hence the serious trade deficits that are now eroding the economic, social, and political fabric of our nation.
The Baldwin-Hawley bill will restore the link between the dollar’s value and balanced trade
The Competitive Dollar for Jobs and Prosperity Act (CDJPA), more commonly known as the Baldwin-Hawley bill, will rebalance America’s external trade by attacking the key source of the dollar’s overvaluation – excessive foreign capital inflows. The bill amends the Federal Reserve Act by adding a third mandate, achieving a current account balance, to the existing dual mandate of the Fed – full employment and price stability. And to facilitate fulfilling this new mandate, the bill adds a new policy tool, the Market Access Charge, that is specifically designed for efficient exchange rate management. It also reconfirms another tool used in the past to manage exchange rates – Countervailing Currency Intervention (CCI).
Market Access Charge (MAC)
The Market Access Charge will discourage excessive foreign capital inflows by charging foreigners who want to bring money into America. This charge will reduce the attractiveness of dumping excess savings into America’s financial markets when they are already awash with excess capital.[1]
The Fed would set the MAC rate, but it could start, for example, at 50 basis points (1/2 percent); gradually rise until foreign capital inflows are moderated to a level consistent with a trade-balancing exchange rate; then gradually decline until rising trade deficits indicate the need to resume moderating capital inflows with the MAC. This dynamic, data-based adjustment process will keep U.S. trade in balance more or less automatically in perpetuity.
The MAC will cover all capital inflows at a standard rate. No exceptions will be granted in terms of country of origin, ownership, or declared purpose – except for de minimis transactions and money brought in to pay for U.S. exports. The MAC will be particularly effective in moderating private capital inflows because such flows are sensitive to the interest and dividends paid on invested funds.
The Market Access Charge will generate up to $100 billion of additional government revenues per year from MAC fees, which will be paid 100 percent by foreigners, and from additional tax revenues on the increased output stimulated by the MAC. The additional government revenues can be used, for example, to support initiatives that increase U.S. competitiveness such as improved infrastructure.
Countervailing Currency Intervention (CCI)
The other weapon against trade deficits endorsed by the Baldwin-Hawley bill is Countervailing Currency Intervention (CCI). In the past, the Department of the Treasury and the Federal Reserve, which are America’s monetary authorities, have occasionally intervened in the foreign exchange market to counter disorderly market conditions.[2] The currencies used to intervene have usually come equally from Federal Reserve holdings and the Exchange Stabilization Fund of the Treasury. Under countervailing currency intervention, if China buys $500 billion of US Treasuries with yuan to force the dollar up and the yuan down, the Fed and Treasury will each purchase $250 billion worth of yuan to offset China’s manipulation. Such intervention will help prevent further appreciation of the dollar driven by currency manipulation.
Conclusion
The MAC needs to be implemented as soon as possible because it will increase U.S. competitiveness in an effective, efficient, and timely, market-friendly manner – something that no other policy package can do. Increased competitiveness will balance America’s foreign trade, thereby increasing economic growth, the number of jobs, wage rates, government revenues, and financial sector efficiency. This will bring closer the day when all Americans can enjoy the dream and the reality of shared prosperity.
[1] Key signs of “excessive” capital include, for example, exceptionally low interest rates and exceptionally high stock market prices.
[2] See “U.S. Foreign Exchange Intervention” at https://www.newyorkfed.org/aboutthefed/fedpoint/fed44.html.
During his thirty-years with the World Bank, Dr. John R. Hansen worked at the nexus of trade, industrial, and macroeconomic policies in countries around the world and has written numerous books and studies based on this work. After retiring from the World Bank and from consulting with national and international organizations including DFID, USAID, UNDP, and the World Economic Forum, Dr. Hansen has focused on the economic and social problems facing America. He is an active member of the Coalition for American Prosperity, serving on its Advisory Board, and is the founding editor of the blogsite “Americans Backing a Competitive Dollar.”
