Excerpt: “The administration has to tackle the dollar’s overvaluation along with the tariffs to really fix U.S. trade performance,” said Michael Stumo, head of the Coalition for a Prosperous America (CPA), a labor and manufacturing group that backs tariffs and currency moves.
Greg Owens wants to sell his company’s stainless-steel flatware to customers in Britain and Australia. Only one thing stands in his way: the strength of the U.S. dollar.
Owens’s company, Liberty Tabletop, the last stainless steel flatware maker in the United States, produces its distinctive offerings in a century-old brick building in Sherrill, N.Y. Each time Owens converts the sales price of competing products in those overseas markets into dollars, he flinches.
“When I’m at a 20 or 30 percent disadvantage versus my competitors’ prices, I have no chance — and that’s pretty much what’s happening,” he said. “If that were somehow to be corrected, it would go a long way to helping us be more competitive.”
Owens’s frustration stems from President Trump’s approach to shrinking the U.S. trade deficit. Trump promised during the 2016 campaign that he would act against China for manipulating the yuan’s value, and he repeatedly has called the dollar “too strong.” But he has taken no direct action on currencies, instead relying on tariffs to battle trade barriers that he says hurt American companies.
Trump’s “America First” stance has yet to make a dent in the merchandise trade deficit, which hit a monthly record in September. Amid signs that the rising dollar is depressing U.S. exports — and muting hiring growth in a handful of industrial states — some labor and business groups are calling on the president to take action to weaken the U.S. currency. Yet his economic policies are making it stronger.
“The trade deficit is a function of the dollar, not a function of bad trade practices abroad,” said Brad Setser, who was a White House and Treasury Department economist in the Obama administration. “But the basic problem the administration faces is, its own tax policy and fiscal policy is driving the dollar up.”
The dollar has risen more than 7 percent this year against the currencies of major U.S. trading partners, part of a 22 percent gain since the end of 2013, according to the Bank of International Settlements index.
A stronger dollar acts as a price increase for U.S. goods sold abroad while making imported products less expensive for Americans. The greenback’s effect can be glimpsed in Liberty Tabletop’s near-exclusive focus on domestic sales as well as government statistics showing that, excluding oil, U.S. exports of goods in September were lower than they were four years ago.
Currency values have had an especially pronounced effect on U.S.-China trade, which accounts for nearly half of the annual $800 billion U.S. deficit in goods trade. For more than a decade after joining the World Trade Organization in 2001, Beijing intervened in foreign exchange markets to keep the yuan artificially low. That boosted Chinese exports, often at the expense of American manufacturers, and contributed to the hollowing out of Midwestern industrial states that Trump won in 2016, economists say.
Between 2001 and 2017, Chinese trade destroyed 3.4 million American jobs, three-quarters of them in manufacturing, said economist Robert Scott of the union-backed Economic Policy Institute.
“The single most important cause has been currency manipulation and currency misalignment,” said Scott, who said other U.S. trading partners, such as Japan, the European Union and South Korea, also have benefited from artificially low currency values.
Other economists say the trade deficit is linked to broad economic forces, such as a relatively low national savings rate.
China no longer intervenes as routinely in currency markets, doing so only to prevent overly swift or destabilizing moves in the yuan, economists say. As a result, the People’s Bank of China’s dollar reserves are 9.7 percent, or $124.2 billion, lower than they were in January 2014.
Still, since April, the yuan has dropped 9.5 percent against the dollar, eroding the 10 percent and 25 percent tariffs that Trump has imposed on Chinese goods.
As the global reserve currency, the dollar benefits from steady foreign demand no matter how the U.S. economy is performing. That helps keep domestic borrowing costs lower than they otherwise would be, a benefit that economists describe as an “exorbitant privilege,” and supports the dollar’s value.
Several factors explain the dollar’s lofty perch. The Federal Reserve’s interest rate increases — even as the European Central Bank keeps its rates on the floor — are drawing foreign capital to U.S. investments and currency.
But Trump’s tax and spending policies also are driving the dollar higher, along with widening the trade deficit, according to the International Monetary Fund, which calls the dollar the most overvalued of 14 major currencies.
Last year’s $1.5 trillion Republican cut in corporate and personal income taxes, along with the decision to eliminate congressional limits on government spending, has revved up the economy and created nearly $1 trillion budget deficits for the coming years that require financing from abroad.
“The dollar is overvalued,” said Joseph Gagnon, a former Federal Reserve economist now at the Peterson Institute for International Economics. “We have a bigger trade deficit than can be explained by fundamentals.”
In January, Trump abandoned his earlier worries about a rising greenback and embraced U.S. presidents’ traditional view, telling CNBC: “The dollar is going to get stronger and stronger, and ultimately I want to see a strong dollar.”
But he also has criticized the Fed’s interest rate increases, calling for lower rates that would allow the dollar to sink, and he has accused China and the European Union of manipulating their currencies to gain a trading edge.
Instead of tackling currency issues, the president this year has tried to reduce the trade deficit by imposing tariffs on solar panels, washing machines, industrial metals and $250 billion in Chinese imports.
Many economists and business executives doubt that approach. Countries that resort to tariffs typically end up with falling output and productivity, higher unemployment rates and greater inequality while failing to close their trade gaps, according to a new International Monetary Fund study.
“We do not find an improvement in the trade balance when tariffs rise,” concluded the paper, which examined 151 countries over a 51-year period and found that tariffs were associated with a rising exchange rate.
“The administration has to tackle the dollar’s overvaluation along with the tariffs to really fix U.S. trade performance,” said Michael Stumo, head of the Coalition for a Prosperous America (CPA), a labor and manufacturing group that backs tariffs and currency moves.
The CPA favors a variable fee on financial flows into the United States to reduce demand for the dollar and lower its value. Legislation would be needed to make that happen, something Stumo acknowledges is unlikely given opposition from the financial industry and the Treasury Department.
Some on Wall Street are skeptical that the administration will intervene in currency markets.
“It is theoretically possible, but I think unlikely,” Marc Chandler, chief market strategist for Bannockburn Global Forex, said in an email. “It would complicate efforts to discourage China from intervening. I don’t think that [Treasury Secretary Steven] Mnuchin or [National Economic Council Director Larry] Kudlow would advise.”
The strong dollar may be weighing on the U.S. manufacturing rebound. September factory employment fell from the previous month in Indiana, Iowa, Louisiana, Minnesota, North Carolina, Oregon and Pennsylvania, according to the Bureau of Labor Statistics.
Factory hiring increased in October in all of those states except Louisiana, but many of the gains were minor and Wisconsin’s manufacturing payrolls were flat.
The new-export-orders component of the Institute for Supply Management’s manufacturing index for October also fell to a two-year low on Nov. 1. “The factory sector is starting to succumb to the head winds of a stronger dollar and slowing global growth,” Andrew Hunter, U.S. economist for Capital Economies, wrote to clients.
That helps explain the urgency of the calls for the president to act on currency policy.
The Trump administration should seek a broad realignment of the dollar, along the lines of the 1985 Plaza Accord, which committed Britain, France, Japan, the United States and West Germany to drive down the dollar against the Japanese yen and the German mark, the EPI’s Scott said.
The administration has taken only limited action. The most recent congressionally mandated Treasury Department report concluded that no country met the formal standards for being labeled a currency manipulator, although it said that recent weakness in the Chinese yuan was “of particular concern.”
Administration officials included provisions in the new U.S.-Mexico-Canada trade agreement barring currency manipulation. The Office of the U.S. Trade Representative called the measure “unprecedented,” and it is widely considered a template for any future deals the administration negotiates.
But there’s no sign of the broader, immediate action some seek.
“While the trade hawks are winning on some of the issues like tariffs and the renegotiation of trade agreements, the Treasury wing still seems to hold sway with respect to these currency issues,” said Scott Paul, president of the Alliance for American Manufacturing.
As Washington debates, manufacturers struggle.
Todd Diggs of Charlotte watched with dismay as the strong dollar just about drove him out of the Mexican market. As director of international sales for Charlotte Pipe, Diggs sells cast iron and plastic pipe to industrial customers in about 40 countries.
In the past, he has seen sharp dollar moves hurt his company’s sales in Brazil, Colombia and South Korea.
“It almost prices us out of the market,” he said of the rising U.S. currency. “It locks us out of any business when it goes in that direction.”