For the US Trade Deficit the US $ is not the problem
What about the US trade policy: did it help or hinder with the trade deficit? At the moment, our Administration believes that the artificially low Yuan is a problem.
Hence, it has been pressuring China to allow its currency rise in value against the dollar. Such a development, by making U.S. exports cheaper and Chinese imports costlier, is presumed to reduce the trade imbalance between the two countries, contributing as a result to close the US national trade deficit which has annually ranged from 4 to 6% of GDP over the last decade.
But, what if the whole ideology behind our trade thinking was flawed? What if, as most recent trade data suggests, the assumption of a cheap dollar coming to the rescue was an illusion?
Consider this: Between 1980 and 1985, following the Volcker interest rate hike, the dollar’s value rose some 40 percent in relation to the currencies of major U.S. trading partners, but the trade deficit did not spin out of control as feared , as it peaked at only about 3% of GDP in 1985.
Conversely, between 2004 and 2009 the dollar depreciated by more than 30% relative to other major currencies — notably Euro, Yen and the Canadian dollar—and yet the trade deficit still shot up (not down!) to reach a peak of 6% of the GDP in 2006. What happened to the theory?
The theory does not take into account three realities. Firstly, America’s trade deficit is the result of overdependence on two kinds of imports: petroleum and Chinese goods. Secondly, import demand is unlikely to lessen materially for either of these unless there is a large price increase in dollars. Thirdly, partly because China insists on maintaining exchange-rate stability with the dollar, the volume of US exports – the critical piece – changed little despite a weak greenback.
Instead of sharply focused Energy and Trade policies to stop and possibly reverse the overdependence on oil and China, the US emphasis has wrongly been placed on a cheaper dollar. It is surprising to see the indifference toward a cheaper dollar which could end-up importing inflation to the US while exporting deflation abroad resulting from goods and services now priced at an artificial discount, such as a Boeing airliner, an Intel chip or Google software.No, America’s response to the trade deficit should not have been to engage in commodity-like, price-based competition, but in innovation-driven, product-based competition.
Today most of the things that China, Japan or the EU import from the USA are higher-value, higher-margin products anyway: why reduce their price artificially with a cheap dollar unless it translates to a commensurate increase in volume? If Intel or Microsoft try to boost their exports to the rest of the world with a price-discount, that decision should be theirs, and not that of the government.
Also, even if China succumbed to the pressures and let its currency appreciate say by a sizeable 20%, this would only reduce the total US trade deficit by only about a tiny 6%, unless China also imports $200B of extra US goods. Simply stated, contrary to the current mindset, fixing the Yuan’s exchange rate will do precious little to solve the problem. The answer lies elsewhere: “fixing” free-trade — in an asymmetrical world with no reciprocity — is a better place to look.
It is increasingly clear the US did not get to be a triple “deficit nation” simply because of the way it taxes and spends its citizens’ money, but because of dissonant fiscal, monetary and trade policies over the last 25 years. Especially in the last decade, the profusion of easy credit led to financial overleverage everywhere, seriously destabilizing our banks and the economy until the Great Recession of 2008, urgently necessitating extraordinary government spending and unprecedented monetary stimulus by the Fed, further undermining the value of a dollar whose weakness did not help the trade deficits, sustaining as a consequence the rise in foreign debt.
This vicious circle must be broken. But if one thing is clear, the dollar is the victim not the cause.
Moris Simson, former high-tech executive who now heads a strategy consultancy, is a fellow of the IC² Institute at the University of Texas