An Overvalued Dollar Is Harming America’s Global Competitiveness

July 28, 2017

There’s little doubt that the United States has suffered a manufacturing crisis over the past 15 years. With millions of factory jobs lost, and tens of thousands of factories having closed their doors, it’s clear that the global market has tilted unfavorably against U.S. industry. But the root causes of this decline extend far beyond the simple notion of “low-wage competition.” And while the Trump administration is beginning to address overseas mercantilism, it’s important to recognize that an underlying currency problem continues to hamper U.S. manufacturing competitiveness.

By Michael Stumo, originally appears on Morning Consult

Undoubtedly, dumping, subsidies and intellectual property theft have fundamentally harmed U.S. producers. And the new administration is correct to bring trade cases — particularly in industries like steel — where America’s manufacturers face competition from nations that violate the rules of world trade.

But trade cases will only nibble around the margins of a much larger problem. What President Donald Trump must confront is a situation where the U.S. dollar has become significantly overvalued in the world market. And this overvaluation is driving up the cost of U.S. exports and reducing America’s industrial competitiveness.

Currently, traders and private investors are investing hundreds of billions of dollars annually in the purchase of U.S. currency, bonds and stocks. In fact, the dollar investments of private investors now far outweigh the transactions of government investors, with roughly $5 trillion of daily turnover in currency trading. While it’s flattering that the world continues to see the dollar as its primary currency, the net effect of this favoritism is to continue driving up dollar demand, increasing its value.

Research by the Coalition for a Prosperous America suggests that the dollar may be overvalued by as much as 25.5 percent, compared to its “Fundamental Equilibrium Exchange Rate.” And not only is the dollar overhyped, but the currencies of key competitors like Japan and Germany are actually significantly undervalued at the same time.

In the arena of global trade, this dollar overvaluation continues to hurt America’s manufacturing competitiveness while driving up the U.S. trade deficit. As the Peterson Institute’s Fred Bergsten and William Cline have noted, “every 10 percent rise in the dollar adds about $350 billion to the trade deficit…with a corresponding loss of about 1.5 million jobs.”

Manufacturing matters, though. And if the Trump administration hopes to reboot domestic industry, a dollar fix is urgently needed.

One way to bring greater parity for the dollar would be a “Market Access Charge” proposed by John Hansen, a 30-year veteran of the World Bank. Hansen’s MAC would apply a 0.5 percent charge on any dollar purchases by a foreign individual or entity. Such a fee would help to discourage the kind of short-term dollar investments that drive much of the current market, with investors briefly holding dollars and dollar-denominated securities for a quick profit. Such a MAC could be imposed on a sliding scale, and adjusted to address subsequent changes in America’s trade deficit.

Many nations have adopted similar policies to address pressures on their own currencies. And notably, a MAC could be implemented unilaterally by the U.S. government, since it doesn’t violate either International Monetary Fund or Word Trade Organization rules.

There is certainly a precedent for such action. In 1985, the Reagan administration negotiated the Plaza Accord to address the dollar’s overvaluation against both the Japanese Yen and the West German Deutsche Mark. Such a coordinated intervention helped reduce the dollar’s value, boosting U.S. competitiveness for a number of years.

While the Plaza Accord worked 30 years ago, the more recent explosion of financial trading has generated a situation where the dollar is once again significantly overvalued. And until such a distortion is addressed, America’s manufacturers will continue to struggle in the global arena.

If the Trump administration is serious about rebuilding America’s factories — and putting Main Street ahead of Wall Street — a MAC approach could generate the dollar competitiveness needed to rebalance trade flows. Otherwise, America’s trade deficits will persist, and domestic manufacturers will continue to struggle.

Michael Stumo is chief executive officer of the Coalition for a Prosperous America.

Morning Consult welcomes op-ed submissions on policy, politics and business strategy in our coverage areas. Updated submission guidelines can be found here.

Showing 12 reactions

Please check your e-mail for a link to activate your account.
  • If we implement Buffet’s plan and the actions the Initiative and CPA recommend I believe we will do fine. If we do not do fine, then I would consider your proposal.
  • Harry,

    My solution is to implement Buffett’s "Balanced Trade. From that point, I would argue that we gradually withdraw from our dependence on China for “cheap goods.” We have a “devil’s bargain” with China, where they are selling us the rope by which we will hang ourselves. Surely, you can see that.
  • Bruce,
    Actually, more jobs are coming back than are being lost.
    I have been waiting to hear your solution. I am entirely in favor of Buffet’s proposal.
    Until we convince the government to act, please help us bring back what can be brought back.
  • Harry,

    No doubt your heart is in the right place, but for every job you “bring back,” ten more are lost. I am trying to explain that there is a strategy that will help, and you are not hearing me.

    We can’t compete with China, nor should we have to. We should not be doing business with China at all. We should begin divorcing ourselves from China by adopting Warren Buffett’s “Balanced Trade” recommendation. If you don’t know what I am talking about, you should not even be a party to this conversation.

    All your “feel good” efforts are accomplishing is to give false hope to a few clueless people, and to give self-serving politicians an excuse to keep dragging their feet on trade policy.

    Bruce Bishop
  • Bruce,
    We are confident in our data. We are succeeding at helping companies bring jobs back. We are advocating for changes such as CPA wants. Every job we and CPA brings back helps make the country stronger. What are you doing to improve the situation except complain? Sorry to be blunt, but I work at reshoring 70 hours a week with great success. When you accomplish something to improve the situation, let me know.
  • Harry,

    GE has been pretending to keep Appliance Park alive for purely PR reasons. In its glory days, Appliance Park (Louisville, KY) had about 25,000 employees. They got down to under 2,000 and were trying to sell it, but the negative publicity was hurting the brand. They decided to “bring back” some manufacturing, but, according to an article on www.wdrb.com, they were “losing hundreds of millions of dollars” on the operation. That was published 11/21/16. They have sold GE Appliances to Quingdao Haier – of China. Those jobs are headed back to China.

    Walmart’s plan to bring back $250 billion over 10 years - $25 billion a year — is a drop in the bucket. While some jobs are being brought back, amid much fanfare, thousands of others, lost to China, are not reported. As I recall, your own website admitted to a 7,000 job net gain. There is no net gain. We continue to bleed jobs to China, and now, to India (Mahindra tractors), and even places like Pakistan (washcloths), and VietNam (candles.)

    We will never be able to compete with China. We should not have to. We should not be doing business with China at all. Our best bet is to follow Warren Buffett’s advice, and force a gradual reduction in our trade deficit.

    I admire your efforts, but I have been involved in this since the seventies, when union workers were paying $5 to take turns smashing a Honda Civic with a sledge hammer. After 20 years in manufacturing, I spent another ten years with the Manufacturing Extension Partnership — trying to help U.S. manufacturers stay in business against the onslaught of Chinese competition. I finally realized that it was a hopeless situation. Our greedy, incompetent government has sold us out. Eventually, ALL of our manufacturing jobs will be gone, and China will eventually own us, unless we get a government that cares about the American people.
  • Bruce,
    Thanks for asking.
    We have tracked about 330,000 mfg. jobs brought to the U.S. thru reshoring and FDI from 2010 to 2016. A sample of the cases can be seen in slide format at http://reshorenow.org/companies-reshoring/. All can be accessed via our Library http://reshorenow.org/library-search/. Walmart is the largest driver of reshoring with their commitment to buy $250 billion more U.S. products over ten years.
    Our data suggests that about 25% of what is offshore would come back if companies would do the math correctly. To get more back requires major field leveling.
  • Harry,

    Thanks for your response. Can you point me to a list of “jobs brought back?” What products? What companies? I have attempted to investigate all of the “Made in America” websites, but all I have found are dead ends, or very expensive items (a replica of the 1911 Colt 45 for $5,000), or tiny 10 person T-shirt shops that couldn’t supply one Walmart. The much ballyhooed “Made in USA” products — like ShopVac — are mostly Chinese components — boxed in the USA.

    I do not believe there is any way for us to compete with China — nor should we have to. We should not be doing business with China at all. Have you read Peter Navarro’s book “Death by China?”

    Best regards,

    Bruce Bishop
  • Bruce,
    1. Your comments bear no relationship to mine. I wrote that the high USD is one factor causing the large wage gap. Nothing about “15% of cost.”
    2. I have been in manufacturing fro 50 years. The Reshoring Initiative has made great progress in bringing jobs back
    3. On the subject of competing with China, the right combination of much lower USD and regulations, much better skilled workforce, use of TCO for sourcing decisions, VAT or BAT would bring much of the work back from China.
  • Harry Moser,

    With due respect, the Foxconn workers in China who built your iPhone, work 16 hour days, six days a week, for about $240 per month. Do the math! That is a helluva lot more than a 25% advantage.

    The people who dismiss China’s labor advantage as “only 15% of cost” have never worked in manufacturing, or been involved with product costing, or considered the significance of wages and salaries in the cost roll-up of any product.

    What the “experts” overlook is that China’s advantage is not only “cheap labor,” but cheap everything. The major component of all product costs is “labor, or salaries,” all of which are much cheaper in China. Material, overhead, energy, and transportation, are all much cheaper in China, because the people who provide these things work just as cheaply as the “labor” on the assembly line.
  • A simple two-slice toaster, made in USA, costs about $250. That same toaster, made in China, and available at Walmart, costs $25. All of China’s costs — material, labor, overhead, energy, and transportation — are about one-tenth of our costs. China’s biggest advantage is in “compliance,” which is essentially zero in China. The thousands of regulations, that all cost money in the U.S., are nonexistent in China. China has zero regard for the environment (EPA), human rights (EEOC), or worker safety (OSHA), whereas our manufacturers are constantly harassed by our government — at all levels — with a growing and increasingly burdensome pile of regulations.

    We can never compete with China — no matter how much we argue about “currency manipulation” or tariffs. We could cut the dollar in half, and charge a 100% tariff on every import, and we still couldn’t compete with China.

    We should not have to compete with China. Communist China is a criminal enterprise. We should not be doing business with China at all, much less be allowing China to steal our technology, our intellectual property, and our jobs. China is draining our wealth and our economy, not for the benefit of her citizens, but to build up her military and to enrich the honchos of the Chinese Communist Party.

    Peter Navarro — (yes, that Peter Navarro) Trump’s trade guru — and Greg Autry published an excellent book entitled “Death by China.” It has been made into a documentary — video free on Youtube. Here is a link to the trailer. https://www.youtube.com/results?search_query=death+by+china+trailer

    Communist China is destroying us — without firing a shot. Anyone who doesn’t get this is clueless — including many journalists, academics, politicians and economists. If you take the time to read, or watch “Death by China,” you will be better informed than most of the above, and you will realize that you are a nationalist, not a globalist.
  • I agree 100% re MAC.
    I would not position high U.S. currency and low offshore wages as totally separate factors driving the trade deficit. The USD being 25% too high makes offshore wages about 25% lower than they would be with a correct USD value. Thus the two factors are tightly linked.