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The Business Case for Rebalancing Trade to Grow Jobs and the Economy

The US imported $500 billion more goods and services than it exported last year. We are the biggest trade deficit country in the world, absorbing the oversupply of a few major countries such as China, Germany, Japan and South Korea (surplus countries). This causes US growth stagnation, wage stagnation, under employment and an eroding middle class. ASBC member businesses struggle more than they would if the economy, wages and consumer spending were growing.

Because there is so much misinformation in the press, I would like to give you a structure to think about trade. First, the volume of overall trade results from growth in the underlying national economies. If the world economy is growing, global trade volumes grow. If the world economy goes into recession, trade contracts.

Second, the balance of global trade depends primarily upon exchange rates adjusting to trade balancing equilibrium prices so no countries are persistent surplus or deficit countries. Third, the composition of what a country trades is impacted by relative cost advantages in labor, capital and technology. Those cost advantages can be artificially engineered by strategic government policy in the form of subsidies, tariffs and tax breaks.

When the press talks about trade wars, trade retaliation and protectionism stopping trade, they are simply wrong. Aside from the fact that trade wars do not and cannot exist, an issue for another day, they would only impact the composition of trade. Trade retaliation against US beef or German cars would simply shift the imports and exports to other products. The volume of trade and the balance of trade would remain stable.

Persistent global trade imbalances are the big issue today, causing increased rejection of the international trading system. The surplus countries over produce, under consume and export their oversupply to deficit countries. They excessively rely upon foreign (often American) consumers for growth. Surplus countries also export their unemployment to deficit countries. Figure 1 illustrates the imbalances among the major economies. Figure 2 shows the biggest US bilateral trade deficit countries.

Figure 1: Current Account Balance as Share of GDP

Figure 2: Top 10 US Trade Deficit Countries

Trade agreements are surprisingly irrelevant to trade balance. Contrary to what you read in the New York Times or Wall Street Journal, there is little correlation between the existence of a trade deal and improved US trade balance performance. The Trump administration is focusing upon trade agreements and trade law enforcement. There are reasonable grounds for doing so, but fixing the US trade deficit is not one of them.

Exchange rates are the biggest problem because they have lost their connection with trade balancing equilibrium pricing. If a country’s currency is persistently undervalued, it will have a trade surplus because exports are more price competitive and imports are more expensive. Overvaluation makes exports expensive and imports cheap, regardless of whether its businesses and workers are productive.

CPA recently quantified currency misalignment using the same methods as the International Monetary Fund, with modifications. Figure 3 shows the astounding results.

Figure 3: Major Currencies Under/Overvaluation May 2017

The surplus countries in Figure 1 are the undervalued currency countries in Figure 3. Conversely the deficit countries in Figure 1 are the overvalued currency countries in Figure 3. Surplus countries enjoy full employment and strong growth because they rely both on domestic consumption and foreign consumption. Deficit countries suffer from under-employment and stagnation because, on net, their aggregate consumer demand leaks to surplus country producers.

The US dollar is astoundingly overvalued by 25.5%. This is a 25.5% export tax on US-made goods and services. It is a 25.5% import subsidy for foreign goods and services entering our market. US producers can be, and are, very productive but are denied fair market share by the bloated dollar price.

Currency manipulation (strategic central bank intervention in foreign exchange markets) by China and other countries has ebbed since 2014. But currency misalignment persists because foreign exchange markets have lost their connection with trade balancing equilibrium pricing.

Dollar overvaluation is now caused by massive inflows of foreign capital seeking relatively high US interest rate returns or simply to store wealth by buying dollar denominated assets. My organization, the Coalition for a Prosperous America, has recently opted to support a solution called a Market Access Charge (MAC), a charge on foreign capital inflows seeking dollar assets. The charge would start low, at 50 basis points, and increase every six months until dollar prices start moving downwards towards an equilibrium price. If and when the US achieves balanced trade, the MAC would disappear.

The IMF has approved of tools like the MAC to control the massively disruptive sloshing of capital across the world that can destabilize economies. The Federal Reserve currently uses a variable interest rate charge called the Federal Funds Rate to control the supply of money within the US. The MAC is a similar tool to control the oversupply of foreign incoming capital. it is a solution the US can lawfully implement unilaterally without negotiating with countries that benefit from currency misalignment.

ASBC member businesses’ growth is severely hampered by the strong dollar. Our companies are prevented from establishing competitive export prices for goods or services. Or they are harmed by artificially low price import competition. Or they are harmed by general economic stagnation and depressed consumer buying power.

ASBC should consider supporting solutions, like the MAC, to eliminate currency misalignment forever. The balanced trade that results will spur wage growth, economic growth, and broadly shared prosperity.

Michael Stumo is the CEO of the Coalition for a Prosperous America