Tuesday, December 6, 2016

Strong Dollar. Who are We Going to Blame Now?

President-elect Trump rode into Washington on a horse named Unfair Competition. One part of the story is how other governments manage their currencies so as to gain a competitive advantage against the US. And while I agree that countries sometimes do that, such currency manipulations are not among the dominant forces now. If anything we in the US are the one’s causing our manufacturers to lose competitive advantage.

Why worry? Or was that What me Worry? Regardless, in the last month (between November 4 and December 2) the dollar went soaring. It rose in that short time by more than 10% against the Japanese yen and 8% relative to the Mexican peso. It rose by about 5% against the euro and the Brazilian real and by lesser amounts against the Korean won and the Chinese renminbi. It held steady against the Canadian dollar. When the dollar rises by such large amounts US exports are less competitive in global markets. So we fret. This puts US exporting companies at a disadvantage. Clearly the bad guys must have done this to us!

But alas, I don’t think that is true. Most experts are saying that we did it to ourselves. Experts are saying that the Trump bump is making people more optimistic about the US economy. This optimism makes US assets like bonds and stocks much more appealing to investors. It also emboldens Ms Yellen and her band of Federalies to raise interest rates. Thus we are receiving a tsunami of attention from global investors who must first buy dollars so they can buy our very attractive assets. This revived love of dollars means a higher value for the dollar.

This is not a trick played on us by evil China or Mexico. The negative impacts on US exporters are because investors have concluded that Trump will be good for the US economy – at least for a while. Even before this latest wave of foreign investment, the world marveled at how the US recovered after the global recession while other countries continued to struggle. This has been lifting the dollar for some time and has made life difficult for US exporting companies. During the last two years the dollar rose by 13% against the renminbi. It also rose by 8% against the yen and by almost 30% against the euro. 

This doesn’t look like unfair currency manipulation to me. It has more to do with US policy and economic performance. It is market forces working in a global economy.
So maybe we should dispense with the unfair competition talk and ask ourselves what we really want. If the "experts" are correct, then it appears that the best way to help US exporters is to do something to make the US weaker and grow more slowly. But that is tantamount to throwing the baby out with the bath water.

Instead, if we really want to help our exporters, we ought to have policies that do not weaken our trading partners. When they get stronger they will buy more – and some of that extra spending will be directed toward US goods and services. Slapping tariffs on goods we import from key trading partners will do nothing but weaken them, make the dollar stronger, and smack our exporters. Are you sure that’s what we want to do?

One last point. The last time I looked it took two to tango. It also takes at least two to do JD shots but that’s a different story. Trade is more than an export story. While the optics are vivid with respect to exporters and their workers – countries gain with strong imports and with strong inbound and outbound investment. Keep in mind that when the dollar appreciates and negatively impacts exports – that same rise in the value of the dollar improves the situation for importers and makes foreigners more interested in investing in the US. Keeping in mind that many US imports are business goods that add to US productivity, a high and rising dollar is sometimes on net, a great boon to American business. The optics of the latter are less clear than the export story but nevertheless are important.

Summary: We should be alert to real rather than imagined unfair competition. Let's stop tilting at windmills. Competitive advantage of a country is determined by more than export sales. Policy should focus on the many avenues in which trade enhances American well-being. 

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