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A More Competitive Dollar Would Boost US Manufacturing

Oct. 7, 2020
The rising dollar--35% in the past nine years--makes U.S. exports more expensive overseas.

In March, the Federal Reserve was forced to act in order to avert an international financial crisis. With corporations around the world closing down at the start of the COVID-19 crisis, payments from customers stopped. Foreign companies needed funding to meet their obligations. But they found banks suffering an acute dollar shortage. At the same time, large investment funds were trying to sell off stocks and bonds in order to buy U.S. assets. All of this sent the dollar’s exchange rate soaring.

In mid-March, and with the dollar having climbed 7% in mere days, the Federal Reserve announced it would provide $450 billion in credit to central banks throughout the world. In late March, the Fed again stepped in to provide cash dollars to emergency sellers of U.S. Treasury bonds.

Overall, the crisis highlighted the huge size of the dollar economy outside the United States. It’s estimated that non-U.S. banks hold $12.4 trillion in bank deposits of U.S. dollars—almost equal to the $13 trillion in deposits held by banks within the United States. And international markets now hold a total of $86 trillion worth of currency swaps—a sum four times the size of the U.S. economy—as financial investors hold huge amounts of dollar assets.

All of this demand for U.S. dollars, stocks, and bonds has consistently driven up the dollar’s value. Over the past nine years alone, the dollar’s trade-weighted exchange rate index has risen 35%.

This is a major problem for domestic manufacturers since it makes U.S. exports more expensive overseas—and also makes imports cheaper in the U.S. market. The result has been a progressive deindustrialization of the U.S. economy—with the United States losing roughly 5 million manufacturing jobs in the past 20 years.

Domestic manufacturers and agricultural producers are urgently seeking a more competitive dollar. In response, Senators Tammy Baldwin (D-WI) and Josh Hawley (R-MO) introduced a bill in 2019 that would create a “Market Access Charge” (MAC)—a transaction fee on foreign investors seeking U.S. dollars and financial assets. Their legislation would task the Federal Reserve with setting this fee at a level sufficient to reduce foreign dollar demand—and bring the dollar back to a competitive level. The goal would be to help eliminate America’s staggering goods trade deficit, which reached $854 billion last year.

Our organization, the Coalition for a Prosperous America (CPA), just completed a study of the MAC legislation. We found that a MAC fee of 5% on foreign purchases of U.S. financial assets could reduce the dollar’s value by 27%. Doing so could rebalance U.S. trade within five years.

This would provide a major boost for America’s factories and farms. The stimulus to the economy would lift Gross Domestic Product (GDP) by 4.6 percent in that time—adding roughly a trillion dollars to the domestic economy. This would help to create an additional 4.9 million jobs, including 1.7 million in the manufacturing sector. It would also raise $300 to 600 billion of new revenue for the U.S. Treasury—all paid by foreign investors.

Some have speculated that reducing foreign capital inflows could raise U.S. interest rates. But our model found that interest rates would rise by just fourteen-hundredths of a percentage point. The rise would be extremely small because the U.S. is far less dependent today on foreign purchases of U.S. Treasury debt than a decade ago. However, the Fed could always take offsetting action to lower interest rates through its customary monetary policy.

The point of the MAC is to add an additional tool to the Fed’s armory—and address America’s trade imbalance by realigning the dollar to a value that creates a level playing field. That could return the U.S. economy to the robust growth rates seen prior to 1971—when a stable dollar played an important role in making America competitive against imports.

A competitive dollar can play a huge role in restoring the strength of the U.S. economy. And if the huge dollar swings seen at the start of the COVID pandemic offer a helpful lesson, it’s that Federal Reserve intervention should be able to help America’s domestic producers, not just overseas investors.

Jeff Ferry is chief economist at the Coalition for a Prosperous America. 

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