July 31, 2017

The Threat of U.S. Dollar Overvaluation:
How to Calculate True Exchange Rate Misalignment
     and How to Fix It

Cross-posted from:

This memo explains (1) the dollar overvaluation problem, (2) how to accurately calculate the dollar’s misalignment against trading partner currencies, and (3) how the Market Access Charge (MAC) that CPA and others favor would fix this serious threat to America’s future.

The foreign exchange value of the national currency should play the pivotal role in bringing excessive trade deficits (or surpluses) back into balance.
Unfortunately, however, exchange rates have lost their link with trade balancing equilibrium pricing. The graph below shows very problematic over and undervaluation of the currencies of the United States and its major trading partners.

We propose a new policy tool, the Market Access Charge (MAC), to move the dollar back to a competitive, trade-balancing exchange rate.

For remainder of the original article, click here.

For full data set showing derivation of exchange rate adjustments required for true-zero current account balances, click here.

America Needs a Competitive Dollar - Now!

July 7, 2017

World's Most Misaligned Currencies -
Dollar, Yen, and Euro for Germany

Any country that devalues their currency in order to take unfair advantage of the United States, which is many countries, will be met with sharply. And that includes tariffs and taxes. 

Candidate Trump, Pennsylvania, 6/28/16

Messages like this resonated with voters across the nation during the Presidential Campaign. "Foreigners are manipulating their currencies" and "currency manipulation is destroying American factories and jobs" have been the rallying cries. 

Currency manipulation has indeed created serious problems for the competitiveness of factories and farms across America, especially during the period 2003-2013, the "Decade of Manipulation" as Fred Bergsten and Joe Gagnon have called it in Chapter 4 of their new book, Currency Conflict and Trade Policy.  But we must keep in mind two very important facts. 

First, even during this period, private capital flows greatly exceeded public capital flows into the United States (Figure 1). There is no evidence that an open-market purchase of $100 billion of U.S. securities by the Chinese Government would have any more impact on the dollar's exchange rate than an equal purchase by Deutsche Bank AG of Germany. Thus, even during the "Decade of Manipulation," excessive private capital flows into the United States clearly had a larger impact on the dollar's exchange rate than did currency manipulation.

Figure 1

Second, the Decade of Manipulation ended about four years ago, but the US trade deficit still amounts to hundreds of billions of dollars per year because the U.S. dollar is still so sharply overvalued.

This note uses the latest data from the IMF and the Peterson Institute for International Economics (PIIE) to show (a) the severity of the dollar's overvaluation, and (b) the uniqueness of this overvaluation -- which is truly a one-of-a-kind situation for the entire world.

Among the currencies of the countries accounting for the large majority of US trade -- and almost all of its trade deficits, the dollar is the only currency that is significantly overvalued -- and it is overvalued by a massive 25.5 percent (Table 1, column 7). No wonder the US suffers serious trade deficits. [1]

Table 1

June 27, 2017

Can the US Have Balanced Trade with Mexico under a Renegotiated NAFTA?

Widespread discontent regarding America’s large trade deficits with Mexico is clearly the main force behind the U.S. Government’s desire to renegotiate the North American Free Trade Agreement (NAFTA). As President Trump said repeatedly during the campaign, 

       "Mexico is killing us on trade."

He reiterated that point in a recent tweet:
“The U.S. has a 60 billion dollar trade deficit with Mexico. It has been a one-sided deal from the beginning of NAFTA with massive numbers of jobs and companies lost.” [1]

Can NAFTA be renegotiated in a way that restores a better balance in trade between Mexico and the United States? 

The Big Mac and other Purchasing Power Parity Indices
- Use and Abuse

Does the "Big Mac Index" that The Economist regularly publishes indicate if a country's currency is over- or under-valued compared to the rate needed to balance its external trade? 

Far too often, the popular press -- and even serious policy makers --assume that this is true. However, neither the light-hearted Big Mac indices nor the very serious Purchasing Power Parity (PPP) indices have any significance in the context of determining if exchange rates are consistent with balanced trade. 

June 20, 2017

NAFTA - The Problem is the Dollar's Overvaluation,
Not Currency Manipulation by Mexico and Canada

Commentaries for the upcoming USTR hearings on NAFTA modernization from various labor and industry organizations have called for tough measures against currency manipulation.

Currency manipulation is of course a well-known hot-button issue and deserves to be addressed. But in the context of NAFTA hearings, this is simply the wrong focus.

To raise currency manipulation in the NAFTA context implies that Mexico and Canada are currently manipulating and undervaluing their currencies, thereby harming the United States. This is not true.

If a country has an undervalued currency, by definition it has an overall trade surplus with its global trading partners. However, as shown in the following graph, Mexico and Canada both run overall trade deficits.

In fact, for the past sixteen years Mexico has had an unbroken string of global trade deficits, averaging 1.7 percent of GDP, and Canada has had nothing but trade deficits since 2009, yielding an average trade deficit since 2000 of 0.7 percent of GDP. In 2016 alone, the respective deficits of Canada and Mexico were 3.7 percent and 2.7 percent. On average, their deficits are getting worse, not better.

How can we explain the fact that our NAFTA trading partners have been running significant trade surpluses with us, but despite these surpluses, their overall trade has been in deficit for years? The answer is very simple:

  • The currencies of Canada and Mexico are overvalued, but the U.S. dollar is even more seriously overvalued. 

The solution to our trade deficits with Canada and Mexico lies not in forcing them to revalue – that would leave them with even larger global trade deficits. The solution lies instead with reducing the dollar’s overvaluation – currently estimated at about 25 percent with respect to the rate that would balance U.S. trade.

Launching futile fights against currency manipulation that does not exist within NAFTA today will do nothing to solve America’s trade problems and could easily undermine progress in other area important to America's future.

Instead, the road to a prosperous future for all Americans lies with bringing the U.S. dollar to a fair competitive value and keeping it there. The  Market Access Charge (MAC) is the only tool that can accomplish this important task.

The MAC can make U.S. factories, workers, and products more competitive, both within America and in export markets, by removing the 25 percent tax on the selling price of all US industrial, agricultural, and other products currently imposed by the dollar's overvaluation with respect to the exchange rate that would balance US trade. Furthermore, the MAC would eliminate the 25 percent subsidy automatically granted to all imported products by the dollar's overvaluation.

I hope that organizations making oral presentations at the NAFTA hearings will make this point loud and clear.

America Needs a Competitive Dollar - Now!