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!

June 18, 2017

MAC - Expert References

This post provides a list of key explanatory posts about the MAC appearing on this website, plus selected references made by other economic experts to the MAC since the beginning of this year.

Key Explanatory Notes on the Market Access Charge

This website provides over 50 posts on the MAC's design, the reasons the MAC is needed, and the MAC's probable benefits for America. The most useful and most frequently visited are the following:
How the MAC Would Help Restore American Manufacturing
Currency Manipulation or Currency Misalignment
Make the Better Way Even Better
Of these, the first provides the best overall view of the MAC's purpose, design, and implementation.

Expert References

Since the beginning of 2017, the following references to the MAC by other experts are particularly relevant:

2017.01. Robert E Scott. Growth in U.S.–China trade deficit between 2001 and 2015 cost 3.4 million jobs. Here’s how to rebalance trade and rebuild American manufacturing. Washington: Economic Policy Institute.

 “John Hansen (2016), another distinguished economist, has proposed the imposition of an adjustable “market access charge,” a tax or fee on all capital inflows that would reduce the demand for dollar-denominated assets and hence the value of the currency. By revaluing the currencies of surplus countries, the U.S. trade deficit could be reduced by between $200 billion and $500 billion dollars, raising demand for U.S. exports. (Rebalancing the dollar would also help exports in the services and agriculture sectors.)”

2017.02. Jeff Ferry. Fixing the Bloated Dollar. Washington: Coalition for a Prosperous America.

"... Joe Gagnon ... is intrigued by another, even more radical proposal, called the Market Access Charge or MAC.  The MAC is the brainchild of economist John Hansen, now retired after a career at the World Bank. Hansen’s vision is for a charge, starting at 50 basis points (half of 1%) on inflows of foreign capital into U.S. financial assets. The one-time charge upon entry would be levied not on the interest but on the principal invested into U.S. assets. There would be no political debate required over which nations pay the MAC. They all would. The revenue flowing to the Treasury would be counted in billions of dollars.
The advantages of the MAC are that it is relatively easy to administer and it is highly likely to drive down the dollar. Most important, it demonstrates to the world that the U.S. is serious about making sure that its currency serves the needs of its domestic economy instead of the other way around.

2017.06. C. Fred Bergsten and Joseph E. Gagnon, Currency Conflict and Trade Policy: A New Strategy for the United States. Washington: Peterson Institute for International Economics.

“The United States could impose a transactions tax or a “market access charge” on new purchases of US assets by currency manipulators.”

2017.06. Daniel DiMicco, Brian O’Shaughnessy, and Michael Stumo. CPA Testimony for NAFTA Negotiations. Washington: Coalition for a Prosperous America.

"First, and most importantly, a capital flow management tool called the Market Access Charge (MAC) should be implemented to push the US dollar towards its trade balancing equilibrium rate, increasing U.S. exports and reducing imports. CPA’s recent analysis, using the IMF Fundamental Equilibrium Exchange Rate (FEER) method, corrected to target a zero current account balance in 5 years, shows the dollar is about 25.5% overvalued today."

2016.06. Bob Tita, "How to Revitalize U.S. Manufacturing," Journal Report: Future of Manufacturing, pp 1-2. New York: Wall Street Journal.

Although it did not appear in 2017, this expert reference to the MAC is well worth noting as it appeared in the Wall Street Journal. In the article, Mr. Tita noted:

"Lowering the value of the dollar is difficult, especially as long as foreign investors keep pumping their dollars into U.S. investments. John Hansen, a former economic adviser for the World Bank, has a solution that he says could keep a strong dollar from further swelling the trade deficit and discourage high-frequency, speculative trading by foreign investors in U.S. financial markets.
The idea: market-access charges. A base-rate charge of 0.5% could be applied on all foreign-originated inflows of money into U.S. investments. The rate would gradually climb to about 2%. Further increases would be linked to increases in the trade deficit, which is about 3% of U.S. GDP. If the deficit remains unchanged even with the fee, Mr. Hansen anticipates 0.25% increases in the fee every six months. When the deficit retreats, the fee would fall. The fee revenue could be used for government-funded research to help manufacturing."

America Needs a Competitive Dollar - Now!

April 15, 2017

US Treasury Currency Report:
Foreign Exchange Policies of Major Trading Partners
-- The Long-term Effects of China's Currency Manipulation

Tyler Durden of ZeroHedge has posted a very useful note on the Treasury’s latest foreign currency report here. Of the passages he highlights, the following provide particularly useful guidance for those formulating a new US trade policy for the 21st century:
"[China] has a long track record of engaging in persistent, large-scale, one-way foreign exchange intervention, doing so for roughly a decade to resist renminbi (RMB) appreciation even as its trade and current account surpluses soared. China allowed the RMB to strengthen only gradually, so that the RMB’s initial deep undervaluation took an extended period to correct."  
 "... distortions in the global trading system resulting from China’s currency policy over this period imposed significant and long-lasting hardship on American workers and companies"
These "significant and long-lasting hardships" are still with us today!

Although China is not manipulating its currency today and has not done so for about two years, China -- and the United States -- allowed the RMB to remain undervalued for so long that China’s manufacturing sector was able to increase its productivity sharply while hiding behind an undervalued currency. Because of the breakdown in the global exchange rate determination system, the RMB/USD rate failed to adjust in response to this productivity increase.[1]  Hence the "significant and long-lasting hardships" that America continues to suffer.

Conclusion: Any trade policies for the 21st century that Congress and the new Administration may develop should include a mechanism such as the Market Access Charge (MAC) that will correct existing currency misalignments – even if there is no active currency manipulation going on today.
[1]. This failure reflects the collapse of the classical link between exchange rates and balanced trade in the 1970s when exchange rates came to be set more by trade in capital assets than trade in real goods and services. (For more on this fundamental change that is central to America's trade deficits today, see  Exchange Rate Determination – The Paradigm Shift).

America Needs a Competitive Dollar - Now!

April 12, 2017

Would a MAC Harm America's Financial Markets?

"A MAC could cause chaos in America's financial markets."
True or False?

A reader asked the other day if introducing a MAC could seriously upset America's financial markets, thereby causing more harm than good.

This question can be addressed from several different perspectives such as interest rate levels, liquidity, and profitability.

Without doubt, the MAC could have an impact in each of these areas. For example, moderating the inflow of foreign capital will mean less capital circulating in US financial markets, and this could raise interest rates. However,  would be good rather than bad. Today's pathologically low rates today discourage savings, encourage speculative risk-taking, and facilitate wasteful expenditures. Raising interest rates gradually, as the MAC would do, would provide a "soft-landing" transition to a stable environment that supports sustainable real economic growth.

Likewise, moderating excessive capital inflows would reduce market liquidity, but excessive liquidity can hurt rather than help growth and stability as IMF studies  have shown. Furthermore, liquidity in America's financial markets, as proxied by the ratio of stock market capitalization to GDP or total credit market debt outstanding to GDP, is far higher today than it was when America was growing on average by three percent per year -- about 50 percent faster than it is growing today.

But these are issues for another time. Perhaps the best way to look at the probable impact of the MAC on US financial markets is to look at the impact of changes in the Fed Funds rate. This approach is very reasonable given that the MAC and the Fed Funds rate are similar in nature, purpose and size.


The Fed Funds rate is an interest rate. Without going into all the details, we can safely say that changes in the Fed Funds rate produce changes in the effective cost of capital circulating within the United States.

The nature and impact of changes in the MAC rate are directly analogous to changes in the Fed Funds rate -- both change the effective cost of capital in America's financial markets.


The Fed Funds rate and the MAC are both designed to moderate the demand and supply of capital. The Fed Funds rate affects capital circulating within the United States, while the MAC provides its long-missing counterpart, a tool needed to moderate the demand and supply of foreign-source capital.

The Fed Funds rate moderates the domestic flow of capital by changing the cost of borrowing.[1]  The MAC moderates the inflow of foreign capital by changing the cost of borrowing from abroad.  

By making foreign-source capital slightly more expensive to US borrowers, the MAC encourages borrowers to obtain capital from domestic rather than foreign sources.  Conversely, by leaving foreign lenders with a lower net return, the MAC reduces the inflow of foreign capital, thereby reducing upward pressures on the dollar's value. Highly analogous to the impact of changes in the Fed Funds rate.


In addition to being similar in purpose, the size of proposed periodic changes in the MAC and actual changes in the Fed Funds rate over the past several decades are similar.

The Fed Funds rate normally changes in increments of 25 to 50 basis points, which is the same as that recommended for the MAC. [2]  As the MAC is very similar in design to the Fed Funds rate, it is reasonable to predict that the impact of changes in the MAC rate on domestic financial markets will be essentially the same as that of similar changes in the Fed Funds rate. On this basis, we can draw the following conclusions regarding the probable impact on US financial markets of implementing a MAC:

  1. The Fed Funds rate has been in operation for decades. During this period, rate changes have occasionally caused larger-than-normal fluctuations in the short term, but they have never created a crisis in US financial markets. Quite the contrary, changes in the Fed Funds rate have continued to be used for over sixty years precisely because they help prevent market instability and crises.
  2. The MAC would serve as a vital complement to the Fed Funds rate, helping prevent havoc like the housing and stock market bubbles that ended with the Crash of 2008. These crises, by the way, were caused to a very significant degree by excessive foreign capital inflows.
  3. The size of periodic changes in the Fed Funds rate and those proposed for the MAC charge are identical. Since changes in the Fed Funds rate have never wrecked havoc with America's financial markets, there is no reason to think that changes in the MAC would.
  4. Changes in the MAC rate would be made for the same reason as changes in the Fed Funds rate -- to "take away the punch bowl" whenever US financial markets become overheated. Traders who make their living from the market -- and who make the most when the market is "hot" -- rarely like to see the punch bowl removed. But taking away the punch bowl strengthens and stabilizes markets -- it does not wreck havoc.
Introducing a MAC would certainly change the status quo. In the process, some groups will benefit more than others.We know what groups benefit most from hot markets and overvalued dollars. We know what groups are seriously harmed by hot markets and overvalued dollars.

In the end, we Americans must decide if our country is best served by assuring out-sized profits for those engaged in speculative trading, a portion of the economy that adds relatively little to real output, or if it is better served by assuring the competitiveness of America's factories, farms, and other directly productive activities.

 [1] For simplicity, "borrowing" as used here covers obtaining money through both equity and debt transactions.
[2] Since 1990, 70% of the changes in the Fed Funds rate have been 25 bp and an additional 26% have been 50 basis points. The remaining 4% have been changes of 75 bp.

America Needs a Competitive Dollar - Now!

April 7, 2017

Germany has parlayed its Eurozone membership into massive trade surpluses.

When challenged about their massive trade surpluses, the Germans seem to enjoy hiding behind the euro -- “whose value they cannot control.” Meanwhile, they hold down domestic wages and prices, effectively devaluing the euro within Germany against the euro for other European countries.

If the Eurozone countries had implemented a Market Access Charge (MAC), the Eurozone Crisis might well have been avoided, or at least significantly reduced.

The German “vendor finance” that flooded into Europe’s southern periphery countries prior to 2008 drove wages and prices sharply higher in these countries. As their goods became less competitive with imports and as exports, increasingly large current account deficits and foreign debt liabilities emerged.

This cross-border flood of German credit may have been engineered as part of Germany’s aggressive export policies. But a key element was the large spread between interest rates in Germany and those in its neighbors to the south within the eurozone, a spread driven primarily by Germany’s exceptionally high domestic rate of savings and the consequent surplus of domestic capital.

For example, the average spreads over German rates for Spain and Italy averaged 3.3 percent between 2011 and 2013 (see chart below). Adding Greece to the unweighted average would raise the spread to an astounding 6.9 percent.

As Maastricht criterion long-term bond yields (mcby) in Germany averaged only 1.9 percent during this period, German bankers lending to the southern European countries earned returns 1.7 to 3.7 times higher than at home. Such spreads proved irresistible, especially when the German banks’ perceived risks of currency mismatch and default were close to zero.

If each Eurozone country had implemented a MAC when the so-called “common currency area” was created, MAC charges would have been triggered in the southern tier nations as soon as their trade deficits reached one percent of GDP.  Although an initial MAC rate of 25 to 50 basis points would not have had an immediately tangible impact on cross-border lending, the market access charge would have made Germany’s bankers think twice about the rising risks of lending to such markets.

Over time, with semi-annual increases of 25 to 50 bp, the combination of falling net yields and rising risk perceptions would have slowed the flow of capital from Germany into these countries. After two or three years, this process would have moderated foreign credit inflows, thereby reducing inflation sufficiently to return domestic prices and wages to more competitive levels.

In this way, country-specific MACs within the EZ might well have prevented or significantly reduced the impact of the Eurozone crisis that came about largely because of excessive intra-zone, cross-border capital flows.

I would be the last to claim that a policy tool such as the MAC would be sufficient to solve the Eurozone’s problems. The problems there are extensive, complex, and deeply ingrained. Policy initiatives on multiple fronts will be needed. Establishing banking and fiscal authorities with executive powers over the individual countries to assure policies consistent a common currency would clearly be required, and policy reforms going far beyond these basics will also be needed, especially in countries like Greece.

Nevertheless, I would suggest that, even today, introducing a MAC in each of the European countries could make a major contribution to establishing the conditions needed to maintain the unity and viability of the Eurozone. While not sufficient by itself, the MAC may well be necessary.

The European problems of trade imbalances, unemployment, deindustrialization, and social/political polarization are similar, both in nature and in cause, to those we face here in America,.

Think, for example, of the problems that led to the Brexit vote in the UK and to the presidential election results in America’s industrial heartland. Furthermore, recall that excessive cross-border capital flows have been a major cause of the current crises both in America and in Europe.

Consequently, what we learn here about managing such flows can be of great use to other countries that face social and economic problems caused by excessive cross-border credit flows.

America Needs a Competitive Dollar - Now!

March 22, 2017

Mnuchin’s Mission by Jeffrey Frankel
A Brief Comment on China and US Currency Values

In an excellent note on Project Syndicate today entitled Mnuchin's Mission, Jeffrey Frankel wisely noted:
"Fortunately, Mnuchin has so far avoided fulfilling one of Trump’s irrational promises: to label China a currency manipulator on his first day in office. The next opportunity to take that step comes in April, when the biannual Treasury report to Congress is due. Mnuchin should let it pass."
We should be grateful to Professor Frankel for pointing out a truth that far too many people in Washington and in America refuse to accept:
China is NOT a currency manipulator today and has not been for at least the past two years. 

March 3, 2017

Tools for Balancing American Trade -- The MAC is Best

A variety of measures are currently on the table to solve eliminate U.S. trade deficits including tariffs, border-adjustable taxes, and various currency related measures. Each of these tools is needed for specific tasks. However, the Market Access Charge (MAC) is the best tool for providing the overall foundation of an equilibrium exchange rate that balances total trade.

Conventional Measures 

General tariffs, used as a threat, can be a useful bargaining tool. However, such tariffs are illegal, do not solve the dollar’s fundamental overvaluation, can easily trigger destructive trade wars, tend to escalate as interested parties argue their case for preferential treatment (i.e. higher tariffs), and adjustments as global realities change require politically-charged discussions.

Countervailing and anti-dumping duties are legal, provided specific conditions are met, and can be a very useful remedy for specific products, but they affect such a small part of total trade that they cannot fix the dollar’s overvaluation.

Border-adjustable taxes (BATs) have been proposed in the Ryan/Brady “Better Way” plan are not exactly “conventional” tariffs, but share many of the same characteristics: they are probably illegal, have encountered stiff resistance even within the Republican Party because of the negative impact on importers, would make dollar’s overvaluation even greater rather than fixing the overvaluation, and, like ordinary tariffs, provide no exit strategy.

Once in place, America would be forever dependent on BATs. Furthermore, they have no self-adjusting mechanism to respond to changes in relative global prices and productivity levels. The one advantage of BATs over normal tariffs, which tend to be recessionary because they only suppress imports, is that they subsidize exports. However, this involves a serious loss of potential budgetary revenues, making balancing the budget while supporting necessary investments in infrastructure, for example, even more difficult.

Market Access Charge (MAC) 

The MAC overcomes all the problems of conventional measures. It works quickly. It solves the underlying problem – the dollar’s overvaluation. It encourages the domestic production of expanded exports as well as of import alternatives. It generates billions of dollars of net revenues that are derived, not from the average American family, but from foreign speculators and from increased U.S. economic activity that would not have taken place had the MAC not been implemented. And it automatically adjusts to changing global realities without need for political intervention. (For details on the MAC mechanism, see here.)

America Needs a Competitive Dollar - Now!

February 20, 2017

Fixing the Bloated Dollar - Guest Blog by Jeff Ferry of CPA

Jeff Ferry, Research Director for the Coalition for a Prosperous America, recently published an excellent discussion paper on options for fixing the overvalued dollar, one of America's most serious trade problems today. Not only is the Market Access Charge (MAC) among the options listed. It is given top marks.

The CPA has kindly agreed to let us re-post Jeff's paper here on the Americans Backing a Competitive Dollar (ABCD) blog site. Enjoy!
February 14, 2017
By Jeff Ferry
Research Director, Coalition for a Prosperous America [1]

Fear is growing that a rising dollar could sabotage any effort by the Trump Administration to improve the U.S. trade balance as a means of improving the health of our manufacturing industry.

Commentators have suggested that the prospect of rising interest rates and higher U.S. economic growth, combined with any moves to boost net exports, could quickly lead to a rising dollar, throwing improvements in the trade balance into reverse. But there are bold, new solutions to get the overvalued dollar under control, including a plan to charge foreigners a fee to hold dollars, known as a MAC, that the government should consider.

The U.S. needs to address what could be called “macho dollar syndrome,” the belief that a strong dollar is somehow good for the U.S. economy. In reality, a strong dollar makes our exports more expensive, our imports cheaper, thus leading to a larger trade deficit, slower economic growth, and fewer jobs. That dynamic has been taught in introductory economics classes for years.

You can see the living proof simply by looking at Britain’s economic performance in the second half of last year. In June, the Brits voted to leave the European Union. The pound sterling promptly fell 15% as speculators worried about turmoil and trade agreements. The fall in sterling boosted British exports (up 18% year-on-year), leading to a significant uptick in economic growth in the fourth quarter, enabling Britain to finish 2016 with annual growth of 2.0%, the highest growth rate among the G-7 group of large countries.

Recently, some have shown renewed enthusiasm for labeling some of our most mercantilist trading partners currency manipulators. Senate Minority Leader Charles Schumer (D-NY) urged the president to put the label on China. The “currency manipulator” label, under current law, triggers dialogue with the offending country which could lead to further action at the discretion of the president.  The problem with this approach is that persistent Chinese currency manipulation has ebbed recently. According to an October report from the U.S. Treasury, China actually spent $566 billion pushing its currency up not down.

For an economist, “currency manipulation” is better understood not as direct intervention in exchange rates, but as policies that prevent a nation’s trade balance from balancing over a full economic cycle (typically 5-7 years).  According to economist Brad Setser, East Asian countries are managing today their economies to save as much as 40% of their GDP, contributing to their trade surpluses and our trade deficits.  Last October, Setser wrote: “The problem of the global savings glut is now more acute than in 2005…The social costs—and therefore also political costs—of relying on the United States and a few other countries as consumers of last resort are increasingly evident.”

A novel idea to address dollar overvaluation was advanced by Joe Gagnon and Gary Hufbauer of Washington’s Peterson Institute in a 2011 article, Taxing China's Assets.The core of the proposal was a 30% withholding tax on the interest paid on the holdings of U.S. financial assets by entities based in nations the U.S. deemed persistent surplus nations. The benefits of the proposal are that it would exert downward pressure on the dollar (and upward pressure on the renminbi), and it would make it plain to the Chinese and other surplus nations that they are not doing the U.S. a favor by buying our Treasury bonds. On the contrary, they are enabling their economies to grow at our expense, and we would much prefer they increase domestic consumption rather than rely upon U.S. consumers for growth.

The biggest problem with the Gagnon-Hufbauer withholding tax is that it raises an enforcement challenge because it creates incentives for foreign investors to disguise their country of origin. For that reason Joe Gagnon himself is intrigued by another, even more radical proposal, called the Market Access Charge or MAC.  The MAC is the brainchild of economist John Hansen, now retired after a career at the World Bank. Hansen’s vision is for a charge, starting at 50 basis points (half of 1%) on inflows of foreign capital into U.S. financial assets. The one-time charge upon entry would be levied not on the interest but on the principal invested into U.S. assets. There would be no political debate required over which nations pay the MAC. They all would. The revenue flowing to the Treasury would be counted in billions of dollars.

The advantages of the MAC are that it is relatively easy to administer and it is highly likely to drive down the dollar. Most important, it demonstrates to the world that the U.S. is serious about making sure that its currency serves the needs of its domestic economy instead of the other way around.

* * *
Thanks, Jeff. A great message of support for the MAC.

- - - - -
[1] The Coalition for a Prosperous America (CPA) is a nonprofit organization representing the interests of 2.7 million households through its agricultural, manufacturing and labor members. The CPA is working hard to working for a new and positive U.S. trade policy that delivers prosperity and security to America.

America Needs a Competitive Dollar - Now!

January 18, 2017

Foreign Direct Investors will Love the Market Access Charge (MAC)

Would the MAC discourage foreign direct investment in the United States? 

Some readers have suggested that capital being brought into the United States to finance greenfield foreign direct investment should be exempted from the MAC. We should not, they argue, do anything to discourage productivity enhancing investment in America's manufacturing sector, for example.

Although the MAC is explicitly designed to cover all incoming capital, the MAC will not adversely affect greenfield investments. In fact, the MAC will make foreign direct investments in productivity-increasing projects based in the US far more attractive.

January 13, 2017

Make the "Better Way" Even Better
Add Exchange Rate Reform

                                                                                                                                                     John Hansen

Today we propose a new tax code built for growth -- for the growth of paychecks, for the growth of local jobs and economy, and the growth of America’s economy.”           
Kevin Brady

With these words, Representative Brady, as Chair of the Ways and Means Committee and leader of the Tax Reform Task Force, unveiled A Better Way for tax reform.

The Better Way notes that a Made in America Tax (MAT) puts American-made goods and services at a severe competitive disadvantage. The MAT exists because U.S. exports face two tax burdens not borne by the exports from most foreign countries: First, made-in-America goods must compete in U.S. markets with imports that are not similarly taxed. Second, when U.S. goods are shipped to foreign markets, they must pay the VAT charged by those countries.
To fix the Made in America Tax problem, the Better Way plan suggests a border-adjustable tax (BAT) that would exempt American exports from paying the “company tax” proposed in the Better Way to substitute for the current corporate income tax. It also proposes that America effectively impose a tariff-like charge on imports from foreign countries based on the company tax rate.
Although the BAT holds considerable promise, it also contains a potentially serious risk. As its proponents, have noted, the border taxes would serve as tariffs. As such, the proposal has been challenged by those concerned that the tariffs would raise the price of imports, hurting U.S. consumers of both finished and intermediate goods. Also, the BAT may conflict with WTO rules.
However, the proponents argue that the tariff effect of the BAT would be offset by appreciation of the dollar, leaving no net change in the dollar cost of imported goods to consumers.  This is sound thinking according to economic theory. However, this exchange-rate / tariff offset raises two other concerns. First, why are we considering a measure that will make the overvalued dollar even more overvalued? Second, what if the dollar valuation offset to tariffs overshoots the mark.
If the offset mechanism works, at least the dollar’s overvaluation will be no worse than it is today, but on the other hand, the BAT does nothing to make U.S. production more competitive against imports. Furthermore, if the exchange rate rises in line with the BAT rate, the BAT exemption on exports will be offset by the higher exchange rate. 

The Market Access Charge as a Complement to the Better Way

Given these problems with the BAT, I would suggest that, while considering ways to avoid the Made in America Tax, Congress needs to eliminate an even more serious tax on American goods – the overvaluation of the dollar that creates an Overvalued Dollar Tax (ODT). With a Market Access Charge (MAC), the ODT tax can be eliminated in a way that generates revenues that would help finance both a reform of the corporate tax system and the urgently-needed infrastructure problem proposed by the Trump Administration.
Data from the Peterson Institute for International Economics and the Federal Reserve indicate that the U.S. dollar is overvalued by about 35 percent today. Unlike the corporate tax, which is basically a tax on a company’s often small profits, the overvalued dollar tax is a tax on 100 percent of the final selling price of all US goods. Consequently, the Overvalued Dollar Tax can impose a far larger burden on corporate profitability than the corporate profits tax.
The overvalued dollar weakens the competitiveness of American producers both at home and abroad. In the short run, this weakness is often papered over with money borrowed from abroad to cover the deficits caused by America’s booming demand for “cheap” foreign products. But in the medium term, the dollar’s overvaluation makes American producers less competitive, less profitable, less able to maintain U.S. jobs, and less inclined to undertake the investments in real productivity urgently needed for America’s long-term strength and greatness.
The primary cause of the dollar’s massive overvaluation is an excessive inflow of capital from foreigners seeking profits by purchasing dollars and dollar-based assets in America’s attractive financial markets. Most of these flows go into trading that does little or nothing to improve the physical productivity and international competitiveness of America’s manufacturing sector.
Adding a Market Access Charge (MAC) to the Better Way proposal help resolve this problem. A modest MAC would be assessed on foreign capital inflows whenever the dollar was significantly overvalued as indicated by a trade deficit exceeding one percent of GDP. The MAC would reduce net returns to foreign investors ­ especially foreign speculators. With a MAC in place, foreign demand for dollars and dollar-based assets would moderate, and the dollar would gradually move back to its trade-balancing equilibrium exchange rate. Note that foreign traders, not Americans, would pay the MAC charges!

A trade-balancing equilibrium exchange rate would increase domestic and foreign demand for made-in-America goods, accelerate growth, and create more jobs with higher wages. Higher growth would mean larger tax revenues – even if tax rates were reduced as proposed in the Better Way plan. Thus, adding a Market Access Charge to the reform package proposed by Chairman Brady and his task force would make it easier to balance the budget  – while simultaneously increasing critical investments in our nation’s infrastructure and reducing the national debt.

In sum, a Market Access Charge (MAC) would be an invaluable component of the Better Way strategy because it would:
  1. Increase the competitiveness and thus the profitability of U.S. companies – by about three times as much as would a border-adjusted tax.
  2. Move the dollar closer to its trade-balancing equilibrium exchange rate. (The BAT could actually raise the dollar’s value, making U.S. goods less rather than more competitive.)
  3. Stimulate the growth of well-paying jobs throughout the economy and reduce the incidence of poverty in our great nation.
  4. Fix the key underlying problem causing the decline in America’s competitiveness – a seriously overvalued dollar.
  5. Comply fully with WTO, IMF, and U.S. Government rules, laws, and agreements – thereby avoiding the WTO problems that face the border-adjustable tax proposal.
  6. Stabilize the financial sector, thereby reducing the systemic risk of major disasters such as the Crash of 2008. This might even make it possible to reduce the sector’s regulatory burden.
  7. Make important contributions to balancing the budget while providing a solid basis for reducing tax rates significantly, simplifying America’s broken tax code, and improving essential government services. 

For more on the Market Access Charge (MAC) and related issues, see the blog site Americans Backing a Competitive Dollar (www.abcdnow.blogspot.com).

March 23, 2017 (rev.)

John Hansen, PhD          Former World Bank Economic Adviser            hansenj@bellsouth.net
Founding Editor              Americans Backing a Competitive Dollar       www.abcdnow.blogspot.com

January 11, 2017

Would US Tax Treaties Need to be Changed to Implement the MAC?

Would existing US tax treaties have to be changed before a Market Access Charge (MAC) could be implemented? The simple answer is, no.

U.S. tax treaties focus on income taxes, and the Market Access Charge (MAC) is not an income tax. The MAC is a user fee, and there is no evidence that user fees are subject to international treaties.

The facts that the MAC is not an income tax, not a tariff, and not germane to merchandise trade appear to remove it completely from the jurisdiction of all US tax and trade treaties. Thus, no conflict.