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!

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