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

Cross-posted from:

Coalition for a Prosperous America: Michael Stumo (CEO) Jeff Ferry (Research Director) and John Hansen (Advisory Board), July 2017

Introduction

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!

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.

Would the MAC be Legal under America's Bilateral Investment Treaties (BITs)?

Would the proposed Market Access Charge (MAC) be legal under America's Bilateral Investment Treaties (BITs). The answer is simple: Yes.

BITs generally follow a standard model, and the language in the model provided by USTR on its web site imposes absolutely no barrier to implementing a Market Access Charge (MAC). The relevant sections are Articles 3, 4, and 5. These deal respectively with:

1. National Treatment
2. Most-Favored-Nation Treatment
3. Minimum Standard of Treatment 

The MAC was designed to be totally non-discriminatory in terms of nationality of investor in order to comply with these provisions.

Moreover, Article 20 on Financial Services leaves absolutely no doubt of the MAC's legality under Bilateral Investment Treaties. This article provides that:

Nothing in this [Bilateral Investment] Treaty applies to non-discriminatory measures of general application taken by any public entity in pursuit of monetary and related credit policies or exchange rate policies. …  

For purposes of this provision, “public entity” means a central bank or monetary authority of a Party.

The MAC was specifically designed to conform with these standard BIT provisions as well as with the IMF guidelines for acceptable capital flow management tools. The MAC is also consistent with both WTO/GATT guidelines, which focus largely on current account rather than financial account trade, and with the OECD guidelines, which closely parallel those of the IMF.

The main reason that the MAC passes all of these tests is that, unlike most solutions currently being proposed for solving America's trade deficits, the MAC applies in an absolutely even-handed manner regardless of country of origin, type of owner, declared purpose, etc.

In conclusion, the Market Access Charge (MAC) approach is fully legal under both the language and the intent of existing US and international law.

               America Needs a Competitive Dollar - Now!