This post provides an abstract of a paper I was invited to present at the International Trade and Manufacturing Session of the National
Workshop on U.S. Manufacturing and Public Policy at the University of Indiana on October 29, 2015.
The full paper as presented can be accessed through the "Papers" link at the top of the home page of this blog site.
Comments are most welcome.
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American manufacturing has suffered a major decline in
international competitiveness over the years since the first Oil Crisis in the
1970s. This decline is driving the offshoring of jobs and production lines to
low-wage foreign countries and is central to America’s overarching economic
problem today -- excessive trade deficits that have been accumulating for
nearly forty years with no end in sight.
As a result, America now carries the largest stock of
foreign debt in the world. Furthermore, manufacturing’s declining ability to
compete with imports in domestic markets and with foreign producers in export
markets has contributed to America’s high and rising unemployment and income
inequality, as well as to financial market volatility and instability.
Although America’s trade deficits and its manufacturing
decline relative to countries like China are closely linked, one does not
really cause the other. Instead, both are the result of a serious overvaluation
of the U.S. dollar.
The dollar’s overvaluation is driven largely by: (a) the
failure of America’s international monetary policies to keep pace with dramatic
changes in the global economy during the past forty years, and (b) the
fact that, because the U.S. dollar is the world’s main reserve currency, America
is more exposed than any other country to the impact of a tectonic shift in the
way exchange rates are determined.
Following a brief summary of reasons that American
manufacturing has lost its competitiveness and that trade deficits have become
so large, the paper summarizes the pros and cons of the ways America could
increase its international competitiveness and reduce its trade deficits. The
paper finds that the key reason for declining competitiveness and rising
deficits is the flood of foreign capital into America, starting in the 1970s,
to take advantage of America’s financial markets.
This has caused the dollar to
become seriously overvalued because (a) the
demand for dollars and dollar-based assets has pushed up the dollar’s market
exchange rate; (b) excessive
capital inflows have driven up domestic prices, making American goods more
expensive and less competitive, and (c) the
market exchange rate has not adjusted sufficiently to restore balanced trade
and international competitiveness for American manufacturing.
Based on this analysis, the paper finds that the best way to
restore competitiveness and reduce external deficits would be to moderate the
inflow of foreign capital coming into U.S. markets so that the present glut of
capital no longer distorts the American economy.
The paper then examines a new approach that appears to have
the best pros
pects for success, namely a small “market access charge” (MAC) on
capital inflows that would be paid by foreign investors who want to exploit
America’s financial markets when these markets are already overheated and are causing
the dollar’s overvaluation as indicated by a rising trade deficit relative to
GDP.
After describing the legal and economic foundations for the
MAC and how this simple mechanism would work in practice, the paper analyzes potential
headwinds to the policy’s implementation and how likely issues can be resolved.
It also examines the MACs expected benefits for stakeholders across the economy
who will create tailwinds that should allow the MAC to become the core of a consensus-based
manufacturing and trade policy for America for the 21st century.
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To access the full paper, click on the "Papers" link at the top of the home page and select
"International Trade and Manufacturing Policies for the 21st Century: Yes, We Can Build a Consensus".
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To access the full paper, click on the "Papers" link at the top of the home page and select
"International Trade and Manufacturing Policies for the 21st Century: Yes, We Can Build a Consensus".
