Last November, President Trump’s designated chair of his Council of Economic Advisors (CEA), Stephen Miran, published a lengthy paper entitled “A User’s Guide to Restructuring the Global Trading System.” The paper starts by laying out the intellectual justification for Trump’s aggressive interest in trade barriers. Miran argues that the preeminent role of the dollar in the international financial system has boosted the demand for dollars, pushing the dollar’s value above its equilibrium level. This overvaluation, in turn, has led to reduced export competitiveness, persistent trade deficits, and most importantly, the erosion of US manufacturing. Accordingly, Miran outlines some decidedly outside-the-box suggestions for depreciating the dollar while still preserving its dominant global role, including a “Mar-a-Lago” accord with our trading partners to intervene against the dollar, a “user fee” on foreign holdings of US Treasuries, and browbeating foreign governments into lengthening the maturity of their Treasury holdings.
For lack of space, I will defer my analysis of Miran’s policy proposals for a future discussion, and I focus this note on their intellectual justification. The first part of Miran’s argument, that dollar dominance has boosted the demand for dollars and thus appreciated the exchange rate, is neither implausible nor particularly controversial. Certainly, the demand for dollars is substantial, as evidenced by the 57 percent of all foreign international reserve holdings that are in dollars, compared to a share of the United States in global GDP of only 26 percent.
Although the exact extent to which the dollar exceeds its equilibrium value is quite uncertain, our external deficit has probably widened somewhat in response. The chart below indicates that among the G20 countries, the US current account deficit has been the third largest, suggesting some degree of dollar overvaluation. On the other hand, the US deficit trails that of a country with little reserve-currency status (Australia) and one with essentially negative reserve status (Turkey). Taking a different approach, studies have found the US current account deficit to be several percentage points of GDP too large, once controlling for economic growth, fiscal deficits, and other factors. All told, it looks like the dollar’s preeminent role probably has widened our external deficit, but by how much remains unclear.
Figure 1: G20 Current Account Balances 2000-2019
A strong dollar, however, is not the reason for lower manufacturing employment. The chart below shows no correlation between the steady erosion of the share of manufacturing in US employment and the wide swings in the value of the dollar.
Figure 2: The Manufacturing Share of US Employment and the Dollar
In fact, the declining share of employment in manufacturing is hardly limited to the United States. As indicated in the chart below, countries with persistent trade surpluses (Germany, Japan, South Korea) as well as trade deficits (UK, US, Australia) have all experienced trend declines in the share of manufacturing jobs, and of roughly the same extent. These shared trends importantly reflect the rapid pace of productivity growth in manufacturing, which shrinks the need for labor even as it boosts manufacturing output.
Figure 3: The Manufacturing Share of Employment Internationally (percent)
Once it is conceded that the dollar is not a primary cause of the decline in US manufacturing employment, the justification for taking aggressive measures to lower the dollar goes out the window. As I’ve noted in previous writings, the trade deficit per se is not a problem: with unemployment near record lows, our spending on imports is no threat to our economy, and, in fact, it reduces the likelihood of overheating and inflation. Rather, as evidenced by the recent declines in household confidence and consumer spending, one of the greatest threats to our prosperity is uncertainty about Trump’s future actions in the realm of international economic policy. I hope the future head of the CEA is prepared to acknowledge that fact.
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