Some sources claim that the actions of the United States in the global economy risk a return to a destructive Smoot-Hawley trade policy. These sources aren't credible. If, indeed, a few fringe observers are advocating policies that will trigger a trade war, they will receive little serious policy attention.
Unsubstantiated alarms of this kind should be ignored in favor of a rational discussion of how policy can be shaped to secure U.S. national interest, integrating it into a global policy that will expand, rather than contract, world trade.
The United States has a huge stake in the adoption of trade policies that expand world trade—but trade that is based on internationally accepted rules designed to support natural comparative advantage rather than trade conducted through mercantilist policies that produce predatory trade surpluses and unsustainable trade deficits.
China is maintaining its currency at a low level against the dollar, consistently ignoring pressure from the International Monetary Fund (IMF) and key Asian nations to allow its currency to appreciate through market forces against other currencies. Artificial suppression of the value of China's currency and government subsidies for exports are a form of protectionism on a scale not previously experienced in world commerce.
U.S. trade and current account deficits, the highest in world history, are out of control and are at levels that most economists agree are unsustainable. The world needs flexible exchange rates to enssure sustainable growth in world trade.
The role of the dollar as the world's reserve currency is now under pressure, threatening the ability of the United States to finance its budget and trade deficits. China is already calling for the establishment of a basket of currencies (euro, yen, pound, dollar and possibly the yuan) in the form of IMF special drawing rights to jointly replace the dollar as a basket of the world's reserve currencies.
China holds $2 trillion of foreign currency reserves, 70 percent of which are in U.S. dollars. Given U.S. deficits and dollar weakness, China is concerned that U.S. dollar devaluation—attributable to U.S. deficits—will produce significant Chinese capital losses, reducing the value of the U.S. dollars it holds in its central bank. China complains about the dollar weakness directly triggered by the huge U.S. trade deficit to which China is the largest contributor.
The potential for loss of sole reserve currency status of the dollar is real. Traditionally, reserve currency countries have been net world creditors and lenders. The United States is now in the opposite position—a net world borrower and debtor. China, in contrast, is now a major creditor/lender country. This change bodes ill for the dollar's future as the only major world reserve currency. The decline of the dollar to a lower-than-acceptable level will ultimately increase U.S. inflation and external debt interest costs, thereby providing a major long-term challenge to U.S. economic recovery. China, however, continues to create excessive monetary surpluses, artificially undervaluing its currency to grow its export markets, further contributing to dollar weakness.
To avoid too severe a decline or collapse of the dollar, the United States and other governments must now respond by initiating a major multilateral effort to convene an international monetary conference through the IMF, or preferably a new venue with countries forced out of export markets by Chinese currency policies. The objective would be to establish a new world monetary regime consisting of countries with free-floating convertible currencies to ensure that these floating currencies will become the basis for trade expansion, in the process providing vitally needed adjustments in out-of-control national trade surpluses and deficits.
Why should China and other countries engaged in competitive currency devaluations cooperate in a monetary conference leading to the formation of a club of countries with free-floating currencies? The answer is that a country's export trade access to the markets of other countries cooperating in a joint free-floating monetary regime would in significant part be dependent on that country's adoption of a free-floating convertible currency. Refusal to do so would result in limitations on the trade access of any non-participating country to the markets of member countries participating in the new monetary policy regime. This approach is the surest route to sustained world trade expansion and the avoidance of trade wars generated by out-of-control trade deficits and surpluses. Such a policy won't be easy to accomplish, but coordinated efforts of the Western industrial countries and several interested Asian nations to convince China to cooperate should give it a fair chance of success.
In addition to currency correction, we must ensure the United States is still a competitive place for manufacturing investment; reduce our trade and current account deficits; engage in a concerted drive for greater energy independence; rebuild the obsolescent and deficient U.S. infrastructure; and revise the U.S. tax code, adopting a revenue-neutral value-added tax to replace an equal amount of U.S. business taxes, to be imposed on imports and rebated on exports.
The Steel Manufacturers Association urges the administration and Congress to consider the proposed monetary policy to expand world trade and the additional policies we propose to restore U.S. manufacturing strength.
THOMAS A. DANJCZEK
Thomas A. Danjczek is president of the Steel Manufacturers Association (SMA), Washington.