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
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
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.