Many Say Yes, including Biden Team officials, but It is Complicated

It's hardly a new idea, but a number of economists are once again suggesting a good way to grow US manufacturing is to weaken the value of the dollar.

Supply Chain Digest Says... There are many differing views on this topic. Many see a strong dollar as keeping prices low and avoiding inflation. What do you say? Click here to send us your comments Click here to see reader feedback

In his winning presidential bid in 2016, Donald Trump widely criticized China for artificially keeping the value of the Yuan currency low, on the belief that a weak currency makes US imports of China-made goods less expensive, and the effective costs of US exports to China more expensive.

That rewards US companies to move production or sourcing to China, reducing US manufacturing output and jobs.

Now an article this week in the New York Times gives additional credence to this perspective.

"Dollar overvaluation is the big problem," Mike Stumo, CEO of the Coalition for a Prosperous America, which represents small and midsize manufacturers and farmers, told the newspaper's Noam Scheiber.

The dollar, as the world's reserve currency, and backed by a generally strong US economy, has been strong for several decades.

In some cases, such as allegedly China, other countries have suppressed their currencies' value to make their export cheaper for American consumers and businesses.

The Time's article says research by Joseph Gagnon, a former Federal Reserve Board economist now at the Peterson Institute for International Economics, and Fred Bergsten, the institute's founding director, showed China was the world's leading currency manipulator for the first decade of the 2000s.

The paper estimated that such currency manipulation cost the United States one million to five million jobs in 2011.

In a newer study, Gagnon found that more recently medium-size economies like Switzerland, Taiwan and Thailand are purposely holding down their currencies to gain trade advantage.

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All told, resulting from a variety of factors, Gagnon the US dollar was 10-20% above its expected value in 2019, likely costing hundreds of thousands of manufacturing jobs.

The chairman of a US manufacturer of copper and brass products says the strong dollar has resulted mass outsourcing of production in tha sector, killing jobs.

"It was currency. It overwhelms everything else," Brian O'Shaughnessy told the Times.

Now to be sure, there are many differing views on this topic. Many see a strong dollar as keeping prices low and avoiding inflation.

If it wanted to weaken the dollar, the Biden administration has several options. For example, the US could buy enough foreign currency to lower the value of the dollar by 10 to 20%. There are other possibilities.

But it is a complicated issue – for example, intentional efforts to weaken the dollar could cause foreign investors to rein in their purchases of US debt, pushing interest rates up and making the US deficit more expensive to carry.

In fact, economist Fred Bergsten cited above says taking the move too far against a given country's currency "would essentially be an act of economic war."

However, the Biden economic team now includes several members known to favor or at least be open to efforts to weaken the dollar.

However, the most important team member of all, Treasury Secretary Janet Yellen, said at her confirmation hearing in January that the dollar's value "should be determined by markets" and that "the United States does not seek a weaker currency to gain competitive advantage."

One thing is clear: the tariffs did little overall to reduce Chinese and indeed other imports. Maybe that leaves currency strategy as the next lever to try.

What are your thoughts on weakening the dollar? Good or bad idea? Let us know your thoughts at the Feedback section below.

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