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Rebalancing the Economy
The U.S. needs domestic reform, not foreign scapegoats.


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America’s economy is not performing for its people. As the recovery drags on at a snail’s pace and unemployment remains stubbornly high, the public has grown increasingly impatient for answers and for solutions. In recent months, the Obama administration and much of America’s political class has found an easy target for this frustration: foreigners. The U.S. trade deficit is running over $500 billion annually, or about 4 percent of GDP, while other large economies like China and Germany run equivalently massive surpluses. In the language of political opportunism, that roughly translates to “other countries are stealing American jobs.”

Any policy that could lower the trade deficit, reducing imports and increasing exports, presents a siren’s call for America’s politicians. A proverbial free lunch, it creates American jobs at no one’s expense except foreigners’ (who, crucially, don’t have a vote in the next election). President Obama’s embrace of this formula could hardly be made clearer than it was in the title of his op-ed in the New York Times last Friday: “Exporting our Way to Stability.”

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Though the president rightly argues that America needs to rebuild its prosperity on a foundation of innovation and production rather than on debt-fueled consumption, he puts the cart before the horse in his solution. Exports can and must be a key component of the U.S. economic recovery, but the unfavorable trade balance the country finds itself in cannot be reversed simply by forcing American goods into foreign markets with economic saber-rattling or diplomatic sweet-talking.

The true root causes of the world’s economic imbalances, and their remedies, lie in the domestic arena. The United States needs to lead the world’s governments in agreeing to meaningful and reciprocal internal economic reforms if there is to be any hope of progress on this crucial issue.

However, the prospects for thoughtful negotiation and compromise are not promising. World leaders failed to reach any meaningful agreement at this week’s G20 summit, issuing a hollow communiqué that has little power to halt the the growing embrace of protectionist rhetoric and policy by governments around the world. Advocating outright protectionism has become somewhat of a faux pas among Washington’s elite in the age of globalization, so the preferred strategy adopted by most American politicians has been to launch a public relations campaign accusing other nations — and China above all — of protectionism and demanding that they do more to open their markets to American exports.

In today’s putative trade wars, the primary instruments of protectionist policy available to governments are three: First are state subsidies for export industries, which put public dollars to work employing export workers and making their products cheaper. Second are tariffs and quotas, textbook policies which directly restrict imports and make them more expensive. And third, currency devaluation simultaneously makes imports more expensive and exports less expensive.

And it is this last type of policy instrument — currency devaluation — that has become the favored protectionist tool of governments around the globe and is now the primary focal point for the world’s rising economic tensions. In recent months Japan, South Korea, Thailand, Taiwan, Brazil, Indonesia, Malaysia, Israel, and Switzerland — among other nations — have all taken steps to either actively devalue or defensively halt the appreciation of their currencies. Most notably, of course, China continues to keep its currency artificially low (generally assumed to be about 20 percent less than true value). Present in the Chinese currency clamor is not just a call for a rise in the yuan, but also a growing openness to, if not explicit advocacy of, a general fall in the dollar. Yet this comes at a time when the dollar is hitting historic lows against currencies across the board — from the yen to the real to the rupee. Since June alone, it has lost more than 10 percent against the world’s other major currencies.

The dollar devaluation implicitly called for by so many policy-shapers has, to a great extent, already been achieved by America’s monetary authority. Why is it, after all, that so many other countries — especially among developing economies — are trying so desperately to halt the huge and growing pressures on their currencies to appreciate? As they have made clear in ever-louder complaints and condemnations in recent weeks, it is the constant flow of dollars streaming into their markets from a U.S. economy running the loosest monetary policy in its history. Having started a fight over an undervalued yuan, the United States seems only to have succeeded in undermining the legitimacy of its own domestic economic policies. It is now under assault from much of the world for printing too many dollars and stands accused of trying to devalue its way out of recession.

With condemnations and warnings about the dollar’s integrity being issued by the top officials in the German, Chinese, Brazilian, and Japanese finance ministries just days before the G20 summit, chances were never high that President Obama would convince these principal trading partners to alter their currency policies. But the bigger problem is that currency is not even the real root cause of global trade imbalances to begin with. Even if the Chinese enthusiastically agreed to America’s wildest demands tomorrow, playing with those exchange rates alone would not restore balance to the world economy.

The trade patterns of the 1980s offer a useful parallel for today. In 1985 the dollar was overvalued and the United States was running huge trade deficits. To deal with these imbalances, the world’s leading economies adopted the Plaza Accord — a multilateral agreement on currency reforms that is often touted today as a model for the kind of international pact that could solve the current crisis. The accord was extremely effective in devaluing the dollar: Both the yen and the deutschmark rose nearly 40 percent against the greenback in the five years following its adoption. But while the U.S. trade deficit with Western Europe fell from roughly $30 billion to zero and then evolved into surplus by 1990, the deficit with Japan actually grew for two years following Plaza and by 1990 was only a fraction smaller than it was in 1985.



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