Dollars and Nonsense

If you find Alan Greenspan’s economic statements difficult to follow, you will find Treasury Secretary John Snow’s pronouncements on the dollar positively inscrutable. According to Snow, the administration (a) has a “strong-dollar policy . . . we’ve had it forever”; (b) is delighted that the weaker dollar is helping American industries to sell more goods abroad; and (c) “has no conscious policy . . . to move the dollar at all.” Oh yes, the Treasury Secretary is also in favor of “a sound [U.S.] currency.”

Get it? The administration wants the dollar to be strong and weak and sound, but has no policy to affect its value. By comparison, the Delphic Greenspan is a model of clarity.

Best to start with the facts. Although the dollar is down only 6 percent against the average of the currencies of all its trading partners, it is down over 25 percent against the euro in the past year. So the politicians, to whom the euro is a political project aimed at creating a rival to the dollar, and who don’t set much store by the economic consequences of their “project,” are delighted. But hard-pressed European manufacturers are watching their goods become increasingly expensive in the crucial American market. Indeed, some newspapers in America are starting to list attractively priced made-in-the-USA substitutes for higher priced German cars, French wines, and Italian designer goods.

Meanwhile, America’s politicians continue to spout support for a strong dollar policy, while keeping their eyes on the most politically sensitive indicator of all—the unemployment rate. The White House is desperate to have that rate start declining early enough in 2004 to enable the president to campaign on a platform of “my tax cuts are setting the economy right.”

So the president’s men are eager to see job-creating American exports increase, and consumption of domestic-made products rise at the expense of imports. In ordinary circumstances they would worry that a falling dollar, by making imports more expensive and relaxing the competitive pressure on domestic manufacturers to keep prices down, would trigger inflation.

But there is enough excess capacity in the economy, enough competition for the consumers’ dollar, and enough Internet-induced increase in consumer knowledge of where bargains are to be had, to keep inflation bottled up. Indeed, the latest figures have experts worrying more about the possibility of deflation than of inflation.

The only worry heard in the corridors of the Treasury and the White House is that the dollar’s decline will turn into a collapse. There are reasons to worry. The trade deficit in March was up by 7.6 percent from the previous month, to the second-highest level on record, and to the 5 percent-of-GDP level that economists consider unsustainable. This means that America has to attract something like a billion dollars in capital investment from overseas every day to offset the trade deficit, a task made more difficult by its low interest rates and lackluster share prices. Should investors decide to unload their substantial holdings of dollar assets, the continuing trade deficit could cause a flight from the U.S. currency. Of course, those investors would have to find an economy with brighter long-run prospects than America’s to flee to—no easy chore.

Then, too, the mounting trade deficit is adding to thus-far unsuccessful pressures on the president to retreat from his robust support for the Doha round of trade-opening talks. America ran a $7.8 billion trade deficit with Western Europe in March, only a bit higher than the $7.7 billion recorded with China. Other countries that sell a lot more to American consumers than they buy from American producers are Japan, Canada, and Mexico, with whom the United States ran trade deficits of $5.8 billion, $5.2 billion, and $3.9 billion respectively in March.

All of which is stirring up protectionist sentiment. The deficit with Western Europe, not the most popular part of the world with Washington policymakers these days, is laid to France’s refusal to allow the EU to reduce barriers to American farm products, and to such interventions as its recent diversion of a $3 billion engine order from low-bidder Pratt & Whitney to a French-led consortium.

Japan, say many American trade experts, maintains its advantage over America by intervening in currency markets to keep the yen from rising sufficiently to make Japanese exports unattractive in U.S. markets. The Japanese authorities spent $20 billion in the first quarter to shore up a weakening yen, and are indicating that they will intervene more vigorously to prevent further declines.

China is another country effectively manipulating the value of its currency to gain an unfair advantage over American producers. China pegs its renminbi to the dollar, so that the decline in the value of the American currency relative to that of the euro and other currencies cannot also be reflected in a lower value relative to China’s currency.

To complete the list, those who want to see America get tough with its trading partners are blaming the deficits with Canada and Mexico on unfair advantages conferred on those countries by the North American Free Trade Agreement (NAFTA).

Never mind whether these complaints are justified. U.S. Trade Representative Bob Zoellick is going to have a tough job maintaining congressional support for the current round of trade-opening talks as the 2004 elections approach, especially if the unemployment rate hasn’t come down significantly when campaigning starts in earnest.

The battle is already heating up. America, backed by 3,000 scientists and a dozen nations, including reliably free trading Australia, has formally asked the WTO to end the EU’s moratorium on imports of genetically modified crops. The EU, for its part, has won WTO backing for its demand that America repeal the $4 billion tax break it confers on its exporters by September or face trade sanctions. But the EU’s blinkered bureaucrats don’t realize that the American election campaign officially kicks off on Labor Day, which falls on September 1. That’s not a time when American politicians want to be seen surrendering to a threat, especially one from the nation’s new adversaries, France and Germany.

This article appeared in London’s Sunday Times on May 18, 2003.