WASHINGTON — When all is said and done, President Trump’s trade war may be fated to fail. There are many reasons why. One is that the target countries — prominently, China, Japan and Germany –…
WASHINGTON — When all is said and done, President Trump’s trade war may be fated to fail. There are many reasons why. One is that the target countries — prominently, China, Japan and Germany — won’t accede to his demands. This is already happening. Another threat is a backlash among U. S. firms, hurt by tariffs that raise their products‘ prices. This, too, is happening.
But even if all these possibilities were avoided, the larger threat to Trump’s trade agenda is the dollar’s role as the major world currency. It dictates trade policy in ways not widely understood and is the ultimate cause of chronic U. S. trade deficits.
The dollar’s role as the major world currency means it’s used to settle trade transactions and make cross-border investments, even when Americans are not involved. As I’ve written before, the extra dollar demand boosts its value on foreign exchange markets. U. S. exports become more expensive and U. S. imports less so.
Trade deficits result. Since 1981, the United States has had only one current account surplus. (The current account is the broadest measure of the trade balance.)
When something continues that long, it’s not an aberration. It’s an integral part of the global economy. In effect, the dollar provides a service to the rest of the world.
We are compensated for this service by receiving imports greater than our exports. Many Americans benefit. Imports restrain inflation and expand consumer choice; the flows of money into dollar instruments (Treasury securities, bank deposits, stocks, bonds) tend to lower interest rates.
But there are losers: most conspicuously, U. S. farmers, manufacturers, and their workers. They face tougher foreign competition in both import and export markets.
Or as economist C. Fred Bergsten of the Peterson Institute puts it: „There’s a structural component to our trade deficits, which is the central currency role of the dollar.
