Politics

Tariffs Are a Sideshow Compared to the Weaponized Dollar

China's threats to devalue its currency would drive U.S. dollar higher on int'l market, making American exports more expensive, less competitive

In recent years, U.S. manufacturers have been competing, and often losing, against government-owned Chinese companies intent on taking market share at any cost. Thankfully, President Donald Trump is fighting back with tariffs to protect domestic industries against China’s economic aggression.

In response to the president’s tariffs, naïve free trade pundits shout “trade war.” But they remain strangely mute about Beijing’s decades-long strategy of stealing technology from U.S. companies. And they say nothing about Beijing’s mandates that American companies relocate to China and engage in joint ventures with government-owned companies.

All of this comes from the Chinese Communist Party, which drafts five-year plans directing the growth of key government-owned industries, enabling them to dominate domestic and global markets — with generous subsidies doled out to make sure the goal is met.

Sixteen years of negotiation by Presidents Bush and Obama failed to curb these predatory trade practices, along with dumping, subsidies, intellectual property theft, and forced technology transfer. Trump has rightly concluded that more talk would also fail.

In response to his recent tariffs, however, Beijing has responded with counter-tariffs — rather than finally comply with trade rules. However, America is well-positioned to win such a fight because China depends on selling to the U.S. market. China needs us more than we need them.

Related: Kudlow Says Trump Right to Challenge China on Trade

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Beijing has now threatened to devalue its currency in response to Trump’s trade measures. This would make China’s exports cheaper, overcoming the tariffs. A devaluation would also raise the dollar price, and make American goods and services more expensive in global markets. The administration needs to develop an effective response to foreign currency aggression.

In 1994, Beijing drastically devalued its currency, the yuan, and pegged it to the dollar at an artificially low rate. This made China’s exports far cheaper in the U.S. market. Conversely, U.S. goods entering the Chinese market became more expensive.

Even after pledging to scrap this currency peg when entering the World Trade Organization (WTO) in 2001, Beijing has held course, stubbornly maintaining its currency within a tight band. Despite an occasional fluctuation, the yuan still remains undervalued — and continues to lower the cost of Chinese goods artificially.

From 2003 to 2013, as many as 20 other countries manipulated their currencies, forcing the dollar higher. As a result, U.S. goods and services became less competitive in foreign markets. The U.S. trade deficit surged to new highs. Millions of good jobs were lost. Tens of thousands of factories closed.

Even today, persistently high volumes of private money flow into the U.S., driving the dollar too high and harming our workers and industries. In effect, foreign governments and investors are weaponizing the dollar against us by driving it above a competitive price.

Last year, the Coalition for a Prosperous America (CPA) released a study showing that the dollar is valued roughly 25 percent above its competitive price. This is equal to an astounding 25 percent charge on U.S. exports sold abroad, plus a subsidy for foreign imports.

Related: America Will Look ‘into the Soul of China,’ Trump Adviser Says

In 2016, candidate Trump promised action on China’s currency manipulation. Now, as president, he faces a real devaluation threat from China. Thankfully, Trump has a chance to fix the problem by abandoning a “strong dollar” policy and developing tools to push the dollar back to a competitive price — which would directly address the China threat and a job-killing trade deficit.

One tool the president should consider is a variable charge on excessive foreign capital inflows, which currently drive the dollar price too high. It’s called a “Market Access Charge” (MAC) and could gently push the dollar back to a competitive level.

Such a MAC system would systematically frustrate any foreign attempts to distort the dollar’s value. A complementary option would be to direct the Federal Reserve to intervene in foreign exchange markets when necessary to neutralize any attempts by the People’s Bank of China to drive the dollar too high.

Trump has been right to press for more balanced trade with Beijing. He can be even more effective by acting to prevent the U.S. dollar from being weaponized against our manufacturers, farmers and ranchers. So when Beijing threatens to devalue its currency, the president should have the necessary tools to respond in kind.

Michael Stumo is CEO of the Coalition for a Prosperous America. 

The opinions expressed by contributors and/or content partners are their own and do not necessarily reflect the views of LifeZette.

Michael Stumo
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Michael Stumo is CEO of the Coalition for a Prosperous America (CPA)

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