Wall Street didn’t enjoy President Donald Trump’s announcement earlier this week that he’ll impose tariffs on steel imports from Brazil and Argentina.
But America’s farmers and manufacturers cheered.
That’s because both sectors have long faced unfairly subsidized import competition — particularly from countries that benefit from devalued currencies. They’re pleased to see a U.S. president actually going to bat for them.
The president deserves credit for connecting the dots on a longstanding trade problem, in my view.
It’s a problem that many pundits tend to overlook — that the U.S. dollar has become fundamentally overvalued and is making U.S. exports more expensive in global markets.
Why did the president target Brazil and Argentina?
Here’s why: Both countries have lowered the value of their currencies.
And that has allowed them to undercut the prices of U.S. farm exports.
Brazil and Argentina have been presiding over a massive devaluation of their currencies. which is not good for our farmers. Therefore, effective immediately, I will restore the Tariffs on all Steel & Aluminum that is shipped into the U.S. from those countries. The Federal….
— Donald J. Trump (@realDonaldTrump) December 2, 2019
President Trump is rightly calling them out for such manipulative practices.
In his tweet on this issue this week, he explained, “Brazil and Argentina have been presiding over a massive devaluation of their currencies, which is not good for our farmers.”
In response, the president vowed to immediately “restore” the tariffs on all “steel and aluminum that is shipped into the U.S. from those countries.”
What’s noteworthy is that Trump’s tariff announcement didn’t come about because Brazil and Argentina have been subsidizing their steel and aluminum industries. Instead, the dispute involves these countries’ agricultural and manufacturing sectors, which benefit from the extremely low value of their respective currencies.
The Brazilian real recently fell to an all-time low against the dollar.
And the Argentine peso has similarly fallen to a 10-year low against the dollar.
President Trump recognizes two things. First, agreements on tariffs and other trade provisions can be frustrated by exchange rate misalignment. And second, America’s longtime “strong dollar” policy has made U.S. goods and services less competitive both at home and globally, leading to more offshoring and to declining job quality.
Why focus on steel and aluminum — and not Brazilian and Argentinian farm goods? Because the U.S. doesn’t buy agricultural commodities from either country. However, U.S. farmers compete head-to-head against Brazil and Argentina when selling key commodities such as beef and soybeans to China and Europe.
America’s farmers already face tighter margins due to the ongoing trade dispute with Beijing. But with China’s imposing punitive tariffs against U.S. agricultural exports, America’s farmers are struggling to find new markets in Europe and elsewhere.
The currency moves by Brazil and Argentina are making that effort more difficult.
By targeting steel and aluminum, Trump can hit the two countries where it hurts — and use trade policy to address currency misalignment.
That keeps making U.S. exports pricier in the global marketplace — and imports cheaper in the U.S. market.
The dollar’s rise stems from an ongoing flood of foreign capital pouring into U.S. financial markets.
All of this overseas capital coming into Wall Street — and also purchasing government bonds — is continuously pushing up the dollar’s value.
The Coalition for a Prosperous America (CPA) has estimated that the dollar is now overvalued by roughly 27 percent. That’s enough to greatly disadvantage America’s farmers and manufacturers.
President Trump should take the next step: executive action to realign the dollar to a more competitive level.
President Ronald Reagan achieved something similar in 1985 through an international agreement called the Plaza Accord. That arrangement realigned the dollar 40 percent versus the Japanese yen in a matter of weeks.
However, in today’s competitive global economy, other countries are unlikely to agree to a similar deal. They’d rather continue the present situation, in which they’re able to boost exports and undercut U.S. manufacturers and farmers.
However, the 1977 International Emergency Economic Powers Act (IEEPA) allows the president to regulate international commerce in response to severe economic problems. With that in mind, President Trump could task the Treasury Department with realigning the dollar to a competitive price in order to eliminate the nation’s large trade deficit.
Congress is already taking notice of the currency problem.
Last summer, Sens. Tammy Baldwin (D-Wis.) and Josh Hawley (R-Mo.) introduced legislation tasking the Federal Reserve with managing the dollar’s exchange rate in order to increase rebalance trade flows.
There’s an obvious precedent for this, since other countries already manage their exchange rates — overtly or quietly — as part of a concerted industrial strategy. It makes little sense for the United States not to consider a similar approach.
Whether it’s through executive branch action or federal legislation, currency realignment is urgently needed.
America’s currency is now working against the national interest.
And the nation’s farmers and manufacturers urgently need help in a tight, global economy.
Michael Stumo is CEO of the Coalition for a Prosperous America (CPA), a nonprofit group working at the intersection of trade, jobs, tax and economic growth.
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