In January, President Donald Trump traveled to Davos, Switzerland, to speak at the annual World Economic Forum (WEF). His message: “America is open for business.”
Attending the WEF, a platform that advocates for globalization, might seem to be a contradiction to the president’s “America First” agenda. Nevertheless, Trump’s address marked only the second time a sitting U.S. president has attended the WEF.
Trump’s pitch touted, “a prosperous America benefits the world, and fair economic competition is essential to that prosperity.” So how can we achieve free and fair trade, a level global playing field, and a competitive U.S. manufacturing sector?
Studies show that a higher dollar adversely affects U.S. manufacturing employment by increasing imports and lowering exports. A 2017 study by economist Douglas Campbell concludes that a high dollar can explain 30 percent of the 5 million U.S. manufacturing jobs lost from 1995 to 2008.
In addition, job losses from a temporary exchange-rate appreciation are not necessarily reversed when the currency returns to normal levels. The appreciation of the dollar may eliminate much of the physical and skilled workforce capacity in a U.S. industry, while stimulating modernization investment in developing countries, giving them a lasting cost advantage. When the dollar depreciates to its original level, low-cost countries continue to enjoy a cost advantage due to efficiencies gained over time, and the U.S. industry is weakened and unlikely to recover. I have seen this pattern in machine tools, foundry equipment, semiconductor equipment and many consumer goods industries. When I was selling equipment, I drove past the skeletons of companies that were once world-class competitors and would have also been my customers.
When economies were largely driven by manufacturing, trade balances determined currency values. If a country had a large trade deficit, its currency would drop and vice-versa. For the last 30 years or so, financial markets have become dominant. Since the U.S. is a safe haven and the dollar a reserve currency, hundreds of billions of dollars are invested in financial assets here, driving up the value of the dollar and undermining the traditional self-correcting process. As a result, the U.S. has become a great place to have a bank, while losing competitiveness in manufacturing.
We do not want a continuously weakening currency as you find in Indonesia, North Korea and Venezuela. However, a gradual drop of about 20 percent from the current level would do wonders for U.S. manufacturing. At Davos, Treasury Secretary Steven Mnuchin mentioned that a lower dollar would be good for the economy.
At Davos, Trump said that trade has to be “fair and reciprocal.” For example, he pointed out that Harley Davidson motorcycle exports face a 100 percent tariff in India, while motorcycles made in India enter the U.S. duty free. Trump picked an extreme case, but there is a clear pattern of U.S. disadvantage. The average U.S. duty on Indian products is 2.4 percent. The average Indian duty on American products is 9.6 percent, according to the International Trade Centre. The seven-point difference is substantial, equaling about 25 percent of the typical price competitiveness gap between the U.S. and low-wage countries. The U.S. 2017 goods trade deficit with India was $23 billion, worth about 150,000 U.S. manufacturing jobs.
The U.S. has made a great start by cutting tax rates and regulations and by allowing immediate write-off of capital investments. In anticipation of these changes, more than 150,000 manufacturing jobs were created in the U.S. last year through either reshoring or foreign direct investment. If we can make similar progress on the dollar and tariffs, we will maintain the momentum.