Ongoing currency manipulation and commensurate mercantilist policies continue to have grave implications on U.S. competitiveness abroad, especially in regards to trade and the world’s long-lasting dollarized financial system, a recent report reveals.
The U.S. consequently faces an imminent “dollar twilight dilemma” that one expert hints may result in a major decline of the dollar and the phasing down and out of the dollarized financial system of the last seven decades.
“The eventual decline of the dollarized financial system has been recognized for more than a decade,” Ernie Preeg, senior advisor for international trade and finance for the Manufacturers Alliance for Productivity and Innovation (MAPI), explains in his report, titled Twilight of the Dollar with Technology-Intensive Manufacturing at Center Stage.
“But at that earlier time there was little sense of urgency for major new policy initiatives. Most noteworthy in retrospect, China was not yet a major trading nation, with U.S. exports of manufactures in 2000 three times larger than Chinese exports,” he says. “The global structure of trade has changed greatly over the ensuring 13 years, however, making the twilight zone of the dollar a far more urgent and important policy challenge today.”
Preeg tells Leo Rommel of Industry Today that the phasing down and out and subsequent transition of the dollarized financial system could lead to “some form of a multi-key currency relationship,” though he says it’s not clear what that form would precisely look like or entail.
“Critically, there is the choice between whether principal trading nations can get together to manage this transition, or whether the markets will just take charge and if these changes and exchange rates will just react to markets, which could be a lot more disruptive, at least in the short run,” he says.
What Preeg’s report reveals is the dramatic decline in U.S. export competitiveness for manufacturers since 2000 and the related building of official debt to foreign countries.
The U.S. share of global exports of manufacturers declined sharply from 19 percent in 2000 to 12 percent in 2012. Meanwhile, in the same time period, the EU share was down from 22 percent to 19 percent and the Chinese share soared from 7 percent to 22 percent.
“Thus, U.S. exports of manufactures in 2000 were three times larger than Chinese, where by 2012, Chinese exports are almost double the U.S.’s,” he says.
This decline, he notes, has only accelerated since 2009, at the height of the Great Recession.
From 2009 to 2012, the trade imbalances of the five largest exporters of manufacturers, who account for two-thirds of global exports, all experienced significant increases. The Chinese surplus, for instance, rose by 92 percent, to $866 billion. The EU surplus saw a 110 percent increase to $480 billion. And the Japanese surplus rose by 32 percent to $292 billion while the South Korean surplus rose by 50 percent, to $206 billion.
The U.S.? They went the opposite direction, the report says. Its deficit rose by 61 percent, to $516 billion.
“The bottom line is that the $195 billion increase in the U.S. deficit equates to a loss of somewhere between 800,000 and 2 million American manufacturing jobs,” Preeg says.
Also, Chinese exports of high-technology industries grew by $53.5 billion in the first half of 2013 while U.S. exports were up a mere $4.7 billion.
And foreign holdings of U.S. official debt have quadrupled since 2000 to more than $10 trillion, which means that a 1 percent increase in interest paid on this debt raises the current account deficit by $100 billion.
These are disturbing figures, he suggests, when taking into account how manufacturing is, in Preeg’s words, “really the dominant sector for what’s happening in the financial and trading world,” particularly related to exchange rates and the debate on exchange rate manipulation.
After all, manufacturing is the dominant sector of trade, he explains, and it takes virtually all of the brunt of currency manipulation by China and others.
“If nothing else, I have something to contribute in terms of putting the facts on the table about the dominant, central manufacturing sector, which not only is the most price exchange sensitive sector, but is also the backbone of technological innovation and military modernization,” he says. “To the U.S., 75 percent of our R&D and 90 percent of new patents come out of the manufacturing sector.”
He adds: “If we don’t realize how important manufacturing is for technological innovation and military modernization, the Chinese government certainly does. That’s evident in what’s happened with their manufacturing sector. About half of their manufacturing output, incidentally, goes for this huge trade surplus, which is mind-boggling.”
A WORTHY SOLUTION
Preeg says “some people against currency manipulation want us to go protectionist and just cut off imports.”
Instead, he argues for two key ingredients to be added to the mix: a comprehensive U.S.-led policy response to the fundamental changes in the trade and financial systems and an integrated network of free trade agreements linked to the IMF obligation for market-based exchanged rates.
“My proposal is to continue pursuing free trade agreements across the Atlantic and Pacific and to other interested parties, but it should be linked to a commitment to market-based exchange rates in keeping with IMF obligations,” he says.
He adds that U.S. needs “bold and forward-looking leadership if there is to be a negotiated twilight path” for the dollarized financial system.
“Unfortunately, over the past decade, the United States has been in a state of leadership policy denial about the mercantilist policies of others while the U.S. technology-intensive manufacturing industry has suffered,” he says.
About the Manufacturers Alliance for Productivity and Innovation (MAPI)
The Manufacturers Alliance for Productivity and Innovation (MAPI), established in 1933, is a nonprofit organization engaged in economic and policy research, continuing professional education, and allied activities. The Alliance’s corporate membership includes U.S.-based and international companies in manufacturing and related business services.