The United States is most economically prosperous when politicians and policy elites fully embrace free market capitalism, which includes free trade on a level playing field.
Make America Great Again, MAGA, remains the trademark slogan of former President Donald Trump as he campaigns to be elected President. But some of the economic policies proposed by Trump and his closest advisers would make the nation economically weaker.
True, embracing free trade is not possible with statist economic regimes. In China, very high structural domestic savings rates are used to create excess capacity of manufactured goods which are then dumped into overseas markets, including the domestic U.S. market. But China aside, the United States is great when it is fully committed to capitalism and free trade.
Unfortunately, Trump appears dedicated to sophomoric ideas about trade balances, the cult-like status of manufactured goods, and misguided policies about the status and value of the U.S. dollar.
Robert Lighthizer, U.S. Trade representative during the Trump administration and now senior advisor to the Trump campaign, is floating the idea of depreciating the dollar in order to improve the U.S. trade balance, to stimulate the export of manufactured goods and to increase employment in the domestic manufacturing sector.
It’s a stupid idea. Depreciating the dollar would be a disaster. A weak dollar contributes to inflation which the Federal Reserve is fighting at this very moment. Federal Reserve Chair Powell said on Tuesday that the last mile in the inflation battle is proving more difficult than expected. By deliberately embracing weak dollar policies, a future Trump administration would be blessing high inflation, very elevated interest rates, and, most importantly, would discourage international investors from purchasing U.S. Treasuries which fund the unsustainable federal deficit. The U.S. requires foreign buyers of U.S. debt.
Why purchase a depreciating asset?
If global financial markets caught even a hint of an overt weak dollar policy, prices for U.S. Treasuries would plummet. Funding costs would soar. Interest payments on the federal deficit would further crowd out important private investment. A recession would be inevitable. Trump’s advisers have not connected the dots on a weak dollar policy. Trump and Lighthizer also do not understand that a trade deficit is not necessarily a bad thing.
The U.S. pays for imports with dollars. Foreign manufacturers happily accept payment in dollars because they have confidence in the dollar and the underlying strength of the U.S. economy. A strong dollar enables U.S. households to consume more goods and services. Americans enjoy a high standard of living. Manufacturing is increasingly characterized by capital and intellectual property investment. Capital funds highly sophisticated manufacturing equipment which is not labor intensive. Productivity rises, output increases, but labor input falls. The nation benefits from the manufacture of very high-value goods.
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Semiconductors and Artificial Intelligence are the fuels of the global economy of this century. Semiconductor design and fabrication are capital and intellectual property intensive. But the semiconductor industry is not characterized by labor intensity. A strong dollar enables U.S. semiconductor companies to import the most advanced semiconductor lithography machines from ASML, a Dutch company. Such machines each cost almost $400 million. The ASML machines are essential for fabricating the 2-nanometer chips required for the hyperscale computing that drives artificial intelligence.
The U.S. wants to be on the high ground of the global economy, semiconductors and AI. A strong dollar contributes to that policy goal. Greatness is achieved by being the best, not through currency chicanery.
James Rogan is a former U.S. foreign service officer who later worked in finance and law for 30 years. He writes a daily note.