Then-presidential candidate Donald Trump campaigned throughout 2016 on the promise of making America great again. Much of this involved fierce rhetoric about foreign currency manipulation and the unfavorable exchange rate that the dollar suffers against its international counterparts. Most Americans accept the fact that political campaign often involves exaggerated theater. Once in office, the magnitude of the vitriol settles down. And it is this transition that President Trump needs to make.
It’s not just a matter of diplomacy. Donald Trump promised not only jobs, but a new era in America. This translates into punitive actions against currency manipulation and other tactics that impact the exchange rate. In the broader scheme of things, the President is absolutely correct. Currency manipulation is a way for countries to “subsidize their exports and raise the price of their imports, sometimes by as much as 30-40%,” according to Forbes. This subsidization is a result of the dollar being the world’s reserve currency.
No doubt about it — currency manipulation is a serious problem. And China is often labeled as the worst offender. But this is a matter where attitudes of moral righteousness must be set aside for practical considerations.
First, we have to look at the obvious connection. If we blasted China for their currency manipulation, and thereby created a favorable exchange rate, we would in effect create dollar appreciation. But the quickest way for us to get to the promised plus-3% growth in GDP is to have dollar devaluation. Then, our exports will be cheaper relative to other international currencies, and economic activity will rise.
A strong dollar sounds great politically and patriotically, but it doesn’t really jive with economic growth. Rather, this is a policy of economic sustainment. So dollar devaluation is the key, and China’s currency manipulation of their yuan is the unbreakable lock. Donald Trump, of course, is determined to break it, but that leads to the second issue.
If we do finally get dollar devaluation, and in turn, yuan appreciation, that will make Chinese labor costs skyrocket. That would be a good thing, the Trump administration might say, because companies would be incentivized to bring back jobs to the U.S. But the problem is the economies of scale. Long story short, developing nations like China, India, and a host of others are more efficient at manufacturing. We, on the other hand, are better at innovation.
If we continue pursuing the path of dollar devaluation, then Donald Trump isn’t running on a message of make America great again. Rather, he’ll be imparting the theme of make America dumb again. No one goes to college in the hopes of getting a manufacturing job. They have on-the-job training and industrial certification programs for that — far less costly and time-intensive than a four-year program.
Instead, American youth are focused on getting white-collar office jobs. And you know what? We have to embrace this trend. We can never go back to being a manufacturing powerhouse because we can never compete with a Chinese factory labor force that will accept pennies on the dollar. So Donald Trump needs to dial it down, or risk dialing up macroeconomic instability.