Commentary | Economic Growth

Testimony on the impact of overvalued dollar on the American economy

Opinion pieces and speeches by EPI staff and associates.


Testimony on the impact of overvalued dollar on the American economy

by  Robert Blecker

Mr. Chairman and members of the Committee, my name is Robert Blecker, and I am a professor of economics at American University and a research associate of the Economic Policy Institute here in Washington. I would like to begin by thanking you for the opportunity to testify at this hearing. I have submitted to the Committee a report I recently wrote for the Economic Policy Institute on how the overvalued dollar has affected the U.S. manufacturing sector, and I would respectfully request that this report be entered in the Record along with my written statement.

Mr. Chairman, there has been much attention in the last few months to the falling value of the U.S. dollar. However, while attention has been focused on the dollar’s fall relative to the euro and a few other major currencies, less attention has been paid to the fact that the dollar has fallen much less or not at all compared with many other currencies of other important trading partners. Especially, the dollar has not fallen nearly as much relative to the Japanese yen, and has a fixed or managed exchange rate with the Chinese yuan (renminbi), the Taiwanese dollar, and certain other Asian currencies, due to the currency manipulation practiced by their governments. As a result, the dollar has not fallen nearly enough overall to undo the damage caused by its overvaluation for the past several years.

According to the statistical estimates in my EPI Briefing Paper, the rise in the dollar up to 2002 caused the following damage:

  • A loss of three-quarters of a million U.S. manufacturing jobs;
  • A decline in profits on U.S. manufacturing operations of about $100 billion per year; and
  • A reduction in capital expenditures at U.S. manufacturing plants of over $40 billion at an annual rate.

Furthermore, as I testified to the U.S. Trade Deficit Review Commission four years ago, the high dollar has been a significant cause of the nation’s large trade deficit, along with depressed economic conditions in foreign markets and a long-term shift of manufacturing production to other nations.

Although my analysis does not distinguish U.S. manufacturing businesses by size, I believe that small businesses are likely to be disproportionately represented among the companies hurt by the overvalued dollar, because small businesses tend to be less multinational in scope and hence have less of an ability to produce or source products overseas. If such businesses do manage to shift production or outsource abroad in response to a lower dollar, the result is still a loss of American jobs that can devastate local communities. Furthermore, the fact that the high dollar has led American manufacturers to cut back their domestic investment expenditures portends slower growth and reduced technological innovation in these industries in the future.

For all these reasons, the recent decline in the dollar to a more reasonable level relative to the euro, the British pound, the Canadian dollar, and certain other currencies gives a ray of hope for the manufacturing sector to begin a recovery from its current depressed state. However, this ray of hope is significantly dimmed by the partial nature of the dollar’s decline to date.

The countries that have let their currencies rise the most against the dollar, chiefly the Europeans and Canadians, account for less than half of U.S. trade overall, and less than half of our trade deficit. Even in regard to those currencies, the dollar has lost only part of the value it gained between 1995 and 2002. However, the situation is even worse with Japan and other East Asian countries that actively manipulate their currency values, yet account for the largest part of the U.S. trade deficit. The dollar has fallen only about 12 percent versus the yen since February 2002, compared with about 27 percent versus the euro, due largely to Japan’s intervention in currency markets to buy up dollars and keep the yen from rising. China, Taiwan, and many other developing nations maintain pegged exchange rates, and hence do not allow their currencies to rise to market-determined levels in response to their trade surpluses with the United States.

These East Asian countries have amassed reserves of well over $1 trillion U.S. dollars as a result of their efforts to keep their own currencies undervalued and maintain their artificial competitive advantages in the U.S. market, and such intervention has grown in intensity in the past few months as the dollar has fallen relative to other currencies.

In response to these policies, the United States needs to take strong measures to pressure our leading trading partners in East Asia to abandon their currency manipulation and allow their currencies to rise to market equilibrium levels in the long run. We should use the authority that the Secretary of the Treasury has under U.S. law to investigate currency manipulation and negotiate with trading partners that obtain chronic trade surpluses with us by undervaluing their currencies. Also, we need to make the maintenance of realistic, equilibrium exchange rates a condition for trade liberalization and market opening agreements. Free trade cannot bring the mutual benefits that it is supposed to provide in theory, unless the theoretically required conditions of balanced trade and full employment are met, and those conditions cannot obtain in the presence of significantly misaligned global exchange rates. I would urge that all future trade agreements include prohibitions on currency manipulation for the achievement of artificial competitive advantages and that this issue be given a priority role in future trade negotiations, such as in the WTO and the proposed FTAA.

Of course, the United States should not be indifferent to the fact that rising currency values can threaten economic prosperity in other countries, but the right solution to this problem is to encourage our trading partners to stimulate their own domestic economies, rather than to keep the dollar overvalued and let them achieve export-led growth at our expense.

Thank you very much, and I’d be happy to answer any questions.

Robert A. Blecker is Research Associate at the Economic Policy Institute and Professor of Economics at American University in Washington, D.C.


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