A strong dollar makes America strong. Any campaign to devalue it is likely to backfire.
Elizabeth Warren’s “economic patriotism” differs in style and content from Donald Trump’s economic nationalism, but they have found common cause in vows to weaken the dollar. That is a strangely self-defeating agenda for patriots or nationalists of any political fashion.
Mr. Trump and Ms. Warren argue that China and other emerging rivals weaken their currencies to promote exports and gain jobs, so why shouldn’t America follow a similar policy? Here’s why: Because America is not an emerging country. It’s an unrivaled financial superpower, a position built in large part on hard-won trust in the dollar, which is an enduring source of American power and prosperity.
When the dollar strengthens and weakens in response to buying and selling in the global currency markets, foreign countries don’t protest. Occasionally they have cooperated with the United States to stabilize the dollar. But nothing will destroy trust in American financial leadership, and the benefits that go with it, more surely than for the United States government to start unilaterally manipulating the dollar for its own competitive advantage.
If Vietnam or South Korea manipulate their currencies in a bid to improve their exports, a few of their trade partners may retaliate; if the financial superpower plays the same game, the whole world will respond, because the dollar is the international standard. A record high 60 percent of countries now measure, or “anchor,” the value of their own currencies against the dollar. Any campaign to devalue the world’s anchor could set off a destructive wave of competitive devaluations.
After World War I, when America challenged Britain as the leading global empire, the dollar began gaining on sterling as the currency that most central banks preferred to hold in reserve. Reserve currency status had long been a perk of imperial might — and an economic elixir. By generating a steady flow of customers who want to hold the currency, often in the form of government bonds, it allows the privileged country to borrow cheaply abroad and fund a lifestyle well beyond its means.
Other countries watched the United States assume this role with dismay. In the 1960s, Valéry Giscard d’Estaing, then finance minister and later president of France, called the dollar’s powerful status America’s “exorbitant privilege.” And for nearly a century now this privilege has helped to keep United States interest rates low, making it possible for Americans to buy cars and homes and, in recent decades, run large government deficits that they could not otherwise afford.
But that argument can’t be applied to other countries targeted by Mr. Trump. Aaron Tornell, a Mexican-born economist at the University of California, Los Angeles, noted that since the 1980s, Mexico has turned away from left-wing isolationism toward liberalized markets and closer cooperation with the U.S. on trade and security issues such as narcotics. Advocates in Mexico of this integration argued American presidents and big business would prevent the U.S. from using its enhanced leverage to punish Mexico.
Mr. Trump’s policies could “destroy the political foundations of a country that has been following liberal economic policies for the last 30 years and give more power to those who want to be like Venezuela,” Mr. Tornell said.
But there is a real underlying risk that by deploying and using its economic weaponry so frequently the U.S. will, in the long run, drive others, friend and foe alike, away from its economic orbit. “These are not zero-cost options,” says Robert Hormats, former under secretary of state for economic affairs and an adviser on international economics for presidents going back to Richard Nixon.
Imposing tariffs on China and other nations trying to send their goods to the U.S. not only raises the prices of those products for Americans, it also gives targeted nations an incentive to develop markets, and long-term trade ties, in other countries.
At the same time, those foreign nations can retaliate by cutting purchases of American goods, or by slapping retaliatory tariffs of their own on American products, making them less competitive, as China has just announced it will do. The Chinese may find other countries to provide, say, wheat and soybeans, and in doing so develop lasting, non-American trade ties.
“If the U.S. develops a reputation as an unreliable supplier, countries will turn to our competitors, and, when sanctions end, earlier supply chains will be difficult to restore,” says Mr. Hormats.
.. Similarly, there is a danger the U.S. is providing both allies and adversaries an incentive to find ways around using the American financial system as the wiring for international commerce.
For now, there are few alternatives to using American banks for clearing international transactions. As a result, enemies find they can be shut out of much international commerce by crossing the U.S. and being slapped with American sanctions.
But it isn’t just enemies. Friends also know their companies can be isolated if they don’t heed American wishes to shut down commerce in countries on the American black list. The risk of losing access to the financial system is a powerful motivator.
Yet overuse of this threat could compel other counties—including the very allies whose cooperation the U.S. seeks in applying financial pressure to the bad guys—to find alternatives to using dollars and American banks. Mr. Hormats notes that this “is not easy to do now, given the dollar’s pre-eminent role, but over time such overuse could eat away at the dollar’s role and hence U.S. leverage.”
Indeed, there are signs that others are seeking alternatives to the dollar and the American-led financial network. The European Union is trying to set up its own payment system to allow oil companies and businesses to continue trading with Iran despite American sanctions. China has made clear it would be happy to lead a different international finance system and use its currency as an alternative to the dollar.
Similarly, 11 Pacific Rim allies have moved ahead with their own new trade bloc after the U.S. pulled out of the Trans Pacific Partnership trade deal.
America remains the big kid on the economic block, but it isn’t the only one. The danger is that it could come to be seen as the bully who tries to intimidate the other kids once too often, persuading them to join together to find ways around him.