The economist Richard Koo built pianos in Hong Kong for his father-in-law for a year and a half between college and graduate school. Now he is the chief economist of Nomura Research Institute in Japan.
He told me that his experience in business helped sensitize him to the commercial importance of currency exchange rates, which are how much one nation’s currency is worth in terms of others’.
If a nation’s currency rises against others’, the goods it exports become more expensive for foreign buyers, and the goods it imports become cheaper, displacing domestically made products.
“You try to cut costs. One day you open the newspaper and see all of your efforts of months and months are down the drain. You have to be in a job like that to feel the pain” of exchange rate fluctuations, “and sometimes the joy,” Koo said. “Maybe that’s one reason I never completed my Ph.D.” he added. “I was always arguing back against my professor, saying, ‘That’s not the way the world works.’”
Koo argues that the dollar is chronically overvalued to the detriment of the U.S. economy, especially the manufacturing sector. He says the damage to manufacturers — and factory jobs — caused by the dollar’s strength helps account for the backlash against free trade in the United States. His proposed solution is a new international accord to lower the dollar’s value, similar to the Plaza Accord of 1985 that was struck in New York’s Plaza Hotel by the United States, Japan, West Germany, Britain and France.
The Coalition for a Prosperous America, which is made up mainly of small and medium-sized manufacturers, calculates that last month the yuan was 24 percent undervalued against the dollar, the yen was 32 percent undervalued and the euro was 19 percent undervalued. “If we realigned the dollar to a competitive level, there would be a boom in U.S. manufacturing production and the entire U.S. economy, including job numbers, and household incomes would benefit,” Jeff Ferry, the organization’s chief economist, wrote to me by email.
“The price of the dollar is one of the most important prices in the world economy and we are letting it be tossed about like a wooden ship on stormy seas,” Ferry added.
I talked to Koo about his ideas and I read about other plans for how to deal with the seemingly perpetual trade deficits of the United States. One thing I found is that this is not an easy problem to solve. But I give Koo credit for trying.
Koo is a citizen of the United States, where he attended college and graduate school, although he has spent most of his life in Japan. He has worked for Nomura since 1984. Fluent in Japanese, he’s often called on by the Japanese media to give an American perspective on the news. He’s famous, at least among economists, for coining the term “balance sheet recession” to describe Japan’s prolonged slump after its real estate boom busted in 1990. He sees China following the same pattern now.
The United States keeps running trade deficits because the dollar isn’t sinking to the level that would be required to balance imports and exports. I’d say the reason the dollar isn’t sinking is that there is strong demand by the rest of the world to invest in the United States, including through American stocks, bonds, companies and real estate, and dollars are needed to do that. The United States, for all its problems, is perceived as a safe haven.
There is another way to look at the same set of facts, which is that Americans have no one to blame but themselves for the trade deficit because they’re under-saving. By this theory, given a lack of domestic savings, the only way they can fund needed investment is to bring in money from abroad, so foreigners spend their dollars on investments in the United States rather than American goods and services. (Households usually do most of the saving and businesses usually do most of the investing.)
I don’t find the second explanation as satisfying as the first one, but in either case, it’s clearly not the trade balance that’s determining exchange rates. It’s investors. And that includes foreign governments, which sometimes use their own currencies to buy up dollars, thus keeping the dollar strong and making their nations’ goods and services relatively cheap. China was notorious for doing this, although recently it has had to lean the other way, propping up the yuan (also called the renminbi), which has fallen from favor because of a slump in the Chinese economy.
The strong dollar is good for American consumers, who benefit from low import prices, but bad for Americans whose companies export or compete with imports (as I have written a million times since 1985, when I covered the aftermath of the Plaza Accord).
Koo admits that a new Plaza Accord would be much harder to strike than the original. China, a minor player in 1985, is a huge one now, and would be reluctant to allow a significant appreciation of the yuan against the dollar, since that would hamper Chinese exports. From the looks of it, the Chinese want the yuan to stay right around where it is.
Koo said it would still be in China’s interest to join a coordinated international intervention to bring the dollar lower, because doing so would blunt protectionist pressures in the United States, ultimately helping Chinese exporters. If China came onboard, other Asian nations would as well, he predicted.
Another strategy would be to limit the inflows of foreign capital that are responsible for propping the dollar up. Capital controls used to be common, even in developed nations, but came down after World War II, and especially after 1980, as economists preached the message that the free flow of money across borders would enhance global productivity by getting resources to their highest and best use.
Michael Pettis, a professor of finance at Guanghua School of Management at Peking University in Beijing, wrote in June that capital controls would “restrict the ability of foreigners to dump excess savings into the U.S. economy.”
Restricting flows of incoming capital “is an idea that has received surprisingly little discussion in policy circles, but it could benefit the United States and ultimately, the rest of the world,” Simon Tilford, now the chief economist at the Center for European Reform, and Hans Kundnani, now a visiting fellow at the Remarque Institute at New York University, wrote in Foreign Affairs in 2020.
They suggested that the United States could penalize short-term speculation but exempt long-term investment by foreigners.
When I asked Koo about that, he said “the genie is out of the bottle,” meaning it’s too late to go back to a world of capital controls, which he said would be highly disruptive.
Jonas Goltermann, the deputy chief markets economist for Capital Economics in London, agreed with Koo: “Even if you thought you were moving toward a better world, you’d have a big shock in the interim from breaking all the financial linkages.” On the other hand, he didn’t think Koo’s solution of coordinated intervention in the foreign exchange market was likely to work, either.
As I said, not an easy problem to solve. Right now, though, it’s just being ignored by politicians. “This is the debate that is missing in Washington, D.C.,” Koo said. “If the establishment doesn’t really address this issue, Donald Trump can run amok,” he said. Trump is correct that big, chronic trade deficits are a problem, Koo said, “but his tariffs are not the solutions we like to see.”
The Readers Write
At some point U.S. companies with operations in China, or that are affected by Chinese competitors, and their critics in Congress must find a middle way, particularly in electric vehicle and solar panel manufacturing. Requiring Chinese market leaders to manufacture in the United States and license their technologies to Americans needs to be commonplace. China must moderate its drive toward self-sufficiency. China can’t have its moon cake and eat it too. At the same time, we must oppose the “China is the enemy” groupthink that dominates the official thinking in Washington.
Douglas Barry
Washington
I don’t see how Apple eliminates Chinese dependency. It would have to work down, component layer by layer, even as it managed an ever broader and more detailed set of supplier relationships, requirements, etc. Impossible to do without impact on profit margins. A possible route for Apple is to make some U.S.-based contract manufacturer its new Foxconn. Ten years? Easily.
Tom Barson
East Lansing, Mich.
Frank McCourt said he would buy TikTok, pitch the algorithm, and allow for authentic relationships. What if that’s not a sustainable business? Tech companies engineer for engagement, because if users don’t come back, the product fails. Unfortunately, engagement is dangerously close to addiction, and treading that line is hard.
Dan Frankowski
Minneapolis
Quote of the Day
“The labor of women in the house, certainly, enables men to produce more wealth than they otherwise could; and in this way women are economic factors in society. But so are horses.”
— Charlotte Perkins Gilman, “Women and Economics” (1898)
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