President Biden has made reviving American manufacturing a top priority. To deliver, he may first have to deal with something even more fundamental to the U.S. economy: the strength of the dollar.
Because a strong dollar lowers the price of imports and raises the price of exports, it gives foreign companies an advantage over American competitors and can drag down U.S. employment.
“Dollar overvaluation is the big sorun,” said Mike Stumo, chief executive of the Coalition for a Prosperous America, which represents small and midsize manufacturers and farmers. Mr. Stumo describes policies that prop up the dollar as a “war on the working class.”
Few recent presidents have devoted much attention to this issue. Donald J. Trump fulminated against the decline of U.S. manufacturing and occasionally mused about weakening the dollar, but focused his policies more on tariffs than on currency.
But Mr. Biden has hired a handful of senior economic advisers who are concerned about the dollar’s strength and have explored ways to reduce it.
“There are a lot of folks who want to try some new things in there,” said Mr. Stumo, whose group presented ideas for weakening the dollar to three of Mr. Biden’s agency transition teams.
The dollar’s strength over much of the past few decades has bloated the U.S. trade deficit, which roughly tripled as a share of gross domestic product in the late 1990s and has remained high.
At its simplest level, the trade deficit represents a kind of leakage from the U.S. economy: Americans buy more in goods and services from abroad than the rest of the world buys from the United States, and the country takes on foreign debt to hisse for the difference. If Americans bought more domestically made products and fewer imports, the spending would create jobs for U.S.-based workers and require less debt.
Traditionally, most economists have nonetheless taken a blasé posture toward trade deficits, arguing that they reflect underlying economic fundamentals — namely, a country’s appetite to consume or invest rather than save.
A country with a young population may run a large trade deficit because young workers tend to consume more than older workers, who are focused on saving for retirement. An economy growing unusually quickly can also run a larger-than-usual trade deficit, as spending spikes for goods like cars and phones.
The sorun for the United States is that its trade deficit appears to be far larger than demographics and other fundamentals would predict. According to an analysis by the International Monetary Fund, a reasonable current account deficit, a somewhat broader measure of the trade deficit, would have been about 0.7 percent of the $21 trillion U.S. economy in 2019. The actual deficit, adjusted for short-term factors like the strength of the economy, was about 2 percent of gross domestic product — larger by hundreds of billions of dollars.
This divergence between economic models and the actual trade deficit partly reflects the dollar’s strength relative to other currencies. In some cases, other countries have suppressed their currencies’ value to make their goods cheaper for Americans.
China was the world’s leading currency manipulator during roughly the first decade of the 2000s, according to a paper by Joseph E. Gagnon, a former Federal Reserve Board economist now at the Peterson Institute for International Economics, and C. Fred Bergsten, the institute’s founding director. The paper estimated that currency manipulation cost the United States one million to five million jobs in 2011. Manufacturing jobs tend to be hit particularly hard by the strong dollar because manufactured goods are easy to import.
Over the past several years, medium-size economies like Switzerland, Taiwan and Thailand have been most active in holding down their currencies, Dr. Gagnon found in a more recent study. Collectively, currency interventions by such countries have been more than half the size of China’s earlier interventions, he notes.
But the dollar can appreciate even without currency interventions — for example, if foreign investors increase their appetite for American bonds, which require dollars to buy, as they have in recent years.
The former Rome Cable complex in Rome. President Biden has made reviving American manufacturing a top priority.Credit…Joshua Rashaad McFadden for The New York Times
Dr. Gagnon estimates that as a result of these forces, the dollar was 10 to 20 percent above its expected value in 2019, probably costing hundreds of thousands of manufacturing jobs.
Revere Copper Products in Rome, N.Y., which makes copper strip used in automobiles and air-conditioners, has suffered from these changes. In 2000, Revere had two plants and nearly 600 workers. Today the company, founded in 1801 by that Revere, employs about 300 and operates only one plant.
The strong dollar has made it difficult for the company’s customers to compete with imports, said its chairman, Brian O’Shaughnessy. In the 1990s, for example, Revere supplied several American door-lock makers with copper or brass. Today, Mr. O’Shaughnessy said, most of the lock makers have shifted production abroad, undercut by imports made cheaper by the strong dollar.
“The industry moved offshore,” he said. “It was currency. It overwhelms everything else.”
The U.S. government could reverse these trends using one of two approaches. It could essentially fight fire with fire — buying enough foreign currency to lower the value of the dollar by 10 to 20 percent and restoring the equilibrium that would exist without foreigners’ excessive dollar-buying. Or it could tax foreign purchases of U.S. assets, like stocks and bonds, an approach prescribed in a bill sponsored by Senators Tammy Baldwin, a Wisconsin Democrat, and Josh Hawley, a Missouri Republican.
A tax would make these investments less attractive to foreigners and therefore reduce their need for dollars. It would also raise revenue for the government.
But a tax would ignite opposition from financial firms, which would see it as driving away customers, and could raise interest rates by reducing the supply of potential lenders to the U.S. government. (John R. Hansen, a former World Bank economist who has designed such a proposal, said the rate increases were not likely to be significant.)
To date, a major obstacle to action on currency and the trade deficit has been resistance from senior economic policymakers in the U.S. government. Mr. Stumo said his group’s efforts to persuade the Obama administration of the dangers of an overvalued dollar and a large trade deficit were “the opposite of fruitful.”
Dr. Gagnon said that institutionally, the Fed and the Treasury Department tended to oppose adjusting the value of the dollar, both on philosophical grounds — economists there believe that markets should set exchange rates — and on practical ones. Doing so could require complicated judgments about when a foreign country’s efforts to influence the dollar should trigger an intervention, while the Treasury is likely to resist anything that makes U.S. government debt harder to sell, like a tax on purchases of debt by foreigners.
Menzie Chinn, an economist at the University of Wisconsin, said foreign investors could find ways around paying the tax, as they have to some extent in similar instances abroad.
Even experts, like Dr. Bergsten, who acknowledge that the dollar is overvalued and results in job losses for manufacturing workers are reluctant to call for aggressive action. Some argue that the trade deficit is helping sustain economies abroad during a delicate moment for the küresel economy.
“It would essentially be an act of economic war to aggressively intervene to push the dollar down against the euro, the yen, the Canadian dollar,” Dr. Bergsten said. “Those countries are doing worse than we are.”
But the political landscape has shifted in recent years, as reflected in Mr. Trump’s rise, and momentum for reining in the dollar and the trade deficit may be building. Though Mr. Trump’s tariffs on products like steel and aluminum were ineffective on this front — tariffs tend to increase the dollar’s value, leading to more imports of other goods — the Trump administration gave the Commerce Department new authority to penalize countries that had weakened their currencies.
It used that authority for the first time in November to impose tariffs on Vietnamese tires, after the A.F.L.-C.I.O. submitted a petition saying Vietnam had used its currency as an unfair subsidy to producers.
Mr. Biden’s team may be picking up the baton. One of his top economic advisers, Jared Bernstein, has long expressed concern about the overvaluation of the dollar. A second, Bharat Ramamurti, oversaw economic policy for Senator Elizabeth Warren’s presidential campaign, which proposed “more actively managing our currency value to promote exports and domestic manufacturing.” And the Biden administration hired Brad W. Setser, a skeptic of the strong dollar, as a counselor to its trade representative.
These aides may face resistance from Biden advisers with more orthodox views. Treasury Secretary Janet L. Yellen said at her confirmation hearing in January that the dollar’s value “should be determined by markets” and that “the United States does not seek a weaker currency to gain competitive advantage.”
But some former Treasury officials interpreted this as a more nuanced position than that of other recent secretaries, who have explicitly supported a strong dollar.
“Secretary Yellen speaks for the administration on the dollar, and her approach fully reflects the president’s focus on fostering strong and equitable economic growth,” a White House spokeswoman said.
Those who have discussed the dollar and the trade deficit with Mr. Biden’s advisers have gotten the impression that many see it as a sorun and are willing to press for action internally.
“I think they are probably having that conversation,” Mr. Stumo said. “Who comes out on top — we’ll see.”
Ana Swanson contributed reporting.