A story in Tuesday’s Wall Street Journal highlights a truth about the economy that Washington’s policy makers have chosen to ignore. The value of our currency relative to our competitor nations’ currencies is a huge driver of factory location. Despite its positive connotations, a strong dollar is bad for U.S. exports and U.S. manufacturers. For years, Japan bought U.S. treasurys as a way to cheapen its own currency and strengthen ours, just as China does. The result was that Japanese imports to the U.S. were artificially cheaper and Japanese cars built in Japan had a price advantage even overseas, when competing with U.S.-built cars. (The same would be true for refrigerators or construction equipment, or any other manufactured goods.)
But lately, Japan has been unable to prevent its currency from strengthening against the dollar, so much so that the advantage has been flipped, and it is beginning to make more sense for Japanese automakers to build their cars in the U.S. than in Japan. As a result, Nissan is closing plants in Japan and moving lines to Tennessee and Mississippi, and Honda plans to export cars from the U.S. in large numbers—150,000 a year by 2017.
What is true for Japan is true in spades for China, which for years has maintained a weak yuan relative to the dollar. Other countries in Asia have also followed China’s lead. If China let its currency strengthen, products made in China would be much more expensive here, leading many producers to move manufacturing operations back to the U.S. By the same token, products made in the U.S. get an immediate price advantage and would once again be competitive in world markets.
The Obama administration and Congress should agree to legislation that would force China and other Asia currency manipulators to give up their tactics and give our manufacturers a fair chance to compete. As EPI’s senior trade economist Robert Scott has shown, no other single legislative action is likely to create more jobs, do more to correct our trade deficit, or do more for our budget deficit.