Trade and jobs – why make it so hard?

Sometimes it seems like policymakers think that points are given for degree of difficulty. The Washington Post reports a number of policies are being considered by the Obama administration to “reward companies that choose to bring jobs home” and eliminate tax breaks “for companies that are moving jobs overseas.”

The impulse behind these ideas seems fine to me – the U.S. economy continues to “leak” too much demand to the rest of the world in the form of chronic trade deficits.

But, as the article notes, designing tax-based solutions to this problem will be quite complex and would take huge amounts of money to actually move the dial on this problem.*

If only there was a policy solution that was simple, could happen even without a gridlocked Congress, and would actually move the dial on the problem of large trade deficits dragging on growth.

But there is! Allow the dollar to fall in value sufficiently to move the trade deficit much closer to balance. Currently the biggest impediment to this happening is the policy of major U.S. trading partners (China is the linchpin) of managing the value of their currency to keep it from rising against the dollar – this results in Chinese exports gaining cost-advantages in both the U.S. and third-country markets where Chinese-produced goods compete against U.S.-produced ones.

Presumably this issue came up in Treasury Secretary Tim Geithner’s meeting with Chinese leaders yesterday, but this issue has “come up” between the U.S. and China for a decade with no movement. As Joe Gagnon and Gary Hufbauer have pointed out, however, there is no need to wait for China on this one – the U.S. could solve this currency management unilaterally.

Engineering a decline in the dollar’s value costs taxpayers nothing, can be done without moving through a gridlocked Congress, would actually provide significant help to the job market in coming years, and requires no Byzantine redesign of the tax code.

So, yes, one probably shouldn’t bet on it happening.


*Yes, there are ways that features of the U.S. tax code provide some incentive for production abroad rather than at home – and these should be removed. But this is surely a second- or even third-order driver of trade flows, at best.


  • Marvin McConoughey

    Debasing the currency further will certainly have some short term positive effects, but the larger reality is that doing so is a palliative that has no lasting value.  The essential economic problem is that our labor supply continues to be overvalued with respect to our major competitors.  Savers already do well to make one or two percent, almost certainly less than inflation.  Reducing the real value of their liquid holdings further brings specific harm to those who already face poor returns.

  • Sean McIntosh

    I’d agree with Mr. or Dr. McConoughey below.  Net exports will have a marginal effect on promoting economic growth.  Plus, I think it’s a bit risky to allow our currency to depreciate so that investors can take their capital flows elsewhere.  I think that effect is more adverse than the positive effect of decreasing our trade deficit.  As Paul Krugman said, we need people out there circulating money in the economy.  Out of the Y = G + I + C + NX, C is the most important element to stimulate.  Like Mr./Dr. McConoughey said, too many people (including myself) are saving.

  • Andrew Dumont

    This post also seems to miss the fact that intentionally depreciating the dollar would: 1) likely compromise the Fed’s independence by asking it to carry out fiscal policy goals through the manipulation of the currency; 2) result in an increase in prices for all imported goods for all consumers (which in this day and age make up a large portion of goods consumers produce) making all consumers worse off and likely completely offsetting any benefit that the policy could potentially have; and 3) be a zero-sum policy in terms of our relations with our non-currency-manipulating trade partners, which would increase the already large ire with which they view the current policy of quantitative easing and other open market operations being performed by the US, further damaging our international relationships.  All this to say that, while it may potentially have some minor impact on job creation and the trade balance, it is assuredly a second-best (at best) policy solution to the problems facing the country and should not be pursued.

  • Anonymous

    Josh,

    Great post. An overvalued dollar continues to be a key
    factor explaining America’s
    high trade deficits and high unemployment. Given that a billion dollars of
    trade deficit translates into roughly 10,000 jobs – jobs for American workers who would otherwise be producing exports or import alternatives sufficient to
    close the trade gap – the estimated 2011 external deficit of $450-$500 billion means that we could have put 4.5-5.0 million people
    back to work if the dollar’s exchange rate had been at levels consistent with
    externally balanced trade.

    In his comment on your post, Dumont
    claims that a more competitive rate for the dollar would hurt consumers by
    raising the cost of imports. This is true – but hardly the end of the story. His
    analysis fails to look at the parallel benefits.

    Imports only accounted for about 16% of GDP on average
    over the past five years. If the cost of imports were to rise by 10% (the amount
    by which the Peterson Institute thinks the USD is currently overvalued), import
    prices would increase by only 1.6% of GDP, or about $235 billion. This only
    about half of the $450-500 billion benefit that would come from the domestic
    production of exports and import alternatives. In other words, the net benefit
    of a more competitively valued dollar is strongly positive.

    Incidentally, the $235 billion figure includes the
    additional cost of all raw materials, intermediate inputs, capital goods, and
    consumption goods – not just the additional cost of consumer goods. Since
    consumer goods account for less that 25% of total imports on average, the
    direct impact on consumers of higher prices for these goods would be less than
    $60 billion or 0.4% of GDP.

    In contrast, consumers as workers receive about 56% of
    GDP as compensation in various forms. Therefore, if the U.S. used a more
    competitive exchange rate to increase GDP by 5%, which was the average trade
    deficit over the past five years, this would increase workers income by about $410
    billion (GDP*5%*56%).
    Yes, Dumont is right
    that a more competitive exchange rate would cost consumers – about $60 billion
    in terms of higher prices for imports. But the $410 billion benefit that consumers
    would reap in terms of higher incomes through higher levels of employment and
    possibly higher wages would exceed this cost by nearly seven times!

    EPI could well make more use of data like this in its
    campaign to convince America
    that we need a more competitive dollar – now!
    John Hansen, PhD
    World Bank (retd)

  • Anonymous

    Josh,
    A further thought on this post. I completely agree when you say: “If only there was a policy solution that was simple, [creating jobs at home] could happen even with a gridlocked Congress, and would actually move the dial on the problem of large trade deficits … But there is! Allow the dollar to fall in value sufficiently to move the trade deficit much closer to balance.”
    But then you go on to say that China is the lynchpin of the problem and endorse the Gagon/Hufbauer (GH) recomendation that the U.S. impose penalty wihtholding taxes on China, and perhaps on any other country that manipulates its currency.
    I have three concerns with the GH proposal. First, introducing the necessary international treaty and domestic tax law changes would not be as simple as you indicate. Second, this approach is unlikely to fix the U.S. trade deficit and unemployment problems because it focuses primarily on China, which is only part of our overall problem. Third, being discriminatory between countries, the GH proposal could almost certainly be challenged successfully under WTO/IMF rules.

    A far better approach, I would suggest, would be to introduce a “Capital Inflows Moderation Charge” (CIMC), a modest one-time transaction charge on all inbound foreign capital seeking to purchase U.S. capital assets. The CIMC approach has all of the signaling/incentive benefits of the GH proposal and fewer of the problems.
    Like the GH proposal, it would reduce the attractiveness to China and other countries of investing in the U.S., reducing foreign capital inflows and allowing the dollar to move to a more competitive rate.
    Unlike the GH proposal, the CIMC approach would have the following benefits:
    First, it would apply from the outset to all capital flows, not just those from China. Covering all capital flows would make it posible to impose a lower charge, thus reducing the risks of legal challenge and retaliation.  
    Second, the CIMC would not require Congress or the administration to officially label China as a “currency manipulator”, a process shown by experience to be highly contentious and unreliable.
    Third, since the CIMC would apply equally to all capital inflows regardless of origin, the CIMC could not be challenged under WTO or IMF rules as being discriminatory.
    In short, the CIMC would offer a better way to engineer the decline in the dollar’s value that you rightly state is key to solving our trade deficit and unemployment problems.
    America needs a competitive dollar – now.
    John Hansen, PhD
    World Bank (retd)