Financial Resource

trillion.  The IMF would have to take on the characteristics of a world central bank, which is sure to be controversial, especially in the U.S., which has veto power over SDR issuances, and will not be anxious to relinquish the prestige associated with the dollar as reserve currency.

Another option would be for the U.S. to adopt a more coordinated approach to exchange rate policy involving target zones, but retaliation by trading partners, intent on maintaining exchange rate advantage over the dollar might result in uncontrolled growth of money supply in multiple countries, kicking off an unacceptable period of high global inflation. 

A tax on all cross-border currency flows would help dampen speculative currency movements, and could have the additional advantage of raising much-needed funds for global health and development initiatives. Such a tax would not be precluded by a move to an SDR-type reserve currency.

Fundamentally, the time has come to ask if there is a net benefit to the U.S. of having the dollar as the global reserve currency.  We have to consider whether there are longer-term benefits to rebuilding a domestic manufacturing/industrial base and creating job growth in low- and mid-skill economic sectors that is being impeded by an overvalued dollar.

The McKinsey Global Institute (MGI) recently released a study examining the costs and benefits to the U.S. economy of the dollar as reserve currency.  They found that the net financial benefit was between billion and billion—or 0.3% to 0.5% of U.S. GDP. In the first half of 2009, the dollar appreciated by about 10% due to its safe-haven role, and the cost-benefit became less positive to mildly negative.  The estimated range was between a net benefit of billion and a net cost of billion.

The as the global reserve currency, U.S. is able to raise capital more cheaply owing to large purchases of U.S. Treasury securities by foreign governments and government agencies. Those purchases have reduced the U.S. borrowing rate over the past few years and are worth about billion to the U.S. But without a yawning trade deficit, and with re-development of a vibrant manufacturing sector, it is likely that U.S. international borrowing needs could be reduced by more than the estimated net financial benefit.

So long as the dollar remains the reserve currency, it will be a magnet for official reserves and for global liquid assets, keeping it overvalued by between 5% and 10% according to MGI researchers.  And that means that U.S. exports cost more on world markets while imports are too cheap in U.S. domestic markets. That has a short-term benefit for consumers, but represents a long term detriment for U.S.-based manufacturing, and for the U.S. fiscal position.

U.S. policymakers therefore need to ask, “Is it more important to the U.S. economy, and to U.S. manufacturers and workers, to be able to borrow cheaply, or to compete on world markets and create jobs?”  MGI estimates that exporters and manufacturers are losing about 0 billion per year, and that employment in these sectors is reduced by nearly a million jobs.

The Europeans seem to recognize the long-term downside of their currency becoming an alternative or secondary reserve currency. In a November 2009 interview with Le Monde, European Central Bank president Jean-Claude Trichet said that the euro was “not designed to be a global reserve currency.” 

Some economists see the renminbi as eventually supplanting the dollar as the global reserve currency, but that is unlikely to happen for many years, perhaps not before 2050.  The renminbi is now plays only a minor role in international exchange, owing to liquidity and convertibility issues. If it were to play a larger role, it would appreciate, undercutting China’s export-led growth policy.

If the world’s two main reserve currency issuers increasingly see little national economic benefit to continuing that role, the time has come for a global summit to find an innovative solution such as adoption of SDR as a reserve currency.  Failure to do so will result in a period in which an unmanageable global financial system is characterized by volatility and speculative capital flows. Such a period would be extremely difficult for businesses and national economies, with exchange rates frequently out of line with economic fundamentals.  American workers will likely bear the brunt of global currency instability as credit becomes increasingly dear and business activity further contracts.

Policy Prescriptions to Rebalance Global Trade

Trade deficits, gains from trade, and exchange rate fluctuations only matter insofar as they affect real people, positively or negatively. U.S. workers have paid a steep price for U.S. globalization policies, while multinational businesses have been big winners.  Thus, new approaches should be based on an analysis of how past and current approaches have failed U.S. workers.  The outsize influence of business interests in trade policymaking bears significant responsibility. It is no coincidence that the Dow Jones Industrial Average of stock prices for the largest U.S. firms soared from the mid 1980’s to 2000, as global trade flows dramatically increased.  Even since 2000, and despite high volatility and the financial crisis that began in late 2008, stock prices have held up remarkably well and corporate profits in 2010 are at record levels while wages remain depressed and unemployment is unacceptably high.  U.S. multinational corporations have clearly prospered under the current global trade regime.

U.S. trade policymaking has long been dominated by a powerful center-right coalition of corporate business interests.  Republican business conservatives, supported by center-right Democrats have ensured that investor rights have received top priority, while workers, consumers protections, and the environment have been largely ignored. Through trade agreements like NAFTA, and WTO rulemaking, U.S. firms have been provided tremendous support for outsourcing labor abroad.

Just one example of how this has played out for U.S. manufacturers: Mexico now exports more vehicles (a high-technology sector) to the U.S. than the U.S. exports to the rest of the world.  The number one Mexican exporter of vehicles is a U.S. firm: Chrysler.  US multinationals initially used foreign plants to serve foreign markets, but over time, that has changed.  Now those foreign plants largely serve the US market.  U.S. firms export intermediary goods for assembly abroad, and re-import value-added finished goods in a purely labor arbitrage arrangement.

Trade agreements have promoted multinational business interests in many ways, including through limits on trade related investment measures,[5] intellectual property rights enforcement with binding dispute settlement mechanisms, and by bringing services trade into the WTO.

These and other business-favored trade rules have fostered tremendous growth in foreign investment that has accelerated the impact of trade on workers throughout the developed and developing worlds.

Globalization has also allowed U.S. multinationals to escape regulatory systems that were implemented after the 1930’s.  Those systems brought stability, environmental protections, and broadly shared prosperity in the U.S. and to a lesser extent globally.  As globalization has proceeded, economic competition has become a race to the bottom in environmental protection, wages and labor standards, and consumer protections.

The time has come to build a new coalition for trade management that is center-left…giving more attention to workers, the environment, and consumers. Trade management and international trade agreements must focus on the following:

Priority must be given to a global trade environment that fosters a high and rising standard of living for all Americans, and for working people around the world. A domestic manufacturing base is an essential component of a diverse economy that achieves broadly shared high living standards. This is true for all countries, but the U.S., after decades of manufacturing-sector decline, should make this the top priority.

Domestic tax policies and a domestic industrial policy aimed at manufacturing jobs creation must be a part of this new approach. Most national governments intervene to affect the structure of national economies and affect outcomes.  The U.S. has a long professed opposition to market interventions by government, but in fact, U.S. policies intervene in many ways, often benefitting the interests of influential multinational businesses.  Active and coherent intervention, with input from management, labor, political leaders, and others, should be brought to bear in the promotion of specific industries in which high-wage jobs can be fostered and where the U.S. can compete internationally on a more level playing field.  Attention should also be given to easing the challenges faced by workers, firms, and communities affected by structural economic change.

 Chronic U.S. trade deficits must be addressed, particularly deficits related to trade with China, Japan, Mexico, and Europe.  Trade deficits are the effect of policies that have encouraged the offshoring of U.S. manufacturing and negatively affected U.S. workers.  The structural causes of these deficits vary among trading partners, and the solutions will vary somewhat in each case.  The deficit with Europe is mostly a factor of slow growth on the continent that will have to be dealt with mainly by European leaders.
The problems with China and Japan are more complex, and involve exchange rate manipulation (addressed earlier… consideration should be given to adoption of a new global currency reserve regime based on the IMF SDR model); and systematic

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