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Dollar realignment: an inadequate trade policy?

By Kevin Phillips / June 6, 1986



THE House of Representatives' lopsided vote late last month for a trade program -- a program President Ronald Reagan condemns as raw protectionism -- implicitly but unmistakably rebukes United States international economic policy. This is deeply significant. One can argue that Washington's pursuit of a chimera -- trying to solve the trade deficit through currency devaluation -- has allowed the real historical and political dimensions of the trade crisis to go largely untended, in the process speeding up the transfer of US wealth and global economic leverage to Japan.

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The linchpin, of course, was last year's Reagan administration decision to deal with the trade crisis principally through currency realignment. Devalue the overpriced dollar by 20 to 25 percent, key officials said, and the trade problem will be brought under control. Congress won't have to -- and should not -- pass legislation restricting imports or hobbling the President's authority in trade matters.

Nine months later, that narrowly based strategy looks increasingly inadequate.

Multinational corporations have received some benefit, but Congress generally dismisses the administration as a failure on the trade front. Thus this spring's resurgent demand for legislation.

Recent official data have fanned the fires of political frustration. After all, the dollar has been tumbling for 15 months now, falling much further than originally predicted against currencies like the Japanese yen; yet we have seen little gain in the trade statistics. The improvements forecast for early to mid-1986 have not materialized.

Let me stipulate: The 1985-86 decline in the dollar is certain to bring greater trade benefits in 1987. But it probably won't be enough to push next year's trade deficit below $120 billion or so, and that's a painful prospect. Moreover, two particular shortfalls stand out in the administration's reliance on currency devaluation:

Foreign companies, Japanese in particular, are absorbing currency losses to maintain increased shares of United States markets.

Many commercially important currencies have stayed roughly the same against the dollar -- those of major US trading partners like Canada, Mexico, Taiwan, and Korea -- so that the US trade deficit with these nations has stayed the same or worsened.

If Congress is proposing heavy-handed remedies, one reason is that the administration's own blinders have arguably promoted a near-absence of serious analysis of world power realignment.

Respected congressional specialists like Sen. John Danforth of Missouri and Rep. Sam Gibbons of Florida -- chairmen, respectively, of the Senate and House international trade subcommittees -- have been driven toward ``protectionism'' by White House inaction and naivet'e as much as by anything else.