Why the Proposed Mar-a-Lago Accord May Not be the Magic Wand That Trump Is Hoping For

If the ultimate goal is to rebalance trade and transform the United States from a net importer to a net exporter, the proposed Mar-a-Lago Accord may not be the magic wand that the Trump administration is hoping for. The idea of a coordinated depreciation of the U.S. dollar in exchange for lowered tariffs on key economies sounds promising, but history and economic realities suggest otherwise.

The United States has run a trade deficit for much of its history, with a persistent trade deficit since the 1970s. While a weaker dollar makes U.S. exports more competitive and protectionist tariff hikes encourage “buying American,” the stubborn trade deficit is not just about trade policy or an overvalued dollar. It is an outcome of industrialization amid a global division of labor, driven by multinationals’ optimizing resource allocations worldwide.

Moreover, the U.S. dollar’s status as the world’s dominant currency and the U.S. Treasuries’ benchmark role as risk-free assets keep demand for the dollar high. This, combined with the Fed’s interest rate hikes to combat inflation, keeps the dollar strong, making U.S. exports pricier and imports cheaper.

Data from the Bank for International Settlements show that since 2011, the dollar has strengthened to a level comparable to 1985, the year when the United States, France, Germany, the United Kingdom, and Japan signed the Plaza Accord to collectively depreciate the U.S. dollar relative to the Japanese yen and the German Deutschmark. The Plaza Accord successfully devalued the dollar but failed to achieve its primary goal of correcting the U.S. trade deficit with Japan.

Fast forward to today, a Mar-a-Lago Accord would need to include China, which accounts for about one-third of the U.S. trade deficit (about $279 billion). However, convincing the People’s Bank of China to join a collective action that would appreciate the renminbi and reduce its export competitiveness is a tall order. Even if the Trump administration can get the People’s Bank of China to join the European Central Bank, Bank of England, and Bank of Japan to coordinate policies to weaken the dollar, such action does not guarantee lowering the U.S. trade deficit.

China’s manufacturing prowess and competitive export industries surpass Japan’s in the 1980s. The competitiveness of Chinese export and manufacturing bases is not merely due to an overvalued dollar and a weak renminbi but stems from a long tradition of active industrial policies and high savings relative to household consumption. A weaker dollar will not boost Chinese imports, especially given China’s weak consumer sentiment amid slower economic growth. Unless the U.S. government relaxes export controls and grants China access to advanced chips and technologies, it is unrealistic to expect China to buy enough from the United States to narrow the trade deficit.

Additionally, a weak dollar and tariffs will not stop Chinese exporters from seeking higher profits abroad. Fierce competition and razor-thin profit margins at home due to years of massive capacity investment have driven Chinese manufacturers to set up production and assembly facilities in countries with trade agreements with the United States, such as Mexico, Morocco, and Vietnam, to diversify their supply chains and mitigate the impact of tariffs.

In conclusion, while a Mar-a-Lago Accord might sound like a strategic move, it is unlikely to achieve the desired trade rebalance. The complexities of global trade dynamics, structural economic factors, and the entrenched positions of key players like China make it a challenging endeavor.

This piece was originally published in The International Economy.