A SYMPOSIUM OF VIEWS

Dollar What to make of

Fantasy? the proposed

Mar-a-Lago Accord
and the U.S. dollar?

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ith Donald Trump’s return to the White House, global financial markets are
fixated on the potential for the new administration to initiate an assertive poli-
cy of financial realpolitik and dollar diplomacy. The administration’s belief is
that the United States economically is in a unique position as an energy superpower with
strong economic growth.
During President Trump’s first term, policymakers initiated bilateral tariffs that many
argue failed to lead to any significant trade rebalancing. Could a coordinated depreciation
of the U.S. dollar in exchange for lowered tariffs on key economies—in the spirit of the
1985 Plaza Accord—be a more successful tariff endgame for Trump 2.0? Or is a Mar-a-
Lago Accord just another off-the-cuff presidential fantasy?

More than thirty distinguished thinkers offer their views.

14 THE INTERNATIONAL ECONOMY FALL 2024

 We are not even sure
It seems to be a bad that the Trump
administration wants
idea. It’s fighting evil a weaker dollar.
with evil. The truth Treasury Secretary Scott
is simpler. Bessent has called
for a strong dollar.

JACQUES DE LAROSIÈRE JASON FURMAN

Former Managing Director, International Aetna Professor of the Practice of Economic Policy, Harvard
Monetary Fund, and Honorary Governor, University’s Kennedy School, Nonresident Senior Fellow,
Banque de France Peterson Institute for International Economics, and former
Chair, President’s Council of Economic Advisors

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hat seems increasingly certain is that the dis-

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advantages of a protectionist tariff policy such here are four problems with the argument that Donald
as reduced competition, propensity to inflation, Trump is steering the United States towards a mega-deal
lower international trade, reduced growth, and more, Mar-a-Lago Accord on the value of the dollar.
outweigh its mercantilist advantages, including promo- First, we are not even sure that the Trump adminis-
tion of national production and damage to competitors. tration wants a weaker dollar. Treasury Secretary Scott
Free market forces are still the surest way to achieve the Bessent has called for a strong dollar. And President
best global balance. Trump has repeatedly talked about wanting to arrest any
The idea that we need an international agreement to moves away from the dollar as the global reserve curren-
drive down the dollar—which could collectively moder- cy, something that also is consistent with wanting a strong
ate the tariffs of the largest economies—seems to me to dollar. A strong dollar would also help restrain inflation,
be a bad idea. It’s fighting evil with evil. Lowering the which continues to be a stubborn problem.
value of the dollar collectively would increase imported Second, regardless of what the Trump administration
inflation and impoverish the United States. wants, the value of the dollar will be much more deter-
Experience shows that the desire to lower the ex- mined by its own economic policies than its own desires
change rate is a bad idea. In the first place, this desire or the desires of any other countries. Most importantly,
is most often illusory or counter-current. What makes if they pursue fiscal plans with large deficits, that would
a currency strong is the strength of the economy as a strengthen the dollar.
whole as validated by the market, its capacity to gen- Third, to the degree the United States tried to use
erate long-term savings and thus encourage productive international coordination to nudge the dollar, it would
investment, and labor productivity. It’s certainly not be necessary to have tremendous focus on that goal. That
about manipulating the exchange rate downwards. The is not what we are seeing so far with the rationale for
idea of “offsetting” tariffs by lowering the exchange rate tariffs shifting daily from Mexican and Canadian border
is a false good idea. The exchange rate is the result of disputes to the BRICS’ use of alternatives to the dollar. If
thousands of factors, not of administrative cooperation. anything, the trade deficit rationale for tariffs—the only
The truth is simpler. The dollar is still the center of one linked to the value of the dollar—seems to have fad-
the world’s monetary system. This brings both additional ed into the background.
power to the United States but also risks. Finally, even a concerted focus on a global negotia-
To insist on arbitrarily lowering the value of the world tion on the dollar may not be sufficient. Who would one
standard seems to me a dangerous and bizarre proposal. even negotiate with in Europe since no individual country
Lowering the value of the world currency is certainly not can do much if anything to affect the value of the euro?
a good idea for the world, which would deteriorate an es- It is hard to imagine the European Central Bank sitting
sential benchmark. Nor is it a good idea for the United down at the negotiating table swapping tariffs for higher
States, which needs a stable currency—a reflection of a European policy rates. And with China, tariffs could end
strong economy—and to avoid at all costs the destruction up hurting the United States more than they hurt China—
of an inflationary spiral. thus failing to create the leverage we hope they will.

FALL 2024 THE INTERNATIONAL ECONOMY 15

 Overall, the best thing the Trump administration Two policies are key to reducing the trade deficit—
could do for the dollar is to focus on the strength, sustain- fiscal policy and dollar policy—and they have an essen-
ability, and predictability of its domestic economy and not tial synergy. Evidence suggests that the trade deficit will
expect foreign countries to offset any of our imbalances. shrink by roughly half of any reduction in the budget
deficit. However, a big reduction in the budget deficit by
either raising taxes or cutting spending would slow the
economy abruptly and push workers out of jobs. That is
why dollar policy is an essential adjunct. A weaker dollar
Trump should limit would boost exports while also providing help to indus-
tries that compete with imports. The result would be to
his tariffs to Chinese fill in the gap in spending caused by budget cuts and keep
Americans fully employed.
exports, including The principal tool of dollar policy is official pur-
chases and sales of foreign currency, also known as for-
those routed through eign exchange intervention. Trump should ask Congress
for the (budget-neutral) capacity to sell dollars and buy
third countries. foreign exchange to push the dollar down. He should ask
our major trading partners to cooperate via a Mar-a-Lago
Accord. The threat of U.S. tariffs and trade barriers did
JOSEPH E. GAGNON help to achieve the Plaza Accord of 1985. But an even
Senior Fellow, Peterson Institute for International Economics better approach, if trading partners resist, is to tax foreign
purchases of dollar assets, an action that does not violate

P
resident Donald Trump clearly loves tariffs as a bar- U.S. obligations to the International Monetary Fund or
gaining chip to gain concessions from other coun- the World Trade Organization. Indeed, Brazil used such
tries, for the revenue they generate to fund tax cuts a tax several years ago to counter an overvalued currency
elsewhere, and because he mistakenly believes they will and neither the IMF nor the WTO challenged the tax’s
reduce the massive U.S. trade deficit. However, these legitimacy.
goals are mutually incompatible and tariffs are not a good
way to achieve any of them.
You can’t negotiate away a tariff on which you are
relying for future revenues. Excessive use of tariffs would
have a disastrous impact on the U.S. economy. Because Exchange rate
our trading partners understand this, the most extreme adjustments, which affect
and broad-based tariff threats are not credible bargaining
chips. Perhaps most importantly, by threatening tariffs not only trade in goods,
against allies and enemies alike, Trump risks pushing the but also international
rest of the world together in a coalition to isolate America. movements of people and
If Trump would limit his ambitions to protecting key
manufacturing sectors from a Chinese export tsunami and capital, cannot be the quid
reducing the overall U.S. trade deficit, he would have a pro quo of Trump tariffs.
decent chance of success. He should limit his tariffs to
Chinese exports (including those routed through third
countries) in bona fide national security sectors broadly MAKOTO UTSUMI
defined. These would include automobiles, aircraft, ships, Former Vice Minister of Finance for International
semiconductors, robots, and other cutting-edge technolo- Affairs, Japan
gies needed for a strong national defense.

A
The piecemeal tariffs of Trump’s first term had no im- Plaza II Accord (or Mar-a-Lago Accord) is incon-
pact on the U.S. trade deficit, which only continued to grow. ceivable because of the following reasons.
Some of his advisors took the lesson from this experience First, at the time of the Plaza Accord, there was
that across-the-board tariffs are needed. But across-the- a more or less shared view that the exchange rates of ma-
board tariffs would push the dollar up, offsetting some of jor currencies were somewhat based on the economic fun-
the tariff’s effect on imports while also reducing exports. damentals. However, this shared view does not exist now.
History shows that tariffs reduce both imports and exports Second, the close relationships among the re-
roughly equally, with little impact on trade balances. sponsible officials in governments representing major

16 THE INTERNATIONAL ECONOMY FALL 2024

currencies made it possible to elaborate plans and imple- Second, Baker worked cooperatively with his G7
ment them effectively. colleagues to stimulate their economies while he pledged
Third, the Trump administration prefers to cut the budget deficit (through the Gramm-Rudman-
person-to-person bilateral negotiations and would not like Hollings spending caps) and to keep U.S. markets open. In
and would not be capable of succeeding in time-consuming 1986, the G7 finance ministers began to synchronize their
multilateral negotiations. work with heads of government at G7 economic summits.
Fourth, the macro policy coordination which backed Third, Baker simultaneously pushed for a
up the Plaza Accord would be impossible at the present budget-neutral tax reform (1986) to lower marginal rates,
conjuncture. broaden the tax base, and boost growth.
Fifth, the weakness of the Japanese and the European The Trump approach is to raise tariffs, add to barri-
economies would prevent these countries from accepting ers, threaten partners and disdain cooperation, attack free
and adopting policies to strengthen their currencies. trade with Canada and Mexico, destroy the WTO, and add
In any event, the exchange rate adjustments, which to the budget deficit. If pursued, this confrontational com-
affect not only trade in goods, but also international move- bination would likely strengthen the dollar, increase im-
ments of people and capital, cannot be the quid pro quo of balances, raise prices, and undermine cooperation among
Trump tariffs. economic partners and allies.
As former Treasury Secretary Larry Summers
and I recently discussed at the Peterson Institute for
International Economics, the closer analogy for Trump
and Bessent is President Nixon’s 1971 shock that ended
The Trump team has fixed exchange rates, imposed a tariff surcharge, and tried
turned economic history wage and price controls. But Nixon dropped the tariffs
quickly and pushed to lower trade barriers in the Tokyo
on its head by drawing Round. Unfortunately, the stagflation of the 1970s is not
an appealing model for Trump 2.0.
a comparison with
Treasury Secretary
Baker’s efforts in 1985.
The chaos unleashed
ROBERT ZOELLICK by Trump might
Former President, World Bank, former U.S. Trade
Representative, former U.S. Deputy Secretary of State, and strengthen the dollar
former Counselor to Treasury Secretary James Baker
in both the short run

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reasury Secretary Scott Bessent is correct to wor-
ry about international financial imbalances, but his and long run.
disciples have turned economic history on its head
by drawing a comparison with Secretary of the Treasury
James Baker’s efforts in 1985. ESWAR S. PRASAD
First, Baker launched G7 economic cooperation— Professor, Dyson School, Cornell University, and Senior
including through exchange rate adjustments to lower Fellow, Brookings Institution
the U.S. trade deficit—in order to fight trade protection-

D
ism, not to justify higher tariffs. Indeed, the Monday onald Trump wants a weaker dollar in order to boost
after the Plaza announcement, the Reagan White House U.S. exports, protect U.S. jobs from foreign competi-
announced its Trade Policy Action Plan. President tion, and reduce the overall trade deficit. Trump also
Reagan needed Congress to authorize the negotiations wants a strong dollar and will not brook any challenges to
for the Uruguay Round of GATT to lower barriers and its dominance in global finance. Trump’s policies could
create the World Trade Organization. The administration well be at cross-purposes with both of those contradictory
also sought Congressional backing for the U.S.-Canada intentions. Contrary to his stated desires, those policies are
FTA. Baker led an inter-agency effort to gain negotiating likely to drive up the dollar’s value in the short run while un-
authority while resisting protectionist provisions in the dercutting the institutional framework that would preserve
1988 Trade Act. its dominance in global finance in the long run.

FALL 2024 THE INTERNATIONAL ECONOMY 17

 Tariffs on U.S. imports, restrictions on immigration, Christine Lagarde: Ursula von der Leyen, thanks for
and widening budget deficits would all drive up inflation your call. Wie geht’s?
and keep U.S. interest rates high, thus contributing both Ursula von der Leyen: Christine, I love when you
directly and indirectly to dollar appreciation relative to speak German. It rolls naturally off the tongue, n’est-ce pas?
other currencies. A stronger dollar, in tandem with re- What’s your take on the European economy these days?
duced national saving resulting from larger budget defi- Christine: Stagnant and anemic as usual. Little
cits, will in turn expand rather than shrink the overall U.S. change in sight.
trade deficit. Ursula: Well, that’s cheery. Anyway, that’s not real-
Trump’s attacks on the Fed’s independence, weaken- ly why I rang. Our buddy Donald called. He says he’ll
ing of the system of checks and balances, contempt for de-escalate the tariffs he just slapped on us if we boost the
the rule of law, and unpredictable policymaking should all euro in order to help him devalue the dollar. He’ll give me
contribute to a strong desire on the part of foreign govern- the royal treatment in Mar-a-Lago if I can deliver. Florida
ments and central banks to reduce their dependence on the sounds better than Northern Europe in winter. We should
dollar as an international payment and reserve currency. take this seriously to help transatlantic relations.
Ironically, the chaos unleashed by Trump will also cause Here’s my idea. You should slow any interest rate cuts
investors and central banks worldwide to search for safety, to keep differentials against the United States as narrow as
and there are few viable alternatives to the dollar as a safe possible. And I’m going to call Emmanuel and Giorgia and
haven currency. exhort them to ease off their budget consolidation plans.
The eurozone is wracked by economic malaise and A bit tighter monetary policy and more OATs and
political instability, China’s economy is beset by cycli- BTPs should push up rates, give the euro a big boost, and
cal and structural weakness, and there are no other major make Donald happy! Voila!
currencies backed up by strong economies and financial Christine: Ursula, that’s so creative I had never
systems. Even if the Trump era proves good for Bitcoin, thought of it. I’ll mull it over. Perhaps we can chat when
which is clearly in the cards due to his administration’s fa- I’m next in Brussels and it’s sunny.
vorable attitude toward cryptocurrencies, its volatile value
means it is hardly a safe asset. Viewers, here’s the second leaked chat.
Hence, in one final irony, the chaos unleashed by
Trump might, because of the relative weaknesses of other Donald Trump: Jinping, how’s my buddy?
major economies, strengthen the dollar in both the short Xi Jinping: Donald, we in China are so thrilled you’re
run and long run rather than hurting its value or dominance. B-A-C-K.
Donald: Everybody is. The dollar is overvalued. I
want to get our trade deficits down. China is a H-U-G-E
counterpart. As you know, I just jacked up tariffs on you.
But I didn’t really mean it. Ha-ha! I just want you to boost
the RMB and then maybe I can cut them back.
Two imaginary Jinping: Donald, China is a great, proud, strong coun-
try. It takes two to lion-dance. I can tell my central bank to
and clever let the RMB fall versus the dollar to offset your tariffs. We
can buy soybeans from Brazil, make our own planes or
conversations. buy them from Airbus, get cheap energy from Russia now
that Vlad is my vassal, impose export controls on critical
materials, make life even harder for your firms here, and
transship our products via Vietnam and Mexico. We can
make our own chips and compete with you on AI—at far
less cost I might add, and tank your Magnificent 7. Ha-ha!
MARK SOBEL Let’s make a deal—I love that show! Let’s
U.S. Chair, Official Monetary and Financial Institutions do another Phase 1 agreement, but we’ll call it the
Forum, and former Deputy Assistant Secretary for Diaoyutai-Mar-a-Lago Accord. Our negotiators can de-
International Monetary and Financial Policy, U.S. Treasury vise meaningless window-dressing commitments neither
of us has any intention of implementing. For example,

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e interrupt this program for Breaking News. you can even pledge to get your fiscal house in order. It’ll
Havoc just broke out in foreign exchange markets be just like Phase 1. We’ll declare victory and say it’s the
after hackers leaked the transcripts of two private greatest thing ever since the invention of sliced bread.
phone discussions. Roll the tape. What do you think?

18 THE INTERNATIONAL ECONOMY FALL 2024

 Donald: Jinping, great doing business with you. Let’s days, so they do not have all that much ammunition. Japan,
have our teams meet next week! through repeated currency intervention to keep the yen
from falling, has illustrated how ineffective they are today.
We return to normal programming. A major cause of the rising dollar is Trump’s threat of
a tariff war, with which he has alienated most of the world.
Trump opposes all multilateral diplomacy, and any cur-
rency accord would have to be multilateral, which Trump
Trump will not be is likely to oppose, and who would trust Trump after he
has dismissed the U.S.-Mexico-Canada trade agreement,
able to hold down the only significant international agreement he has con-
cluded? The international financial institutions have far
the rise of the dollar too small funds and too little leverage, so they cannot be
of much assistance.
unless the United Eventually, the U.S. public debt is likely to expand too
much, prompting foreign investors to demand ever-higher
States is being hit by interest rates, which will impede U.S. economic develop-
ment, but that might take time. The U.S. tariff war is likely
recession. to reduce global trade, which will hit also the United States.
President Trump will not be able to hold down the rise of
ANDERS ÅSLUND the dollar unless the United States is being hit by recession.
Senior Fellow, Stockholm Free World Forum

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resident-elect Donald Trump’s economic policy does
not hang together, so it is not likely to succeed. It is
likely to lead to overheating resulting in high infla- China, the primary
tion, labor shortages, larger deficits, bigger public debt,
inflation, a rising dollar, and in due time less economic target of the proposed
growth. Key ideas are high unilateral tariffs, deportation
of illegal labor in agriculture, hospitality, and construction, accord, is unlikely
deregulation, and low taxes for the wealthy. Meanwhile
cuts in expenditures are likely to fail. to cooperate.
All these policies are likely to keep inflation high,
which will compel the U.S. Federal Reserve to keep high
interest rates, as long as it remains independent. If the Fed
loses its independence, inflation is likely to rise further.
In the short term, the United States is set to have DOUGLAS REDIKER
higher growth rates, higher inflation, and higher interest Managing Partner, International Capital Strategies,
rates than other developed countries. Therefore, the cur- and Non-Resident Senior Fellow, Brookings Institution
rent large inflows of foreign capital are likely to continue,

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which will drive up the exchange rate of the U.S. dollar onald Trump’s reelection has brought renewed
even further. Since the United States will have large capi- focus on his economic priorities and trade strat-
tal inflows, it does not need to produce much, so its trade egies, particularly his contradictory rhetoric re-
deficit will rise further. garding the U.S. dollar. Trump has alternately called for
A new Plaza Accord as in 1985 is no longer possi- a strong dollar as a sign of American strength, a weak
ble. It was made by the G5. Now the far more complex dollar to encourage U.S. exports and address trade defi-
G20 would be needed. In 1985, the United States had cits, and occasionally a stable dollar, further muddying
very high interest rates, since then-Fed Chair Paul Volcker the administration’s messaging. Incoming U.S. Treasury
was determined to defeat high inflation. The high interest Secretary Scott Bessent is reportedly exploring a “Mar-
rates attracted foreign capital, which drove up the dollar a-Lago Accord,” modeled on the 1985 Plaza Accord. The
exchange rate. It was easier to curb this rise when U.S. proposal would reduce U.S. tariffs—primarily targeting
interest rates had peaked. China and possibly other nations—in exchange for a co-
Today, capital flows have become far larger and freer, ordinated effort to weaken the dollar.
so governments can no longer regulate them. Their curren- The success of the 1985 Plaza Accord depended
cy reserves are too small in relation to their economies these on close cooperation among the United States, Japan,

FALL 2024 THE INTERNATIONAL ECONOMY 19

 Germany, France, and the United Kingdom—nations with strategies that address economic fundamentals, not
aligned economic priorities and mutual trust. Today’s geo- even-greater politicization of monetary policy.
political and economic landscape is starkly different.
China, the primary target of the proposed accord, is
unlikely to cooperate in a coordinated effort to weaken
the dollar. Beijing’s currency policies prioritize domes-
tic stability and economic sovereignty, making sustained
intervention for U.S.-driven goals improbable. China’s The Plaza Accord’s
President Xi Jinping is a more confident leader than the
one Trump dealt with in his first term. His response to success was very
Trump’s bullying will not likely be to play along.
If the accord aims to include other major reserve short-lived.
currency economies such as the eurozone, Japan, and the
United Kingdom, other hurdles would arise. Coordinated
intervention would face governance challenges, disrupt
market-oriented currency systems, and conflict with do-
mestic monetary policies. Geopolitical uncertainties and
diminished trust in U.S. consistency further weaken the HEINER FLASSBECK
likelihood of collaboration. Trust is critical in currency Director, Flassbeck-Economics, and Former Director,
coordination, but Trump’s history of transactional policy- Division on Globalization and Development Strategies,
making and unpredictability may erode confidence among United Nations Conference on Trade and Development
potential partners.

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Markets are also likely to test such politically mo- o begin with, it must be noted that the Plaza Accord
tivated manipulation. Central banks might struggle to of 1985, with the agreement on a devaluation of the
maintain a weaker dollar against countervailing market U.S. dollar, was the political response to a massive
forces. If the dollar were to rebound despite intervention, speculative revaluation of the dollar against most other
Trump might respond by reinstating tariffs or resorting currencies in the first years of the 1980s. The real appre-
to unilateral measures, further destabilizing the global ciation of the dollar against most currencies in the world
economic system. at that time was on the order of 40 percent in just a few
Central banks could initially achieve currency ap- years. During the 1980s, the U.S. current account deficit
preciation by using dollar reserves to purchase their own had risen very rapidly from zero to more than 3 percent
currencies. However, this strategy would reduce their dol- of GDP.
lar reserves. Although China holds substantial dollar re- However, the Plaza’s success was very short-lived.
serves, many countries lack the flexibility to reduce their The dollar depreciated and the current account deficit dis-
holdings without jeopardizing critical buffers against ex- appeared within a few years, but the real dollar rose sharp-
ternal economic shocks. Reduced reserves could height- ly again from 1995 onwards. The U.S. deficit reached its
en financial instability and increase vulnerability to bal- maximum with more than 6 percent in 2005–2006. A re-
ance-of-payments crises, while also undermining the newed depreciation in the early years of the new century
predictability of U.S. Treasury markets globally. brought some relief in terms of the U.S. deficit, but the
The United States has historically championed decline was interrupted again at minus-2 percent.
market-determined exchange rates. A politically driv- The renewed real appreciation of the dollar, which
en effort to weaken the dollar would directly con- began around 2014, is quite massive, although some-
tradict this principle. Independent central banks and what more stretched over time compared to the 1980s.
market-determined exchange rates remain essential for Nevertheless, it also reached almost 40 percent between
ensuring global economic stability, financial resilience, 2014 and 2024. The reaction of the current account this
and sustainable growth. Inviting political intervention in time is amplified by the U.S. growth advantage, which
monetary policymaking around the world could result in has been particularly evident since the coronavirus crisis
broad-based negative implications far beyond any benefits compared to Europe. The U.S. current account deficits are
contemplated by a Mar-a-Lago accord. back above 4 percent.
A Mar-a-Lago Accord is thus unlikely to gain nec- It is obvious that the dollar is strong because the
essary international cooperation, deliver the desired United States has by far the most successful economic
outcomes, or avoid unintended systemic consequences, policy of the industrialized countries and, in particular,
leading to financial instability risks. The complexities of has shown relatively strong growth since 2010. Europe,
today’s geopolitical and economic environment demand which is comparable in size, is falling further and further

20 THE INTERNATIONAL ECONOMY FALL 2024

behind because it has imposed outdated constraints on it- industrialization amid a global division of labor, driv-
self in terms of public debt. en by multinationals’ optimizing resource allocations
In this situation, a politically orchestrated devaluation worldwide.
of the dollar would further strengthen the relative growth Moreover, the U.S. dollar’s status as the world’s dom-
position of the United States and would therefore not last inant currency and the U.S. Treasuries’ benchmark role
in terms of the value of the U.S. dollar. Only a combi- as risk-free assets keep demand for the dollar high. This,
nation of a devaluation of the dollar with a simultaneous combined with the Fed’s interest rate hikes to combat in-
change in economic policy in Europe would be effective. flation, keeps the dollar strong, making U.S. exports pric-
Europe would then have to start to understand that rising ier and imports cheaper.
government debt is inevitable in a situation where the en- Data from the Bank for International Settlements
tire private sector is acting as a saver. show that since 2011, the dollar has strengthened to a lev-
So far, the conservative and liberal parties in Europe el comparable to 1985, the year when the United States,
refuse to acknowledge this simple fact. It is therefore to France, Germany, the United Kingdom, and Japan signed
be feared that a one-time concerted action to weaken the the Plaza Accord to collectively depreciate the U.S. dollar
dollar would quickly peter out and be replaced by a new relative to the Japanese yen and the German Deutschmark.
appreciation of the dollar in the financial markets. A con- The Plaza Accord successfully devalued the dollar but
certed action would only be successful if there were also a failed to achieve its primary goal of correcting the U.S.
transatlantic agreement on the necessity of an active state trade deficit with Japan.
policy to stimulate growth. Otherwise, the United States Fast forward to today, a Mar-a-Lago Accord would
would have to be prepared to intervene without limit to need to include China, which accounts for about one-
prevent an appreciation of its currency. 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 renmin-
bi and reduce its export competitiveness is a tall order.
Even if the Trump administration can get the People’s
The proposed Bank of China to join the European Central Bank, Bank
of England, and Bank of Japan to coordinate policies to
Mar-a-Lago Accord weaken the dollar, such action does not guarantee lower-
ing the U.S. trade deficit.
may not be the China’s manufacturing prowess and competitive ex-
port industries surpass Japan’s in the 1980s. The com-
magic wand that petitiveness of Chinese export and manufacturing bases
is not merely due to an overvalued dollar and a weak
Trump is hoping for. renminbi, but stems from a long tradition of active in-
dustrial policies and high savings relative to household
consumption. A weaker dollar will not boost Chinese
ZONGYUAN ZOE LIU imports, especially given China’s weak consumer sen-
Maurice R. Greenberg Senior Fellow for China Studies, timent amid slower economic growth. Unless the U.S.
Council on Foreign Relations government relaxes export controls and grants China ac-
cess to advanced chips and technologies, it is unrealistic

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f the ultimate goal is to rebalance trade and transform to expect China to buy enough from the United States to
the United States from a net importer to a net exporter, narrow the trade deficit.
the proposed Mar-a-Lago Accord may not be the mag- Additionally, a weak dollar and tariffs will not stop
ic wand that the Trump administration is hoping for. The Chinese exporters from seeking higher profits abroad.
idea of a coordinated depreciation of the U.S. dollar in Fierce competition and razor-thin profit margins at home
exchange for lowered tariffs on key economies sounds due to years of massive capacity investment have driven
promising, but history and economic realities suggest Chinese manufacturers to set up production and assem-
otherwise. bly facilities in countries with trade agreements with the
The United States has run a trade deficit for much of United States, such as Mexico, Morocco, and Vietnam,
its history, with a persistent trade deficit since the 1970s. to diversify their supply chains and mitigate the impact
While a weaker dollar makes U.S. exports more com- of tariffs.
petitive and protectionist tariff hikes encourage “buying In conclusion, while a Mar-a-Lago Accord might
American,” the stubborn trade deficit is not just about sound like a strategic move, it is unlikely to achieve
trade policy or an overvalued dollar. It is an outcome of the desired trade rebalance. The complexities of global

FALL 2024 THE INTERNATIONAL ECONOMY 21

 trade dynamics, structural economic factors, and the en- exports more expensive for the rest of the world. As a re-
trenched positions of key players like China make it a sult, the trade imbalance may further deteriorate.
challenging endeavor. In sum, the announced policy mix is likely to
stimulate growth but can hardly achieve at the same
time low inflation and a smaller external trade deficit.
Furthermore, a stimulative fiscal policy is not consistent
with lower interest rates and a weaker dollar. Something
The economic policies will have to give, possibly after some tensions emerge
between policy actors.
that the new Trump For instance, some political pressure might be put on
administration intends the Fed to avoid raising rates, but this might backfire if
inflation rises again, hurting people’s purchasing power.
to implement are not International cooperation may try to prevent the dollar
fully consistent with from rising too much. However, past experience like the
Plaza or Louvre Accords shows that these agreements are
the stated objectives. short-lived and cannot persist unless they are supported by
domestic policies.
If these policy inconsistencies are not resolved, the
LORENZO BINI SMAGHI persistence of higher interest rates, aimed at avoiding in-
Chairman of the Board, Société Générale, and former flation, will produce downside asset price adjustments and
member of the Executive Board, European Central Bank discourage consumption and investments, leading to slow-
er economic growth.

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he economic policies that the new Trump adminis- The risk of a boom-and-bust economic cycle should
tration intends to implement are not fully consistent not be disregarded, with negative spillover effects on the
with the stated objectives. The objectives in them- global economy.
selves are not disputable, including stronger economic
growth, low inflation, and a smaller external payment
imbalance. The problem is rather with the set of policies
aimed at achieving these objectives, which entail a combi-
nation of external tariffs, tax cuts, deregulation, low inter- The implicit premise
est rates, a tough immigration policy, and a cheap dollar. that protection is
Let’s start with tariffs on imports to reduce the trade
deficit. If this measure is effective and not circumvent- far higher in other
ed through third-country trade flows and agreements, it
must lead at least in the short run to higher import pric- major economies than
es. This should slow down the pace of interest rate cuts in the United States
implemented by the U.S. Federal Reserve over the com-
ing months. Even if the Fed “sees through” the one-off is questionable.
rise in import prices, it cannot underestimate the risk of
second-round effects on domestic prices and wages. In
any case, it will take time before domestic production WILLIAM R. CLINE
replaces imports, if at all. President, Economics International Inc.,
Furthermore, the planned tax cuts can be expected to and Senior Fellow Emeritus, Peterson Institute
boost aggregate demand and put further pressure on infla- for International Economics
tion. On the other hand, slower immigration may create a

I
shortage of labor, pushing wages up. The Fed may thus be n the 1985 Plaza Accord, G5 countries agreed to inter-
under pressure to stop cutting rates sooner than expected vene in exchange markets to weaken an overvalued dol-
in order to prevent the economy from overheating. lar. To correct the economic fundamentals as needed to
As the U.S. economy grows faster than its main trad- make the intervention work, the United States committed
ing partners, in particular Europe and China, the dollar to undertake fiscal tightening, Germany was to cut taxes,
is bound to appreciate. The capital inflows generated by and Japan was to implement tax reform to strengthen pri-
expected stronger corporate earnings and higher interest vate demand.
rates will further support the exchange rate. This could President Donald Trump’s announced policies would
compensate for the effect of the tariffs and make U.S. instead widen the fiscal deficit. The Congressional Budget

22 THE INTERNATIONAL ECONOMY FALL 2024

Office estimates increased tariff revenue at about $3 tril-
lion over ten years, far below the revenue losses of about The decision to leave
$5.5 trillion for full extension of the 2017 Tax Cuts and Lighthizer out of the
Jobs Act plus another $5 trillion for new tax exemptions
on overtime, social security income, and tips, and for fur- administration is
ther corporate tax cuts.
Negotiating leverage for a sequel Mar-a-Lago cur- a strong indication that
rency accord based on the threat of higher tariffs would a currency deal is
lack credibility because Trump’s fiscal reliance on reve-
nue from new tariffs would mean that they could not be not on the agenda.
bargained away. The strategy would also fail to recog-
nize that higher tariff protection would cause the dollar
to strengthen, not weaken. The decline in U.S. imports DEAN BAKER
from higher tariffs would mean the United States would Senior Economist, Center for Economic
be sending fewer dollars abroad to purchase goods and and Policy Research
services, and the new scarcity of the dollar would make

I
it more expensive in foreign currency (the 1936 Lerner t would be a mistake to imagine that Donald Trump has
symmetry theory, whereby the induced appreciation acts a coherent policy on trade and the dollar. While he os-
as a new tax on exports equivalent to the new tariff). tensibly wants to reduce the trade deficit and increase
Under modern conditions of open capital markets, dol- U.S. manufacturing output, his statements do not consis-
lar appreciation would be further magnified by capital tently point in this direction.
inflows responding to a rising gap between U.S. interest Most notably, he has made keeping the U.S. dollar
rates and those abroad, as higher U.S. rates would be as the main international reserve currency a key priority,
needed to prevent higher inflation from the price boost including making bizarre threats against countries moving
imposed by the increase in tariffs. away from the dollar. It’s not clear why exactly Trump
The implicit premise that protection is far higher cares about the extent to which the dollar is used as a re-
in other major economies than in the United States is serve currency, but insofar as the dollar is more widely
questionable. World Bank data place average tariffs at used, it leads to a higher-valued dollar, which would mean
1.5 percent for the United States, versus 1.3 percent for a larger trade deficit, other things equal.
the European Union (despite its 10 percent rate on autos) On the other hand, Trump seems to view tariffs as
and 1.7 percent for Japan. Although tariffs and non-tariff an end in themselves, possibly under the delusion that
barriers tend to be higher in developing economies, foreign countries pay them. Tariffs can increase domestic
many would need to devalue exchange rates to maintain production but will only have much impact if they are co-
external balance if they reduced protection. China is the ordinated with domestic policies on infrastructure, train-
world’s largest exporter and producer of manufactured ing, and possibly subsidies, as the Biden administration
goods, and its non-tariff barriers and export subsidies has done with the CHIPS Act and the Inflation Reduction
warrant special negotiation. Act. Trump has expressed contempt for these policies. In
Agreements to correct exchange rate misalignment that context, the primary impact of tariffs will be trade di-
also imply the parties agree on reasonable limits to sur- version and higher prices.
pluses of the countries being asked to raise their exchange Trump also seems to view tariffs as an opportunity to
rates. The U.S. Treasury has applied a current account wage economic war. He insists that our trading partners
ceiling of 3 percent of GDP as the threshold in one of the are somehow ripping us off if they have a trade surplus,
criteria for designating a country as a currency manipula- when most of the largest ones have no more barriers on
tor. But the International Monetary Fund’s five-year pro- U.S. exports than the United States places on their ex-
jections of surpluses of the major economies are below ports. In this context, the purpose of Trump’s tariffs seems
this level for China (1.6 percent) and the euro area (2.3 to be to claim a victory, when a deal is reached, whether
percent), and only slightly above it for Japan (3.4 percent). or not it is based in reality.
In 2010, U.S. Treasury Secretary Timothy Geithner was Trump told us how serious he was about trade and
unable to get G20 economies to agree to a 4 percent of the dollar when he opted not to offer Robert Lighthizer,
GDP ceiling on current account surpluses. Overall, there his trade representative in his first administration, a top
are several problems with a Mar-a-Lago economic strate- position. Lighthizer is very knowledgeable about the intri-
gy, and if pursued it should not be allowed to distract from cacies of trade policy. He is exactly the sort of person that
the need for U.S. fiscal adjustment that does not depend an administration would want if their goal was to craft a
on major increases in tariff revenue. new Plaza-type accord on currency values.

FALL 2024 THE INTERNATIONAL ECONOMY 23

 The decision to leave Lighthizer out of the adminis- If the new administration tries to pursue a strong dol-
tration is a strong indication that a currency deal is not on lar policy by buying dollars and selling foreign exchange,
the agenda. Negotiating a deal even in the best of circum- an important question is whether participants in the capital
stances would be a difficult process, since China, which is (foreign exchange) market would believe that the appreci-
not a close ally, would have a central role. By contrast, the ated exchange rate was sustainable. If so, there could be
Plaza Accord was crafted with countries that were heavily an increase in the demand for dollar assets in anticipation
dependent on the United States for military protection, in of the policy. More likely, however, market participants
addition to being major trading partners. In short, a Plaza would anticipate that the strong dollar policy could not
Accord-type agreement does not appear to be on the agen- be sustained (barring changes in macroeconomic policy
da in a Trump administration and would likely not get far or other macro changes) and would therefore on net sell
even if it were. dollar-denominated assets, thus adding to the pressure
for depreciation that the enlarged current account deficit
would put on the dollar.
With an increasing deficit, the dollar would like-
ly weaken and U.S. government intervention in the for-
There is no evidence eign exchange market would have to increase to sustain
that either a strong a strong dollar. As U.S. liabilities (dollar debt) increased
and U.S. holdings of foreign exchange assets decreased,
dollar policy or higher other measures would have to be taken or the policy would
be unsustainable.
tariffs would raise Now consider the effect of a relatively large increase
U.S. savings or lower in tariffs for virtually all imports. The evidence from the
initial Trump tariffs supports what economic theory indi-
U.S. investment. cates: foreign exporters would not lower their export pric-
es to absorb tariff costs, so the domestic prices of imported
goods (and of U.S.-produced items competing with them)
ANNE O. KRUEGER would increase. Consumers would surely reduce their
Senior Fellow, Johns Hopkins School of Advanced quantity of purchases of those commodities (and services)
International Studies, and former First Deputy Managing and that would reduce imports. As domestic prices of in-
Director, International Monetary Fund puts used in production (which constitute a large fraction
of imports) rose because of tariffs, those American man-

W
hen a country is incurring a current account defi- ufacturers using imported inputs would find their costs
cit, it is importing more goods and services than had risen; those among them that were exporting would
it is exporting and spending more than its income. find their products less competitive internationally as they
That is the situation in which the United States finds itself. competed with foreign producers who were confronted
The domestic counterpart of the current account deficit with lower (international) prices. The U.S. price level
is the excess of expenditures over income in the United would rise.
States. The deficit will change only if the excess of expen- Worse yet, the United States is sufficiently important
ditures over income changes. internationally that it is highly improbable that tariffs of
First, consider a strong dollar policy alone. Start with the magnitude suggested would not be met with retalia-
the current account. If the dollar were to become stron- tion. That already happened with Trump tariffs imposed
ger (to appreciate), that would make American products earlier, and the larger size of the suggested tariffs currently
more expensive for foreigners and foreign goods cheaper being discussed would make retaliation virtually inevita-
for Americans. Barring other changes, Americans would ble and even larger. That, too, would cut U.S. exports.
export less and import more, thus increasing the deficit. Moreover, while there would be some foreigners
But importantly, the exchange rate is determined by investing in the United States to benefit from tariff pro-
the supply and demand for a currency. In the case of the tection, there would likely be more foreign owners of
U.S. dollar, there is a large market in foreign exchange to exporting producers and traders who would then reduce
finance direct foreign investment and other capital flows. their future investments, if not sell some part of their U.S.
Many foreign private parties and governments buy and dollar-asset holdings. Uncertainty as to whether the tariffs
sell dollars to invest in U.S. assets and to hold in their would be once-and-for-all increases or would be followed
reserves, and Americans do the same with foreign assets. by further protectionist measures would discourage pur-
The net capital flows determine the balance on the cap- chase or holding of dollar assets. Indeed, there should be
ital account. concern as to whether such a seismic shift in U.S. trade

24 THE INTERNATIONAL ECONOMY FALL 2024

policy might not trigger a major selloff of dollar assets in enough to change the Fed’s intentions. By the same token,
the United States and abroad. while some foreign governments might be ready to buy
There is no evidence that either a strong dollar policy off Trump in hopes of forestalling U.S. tariff hikes, it is
or higher tariffs would raise U.S. savings or lower U.S. doubtful they would be able to induce their central banks
investment. Indeed, while there might be short-run effects, to go along.
over the medium and longer term the strong dollar would Even if central banks agreed to help lower the dol-
be unsustainable and the tariffs harmful to growth and lar, and even if they succeeded, it is doubtful that Trump’s
macroeconomic stability. cherished dream of erasing the U.S. trade deficit would
be realized. While looser monetary policy might trigger
a decline in the dollar, inducing some adjustment of trade
flows, it would also encourage greater aggregate spend-
ing, and this would moderate the decline in imports.
Meanwhile, monetary tightening abroad would lower for-
Any effort by eign demand for our exports. Therefore, any effect of the
lower dollar on the trade balance is likely to be blunted.
governments to And that will especially be the case as long as the U.S.
government continues to spend far more than it earns.
lower the dollar is And this brings me to my last point. A Mar-a-Lago
accord to lower the dollar would not only be ineffectual
doomed to failure. and counterproductive—it would be pointless. The big-
gest threat to U.S. growth and prosperity is not the trade
deficit—it is the federal budget deficit, which is now run-
ning at over 6 percent of GDP. Continued large deficits,
STEVEN B. KAMIN mounting debt levels, and rising interest payments will
Senior Fellow, American Enterprise Institute, and former increasingly call into question the very solvency of the
Director, International Finance, Federal Reserve Board federal government. The Mar-a-Lago accord this country
of Governors needs is not a deal with foreign governments to lower the
dollar, but a broad-based agreement among domestic po-

M
y wife frequently accuses me of failing to make litical stakeholders to put our budgetary house in order.
the transition to life in the twenty-first century. It
is true that I rarely use social media, I like read-
ing print newspapers, and my musical tastes are stuck
in the 1970s and 1980s. But that said, I have no interest
in reliving the glory days of international exchange rate
coordination. A weak dollar
For starters, any effort by governments to lower the
dollar is doomed to failure. Foreign exchange market in- policy could
tervention will not lead to a sustained and substantial de-
preciation of the dollar unless accompanied by supportive immediately shake
monetary policies: loosening by the Fed and tightening by
our trading partners. But independent central banks such the stock market.
as the U.S. Federal Reserve, the European Central Bank,
and the Bank of England will undoubtedly balk at joining
a Mar-a-Lago accord.
Why? Simply put, there’s a good reason for the dol- GARY CLYDE HUFBAUER
lar’s strength. The U.S. economy has been growing brisk- Nonresident Senior Fellow, Peterson Institute for
ly in recent years, while many of our trading partners International Economics
have languished. A substantial depreciation of the dol-

A
lar, and the monetary policies required to bring it about, mong Trump’s disruptive policies is deliberate dollar
would not be in the best interests of either us or them. devaluation to cure the U.S. trade deficit, now run-
At its December policy meeting, the Fed scaled back the ning around $1 trillion annually. The contradiction
extent of monetary easing it anticipates next year in light with other Trump priorities—broad-based tariffs and lower
of the strength of the U.S. economy and continued worries taxes—does not, for the moment, trouble the president even
about inflation; a deal to hold off on tariffs will not be though these other policies would strengthen the dollar and

FALL 2024 THE INTERNATIONAL ECONOMY 25

 increase the trade deficit. The crunch will come when the and is it causing the competitiveness issue for the United
federal budget deficit escalates to 8 percent of GDP, around States that apparently it did back then? Second, is the new
$2.4 trillion annually, the trade deficit approaches $1.5 tril- president likely to enjoy grand bargains with many coun-
lion, and the dollar continues to rise against the euro, the tries, or delegate to his Treasury secretary? Third, are oth-
yen, and other key foreign currencies. er countries in the position to adjust their policies to keep
At that golden moment, will Trump really instruct the president content about things in order to stop his tariff
Treasury Secretary Scott Bessent to talk down the dollar, threats from being anything other than a threat?
and jawbone Federal Reserve Chairman Jerome Powell On the first, based on the familiarity I have with my
to do likewise? Speculation about Trump’s future actions own past efforts of estimating fair value for exchange
is a hazardous proposition. But whatever delayed effect rates, whether purchasing power parity or equilibrium real
devaluation might have on the trade deficit, a weak dollar exchange rates, it is not clear that the dollar’s overall over-
policy could immediately shake the stock market. After valuation is close to the clear extremes of the 1980s. An
the Smithsonian Agreement of December 18, 1971, the important factor, which is observed independently but of-
Dow Jones Industrial Average had a bad year. But after ten not linked to this specific issue, is the apparent relative
the Plaza Accord of September 22, 1985, the Dow Jones strength in U.S. productivity in recent years, at least com-
rose. So the record of bygone weak dollar policy tells con- pared to the rest of the G7. If this is accurately represented
flicting stories. Trump views the stock market as a barom- in the current data, then this also means the equilibrium
eter of his political prowess. If his closest advisors fear real exchange rate fair value for the dollar itself is rising
adverse political consequences of a weak dollar, Trump relative to the likes of the yen, euro, pound, Canadian dol-
might discard campaign musings. But if his advisors see a lar, and so on, and possibly also the Chinese RMB. This
weak dollar as a political winner, watch out! All told, the would not be evidenced by a more simple PPP calculation.
long-term impact of dollar policy on the trade deficit will In the 1980s, both showed significant dollar overvaluation.
likely take second place to Trump’s short-term political This said, the dollar would be notably overvalued against
calculations, keyed off his financial market soothsayers. the yen still, modestly overvalued against the RMB, euro,
and pound today based on a REER approach, but less so
than a PPP model would show.
Second, would Trump be interested in some grand
multi-country deal? It doesn’t seem to be his style, nor
would delegating such a deal to his Treasury secretary
It takes one back be something that one would guess is top of his person-
al goals. More likely perhaps is a series of bilateral deals
to the glory days of which could coincide and be dressed up as a grand Plaza-
style deal. For example, with China’s President Xi Jinping,
foreign exchange. Trump could say “You guarantee that domestic demand is
going to increase by X, and that you will import more of
A, B, and C from the United States, and we will have a
deal.” And for Germany, the line would be, “You abandon
your domestic growth-constraining debt brake and give
clear plans to boost investment and defense spending to 3
JIM O’NEILL percent of GDP or more, and build more auto plants here
Former Commercial Secretary to the Treasury, United in the United States, and we have a deal.” The same goes
Kingdom, and former Chairman, Asset Management, with others, although perhaps because of their relative im-
Goldman Sachs International portance to their own geographies and therefore the world
economy, these two countries would be crucial.

W
hat to make of it, of course, takes one back to the Third, would these countries want to make such deals?
early days of Smick-Medley and the glory days On the one hand, it seems clear that they should because it
of foreign exchange. I am sure the prospects, is what their own people deserve and should have had for
however probable, bring back great memories. Could we many years, if not decades, and again, as many of this mag-
have a more modern, sophisticated, creative, and positive azine’s long-time contributors have articulated for many a
version of the Plaza Accord? It is certainly up the street of decade, it would help make the world economy more bal-
the new Treasury secretary and all those that have influ- anced and probably less prone to some of the economic
enced him. shocks that have occurred since the 1980s.
There are perhaps three key strands. First, is the dol- In many ways, the Plaza Accord delivered the ex-
lar overvalued in the way it was back in the mid-1980s, change rate adjustment, but didn’t really result in the

26 THE INTERNATIONAL ECONOMY FALL 2024

underlying structural policy responses. In those days, it on investment not destined for actual production of prod-
was more Japan and Germany, and not China, but Japan ucts in the United States. The money arising from the fee
has been stuck with the same domestic demand weakness would flow into an infrastructure investment fund aimed
ever since. These days, it has become smaller and less rel- at renewing the badly eroding U.S. infrastructure.
evant on a relative basis, with India poised to overtake it, if Thus it would both dampen the U.S. trade deficit and
it hasn’t already, in terms of size. But is China for its own renew badly eroded U.S. infrastructure.
domestic political or other hard-to-ultimately-understand
reasons fundamentally averse to lowering its domestic
savings rate and boosting demand, other than infrastruc-
ture? The same for Germany. It has been clear to me even
before the euro crisis, and despite the calmness since, that Any “grand bargain”
for the euro to have a more permanently secure footing,
having its largest populated member—around 25 percent
that has even a remote
of the euro economy—providing a persistent source of chance of success would
demand for itself and its partners would do wonders for
the European financial markets, including probably the require more significant
trading value of the euro. Indeed, if China and Germany concessions than Trump
were to each adopt these broad steps, the dollar would be
highly likely to also decline in value in a more sustained will be willing to make.
healthy way for all.
In this context, I truly hope there is something to the
notion of a Mar-a-Largo accord, rather than some of us WILLIAM A. REINSCH
reminiscing. Senior Adviser and Scholl Chair Emeritus,
Center for Strategic and International Studies,
and former President, National Foreign Trade Council

S
uccessful conclusion of a Mar-a-Lago Accord—
coordinated depreciation of the U.S. dollar in ex-
What about change for lowered tariffs on key economies—sen-
sible though it might be, would require major changes in
a market thinking by key actors that are unlikely to occur. First,
while some of Trump’s advisors have argued for a weak-
access charge? er dollar, the president-elect himself has maintained
he favors a strong dollar. History shows he has strong,
fixed views on international economic issues that have
not changed much in forty years. Trump has for years
favored tariffs as a tool to reduce trade deficits and pro-
mote reshoring of manufacturing. Switching to the more
CLYDE V. PRESTOWITZ indirect approach of dollar depreciation would require a
President, Economic Strategy Institute major shift in his philosophy. One could argue that his
proposed tariffs are merely a tactic to force a global re-

T
he U.S. dollar has long been over-valued as indicat- balancing, part of which would be a U.S. commitment to
ed by the chronic U.S. trade deficit now running at remove the increased tariffs, but it is unlikely our major
about a trillion dollars annually. A consequence of trading partners will be fooled by a promise simply to
this deficit is that foreign interests are drowning in excess return U.S. tariffs to the status quo ante while they push
dollars and are returning them to the United States in the their currencies upwards.
form of foreign investment. This could be beneficial for The other key actor in any accord scenario is China,
the United States if the investment were being made into which has long been skeptical of such arrangements,
new factories and technology. Unfortunately, this is not having watched Japan’s post-Plaza Accord experience.
the case. Indeed, it is mostly being made in luxury real China’s response to every economic crisis, including the
estate, and other non-productive entities. current one, has been to try to export its way back to eco-
To create incentives for productive investment, nomic health. Expecting a coordinated currency apprecia-
John Hansen, myself, and others, have been proposing tion without more significant concessions from the United
a Market Access Charge. This would essentially be a tax States is unrealistic. It is similarly unrealistic to expect

FALL 2024 THE INTERNATIONAL ECONOMY 27

 eurozone countries or the United Kingdom to agree to Pushing for dollar decline will not be easy given that
currency appreciation in their current situation. the “Washington Consensus” has long supported a strong
Third, while the president-elect sees himself as a dollar and the dollar as the global reserve currency. During
successful dealmaker, his idea of a deal is one where the President Trump’s first term, U.S. Treasury Secretary
United States makes few if any concessions while pres- Steven Mnuchin said, “I support a stable dollar,” by which
suring the other parties to make significant ones. His ne- he meant he opposed trying to reduce the value of the dol-
gotiations with China, Japan, South Korea, Canada, and lar. U.S. Treasury Secretary Janet Yellen has made clear
Mexico during his first term all demonstrate that he con- that she would not intervene to help raise the value of the
sistently favors sticks over carrots. Any “grand bargain” yen and lower the value of the dollar. And Trump recently
that has even a remote chance of success would require threatened the BRICS with tariffs if they seek an alter-
the United States to make more significant concessions native to the dollar, even though that would make U.S.
than he will be willing to make. exports cheaper.
There are two problems with dollar defense. First,
over the moderate to long term, a strong dollar is a result,
not a cause, of competitiveness and national strength. As
U.S. competitiveness, especially in advanced industries,
continues its long slide downward, it is only a matter of
Pushing for time before the dollar is dethroned.
Second, a strong advanced industrial base is much
dollar decline more important to U.S. national power than having the re-
serve currency. Wars are won or lost on kinetic weapons,
will not be easy. not currency flows. A strong dollar acts as acid that eats
away at the foundation of U.S. industrial capacity.
So if actions to change the prices of imports and ex-
ports are to be taken, the far more positive step is for Plaza
Accord II: in other words, pressuring other nations to raise
the value of their currencies vis-à-vis the U.S. dollar. And
ROBERT D. ATKINSON for China, the Trump administration should take other ac-
President, Information Technology and Innovation Foundation tions to drive the dollar down vis-à-vis the RMB.

P
resident Donald Trump is right that the massive U.S.
trade deficit is neither healthy nor sustainable. It’s
not healthy in that it reduces U.S. manufacturing
strength, including in advanced and dual-use industries.
It’s not sustainable in that at some point other nations will There are structural
tire of sending us cars, steel, and machines in exchange for
promissory notes. reasons for the U.S.
The problem is that Trump’s solution—tariffs—
won’t work. Tariffs will almost surely lead to retaliation dollar to remain
in the form of tariffs on U.S. exports, leading at best to a
modest decline in the trade deficit. relatively high.
The better solution is to drive down the value of the
U.S. dollar relative to other currencies. International eco-
nomics 101 teaches that a country’s currency valuation
should fluctuate based on the economy’s current account JOHN LEE
balance. If the country is running a deficit, the value of Senior Fellow, Hudson Institute, and former Senior National
its currency should fall to make imports more expensive Security Adviser to the Australian government
and exports cheaper. Conversely, if a country is running

T
a trade surplus, the currency should rise in value. This is he U.S. dollar is the dominant currency in the world
how markets are supposed to work. when it comes to a reliable and long-term store of
Unfortunately, in America’s case they do not. The value and as a widely accepted currency with which
United States has run a current account deficit pretty much to transact. Adding to the high floor price for the value
every year for the last half-century because the dollar re- of the greenback against other major currencies is the re-
mains the reserve currency. ality that geopolitical instability and uncertainty increase

28 THE INTERNATIONAL ECONOMY FALL 2024

demand for the greenback as a safe-haven currency. For
these reasons, there are structural reasons for the U.S.
dollar to remain relatively high vis-à-vis other major A global currency
currencies.
As Trump returns to the presidency, he is unlikely smoothing process
to achieve a coordinated depreciation of the U.S. dollar
against other major currencies such as the euro, yen, and should be part of an
renminbi. It is difficult to see Europe, Japan, and China
agreeing to a Mar-a-Lago Accord in some form. ongoing dialogue.
Indeed, I do not think a coordinated appreciation of
one’s currency against the dollar is Trump’s highest stra-
tegic objective in any event. His primary intention is to
reinvigorate and revive American manufacturing and the GARY KLEIMAN
country’s industrial and technological bases. Rather than Senior Partner, Kleiman International Consultants
a coordinated depreciation of the greenback which will be

T
difficult to achieve, Trump is better off focusing on other he forty-year-old Plaza Accord among the G7 in-
factors: lowering the cost of energy in the U.S. economy, dustrial powers was aimed at trade rebalancing with
lowering corporate taxes, and eliminating or reducing bur- Asia, then Japan, under implied U.S. and Europe
densome regulations. It also appears that Trump will use tariff threat, after currency swings had helped sink a
tariffs to persuade or else compel foreign firms to invest prominent German bank. Emerging markets as an asset
and locate operations within the United States. But a Mar- class or organized group through the G20 or BRICS did
a-Largo Accord is neither likely nor necessary to achieve not exist, and still today have no globally accepted liq-
Trump’s higher objectives. uid units for public or private holders. China’s RMB is
Regarding tariffs, Trump will use the threat of these routinely cited as the likeliest candidate, especially after
against allies and friendly economies to encourage firms it was added to the International Monetary Fund’s SDR
from those countries to invest in the United States and basket, but its weight in foreign exchange reserves and
as a coercive negotiating tool to extract concessions trading remains under 5 percent. It has caught up to the
such as higher defense spending in return for American yen which has stagnated in world markets since its 1990s
protection. When it comes to China, tariffs will be used asset bubble popped and is increasingly used in bilater-
for a different purpose. Unlike Europe and Japan who al import/export settlement, especially with sanctioned
are seen as economic competitors, China is perceived counterparts like Russia and Iran. Local currency use for
by Trump to be a geopolitical and economic rival to the this purpose is a far cry from the universal circulation
United States. This means that measures such as tariffs presumed under the original Bretton Woods exchange
and export controls will be used to structurally prevent rate arrangements abandoned in the 1970s, which then-
China from gaining economic and technological ascen- U.S. Treasury Secretary James Baker and his counter-
dancy over the United States in what is seen as a compre- parts managed to temporarily revisit under their joint
hensive geopolitical contest between the two countries. intervention hotel accord. China, despite its command-
This is a very different mindset and framing to the use ing weight in emerging market equity and bond indices,
of tariffs and other tools to give the United States a com- remains an outlier with the yuan peg in a daily 2 percent
petitive advantage against “friendly” economies such as fluctuation limit against a mostly hard currency basket,
Europe and Japan. and an overall exchange control system that still impos-
To be sure, managed currency policies through in- es quotas on domestic institutional investment in foreign
tervention in money markets by their central banks is a assets. The emerging market mainstream has a free float,
source of annoyance for Trump. He also seems unhap- and neighbors like South Korea and Taiwan have pension
py that a manufacturing and trading powerhouse such as funds and insurers that massively diversify into overseas
Germany enjoys the advantage of a euro that is lower in securities to match their high-tech goods prowess.
value against the U.S. dollar than the previous German A Mar-a-Lago update with meaningful emerging
deutsche mark might have been. But U.S. dollar appreci- market participation would have to forego grand signoff
ation is not the strategic endgame, especially since Trump with a single member or select parties and cast the net
wants the U.S. dollar to remain the world’s reserve cur- widely to influence broad currency direction. An agree-
rency. Therefore, he is unlikely to waste his political or ment with China would have ripple effects most closely
coercive capital on establishing a Mar-a-Largo Accord, with East Asian neighbors whose currencies are aligned
and instead pursue different bilateral objectives against but not in lockstep, but other countries with influential
individual economies such as Europe, Japan, and China. weights and reputations should be part of negotiations.

FALL 2024 THE INTERNATIONAL ECONOMY 29

 Investors have long treated Mexico’s peso and South dollar. Admittedly, the trade-weighted dollar is now not
Africa’s rand as proxies for the universe, with positions far off Plaza Accord levels when viewed in real terms.
reflecting risk on and off sentiment. They are traded But a stronger real exchange rate can be justified by the
both at home and on foreign markets like the Chicago improvement in America’s terms of trade and its fast-
Mercantile Exchange, where large exposures can be er rates of productivity growth relative to other major
taken in spot, forward, and more sophisticated deriva- advanced economies. At the same time, U.S. policy is
tives versions. Brazil and India in turn as charter BRICS contributing to a stronger dollar. Fiscal policy requires
members have advanced futures and options offerings a tighter monetary policy than would otherwise be the
domestically with a sizable non-resident presence. case. And the threat of tariffs is only adding to upward
Under club expansion, central bank reserve managers pressure on the dollar.
are now looking to hold each other’s currencies, while All of this matters because history shows that coordi-
state and private financial institutions likewise begin to nated action to move markets tends to be most successful
supplement their portfolios with Global South denomi- when it is intended to correct a fundamental mispricing.
nations. A global currency smoothing process as an ad- As things stand, the dollar looks only slightly overvalued.
junct to mixed local and regional efforts in developing This is not to say that some sort of “deal” won’t hap-
economies should be part of an ongoing dialogue that pen. Donald Trump prides himself on being a dealmaker.
could be catalyzed with invitations to the Florida resort, It is easy to envisage his administration lowering tariffs on
just like the New Hampshire one eighty years ago, as a China in exchange for promises from Beijing to purchase
true successor to the Plaza spirit. more U.S. goods or to allow the renminbi to strengthen a
bit. But this would be a far cry from the multilateral action
of four decades ago, and skepticism around the idea of
Trump orchestrating a large and sustained adjustment in
History shows that the dollar is warranted.
Instead, close attention should be paid to America’s
coordinated action to balance of payments. The U.S. current account deficit was
move markets tends to be closing in on 4 percent of GDP at its last reading while
most successful when its primary income balance was in deficit. This may not
intended to correct a pose an imminent threat to the dollar. But viewed over the
medium term, the quiet deterioration in America’s balance
fundamental mispricing. of payments provides a more compelling reason than ex-
The dollar looks only pectations for some kind of Mar-a-Lago Accord to believe
slightly overvalued. that the dollar might eventually start to weaken.

NEIL SHEARING
Group Chief Economist, Capital Economics Treasury Secretary

E
fforts to repeat the Plaza Accord with a globally coor- Bessent is uniquely
dinated devaluation of the dollar—a so-called “Mar- capable of orchestrating a
a-Lago Accord”—would face significant challenges
in today’s geo-economic climate. coordinated depreciation
Some are political. The co-signatories of the agree- of the dollar that would
ment signed at the Plaza Hotel in 1985 were all U.S. al-
lies. Today’s key protagonists are the United States and lead to a more balanced
China, two countries enmeshed in a deepening super- global trading system.
power rivalry. This will make it harder to reach a deal.
China’s President Xi Jinping cannot be seen to capitulate
to U.S. demands. The United States would have to make RYAN EHLEBRACHT
significant concessions to extract the same from China. Founder and Chief Investment Officer, Low Tide
This reduces the chances of any substantive change to Capital Management
the current economic relationship between Washington

I
and Beijing. agree with the Reagan era mantra that “personnel is pol-
More fundamentally, the economics of the current icy,” and U.S. Treasury Secretary Bessent is uniquely
situation do not point to an imminent weakening of the capable of orchestrating a coordinated depreciation of

30 THE INTERNATIONAL ECONOMY FALL 2024

the U.S. dollar that would lead to a more balanced glob-
al trading system benefiting American industry over Wall
Street financial engineering. Such a deal is not
Trading is about managing the path, not the destina-
tion. Successful macro trading comes down to anticipat- going to happen.
ing second-order effects as reflexive markets create their
own path as policymakers react to present conditions. A
world-class macro trader conducting economic statecraft
can identify the destination and lead the market down the
path that best accomplishes the goal.
This entails taking a hard line on tariffs right out of
the gate and unleashing the U.S. dollar wrecking ball. The
euro/U.S. dollar rate should quickly be on its way below EV EHRLICH
the 2022 low of $0.95. China’s economy is already on the President, ESC Company, former Undersecretary of
edge, and a move in dollar/offshore renminbi above ¥7.50 Commerce,1993–1997, and former Chief Economist and
will put the fear of capital account pressures front and cen- Head of Strategic Planning, Unisys Corporation
ter in Beijing.

S
With the U.S. ten-year yield approaching 5 percent uch a deal is not going to happen.
(4.8 percent as of this writing), there will be restraints on First, the conditions that made the Plaza Accord
President Donald Trump’s ability to extend the 2017 tax possible don’t exist today. Today’s far deeper currency
cuts without budget cuts elsewhere. But fiscal consolida- markets mean intervention would have to take a back seat to
tion and a reversal of the Biden deficit-fueled economic meaningful fiscal and monetary policy coordination. Forty
strength will not be enough for a sustained peak in the years ago, the United States implemented Gramm-Rudman
U.S. dollar. Aggressive cuts to the bloated federal gov- spending guidelines and the Bradley-Gephardt tax (reform)
ernment from Elon Musk’s Department of Government increase, both of which reinforced the goal of a lower dollar
Efficiency program would likely cause economic condi- exchange rate. Today, DOGE machinations notwithstand-
tions to deteriorate enough to get significant rate cuts from ing, there’s no appetite for spending reductions or—Heaven
a U.S. Federal Reserve that continues to have a dovish forfend!—tax increases. Moreover, unlike Plaza, the target
reaction function. of present American ire is China, and the Chinese have even
With the United States finally in an economic slow- less appetite for the requisite policies to let their currencies
down and a U.S. dollar that has ideally already signaled appreciate than our other trading partners do. Besides,
a short-term topping pattern, it will be time to organize China’s long-term goals in this sphere are not coordination,
a gathering at Mar-a-Lago with the Chinese and new but replacing the dollar as a reserve currency—that’s both
German government. A Sunday afternoon announcement unlikely and far away, but it’s the lens through which they’ll
of forceful fiscal expansion in Germany combined with view their interests.
the Chinese Politburo launching the long-awaited bazoo- Second, the overshooting stemming from Plaza,
ka focused on domestic consumption should be amplified which necessitated the 1987 Louvre Accord and led to
by a joint operation by China and the United States to sell wild asset price swings both here and in Japan, shows that
dollars/buy renminbi on the market open. An announce- this type of coordination takes time, patience, and political
ment of the removal of tariffs on the New York market’s will. A Mar-a-Lago Accord would require sustained goals
open should lead to a day for the history books. and actions among the poles of the international econo-
Accepting this path will be difficult for a president my. But it would be born amid a series of other tensions
who is known to view daily fluctuations in the market all but unimaginable forty years ago—Ukraine, possibly
as his real-time personal ratings. Rather than winning a Greenland, Taiwan, climate, abandoning NATO—we
race to 8,000 in the S&P 500, the goal should be to set all know the list. The G5 in 1985 shared a mission—
the market up with a foundation to eventually rip into the preserving the rules-based international trading system.
2026 midterm elections, giving the administration the Today, in a world in which autarchic nationalism is alive
best chance to continue pursuing productivity-enhancing in the United States and growing quickly elsewhere, not
structural reforms. It’s worth reminding the president that much is shared or sustained except anger.
shortly after Mar-a-Lago’s construction was complete, the Finally … what? The premise is that the Trump admin-
Republicans won in a landslide in 1928, with the Dow istration will bargain with the other major economies by put-
Jones Industrial Average rallying nearly 50 percent from ting a tariff gun to its own head and our partners will be ea-
Hoover’s victory to September of 1929. ger to stop them. Forty years ago, the Plaza occurred against
These views are not intended as investment advice. the backdrop of burgeoning trade deficits and concomitant

FALL 2024 THE INTERNATIONAL ECONOMY 31

 capital inflows—things that had happened. Why should our allies—indeed, the group of Plaza members later became
trading partners rush into an agreement because of some- the G7. Today, the United States would need to strike a
thing that might happen? The Europeans would be wiser to deal with a broader set of countries including adversaries
dare Trump to pull the tariff trigger, boosting U.S. inflation such as China and major emerging markets such as India
by more, I believe, than most conventional estimates, while and Vietnam. Reducing the U.S. trade deficit today would
disrupting supply chains and slowing growth. Once again, almost certainly require a combination of tools including
the wisest counsel regarding Trump is to let what he says negotiated deals; direct actions like tariffs, restrictions on
pass while waiting to see what he’ll actually do. capital inflows, and/or direct U.S. currency intervention;
The Plaza Accord was ultimately a success, but it’s and policies to make U.S. production relatively more ef-
not a template that can be repeated today. Rather, it’s a ficient. A currency deal will be useful but not sufficient.
reason to rue the stability and perspective of the world But the Plaza Accord nevertheless holds important
we’ve since lost. lessons for Trump and his team as they consider mecha-
nisms to reduce persistent trade imbalances.
The first lesson is that “trade rules” will not solve
trade deficits. Since the 1990s, the United States has pur-
sued a highly legalistic trade agenda, promoting rules
for subsidies, labor, the environment, and other topics.
The Plaza Accord Rules have many benefits, not least providing certainty
to firms while promoting socially desirable outcomes.
nevertheless holds But they have proven woefully inadequate at addressing
imbalances.
important lessons The Plaza Accord did not attempt a rules-based ap-
proach to determining the “fair” value of a currency or to
for Trump. ending “currency manipulation.” Instead, it effectively
committed signatory countries to a program of manipulat-
ing currencies to achieve an agreed substantive outcome—
reducing the dollar’s value. If Trump wants to close U.S.
PETER E. HARRELL trade deficits, he should pursue policies designed to close
Nonresident Senior Fellow, Carnegie Endowment for them rather than policies designed to set rules for trade.
International Peace, and former White House Senior Director A second lesson is the importance of signaling to the
for International Economics private sector. Plaza Accord governments ultimately only
intervened in currency markets in a limited way, in part

P
resident Donald Trump is fixated on trade deficits, because the Accord signaled to private market participants
had his formative years in New York in the 1980s, the direction of travel and changed market psychology to-
and has a well-known penchant for a deal. So it is no wards one of devaluation. Today we are seeing a concep-
surprise that his return to the White House has spurred talk tually similar dynamic as companies look to government
of a “Mar-a-Lago” Accord to address America’s structural messaging as a factor to consider in where they locate
trade deficit via coordinated action to depreciate the dollar. global supply chains. Trump and his officials need to con-
The 1985 Plaza Accord, named after the elegant New sider their rhetoric as well as their specific policies.
York hotel where it was announced, is arguably the only A third lesson is that Trump will eventually have
policy initiative that successfully reduced the persistent to decide between using tariffs as leverage for deals and
U.S. trade deficits that began in the 1970s. Between 1985 using them as major source of revenue for the U.S. gov-
and 1987, the U.S. dollar fell by some 40 percent and the ernment. A restive U.S. Congress threatening major new
trade deficit narrowed, albeit after a lag, from roughly $150 U.S. tariffs was an important driver of the Plaza Accord,
billion per year in 1985 to $30 billion per year in 1991. convincing U.S. trade partners that they needed to come
Trump will find it substantially harder to engineer to the table. But after agreeing to the Accord, partner
a similar outcome today. Some of this is changed eco- governments needed to know they would not face tariffs
nomics. The dollar is not as overvalued today as it was anyway. While Reagan continued to pursue targeted tariff
in the mid-1980s, and while currency misalignment re- measures through the late 1980s, after Plaza the threat of
mains an important driver of the trade deficit, it is not as sweeping new U.S. tariffs faded away.
dominant a factor as it was then. The United States also The final lesson is the need for deft diplomacy. Plaza’s
has a much more diverse group of trading partners with architect, then-Treasury Secretary Jim Baker, would later
which it would need to coordinate a currency accord. In go on to serve as Secretary of State and is widely thought
1985, much U.S. trade was with a handful of security of as one of America’s most successful post-World War II

32 THE INTERNATIONAL ECONOMY FALL 2024

diplomats. It took months of artful negotiation to reach the Perhaps most importantly, Trump and his associates
Plaza Accord, and success wasn’t certain. Many of Trump’s have not come to a clear view on the role of tariffs. Are they
top officials have achieved success in business, politics, and a tool to secure trade policy concessions from other coun-
law but it remains to be seen how they measure up to Baker tries? Or broader economic concessions, as in the Plaza
as diplomats. There are likely diplomatic records buried in Accord? Non-economic concessions, like sovereignty over
the Treasury Department’s vaults that would be well worth Greenland or greater defense spending? Or are they princi-
studying in advance of a new global trade negotiation. pally a source of revenue that can offset tax cuts?
From his first term until today, this has remained un-
clear. Even if the governments of the other major econo-
mies wanted to agree with the United States on system-
ic reforms, it is not clear what those reforms would be.
I find it implausible And if it were, the Chinese government, at the very least,
would likely oppose them.
that anything
resembling the
1985 Plaza Accord Pulling off
will materialize. a coordinated
depreciation of the
STAN VEUGER
Senior Fellow, American Enterprise Institute dollar will be much

I
find it implausible that anything resembling the 1985 harder this time.
Plaza Accord will materialize during the second
Trump term. It would require that at least two condi-
tions hold. The first is for the administration to develop a MARC SUMERLIN
well-defined, consistent position on the purpose of tariffs Managing Partner, Evenflow Macro, and former Deputy
and the desired evolution of exchange rates. The second is Assistant to the President for Economic Policy and Deputy
agreement among the governments of the world’s major Director of the National Economic Council
economies to dramatically reform global economic gov-

T
ernance in support of that Trump administration position. he Plaza Accord of 1985 led to an astounding 80 per-
Neither is likely. cent reduction in the trade deficit by 1991, cementing
Trump and his associates have long struggled to devel- James Baker’s legacy as the greatest modern Treasury
op a coherent theory of international economics. The main Secretary. Ironically, his other legacy achievement was
line of thinking is old-school mercantilism: Trump genu- the Tax Reform Act of 1986, which almost bankrupted
inely appears to believe that imports are bad, and exports Donald Trump by reducing tax preferences for real estate.
are good. Superficially in line with that, he frequently talks Pulling off a coordinated depreciation of the dollar
about the desirability of increased tariffs and a weak dollar, will be much harder this time. The dollar had been stronger
but here the contradictions start to become apparent. for longer in the 1980s and the world was a more colle-
Increased tariffs will reduce exports just as they gial place. But there is little doubt that Trump would love
reduce imports, a result known as Lerner symmetry. to have a Mar-a-Lago Accord in the history books, and the
They do so by drawing productive resources into the United States hosting the G20 in 2026 might be the perfect
import-competing sectors of the economy and trigger- opportunity. New Treasury Secretary Scott Bessent has one
ing exchange rate appreciation. This process clashes both big advantage over Baker—his boss is more than willing to
with the instrumental goal of weakening the dollar and the use sticks (tariffs) as well as carrots to force countries to the
eventual objective of reducing the trade deficit. table. While the Plaza Accord was single agreement handi-
Trump’s mercantilist instincts also make him fond ly focused on currency depreciation, a Mar-a-Lago Accord
of foreign investment. Such investment also strengthens could employ multiple policy tools. Countries that need a
the dollar and widens the U.S. current account deficit. The stronger currency—like Japan and Korea and Taiwan—
same goes for the greater budget deficits that will likely might choose that route. Others might choose to lower their
follow from Trump’s domestic priorities. trade barriers or purchase U.S. wares instead. In this case,

FALL 2024 THE INTERNATIONAL ECONOMY 33

 depreciation would play a supporting role rather than being with what appears to be Trump’s accurate view of modern
the only game in town as it was at Plaza. Europe: effete, inept, militarily weak, fading in economic
power. Why not, therefore, suck the Germans dry and dump
the impending collapse of Ukraine on the European Union?
Trump surely grasps that Russia intends no threat to Europe
and also has no interest in trying to save Europe from itself.
What then is this administration’s interest in “protect-
And don’t forget—it ing Europe,” when the Middle East (and the Asian periph-
ery, and Africa) are of far greater strategic and resource
was Scott Bessent importance? Democracy? Freedom?
Historic and traditional alliance? Don’t make me
who helped crash laugh—we’re talking about Donald Trump.
And don’t forget—it was Scott Bessent who helped
the pound in 1992. crash the pound in 1992.

JAMES K. GALBRAITH
Lloyd M. Bentsen, Jr., Chair in Government/Business
Relations, LBJ School of Public Affairs, University The Trump
of Texas at Austin
presidency may see

W
hat to make of a “Mar-a-Lago Accord”?
First question: with whom? The Plaza China overtake
Accord of 1985 was among the G5: the United
States, Britain, France, Germany, and Japan. Today, the the United States.
four largest economies are China, the United States, India,
and Russia. The other three are all members of BRICS.
Taking a wild swing at a cloudy crystal ball—pardon
the mixed metaphor—Trump’s tariff plans and threats TIM CONGDON
may possibly be explained as follows: Chairman, Institute of International Monetary Research
Against Mexico: to secure President Claudia

W
Sheinbaum’s agreement to suppress migration and accept hy does the United States have a current account
deportees. deficit, and does it matter? Whatever the level
Against Canada: to humiliate Justin Trudeau, ending of tariffs on its imports, a logically unassailable
his career. Both goals are reachable and the cost to the identity says that the sum of the financial balances of the
United States would be small and short-lived. If the tar- U.S. public and private sectors is equal to the financial
iffs cover hydrocarbons—a major U.S. import from both balance of the United States with the rest of the world.
countries—they might last longer, potentially spurring The identity follows from the requirement that every debit
more drilling in the Permian Basin, reportedly a key goal has somewhere an offsetting credit. In other words, if the
of Treasury Secretary Scott Bessent. financial surplus of the U.S. private sector is steady at 3
Against China: up to a point, Xi can offset Trump’s percent of GDP, a financial deficit of the entire govern-
tariffs by letting the RMB float down. But he could instead ment sector—both federal and state—above that 3 percent
decide to grow China’s trade elsewhere. America would figure must be associated with a current account deficit on
then import more from Vietnam, Indonesia, Bangladesh, the United States’ external payments.
and Thailand, rearranging trade flows with minor effect on If the government deficit is 5 percent of GDP, the cur-
our deficit with Asia. U.S. consumers would mainly lose rent account deficit will be 2 percent of GDP; if the gov-
the chance to buy goods they’ve never seen, such as BYD ernment deficit is 7 percent of GDP, the current account
cars and Huawei phones. At low cost, Trump can sell deficit will be 4 percent of GDP; and so on. Why have I
China tariffs as a get-tough measure, pleasing the hawks. chosen the 3 percent figure for the private sector? The an-
Tariffs against Europe, combined with cheap energy, swer is that the data show this to have been the average fi-
lower interest rates, a low-union workforce, and steady nancial surplus of the private sector—all U.S. households
growth, are a magnet for European (especially, German) and companies taken together—in the last fifty years, ex-
industrial investment in the United States. This would fit cluding the six quarters most affected by covid.

34 THE INTERNATIONAL ECONOMY FALL 2024

 President Donald Trump’s supporters might say pre-election ideas. I can see two problems: it is not going
that the revenue collected from tariffs will reduce the to happen and it wouldn’t work anyway.
budget deficit, which would be true if the other sources A bilateral exchange rate is a capricious beast—not
of revenue were untouched. But the stated aim is to use just determined by policy settings in both countries, but
the extra tariff money to pay for tax cuts. No hint of con- also, crucially, the financial market reaction to those set-
cern has been expressed by Trump about the enormous tings. For example, fiscal expansion that increases infla-
budget deficits under the Biden presidency. According tion might lead to a stronger exchange rate as the markets
to the International Monetary Fund’s October 2024 anticipate higher interest rates, or the reverse might be
World Economic Outlook database, the United States’ true. Ask Liz Truss. Or Zimbabwe.
general government deficits were over 7.5 percent of Let’s speculate on what might happen if, early on,
GDP in 2023 and 2024, and they will remain above 6 President Trump announces he wants the U.S. dollar to go
percent of GDP in every remaining year of the present down. My guess is that it does weaken, temporarily, until
decade. The current account deficit—the twin of the markets realize there is no policy change to achieve that
budget deficit—will therefore persist for all of the sec- goal, and the exchange rate goes back to doing whatever
ond Trump presidency. it was doing.
The key counter-party to the United States in a pos- Perhaps the president tries to bully his own central
sible Mar-a-Largo Accord would of course be China. The bank, threatening to install one of his stooges as chair or
thinking is that, by engineering a massive yuan apprecia- even change the Federal Reserve Act. This might indeed
tion, China might do enough to discourage Trump’s pro- weaken the dollar, but probably as a result of capital flee-
posed tariff jump. But why would China play ball? It is a ing the country, sending bond yields up and equity markets
competitor with the United States in soft power as well down. Higher bond yields would complicate an apparent
as hard power. Purchasing another nation’s products is a willingness to blow out the budget deficit even further in
major source of soft power. Trump’s tariffs will offend in- order to fund tax cuts, which looks like a higher priority
ternational opinion, upset allies, and lose soft power. By and a more tangible policy objective than a lower trade
retaining its present openness to trade, China’s import bill deficit. The idea would be rapidly abandoned amid a back-
will keep on growing, whereas that of the United States drop of screams from the Cabinet’s many billionaires.
may fall. In 2024, China’s imports of goods and services America’s trading partners are unlikely to be pre-
totaled over $3,200 billion and were still about $1,000 bil- pared to meddle with central bank independence in order
lion lower than those of the United States. But the Trump to raise interest rates in an attempt to send their currencies
presidency may see China overtake the United States. higher. Why should they? Damaging the entire domestic
Far from making America great again, isolationism and economy through excessively high interest rates in order
protectionism will reduce U.S. influence in the world and to protect the segment that exports to America would be
belittle it in the eyes of its trading partners. a bad trade-off. Sure, foreign officials from G7 might
show up in Florida and mutter expressions of sympathy
or promise to look into things, then try and stall for four
years. What about China? Bowing to U.S. pressure and
allowing Trump to crow that he has “won” is unthinkable.
A Mar-a-Lago We should also ask what an accord would really be
trying to achieve. Presumably the aim is to lower the trade
Accord is not going deficit, although it is unclear why this in itself is a use-
ful thing, nor why bilateral deficits are so important. And
to happen and even less clear is whether an accord would be effective in
this aim without complementary domestic policies, such
it wouldn’t as steps to lower the budget deficit. As a starting point, of-
ficials might want to ask why the tariffs of the first Trump
work anyway. administration have been unsuccessful in reducing the ex-
ternal deficit. u

RICHARD JERRAM
Chief Economist, Top Down Macro

T
THE MAGAZINE OF INTERNATIONAL ECONOMIC POLICY
he idea of a Mar-a-Lago Accord to reduce the trade 220 I Street, N.E., Suite 200
Washington, D.C. 20002
deficit by weakening the dollar in return for low- www.international-economy.com
editor@international-economy.com
er tariffs is as fanciful as many of Trump’s other

FALL 2024 THE INTERNATIONAL ECONOMY 35