A Lower Dollar Would Actually Reduce the Trade Deficit

It was unusual to see this issue come up as it did in the news recently.

A couple of days ago, Treasury Secretary Steven Mnuchin touched off a firestorm by saying something that is obviously true. He said that a lower-valued dollar would reduce the trade deficit.

As I pointed out yesterday, this is based on the radical concept of downward sloping demand curves. The idea is that when the dollar falls in value relative to other currencies, it makes goods and services produced in the United States cheaper for people living in other countries. This means that they will buy more of our exports.

On the other side, a lower-valued dollar means that we will pay more for imports. This means that we would buy fewer goods and services from other countries and instead buy domestically produced goods and services.

With fewer imports and more exports, we have a smaller trade deficit. It’s all pretty straightforward.

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We saw a massive increase in the trade deficit in the last decade which eventually peaked at almost 6.0 percent of GDP in 2005 and 2006. This led to the loss of millions of manufacturing jobs, decimating communities in places like Pennsylvania and Ohio.

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All of this is to say that a “strong dollar” is not just a stupid talking point. It is a really big deal with enormous economic consequences for the US and world economy. And those consequences have been very bad for large segments of the US population. Those responsible still have not owned up to this fact. (I’ll also add the little tidbit that the fact our manufacturing workers have to compete with labor in the developing world and our doctors don’t is by design, not a fact of nature. This is yet another reason why those harmed by the high dollar have reason to complain.)