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1 1 (February 14, 2020)

handle is hein.crs/govcaey0001 and id is 1 raw text is: The Dollar and the U.S. Trade Deficit February 14, 2020 Since taking office, the Trump Administration has used the overall and bilateral U.S. trade deficits as one of its barometers for evaluating the success or failure of the global trading system, U.S. trade policy, and trade agreements. In an effort to reduce the trade deficit and for other policy objectives, the Administration has renegotiated existing trade agreements, withdrawn from or suspended negotiations on other trade agreements, initiated new agreements, and placed tariffs on a range of imports. Previous administrations and Members of Congress, while expressing concern, have not legislated policies specifically to reduce the trade deficit. The Trump Administration also has advocated for depreciating the dollar against other major currencies, reasoning that a weaker dollar would increase U.S. exports and reduce the nation's trade deficit. Additionally, the Administration contends that certain countries are manipulating their currencies to give their exports a price advantage. On February 3, 2020, the Commerce Department issued a rule that allows currency manipulation potentially to be considered as a domestic subsidy under U.S. countervailing duty laws. The International Monetary Fund (IMF) concluded in its July 2019 report on external balances that current accounts and currencies may be under- or over-valued at times, but this largely reflected domestic economic policies. Economists have raised concerns about the broader long-term impact on the U.S. economy of financing trade deficits. Changes in exchange rates can affect trade balances through changes in export and import prices and through changes in asset prices and income flows. Most economists argue that the U.S. trade deficit is largely the product of a low national savings rate, attributed in part to U.S. macroeconomic policy, or the combination of fiscal policy notably large and persistent federal government budget deficits and monetary policy. This combination of policies determines the overall national saving-investment balance, which determines the inward and outward flows of funds that affect the value of the dollar and the U.S. trade balance. Most economists argue that attempting to alter the current account balance (comprised of trade in goods, services, and official flows) and, by implication the trade deficit, without addressing the underlying macroeconomic conditions, likely will be counterproductive and create distortions in the economy. Also, most economists contend that, absent changes in the underlying macroeconomic conditions, targeting individual bilateral trade balances most likely will result in trade diversion and offsetting changes in trade balances with other partners, without altering the overall trade deficit. Most economists also argue that attempting to alter the long-run exchange rate of the dollar that differs from its market price is difficult to sustain. Ex ,,,,,e Rat, and Cp .ws Exchange rates reflect the relative prices of currencies, and changes in those rates can affect trade flows by changing export and import prices. As a result, an appreciation in the dollar relative to other currencies raises the dollar- denominated prices of U.S. exports. In contrast, a depreciation in the dollar would have the opposite effect: export prices would fall and import prices would rise. Under the current system of floating exchange rates, extensive cross border capital flows, and the role of the dollar as the dominant global currency, financial transactions are a major factor affecting exchange rates and current account balances. The balance of payments is a system of off-setting accounts. Under this arrangement, a surplus or deficit in the current account is offset by an equal transaction in the capital account, which is comprised of foreign deposits in U.S. banks, foreign purchases of U.S. businesses and real estate, and foreign purchases of U.S. government and corporate debt and equities. For some analysts, the ability of the U.S. economy to finance its trade deficits through such capital inflows reduces the constraint of domestic savings. Most capital account assets are highly liquid and transactions respond rapidly to political and economic events and instantaneously transmit market signals across national borders. As a result, shifts in the capital account in response to market events can drive movements in the exchange rate which, in turn, can affect the current account and the trade balance. From this perspective, efforts to devalue the dollar likely would have an immediate impact on capital flows and investor's expectations that could blunt, or offset entirely, the intended change in the dollar's exchange rate. Currently, the dollar effectively serves as the dominant global currency. As such, the international value of the dollar reflects a broad range of international and domestic economic activities that can far outweigh the size of domestic trade balances alone. On a daily basis, the value of global foreign exchange transactions eclipses the total global value of economic output and the value of all traded stocks and bonds. According to a recent survey, the dollar accounts for 88% of daily global foreign exchange market turnover of $6.6 trillion, or four times the annual amount of U.S. exports of goods and services. The volume of dollar turnover reflects its wide range of uses in international financial transactions, including two-thirds of global central ~dN mppm qq\ a , q mmm, go 's I 11LULANJILiN,

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