The future impact of international market bond to the state economy and gross domestic product outweigh its benefits.

The value of the U.S. dollar as of July 1, 2003 had fallen by 9.1% since its peak in February 2002.1 The benefits of the falling dollar vastly outweigh the costs for the U.S. economy. The primary costs of the falling dollar are higher prices for imported goods and for American tourists traveling abroad. The primary benefit is increased price competitiveness of U.S. products, both for exports abroad as well as in the domestic market. The United States currently has an enormous trade deficit (importing more than it exports), which represents a significant drag on efforts to spur economic growth and create jobs, and has led to an accumulation of foreign debt that will have to be repaid in the future. Given this trade deficit, the benefits of greater international competitiveness prompted by the falling dollar greatly outweigh the costs.

This dollar decline has come largely in spite of the Bush Administration’s stance in favor of a “strong dollar.” The “strong dollar policy” (pursued by both the Clinton and Bush Administrations) has been deeply damaging to the U.S. economy, leading to significant job loss in the manufacturing sector and the accumulation of historically large trade deficits. This overvalued dollar policy should be reversed, and a larger (although orderly) decline in the dollar should be encouraged instead. In the long term, U.S. exchange rate policy should aim to avoid large trade deficits. This could be accomplished through international policy coordination that allows exchange rates to float within a flexible band, but prevents them from getting so overvalued that they generate large trade deficits.2

In recent weeks, the dollar has again risen against the euro. If the dollar is allowed to rise from its current value, this will be a squandered opportunity to generate growth and employment in the United States, especially in the manufacturing sector. If the recent fall in the value of the dollar is sustained, the U.S. economy will be effected in the following ways:

• Absent a reversal, the dollar’s fall over the past 15 months is projected to add, all else equal, between $98 billion and $159 billion to U.S. gross domestic product across the next four to six quarters, owing to the increased competitiveness of net exports from the United States. This GDP growth should translate into job growth of between 333,000 and 530,000, concentrated in the manufacturing sector.
• This increase in U.S. GDP will come at the expense of several of its main trading partners, as demand for U.S. products made more competitive by the lower dollar will crowd out demand for foreign products. The pattern of this reallocation of demand is quite uneven; Canada and the euro area will see large reductions in demand for their exports, while China, Taiwan, and Malaysia will see no reduction (and maybe even a slight increase) in demand for their exports.
• Even the $98 to $159 billion improvement in the U.S. trade deficit is not enough for long-term sustainability; this represents only about 20% to 30% of the current trade deficit. Long-term sustainability requires not only that the dollar continue to fall, but that it fall against a broader range of currencies (especially the Chinese yuan) that are deliberately pegged at a competitive value versus the dollar. Current U.S. law requires the U.S. Treasury Department to act to keep other nations from manipulating their currencies for competitive advantage.