It’s been a dizzying summer for the nation. Wildfires, floods and power outages have hit while Americans are trying to dig out from the impact of the COVID-19 pandemic. Complicating things are shortages of everything from lumber and steel to consumer goods and automobiles. These supply chain disruptions are the unfortunate result of America’s over-reliance on a complex global web of imports. To correct this, and start rebuilding the nation’s manufacturing base, Congress and President Biden must fix America’s flawed trade profile. And the key step to achieving this will be fixing America’s overvalued dollar.
For months, headlines have focused on markets that keep experiencing serious supply chain disruptions. For example, a global shortage of integrated circuit chips has already forced Toyota to slash production by 40 percent. Meanwhile, GM and Ford are storing unfinished vehicles in airport and racetrack parking lots while waiting for missing parts. Initially, economists believed these problems would fade away quickly. But pundits now warn that consumers may well have to accept such delays as the “new normal.”
This shouldn’t be surprising, though. An over-reliance on imports has left the U.S. dependent on excessively long and vulnerable supply chains. And both import penetration and America’s manufacturing trade deficit keep climbing as a result. In fact, the import share of U.S. manufacturing production has nearly doubled since 1997, and the U.S. trade deficit in manufactured goods is likely to reach an all-time high in 2021, exceeding $1 trillion.
A heavy dependence on imports represents a growing threat to U.S. economic and foreign security. Examples abound. During the first stages of the pandemic, China restricted exports of critically needed personal protective equipment. Similarly, nearly three-quarters of the 40 most popular brand name drugs are imported. And many of the nearly 1,000 overseas pharmaceutical plants that supply U.S. consumers have never been registered or inspected by the U.S. Food and Drug Administration. This puts the safety and security of America’s medical care at risk. Likewise, a 2018 Pentagon study concluded that the United States military is too dependent on a range of imports, including the integrated circuits used in satellites, cruise missiles, drones and cell phones.
There are many causes of this excessive import dependence. More than three decades of free trade deals, often written at the request of (and with direct input from) U.S. multinationals, has encouraged firms to offshore production to low-wage locations in Mexico, China and, more recently, Vietnam. This has been exacerbated by the strong-dollar policies favored by both Democratic and Republican Treasury secretaries — including Robert Rubin, Larry Summers and Henry Paulson.
All of these officials have come from (and returned to) Wall Street. That’s significant because Wall Street and multinationals love a strong dollar, since it makes imports cheaper. But it also puts domestic workers in competition with low-wage overseas labor. As a result, wages for U.S. manufacturing workers have suffered. Meanwhile, stock markets and Wall Street banks have earned massive profits as a direct result of globalization and growing import dependence, even though Main Street America has suffered the loss of more than five million manufacturing jobs and 91,000 factories since 1997.
Rebuilding domestic supply chains will be essential to the success of the Biden administration’s “Build Back Better” investments in both physical and human infrastructure. However, many key domestic industries are now hanging by a thread.
Last year, the Commerce Department opened a national security investigation into potential shortages of key electrical transformer components made with specialized, grain-oriented electrical steel. There is now only one U.S. producer of this type of specialized steel, AK Steel, a subsidiary of Cleveland-Cliffs — and Cleveland’s plants in Ohio and Pennsylvania are currently threatened by imports. Ensuring supplies of such critical materials will be essential to rebuilding U.S. infrastructure and ensuring that these investments create good jobs at home, not overseas.
Congress and President Biden are currently considering hundreds of billions of dollars in investments for manufacturing, research, workforce training and related programs. But these plans can work only if Washington takes steps to improve the competitiveness of U.S. manufacturing — and to create demand for American-made manufacturing products. But realistically, even after the nation embarks on a potential manufacturing renaissance, there will still be a near-term dependence on the same import chains currently in short supply.
Recognizing how serious the situation is, the most realistic means to stimulate demand for American-made goods is to make their price more competitive. And that can only be meaningfully accomplished by realigning the U.S. dollar, and reducing its value by roughly 25 percent against the currencies of China, the EU, Japan, Korea and other industrial nations that currently enjoy structural trade surpluses.
An overvalued dollar is the engine that keeps driving up imports. Since July 2014, the dollar has risen by nearly 21 percent, thanks to huge amounts of private foreign capital continually flooding America’s financial markets, and enriching Wall Street and its banks. This rising dollar is making America’s exports progressively more expensive — and lowering the sticker price of imports.
Some in Congress already grasp the seriousness of the problem. Bipartisan Senate legislation introduced last year would address the dollar’s overvaluation by taxing foreign purchases of U.S. financial assets. But this corrective action could be achieved more quickly through executive action by the Biden administration.
Growing trade deficits are the Achilles’ heel of American manufacturing. While supply disruptions and price bubbles arising from the COVID crisis will likely fade in the next year or two, the overarching threat posed by excessive and rapidly growing import reliance will accelerate.
Until Washington confronts the heavily overvalued U.S. dollar, the nation will still be at the mercy of extreme import dependence. Realigning the dollar is the single most effective tool available to rebalance trade, rebuild U.S. manufacturing and eliminate the supply chain shortages posed by America’s globalization run amok.
Robert E. Scott is a senior economist at the Economic Policy Institute (EPI). Follow him on Twitter @RobScott_epi.