Trump Should Follow Reagan's Lead on Trade
Foreign competition is squeezing American manufacturing companies. U.S. factories are shedding jobs and ceding market share to cheap Asian exports. And the president isn’t going to take it anymore.
Welcome to 1985. Trade anxieties dominated the headlines then as they do today, and Washington was scrambling to respond. President Ronald Reagan was keenly aware that the tariffs he had slapped on Japanese imports during his first term had helped get him re-elected. He also knew they were not a solution, that he needed to think bigger.
So does Donald Trump. For all the casual comparisons President Trump likes to draw between himself and Ronald Reagan, he may be ignoring the most apt lesson his hero has to offer. With a strong dollar hurting U.S. manufacturing, Reagan didn’t cry “currency manipulation” first, only to hunt for credible villains later. He saw that the real problem came from the large and persistent current account surpluses that countries like West Germany and Japan were running against the U.S.
In 1985, Reagan negotiated the Plaza Accord, an ad hoc deal with France, West Germany, Japan and the UK to force the dollar’s value downward against the yen and the deutschmark. He followed that, over the next 18 months, with the Tokyo Summit and Louvre Accord. The negotiations focused on three goals: realigning currency values, narrowing current account imbalances, and preserving the open global trading system that had guided all five countries out of the ruins of World War II.
The agreements achieved these aims brilliantly. Within four years, the dollar had fallen by roughly 50 percent against the yen and the deutschmark, and the three main current account imbalances — the U.S. deficit, and the Japanese and German surpluses — had shrunk by half.
Not least, the protectionist drumbeat building in Congress was largely subdued, and the world’s open trading system survived intact.
Today, conditions may be ripe for a new Plaza Accord. Certainly, global current account imbalances and currency misalignments are as severe as in Reagan’s day. Germany just surpassed China to hold the world’s largest surplus, and the combined savings glut in China, Japan, Korea, Taiwan, Hong Kong and Singapore is at a 35-year high (surpassing even the heights of 2007-2008). The dollar is overvalued against every major currency – especially the primary targets (yen, euro and yuan). And after a brief respite in 2015, current account imbalances are again widening, suggesting the problem is unlikely to solve itself.
A Plaza-like gambit should be in some respects easier today. Notably, China, now combating downward pressure on its currency, may be attracted to a deal that stabilizes the yuan and weakens the dollar. Much of the rest of the world may like to ease the cost of dollar-denominated debt held by corporate borrowers outside the U.S. — which now totals nearly $10 trillion, one-third of that in emerging markets. And the dollar stands to strengthen more as the Federal Reserve raises rates.
There is also less scope today for other countries to blame America, as they did in Reagan’s day. During the original Plaza-Louvre negotiations, the U.S. ran a massive budget deficit. Japan and West Germany argued that such fiscal profligacy pushed up longer-term interest rates, attracting foreign capital and thus worsening the U.S. current account deficit. The U.S. is in much better fiscal shape today. Under President Barack Obama, the budget deficit shrunk to 2.4 percent of gross domestic product, from 9.8 percent, helping to keep long-term interest rates at historic lows.
In other ways, however, a new Plaza agreement may be harder. Among Reagan’s most important, and least appreciated, assets were his constructive relationships with leaders in Tokyo and Berlin. And the geopolitical environment in his time was auspicious: Fierce as the original Plaza negotiations were, they played out under the U.S. security umbrella. Sensing growing Japanese anxieties about Russia, Reagan used his warm relationship with then-Prime Minister Nakasone to make Japan a closer U.S. ally. And Japan, having made itself America’s “unsinkable aircraft carrier,” was in no position to oppose exchange rate cooperation.
West Germany, for its part, was already a staunch U.S. ally; its leaders supported the Plaza Accord in hopes of encouraging Reagan’s turn away from the aggressive Cold War posturing of his first term, toward a more nuanced multilateralism. West German officials knew well that de-escalating Cold War tensions was essential to their goal of German reunification.
If President Trump wants to shrink today’s trade deficits, he may likewise need old-fashioned allies. China, unlike 1980s West Germany or Japan, is hardly a military ally, however. And while China may have economic reasons to cooperate, Japan and Germany would now be tougher sells. Both would need to believe that Trump wanted a Plaza-like deal in order to avoid a larger trade war — not to start one.
Reagan’s success was also built on the fact that the Plaza-Louvre Accords were just one part of a broader U.S. competitiveness strategy. While some aspects of Reagan’s broader strategy — voluntary restraint agreements that limited a range of imports, for example, or pricing pacts that prevented Japanese companies from dumping into U.S. markets — might be difficult for any U.S. president to replicate today, others could be doable. Take, for instance, the way that Reagan forced open Japan’s previously impenetrable market, a feat long overdue in the case of China today. (In one recent survey, 80 percent of U.S. chief executives doing business in China said they felt less welcome in the country than they had before.)
Reagan also formed a semiconductor initiative — a $1 billion partnership between the U.S. government and 14 American semiconductor manufacturers that saved the integrated circuit industry by lowering costs and reducing product defects. That industry went on to form the basis of Silicon Valley, which unleashed an era of innovation comparable to the Industrial Revolution and made the digital age possible.
So far, Trump seems more interested in raising tariffs than in prying open China’s market or ramping up public investment in R&D. Absent a course correction — one that begins with treating longstanding allies like allies — Trump risks missing a golden opportunity for a new Plaza deal. As any good dealmaker knows, opportunities like this don’t come around often.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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