Tuesday, the Commerce Department is expected to report the March deficit on international trade in goods and services was $42 billion, up from $37.8 billion in February.
Trade with Japan, Germany, South Korea, and China account for most of the trade imbalance, and their monetary and exchange rate policies pose a significant barrier to U.S. growth.
Since last summer, the dollar has strengthened about 15 percent, making U.S. exports more expensive abroad and imports cheaper on U.S. store shelves. In the first quarter alone, the trade deficit subtracted 1.25 percentage points from GDP growth or about $220 billion.
Japan and Germany, through the European Central Bank, have pursued aggressive monetary policy with the intent of cheapening their currencies to boost exports and increase domestic employment.
South Korea prints won and purchases dollars in foreign exchange markets to keep its currency inexpensive against the dollar, and boost sales of Samsung phones and Kia automobiles in U.S. markets.
China limits inward foreign investment—for example, foreign manufacturers in autos and other industries must limit investments to about 50 percent ownership in joint ventures with domestic partners. This substantially curtails capital inflows and reduces the market value of the yuan. And that is something international organizations such as the IMF fail to consider in assessments of China’s exchange rate policies.
The yuan is not freely convertible on the capital account—foreign financial firms, mutual funds and individuals are limited in their ability to purchase Chinese assets. And those place similar downward pressure on the demand for and market value of the yuan.
Exchange rates translate domestic prices in local currencies into dollars. Purposeful currency undervaluation is perhaps best revealed by differences in what consumers may purchase with local currencies in their domestic economies and what those currencies converted into dollars at prevailing exchange rates could purchase in the United States.
