Mar-a-Lago Accord and dollar devaluation

Sub : Eco

Sec: External sector

Context:

The Trump administration aims to transform the US into a manufacturing superpower and reduce its massive trade deficit.
In 2024, the US faced an over $1 trillion trade deficit, marking the fourth consecutive year of such a trade imbalance.
Trump has two main strategies for addressing this: imposing tariffs or devaluing the dollar.

The Role of US Dollar:

A major reason why Americans import goods instead of buying from domestic manufacturers is the strong purchasing power of the US dollar.
The strength of the dollar is due to its widespread acceptance globally, as it is seen as a stable store of value and a medium of exchange.
US dollars make up 60% of global foreign exchange reserves, and about 50% of all international transactions are denominated in US dollars.
This widespread demand for dollars raises its exchange rate and purchasing power, making foreign goods more affordable for Americans but making US goods more expensive abroad.

Policy Options for reducing the Trade Deficit:

Imposing Tariffs:

By slapping punitive tariffs on imports, the Trump administration hopes to either reduce the demand for imports (thus lowering the trade deficit) or force foreign companies to manufacture in the US, thereby boosting domestic production.
However, this approach could lead to several negative outcomes, including higher prices for US consumers, potential retaliatory tariffs from other countries, and disruptions in global supply chains.
In addition, foreign nations may devalue their currencies in response to tariffs, exacerbating the situation.

Devaluing the US Dollar:

The second option involves convincing other countries to allow the US dollar to lose value relative to other currencies.
If other countries sold their US dollar holdings and bought their own currencies, the increased supply of dollars would lower its value, making US exports cheaper and more competitive.
This scenario has happened in the past, notably with the 1985 Plaza Accord, where the US coordinated with other top economies Japan, Germany, France, and the UK (the G-5) to lower the dollar’s value.
This move was designed to address trade imbalances and improve the US’s export competitiveness.
The Plaza Accord was a successful attempt to devalue the US dollar, bringing down the US exchange rate and easing the trade deficit. However, in the long-term, it had mixed results.
Japan, in particular, suffered from the Accord, as the stronger yen hurt its export competitiveness.
The “Mar-a-Lago Accord” is a proposed economic strategy by the Trump administration aimed at restructuring the global trading system to bolster U.S. manufacturing and address the nation’s trade deficit, similar to the Plaza accord.

The challenges of a new “Mar-a-Lago Accord”:

The number of countries involved has expanded from the G-5 in 1985 to the G-20 today, making it harder to reach consensus.
The scale of currency interventions required to meaningfully devalue the dollar today is far greater than in 1985. Currency markets are now much larger, with daily turnover of approximately $7.5 trillion.
Convincing other countries to devalue the dollar could be politically and economically difficult, particularly if it harms their economies.