Devalue, Devalue, Devalue

With a trade policy overhaul, policymakers should consider devaluing the U.S. dollar.

By Matt van Putten, an economics and foreign policy professional with a background in technology policy and consulting, with a focus on U.S.-China trade and U.S. national security issues. He currently works for the Department of State. The views expressed are his own and not necessarily those of the U.S. Government or any U.S. Government agency.

We have a manufacturing problem. For 40 years, the U.S. enacted policies that systematically supported consumption and finance over manufacturing and production, leading to a massive trade deficit and the loss of America’s industrial base.

This was done through a host of policies. For instance, through lowering trade barriers more than U.S. trade partners did, by signing trade deals that made offshoring production more profitable, by a permissive approach to tax havens, by refusing to penalize trade partners that systematically underpay their workers, through interpretations of antitrust laws that prioritized ‘consumer welfare’ over either market competition or production, and through an overvalued currency. 

Each of these policies undermined manufacturing, agriculture, resource extraction, and labor-intensive industry. The U.S. has run trade deficits every year since 1976, it lost dozens of industries in which it was once a global leader, entire regions have been devastated, and our military-industrial base atrophied. In place of American dominance, our global competitors gained wealth, manufacturing capacity, and market share. Armament stockpiles have been severely depleted by significant military support to allies in Europe and the Middle East, and American producers are currently unable to keep up with demand, leaving the U.S. in a position of having to make difficult trade-offs to secure U.S. interests and protect allies. In a peer-competitor conflict, the United States would need far higher relative capacity to produce aircraft, ships, missiles, ammunition, and other military hardware and software products. 

That shrunken industrial capacity contrasts sharply with one of our near-peer rivals. China’s dominance of global manufacturing provides the PRC with significant national resources for military purposes. With double the manufacturing capacity of the United States, the PRC could increase production of military goods far faster than the United States. While China expanded its capacity, the U.S. share of global manufacturing declined from 28% in 1970, to 26% in 2001, dropping to under 16% in 2024. This imbalance poses grave national security risks. Vice President Vance recently connected the dots by linking the U.S. manufacturing share of the global economy to American victories in WWII and the Cold War. 

The U.S. must urgently increase its share of global manufacturing, because unless it has an equal or greater share than its chief competitors, America risks losing an attritional conflict with a peer rival. And there are other consequences. American labor will increasingly skew toward low-productivity-growth service jobs, and Americans will continue to see their debts rise and incomes stagnate. The problem is even more dire when we consider industries likely to play a role in future wars. China dominates shipbuilding, renewable energy, batteries, rare earth minerals, IT equipment, automobiles, metals processing, and transportation equipment, while making inroads in capital goods and chemicals and pharmaceuticals. Each industry could be critical to victory in a war of attrition. 

Many authors have explained how we arrived at this industrial decline. There are a number of contributing factors, but one that gets short shrift in that discussion: the U.S.’ strong dollar policy. In the aftermath of each financial crisis since 1990, and at present, American governments remained committed to maintaining a strong, free-floating currency—refusing to intervene when trade surplus countries like the PRC pushed the purchase of dollar assets to keep their exchange rates from rising against the dollar. 

A natural correction would have pushed down the value of the dollar if surplus countries had not export their excess savings into U.S. financial markets. The appreciation of surplus countries’ currencies and the devaluation of deficit countries’ currencies would have driven trade toward balance. However, a commitment to a strong dollar prevents this feedback mechanism from functioning and increases costs for domestic producers. Businesses in the tradable goods sector that fail to pivot toward outsourcing production and importing foreign goods for domestic sale lose market share. 

In a well-functioning trade system, the currency of a country that runs persistent trade deficits should decline in relative value, while the currencies of current account surplus countries should strengthen. But in the world we live in, most major trade surplus countries manage the real values of their currencies against those of important trades partners. Their unchecked interventions have made trade deficits and surpluses the norm; and, despite the predictions of economists like Hume, Ricardo, Hayek, Friedman, Krugman, and many other advocates of free trade, they show no signs of rebalancing on their own. 

We must right the ship. In addition to correcting this situation through policies directed at the trade deficit directly, the U.S. should also consider a less well-known approach: devaluing the USD to level the global playing field.

Correcting Decades of Imbalance

One could question if drastic policy changes are worth the risk. The simple answer is that the U.S. confronts far different geopolitical challenges today than it did 40 years ago when the current trade dogma was accepted into the American economic mainstream. Failure to make profound policy corrections risks significant consequences for American security, freedom, wealth, and interests. Unlike during the Cold War, today’s challenges require the rebuilding of American industry. 

At the end of the Second World War, the U.S. accounted for half of the global economy, falling to approximately a quarter today. During the two decades after WWII, the United States ran persistent trade surpluses, exporting investment, capital goods, and commodities to rebuild Europe and East Asia. That was until allies no longer needed growing U.S. investment; instead, they wanted access to American consumers’ demand. The U.S. allowed its trade surplus to decline to zero in the 1960s and entered trade deficit territory in the 1970s, letting American allies’ businesses gain market share against American businesses.

There are steps an ambitiously minded U.S. administration could take. Our current global trade regime and multilateral trade agreements permit a wide range of de facto trade interventions so long as they fall outside the narrow band of policies considered “barriers to trade” by the WTO. Even while tariffs have fallen globally over the past 40 years, persistent trade imbalances have ballooned. 

Some of our trading partners actively make imbalances worse with policies designed to suppress consumption and subsidize exports. Take China, where the CCP maintains weak labor rights, permissive environmental regulations, capital controls, state-directed bank lending, an undervalued currency, high tariffs, and literal slave labor to keep production costs low. These all put downward pressure on Chinese wages and consumption, which in turn prevents Chinese imports from rising in line with Chinese GDP and increases Chinese export competitiveness. None of these interventions are penalized by our multilateral trade institutions.

Americans as workers, producers, and taxpayers lose most from the current trading system. President Trump has frequently suggested using access to U.S. consumer demand as a cudgel against countries that hurt the U.S. through trade. Devaluing the dollar could enhance his other pro-trade balance and pro-producer efforts. President Trump has made it clear that unfair and unbalanced trade is a threat to the United States, both in economic and strategic terms. In line with the administration’s pro-producer and pro-worker orientation, the America First Trade Policy mandates that the Treasury assess and propose measures to address currency manipulation or other interventions that prevent the balance of payments (BOP) from adjusting. The overvalued dollar is one such mechanism.

The Trade Deficit Problem

One 800 pound gorilla in the room is America’s trade deficit, which currently stands at approximately $1 trillion a year, creating an enormous problem. By definition, a trade deficit is negative growth, forcing the American economy to accept $1 trillion in losses. A trade deficit, unaccompanied by a rise in productive investment, causes savings to fall through a rise in unemployment or an increase in debt. In other words, this deficit must drive up household or government debt, lower profits for net exporting sectors (such as farmers or natural resource producers), increase foreign ownership of American companies (i.e., declining American claims on future profits), or lastly negatively impact the entire U.S. economy through a decline in employment (i.e,. underemployment, unemployment, or stagnant wages). If you run a persistent trade deficit, these losses have to go somewhere.

A policy response is required. Economic policies may be characterized as narrow or systemic. Narrow solutions address a discrete problem, like tax credits to microchip manufacturers or subsidies to specific military industries—directly encouraging a specific market outcome. Systemic solutions shift market conditions to support strategic outcomes. Many American leaders have recently advocated for narrow, tactical policies to support important sectors, including industrial policies, subsidies to key industries, environmental regulation (or deregulation), better trade deals, or pro-industry tax policy. 

These all have a role, but we should also consider major, systemic trade and re-industrialization policies, including across-the-board-tariffs, outbound investment restrictions, capital controls, and currency devaluation. These bigger picture, market-shaping approaches could shift conditions toward reclaiming American industrial independence, increasing demand for American labor, raising wages, increasing investments in productivity, securing supply chains, and boosting military-industrial capacity. They would achieve these outcomes by putting downward pressure on the consumption share of GDP, while putting upward pressure on production share—supporting American producers and workers.

Breaking the Mold

Several systemic policies could put downward pressure on the real value of the USD, transferring resources from Americans as consumers toward Americans as producers, while counteracting foreign attempts to drive up the value of the dollar.

For example, the U.S. could regulate foreign capital inflows and/or outflows—something the U.S. did prior to 1971—affording U.S. policymakers an additional tool to manage America’s trade balance. Senators Josh Hawley and Tammy Baldwin proposed doing this in 2019 in the Competitive Dollar for Jobs Act. Their proposal would require the Fed to levy a market access charge on foreign capital inflows, rising until inflows and outflows balance, correcting the abuses of China and other countries that use foreign capital purchases to manipulate exchange rates. 

Short of implementing capital controls, policymakers could aggressively increase net purchases of foreign currency denominated assets, doing to trade partners what some of them have long done to us. This would drive up the values of their currencies and drive down the relative value of the dollar.  

The Benefits of Devaluation

Devaluation acts as something like an across-the-board subsidy for domestic producers, much like universal tariffs. Weakening the dollar against the currencies of our main trade partners would encourage production in the U.S. by reducing the relative cost of production in the U.S., preventing foreign countries from driving up the value of the currency, and increasing net U.S. imports. This would reduce the U.S. trade deficit. 

When the dollar is overvalued, devaluation expands American production, lowering real operating costs for U.S. firms and helping American businesses to more profitable employ Americans to produce goods and services domestically. This, in turn, makes U.S. producers that rely on U.S. labor more competitive in the global marketplace. All together, this translates into higher demand for U.S. products and services, rising incomes, larger U.S. share of global manufacturing, greater demand for American labor, a broader military-industrial base, more secure supply chains, higher profits from domestic production, and higher levels of productive investment. 

As the Trump-Vance administration sets its sights on our broken global trade regime, they should consider dollar devaluation alongside other policies, like tariffs, that are on the front burner. They inherit a position of leverage on trade that the U.S. can and should use to push for a new system. Furthermore, the central role played by the U.S. financial system in the global economy gives the U.S. leverage to fight and win a currency war should trade surplus countries oppose dollar devaluation. 

But reorienting the global free trade system will take time. As that happens, dollar devaluation can help ease the burdens of the system on U.S. industry, individual businesses, and Americans as both workers and consumers.