U.S. president-elect Donald Trump has stated long-standing views that trade deficits amount to subsidies and that the U.S. dollar must remain the pre-eminent international reserve currency.DADO RUVIC/Reuters
David M. Brown is a retired economist whose career involved work with Bank of Montreal, the C.D. Howe Institute and the Ontario Energy Board.
U.S. president-elect Donald Trump has said that his country’s trade deficit with Canada amounts to a US$100-billion per year subsidy giveaway. He has even suggested solving the “problem” by annexing Canada as the 51st state, a stance on which he doubled down this week by suggesting he would use “economic force.”
Many analysts have listed reasons why the U.S. trade deficit with Canada is not a subsidy but Mr. Trump has always seemed impervious to such arguments. He has pointed out in the past that he has held these views about international trade all his life.
Mr. Trump has also stated his view that the U.S. dollar USDCAD-FX must remain the pre-eminent international reserve currency – the vehicle in which most countries hold the lion’s share of their foreign exchange reserves, and the currency in which the largest share of international trade is invoiced in. In response to the BRICS countries’ (Brazil, Russia, India, China, South Africa) musings about a potential rival currency to the U.S. dollar, the president-elect threatened to impose 100 per cent tariffs on their exports to the U.S.
The thing is, these two viewpoints don’t add up. They contradict each other. There are many factors that have supported the U.S. dollar’s leading role over several decades: the size of the U.S. economy, its relative economic and political stability – and the U.S. propensity to run trade and current accounts deficits vis-à-vis the rest of the world.
Wait a minute – how would U.S. trade and current account deficits underpin the outsized international role of the U.S. dollar?
These U.S. trade and current account deficits lead to a growing supply of U.S. dollars and dollar-denominated assets (mainly U.S. Treasury bills and bonds) held in foreign hands. When someone sells goods or services to the U.S., they are typically paid in U.S. dollars. The new owners of these dollars then have several options. They can hold on to the dollars and use them to make purchases from other countries. They can sell the dollars on the foreign exchange market and get their own country’s currency in return. Or they can sell the dollars to their home central bank – if their country’s monetary and foreign exchange rate policies allow for that.
This last option seems quite popular – total official foreign exchange reserves held in U.S. dollars were 6.9 trillion at the end of the third quarter last year, or 57 per cent of the total of allocated reserves in all currencies.
While the U.S. Federal Reserve can and does simply “print” new U.S. dollars, the rest of the world has to work to get more of them. For foreign nations, this work largely takes the form of selling more to the U.S. than is bought from the U.S. Canada sends more goods and services to the U.S. than we get back in return. The difference is made up of new U.S. dollar currency holdings, which can then be used to grease the wheels of international trade the world over.
As long as the U.S. dollar remains the premier currency for reserve holdings and trading, other countries will happily exchange goods and services to get more of them. Their willingness to hold growing stocks of U.S. dollars allows, indeed requires, the U.S. to run current account deficits. Former French president Valéry Giscard d’Estaing once famously suggested this was America’s “exorbitant privilege.”
Today, economists debate the extent to which the U.S. is advantaged by its status as the leading supplier of international money. In any case president-elect Mr. Trump believes this to be so. A better reconciliation of his views on trade deficits and the international role of the U.S. dollar would also advantage both the U.S. and its major trading partners including Canada.