A Strong Dollar Threatens Trump’s Economic Plans
The Trump administration seeks to grow the economy by 3.5 percent per year and create 25 million jobs, but the strengthening dollar poses a threat to its economic ambitions. Already at its highest in the last 14 years, if the dollar gains further strength, it poses serious risks to the U.S. economy by making companies less competitive abroad and by dampening the global economic environment.
Recent economic data bears strong evidence that a rising dollar can be harmful to the U.S. economy. When the dollar appreciated by 20 percent between 2014 and 2015, U.S. exports fell by 6 percent to $186.1 billion, the smallest export amount since 2012. Following the presidential election and the Federal Reserve’s decision to raise interest rates, the dollar rose again, reaching a 14-year high against 16 major trading partners in mid-December 2016. Latest economic data suggests that the dollar’s rising strength has already begun to slow the economy. According to the U.S. Department of Commerce, gross domestic product increased by only 1.9 percent this quarter, signaling the U.S. economy’s worst record since 2011.
The strengthening dollar has been especially harmful for export-oriented companies in the manufacturing, consumer products, and pharmaceutical sectors. Many iconic U.S. firms, such as Coca-Cola, Caterpillar, and Johnson and Johnson, derive a majority of their sales from foreign markets, and consider the strengthening dollar to be a key business challenge. For instance, foreign markets accounts for 61 percent of the sales of Caterpillar, the world’s leading manufacturer of construction and mining equipment. As the dollar strengthens, Caterpillar worries that its revenue will decline further, having already fallen by 18 percent last year.
Pfizer, the world’s top drug manufacturer by revenue, has warned that a strengthening dollar is a “very big challenge” for the company in 2017. The rise in dollar has also hit the sales of Coca Cola, whose revenue fell by 4 percent in 2016. According to a recent survey from the Federal Reserve, with the exception of cars and aerospace, most U.S. manufacturing companies are experiencing weakened activity, citing the strong dollar as a major challenge.
It should be no surprise that, as the export-driven sectors grapple under a strong dollar, they have struggled to create jobs for Americans. In 2015, the manufacturing sector created no jobs, while the energy sector laid off 120,000 workers. Even worse, by taking a toll on their sales and profits and making foreign labor cheaper relative to American labor, a strong dollar incentivizes export-oriented American companies to outsource jobs, which might potentially hurt the Trump administration’s plans to create more jobs, especially in manufacturing.
The strengthening dollar also poses key challenge for the global economy, which should worry American companies that are increasingly looking abroad for growth opportunities. According to Fortune, 40 percent of U.S-based S&P 500 companies gain more than half of their revenue from sales outside the United States. A growing number of U.S. companies are also citing a “challenging macroeconomic environment” or “global headwinds” in their earnings and revenue reports, suggesting the increasing importance of a robust global economy to American businesses.
The strengthening dollar makes the heavily indebted global economy particularly vulnerable to debt crises. Lured by cheap dollar following the financial crisis, the rest of the world, especially the emerging market countries, has accumulated a mountain of dollar-denominated debt. According to Bank of International Settlement (BIS) data, emerging market debt has doubled in the past five years to $4.5 trillion. As a result, emerging market debt now accounts for 217 percent of their gross domestic product.
Such high debt levels themselves do not increase the probability of a debt crisis. However, when a dramatic surge in borrowing is followed by a sudden rise in borrowing costs, the cost of servicing debt can outrun the ability of borrowers to repay. Worryingly, the rise in the dollar has dramatically increased debt servicing costs for a number of key market countries—Russia, Brazil and Turkey—whose currencies lost 61 percent, 43 percent and 19 percent respectively of their value against U.S. dollar last year. Some experts fear that, if the dollar gains further strength, it might strain the ability of emerging market nations to repay some of their debt, leading to a U.S. dollar crisis.
Even if the strengthening dollar does not lead to a full-brown crisis, and rather to a slowdown in the global economy, it will still be bad news for numerous export-oriented U.S. businesses and multinationals operating and selling products in foreign markets.
Given the risks that a strong dollar poses to U.S. businesses and the global economy, it is not surprising that the president’s senior advisor warned policy makers about a stronger dollar, pointing out that further strengthening of the dollar would make it more difficult for the Trump administration to deliver on its promise to revitalize the U.S. economy. At a time when the administration aims to create jobs and boost economic growth, it should pay closer attention to the strengthening dollar and its potential impact on the global economy, U.S. companies, and Americans whose livelihoods are inextricably tied to the economic performance of the global economy.