As I was postig the results of my study of currency exchange rates and trade imbalances – a study which showed that changes in currency exchange rate have no effect on trade – the above-linked article titled “Weaker Dollar Seen as Unlikely to Cure Joblessness” appeared on CNBC.
The article begins by re-stating the now disproven economic theory:
A weakening currency traditionally helps a country raise its exports and create more jobs for its workers.
The article then goes on to make the case that a falling dollar won’t have this predicted effect. I can add one more reason – the theory is flawed and not supported by the data. A weaker dollar will have no effect on the prices of imports, as exporting nations will simply cut costs and subsidize their industries to hold the line on price, assuring that they maintain their share of the U.S. market.
Rising prices for imports certainly would bring manufacturing jobs back to the U.S. But there’s only one way to make sure they rise sufficiently, and that’s for the U.S. to set the prices. In other words, the U.S. needs to apply tariffs. Tariffs must be applied to manufactured products, and the size of the tariffs must be proportional to the population density of the country of origin. This would result in big tariffs on all products from China, even bigger tariffs on products from Germany, Japan and South Korea, but would leave products from nations like Canada, Australia, Saudi Arabia, Brazil and a host of others completely free of tariffs.
The only problem we’d have then would be building factories fast enough to keep pace with demand.