Trade v. The Dollar

Josh Bivens, http://www.epinet.org/briefingpapers/140/bp140.pdf, presents the primary thesis that the Dollar must devalue to cut the Trade deficit. (Thanks to Tyler Cowen for the link.)

Quotes of Use:

In 2002, this deficit reached $488 billion, meaning that the United States imported (consumed) $488 billion more than it exported (produced). This represents almost 5% of total U.S. GDP.

A conservative measure of this debt service burden predicts that, absent improvement in the trade balance, almost 2% of GDP annually will be devoted to foreign debt service.

This more comprehensive measure of the dollar’s value (the Federal Reserve's trade-weighted index) declined by 9.1% from its peak in February 2002 to July 2003.

To date, the euro and the Canadian dollar have seen the largest climb against the U.S. dollar. The euro has appreciated by over 20% against the U.S. dollar, while the Canadian currency has gained around 15% (adjusted for inflation). The Japanese yen and Mexican peso have appreciated by 12% and 9%, respectively. . . .This is a far from optimal pattern of adjustment. The euro area is one of the slowest growing economic areas in the world, yet it will bear much of the burden of relieving the pressure of U.S. trade deficits. This will deprive the euro area of demand for domestic products at a time when such demand is necessary to forestall a full-blown recession.
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The Paper is very competent, but does not enter into realities which will affect Trade dispersals:

1) The euro and Canadian dollar are both backed by economies highly volitile to Unemployment, and retractive policies (Government subsidies of domestic employment) will not allow normal Trade adjustment.
2) China, India, Malaysia, Taiwan, and S. Korea will not free their Currencies from the Dollar, no matter the dollar devaluation, for necessary Trade adjustments.
3) The matrix of U.S. Trade exports is too specialized (sectored) to provide normal adjustment of the current Trade deficit, even with dollar devaluation. The foreign markets simply do not exist.
4) U.S. Imports must be curtailed, to cancel the Trade deficit. This will require a broad-based lateral expanision of American manufacturing into domestic sales. lgl