Nixon's Dollar and the Foreign Fallout

BY ripping the dollar loose from gold and slapping a 10% surtax on imports, Richard Nixon inaugurated a global power play designed to boost U.S. exports and cut the country's worsening balance of payments deficit. Though his moves came as a shock, it appears that he acted none too soon; last week the Commerce Department reported that in July U.S. imports had exceeded exports for the fourth straight month. Still, now that some of the excitement surrounding the Nixon initiative is subsiding, a hard truth is hitting bankers, businessmen and government leaders the world over: a return to any sort of lasting stability in trade and currency dealings will be tedious, time-consuming and laden with difficulties.

Closed Window. Nixon's dollar moves constituted an invitation to foreign governments to float the dollar against their own currencies by allowing the factors of supply and demand to dictate its value overseas. His aim was to force the U.S.'s major trading partners, especially Japan and the Common Market countries, to increase the value of their currencies--and thus the cost of their exports. Once Nixon shut the gold window, the dollar was expected to drop, and the value of foreign currencies to go up. The money exchanges of the world had been effectively closed since the Nixon announcement; until they reopened last week, no one knew for sure how much the dollar would fall or other currencies rise.

The only decisive development came at week's end from Tokyo. After two weeks of agonizing over the Nixon pressure and several times denying flatly that the yen would be revalued, the government of Prime Minister Eisaku Sato finally announced that it would allow the Japanese yen to float against the dollar. This was probably an unavoidable decision for Sato, but it was especially painful and will produce wide-ranging economic woes for Japan. By in effect increasing the price of the yen, Sato dulled the cutting edge of Japan's export drive, not only in the U.S.--which buys 30% of all Japanese exports--but throughout the world. Beyond that, a floating yen proportionately decreases the value of Japanese dollar holdings, which now total $11.3 billion. Japanese shipyards, which currently hold more than $5 billion in construction contracts written in dollars, will be especially hard hit. A 10% floating revaluation would cost Japanese shipbuilders $500 million.

Just how widely the yen will be allowed to fluctuate is not yet clear; the Bank of Japan said it would intervene to prevent too drastic a swing, at least for now. On the first day of the limited float, the yen was traded at an increase of 5% to 7% over the old rate, but just where it will settle is still uncertain. Japanese officials noted that the flotation was only a temporary measure, but U.S. importers were already predicting that the higher yen rate on top of the 10% surtax could effectively close the American market to Japanese steel and most consumer goods.

Drifting Downward. U.S. Administration officials saw the Japanese decision to set the yen adrift among the world's currencies as a tangible sign that the Nixon moves are succeeding--but they emphasized that it was no more than a first step. European reaction to the Japanese announcement, which came within hours of the close of business Friday, was a mixture of surprise and bewilderment. In West Germany the dollar had not declined in early trading. But as the week progressed, rumors began to circulate that the International Monetary Fund, the clearinghouse established at Bretton Woods in 1944, would eventually ask for a 13% to 14% revaluation of the Deutsche Mark against the dollar. Naturally, the dollar thereupon began to drift downward. Then came Sato's surprise announcement. In a seesaw effect, the dollar began to move back up, reflecting a feeling among investors that higher prices for Japanese goods worldwide would help boost U.S. export sales. By the close of business Friday, the mark was being traded at 3.40 to the dollar, a functional revaluation of 7.6%.

Other European currency exchanges were equally fuzzy. In Switzerland, officials prepared to charge fees instead of paying interest for short-term foreign-currency deposits. This would guard against an outbreak of speculation should the dollar begin to sink in the weeks ahead. As the week progressed, that plan hardly seemed necessary. With the Swiss Central Bank poised to buoy up the price of the dollar if it fell below an undisclosed "base level," the Swiss franc merely wobbled fretfully anywhere from 1.2% to 2.8% above its normal dollar exchange rate. In Paris, where a complex two-tier system separates fixed-rate international trade and business dollars from tourist and capital investment dollars, the U.S. currency stayed within 3% of parity for free-floating transactions. In London, the pound reached only 3% above parity. With pressure on the yen relieved, however, Europeans grew concerned that their own currencies might become the new target of international speculation. As a precaution, the British Treasury banned interest payments on new foreign deposits "for the time being."

Substantial Realignment. Much of the caution in the world's money markets is a consequence of increasing uncertainty over just how long the Administration will keep the 10% import surtax in effect.

Nixon is using the surtax as a lever not merely to force the U.S.'s major trading partners to float their currencies but to make sure that those currencies float substantially upward.

Privately, Administration officials have suggested that a 12% to 15% revaluation of the world's major trading currencies is what the President wants. However, except for the President and perhaps his closest economic advisers, no one knows precisely what he will settle for. Not even Nixon himself knows how far he can go--or what will happen if he overplays his hand. Under Secretary of the Treasury Paul A. Volcker has said that the U.S. wants not only a "substantial realignment" of exchange parities, but also some support from Europe and Japan in maintaining military bases around the world. Overseas military expenditures are a major factor in the U.S.'s balance of payments deficit. According to Volcker, the President also wants a relaxation of import restrictions overseas, particularly in Japan. The task facing foreign government leaders is to fit together the disparate pieces of the Washington-posed puzzle. They must figure out how many of Nixon's demands are genuine and how many are bargaining chips in a grand negotiating strategy.

Single Voice. Government leaders overseas know that they will fare far better in their efforts to whittle down the U.S. demands if they can speak with a single voice. An effort to put together a consensus may begin as early as Sept. 15 in London, where the Group of Ten--the ten largest industrial countries in the IMF--will gather to prepare for an IMF general meeting in Washington twelve days later. The first order of business will be to decide just how much the major trading currencies ought to be revalued against the dollar.

Coming to an agreement on a general realignment of currencies will be a hideously complex task. Canada, for one, is not likely to agree readily to a major revaluation against the U.S. dollar. Since May 1970, the Trudeau government has kept the Canadian dollar floating freely against its U.S. counterpart. This has made exports to the U.S. more expensive and imports from it cheaper. Says Minister of Labor Bryce Mackasey: "Canada can live with the surtax much better and much more easily than with a stronger Canadian dollar. I'm more concerned with the relationship of our dollar to the U.S. dollar than I am with the surtax." His reason is simple: 70% of all Canadian exports go to the U.S., but only 17.5% are affected by the surtax, since most are exempted under quota arrangements. Under one special agreement, U.S. automobiles assembled in Canada are exempt from the surtax.

Italy, too, is not eager to revalue. In central and northern Italy, the economic health of numerous small towns depends on their shoe industries, and these industries are almost entirely export oriented. France has also grown increasingly dependent on exports. For all these countries, a 10% surtax at the U.S. border merely shrinks the U.S. market, but a revaluation of their currencies makes their goods less competitive not only in the U.S. but throughout the world.

Wrong Weapons. Government leaders in the Common Market are also angered by what many regard as a beggar-my-neighbor effect of Nixon's package on them. The Nixon program is designed to increase American exports. The Common Market countries already import more from the U.S. than they export to it, so cheaper U.S. goods resulting from a cheaper dollar will only make matters worse for the Europeans. Besides, they contend that most of the American balance of payments deficit comes not from trade but from Government spending overseas and from U.S. corporate investment abroad. Says one top Common Market official: "Nixon has chosen to fight the wrong battle on the wrong battlefield and with the wrong weapons."

Many of these tensions surfaced last week when the 55-member council of the General Agreement on Tariffs and Trade met in emergency session in Geneva to hear the U.S.'s justification of the surtax. GATT delegates fumed at what they saw as the U.S.'s betrayal of more than a quarter-century of free-trade leadership. But the U.S. representative, Deputy Under Secretary of State Nathaniel Samuels, steadfastly refused to spell out either the surtax's likely duration or the terms under which it could be lifted. Following the first day's meeting, Samuels simply said that not even a sizable revaluation of currencies, taken alone, would be enough. "Only a clear improvement of the U.S.'s balance of payments would lead to a review of the import curbs," he said.

Vicious Competition. For the moment, the U.S. has little to fear in the way of reprisals. Though the Common Market has the right to retaliate under Article 23 of GATT, its members hesitate to risk a trade war. Short of that, however, carefully worked out concessions could be wiped out. Foreign car manufacturers expect to export 1.6 million autos to the U.S. in 1971. The surtax could block out enough of them to cause such vicious and desperate competition for remaining markets that some governments would be pressed to erect protectionist trade barriers.

Because of Nixon's actions, already some importers of Japanese-made Toyotas and Datsuns have announced price hikes in response to the surtax. With the Japanese yen now floating against the dollar, those prices may well rise again in the weeks ahead. Last week, West Germany's Volkswagen, Europe's largest exporter of cars to the U.S., announced that the price of the famed "beetle" would be increased by 4.2% for the American market. One reason was the surtax; another was that the company could no longer absorb the cost of the continuing climb in the value of the Deutsche Mark on West Germany's money exchanges.

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