[The Viewpoint of Dongki Kim] Trump Shakes the International Monetary Order: Where Will the Ripple End?

Aiming for a Weaker Dollar and Manufacturing Revival
Encouraging Foreign Sales of U.S. Treasury Bonds
Significant Impact on South Korea's Economy and Security

Recently, the term "Mar-a-Lago Agreement" has become a hot topic in the international economy. It combines the name Mar-a-Lago, President Trump's residence and resort, with the concept of an agreement, evoking international accords that brought significant changes to the global monetary order, such as the Plaza Accord. Rather than an actual agreement, it is better described as a draft agreement that the United States desires. The main content of this draft is contained in a report titled "User Manual for Structural Reform of the International Trade System," announced by Steve Mierny, chairman of the Economic Advisory Council for Trump's second term.

The scholar who greatly influenced Steve Mierny is Michael Pettis, a professor at Guanghua School of Management, Peking University, China. Pettis diagnoses that capital inflows to the U.S. are more harmful than beneficial. He analyzes that capital inflows raise the value of the dollar, cause excessive financialization, and hollow out U.S. manufacturing. Pettis therefore suggests that it would be beneficial for the U.S. to restrict these inflows through measures such as taxation. Several years ago, Democratic Senator Tammy Baldwin and others proposed legislation to tax capital inflows and mandate the Federal Reserve's (Fed) weak-dollar policy.

Since World War II, the world's major trade has been conducted in dollars. As a result, the U.S. continuously supplied reserve currency (U.S. dollars) and reserve assets (U.S. Treasury bonds) to its global trading partners. The U.S. benefited from the dollar as a reserve currency, which was sometimes criticized as an excessive privilege. However, this came with current account and fiscal deficits for the U.S., the supplier of the reserve currency. The U.S. financed large military expenditures through massive external borrowing, contributing to the political and economic stability of the West. Many countries and companies outside the U.S. increased exports to the U.S., gaining profits and creating jobs. Behind this, however, U.S. manufacturing was hollowed out and employment declined. The U.S. easily issued dollar bonds to support excessive consumption, but the debt remained intact. Foreign holders of U.S. bonds received interest payments, but now the interest cost on U.S. debt has exceeded military spending.

In this context, the Trump administration recognizes that countries other than the U.S. should bear a fair share of the benefits of free trade and security. Methods of sharing the burden include increasing military spending by each country and cooperating with U.S. tariff policies, but above all, cooperating in policies to weaken the dollar and reduce fiscal deficits. To this end, the Trump administration seeks to artificially readjust the existing international monetary order.

Mierny's report proposes that to induce a weaker dollar, foreign monetary authorities should be encouraged to sell most of their foreign exchange reserves. To suppress possible interest rate increases during this process, it suggests a bold idea of exchanging U.S. Treasury bonds held by foreign monetary authorities for 100-year discounted bonds. Besides imposing import tariffs as a method to elicit foreign policy cooperation, exclusion from the security umbrella provided by the U.S. and exclusion from swap lines provided by the Fed could also be used.

If foreign cooperation is insufficient, the U.S. intends to induce a weaker dollar unilaterally. It is also considering charging a fee from the interest payments on U.S. Treasury bonds to encourage foreign monetary authorities to sell foreign exchange reserves. Although whether the Fed will cooperate is a variable, the Fed could directly intervene in the foreign exchange market to create a weaker dollar. Through these methods, it is expected to foster manufacturing, strengthen export competitiveness, reduce imports, and decrease debt. However, it is uncertain whether foreign countries will voluntarily cooperate with such bold attempts. The Trump administration's aggressive moves could pose a significant burden, especially for us, given our close ties in security and economic matters. This is a time when wisdom is needed to overcome these challenges.

Kim Dong-gi, author of "The Power of the Dollar" and attorney