The United States has sustained large trade deficits for decades alongside a decline in manufacturing employment. Economists and policymakers debate the root causes of these imbalances. Two prominent explanations have emerged: (1) an overvalued U.S. dollar, which allegedly makes American exports too expensive and imports artificially cheap, and (2) a lack of domestic production competitiveness, meaning structural issues in the U.S. economy (like higher costs or lower productivity) that reduce its ability to compete, regardless of the exchange rate. This report compares and contrasts these arguments – highlighting Stephen Miran’s position in favor of the “overvalued dollar” hypothesis – and reviews critiques from other economists. Key points from both sides are summarized, followed by an assessment of which view is more widely supported in recent expert analyses.
Argument 1: Overvalued Dollar as the Primary Cause
Proponents of this view argue that the U.S. dollar’s exchange rate has been persistently and excessively strong, contributing directly to trade deficits and manufacturing challenges. The basic mechanism is that a strong (overvalued) dollar makes U.S. exports more expensive in foreign markets and makes imports into the U.S. cheaper. This price distortion can lead to chronic trade imbalances: Americans buy more foreign goods, while U.S. firms struggle to export. Over time, industries in the U.S. may shrink or offshore due to this competitive disadvantage.
• Stephen Miran’s Perspective: Economist Stephen Miran contends that the dollar’s unique role as the world’s reserve currency has kept it “persistently overvalued”, placing a heavy burden on U.S. manufacturing . In a recent paper, Miran argues that because other countries demand dollars and U.S. assets (for reserves and investment), the dollar trades above its fair value. He links this to chronic trade deficits and the hollowing-out of American industry. As one summary of Miran’s plan put it: “the US dollar has been overvalued for decades, leading to chronic trade deficits — and the migration of manufacturing out of the United States” . In Miran’s telling, the high dollar benefits financial sectors and consumers (through cheaper imports) but “weighed heavily on the American manufacturing sector” by undercutting export competitiveness .
• Reserve Currency and Capital Inflows: Miran (and others with similar views) often invoke the “Triffin dilemma” – the idea that issuing the world’s reserve currency forces the U.S. to run international deficits. Foreign governments and investors park savings in dollar assets (like U.S. Treasury bonds), which boosts demand for dollars and drives up its value . According to this view, the U.S. ends up importing capital and, as a mirror image, running trade deficits not because Americans are uncompetitive per se, but because the world’s demand for dollars prices U.S. goods out of global markets. Miran writes that the U.S. “runs large current account deficits not because it imports too much, but it imports too much because it must export [U.S. Treasuries] to provide reserve assets” . In other words, the trade deficit is seen as a consequence of the dollar’s international role and resultant overvaluation.
• Evidence Cited: Advocates of this argument point to historical episodes and data. For example, economist Richard Koo notes that U.S. trade deficits widened in the late 1990s even when the federal budget was in surplus, because the dollar sharply appreciated during that period. The strong dollar in the late 1990s and early 2000s coincided with many U.S. manufacturers (e.g. in electronics and appliances) going bankrupt as they “could not compete with imports given such a strong dollar”. Research supports a linkage between a high dollar and manufacturing decline – one study found that the dollar’s 33% surge from 1995–2002 caused a roughly 4% drop in U.S. manufacturing employment (about 740,000 jobs lost) beyond what would have occurred due to productivity gains or recession alone. In short, the claim is that an overvalued currency eroded the competitiveness of U.S. producers, contributing significantly to factory job losses and import penetration.
• Policy Prescriptions: If the overvalued dollar is the culprit, the implied solution is to bring the dollar to a more competitive level. Miran and like-minded economists have floated ideas such as coordinated currency interventions (a modern-day Plaza Accord) or shifts in U.S. policy to deemphasize the “strong dollar” stance . Miran’s paper discusses a potential “Mar-a-Lago Accord” where U.S. trading partners would cooperate to weaken the dollar’s value . The goal of such measures would be to boost U.S. export competitiveness, reduce imports, and thereby narrow the trade deficit while revitalizing domestic manufacturing. These proponents often argue that exchange rate adjustments are a more effective and less risky tool than tariffs for rebalancing trade . In summary, the overvalued-dollar camp believes currency misalignment is the primary distortion that needs correction to fix trade and manufacturing woes.
Argument 2: Lack of Domestic Competitiveness as the Primary Cause
The opposing viewpoint holds that America’s trade deficits and manufacturing challenges are rooted more in domestic economic factors and competitiveness issues than in currency values. Those who subscribe to this explanation acknowledge that the dollar’s value matters at the margin, but they see deeper structural reasons for the U.S. trade imbalance – such as higher relative production costs, insufficient savings, or weaknesses in industrial strategy. In their view, focusing on the dollar overstates the case and risks ignoring the real issues that make U.S. firms less competitive.
• Higher Costs and Lower Productivity: A common argument is that U.S. manufacturing’s decline is largely due to factors like wage differentials, productivity trends, and automation, rather than just an expensive dollar. As trade expert William Reinsch explains, “Most economists today argue that while exchange rates are a factor in manufacturing job losses, the larger causes are higher wages (in the U.S. versus developing countries), low productivity growth, and technology improvements”. Many U.S. industries that left over the past half-century did so because other countries offered cheaper labor or more efficient production for certain goods. Even during periods when the dollar was weaker, the U.S. still ran trade deficits and lost manufacturing jobs, indicating currency is not the sole driver. The United States long ago transitioned away from being a low-wage manufacturing economy, so many lost industries (e.g. consumer electronics, textiles) would not return even with a cheaper dollar. In short, this side argues that American producers often struggle due to structural cost disadvantages and technological changes that have reduced labor demand, which can’t be solved simply by tweaking exchange rates.
• Saving-Investment Imbalances: Another lens for the competitiveness argument is macroeconomic: the idea that trade deficits reflect underlying imbalances in saving and investment, not manipulation of currency. In basic terms, the U.S. trade deficit equals the net inflow of foreign capital – Americans buy more from abroad than they sell abroad because the U.S. economy absorbs more investment and spending than it generates in savings. From this perspective, the cause of the trade deficit is that the U.S. consumes or invests beyond its means (financed by foreign capital), rather than a currency aberration. As Reinsch summarizes the standard view, trade imbalances are often seen as “a reflection of which country is investing more and which is saving more. Americans are simply investing and spending more than they save”, with foreigners filling the gap. This view implies that to reduce the trade deficit, the U.S. would need to save more or spend less, which can be painful (potentially slowing growth). In practical terms, policies like large budget deficits can widen the trade gap – indeed, former IMF economist Maurice Obstfeld notes that higher U.S. fiscal deficits will likely raise trade deficits, all else equal . The emphasis here is that the trade deficit is anchored in macroeconomic choices and fundamentals (fiscal policy, household saving rates, investment climate), not just the dollar’s reserve status. In fact, Obstfeld’s recent analysis finds the U.S. “can supply the world with dollars without [running] trade deficits”, and he argues the notion that the dollar’s reserve role “obliges” the U.S. to have deficits is a myth. This directly challenges Miran’s thesis – suggesting the dollar’s status is not an excuse for perpetual deficits, and domestic policies can adjust the saving-investment balance.
• Critiques of the Overvalued-Dollar Thesis: Economists who favor the competitiveness explanation have critiqued Miran’s position as overly simplistic. Raghuram Rajan, for example, flatly describes Miran’s strong-dollar-causes-deficits argument as “not a persuasive argument”. He and others contend that Miran essentially inverts cause and effect – implying the U.S. is a passive victim of foreign capital inflows – whereas in reality those inflows also reflect U.S. economic attractiveness (e.g. investors seeking safe U.S. assets) and America’s own demand for capital. In other words, the U.S. trade deficit is at least partly self-inflicted, stemming from domestic demand outpacing supply. Critics also note that blaming the dollar can downplay the need for the U.S. to improve its productivity or industrial strategy. Even if the dollar were devalued, would American manufacturing rebound if, say, factories are highly automated or if skills and supply chains have atrophied? Reinsch points out that many industries “will not return regardless of the value of the dollar” due to structural reasons. Moreover, some economists worry that attempts to force a weaker dollar (for example, by undermining the dollar’s reserve-currency status) could backfire – raising U.S. interest rates, deterring investment, or eroding the very advantages (like lower borrowing costs) that the U.S. gets from issuing the world’s preferred currency. A recent analysis by Obstfeld concludes that trade balances are “nuanced” outcomes of both foreign and domestic factors, but often “U.S. factors are dominant” – for instance, he notes that U.S. budget deficits and China’s high saving rates have played big roles in global imbalances. From this vantage, the remedy for trade deficits lies in addressing those underlying factors (e.g. reducing fiscal deficits, encouraging investment in productive capacity, workforce skills, etc.) rather than primarily in exchange rate engineering.
• Acknowledging Exceptions: Importantly, even those stressing competitiveness admit that currency can matter in certain cases. A clear example was China in the 2000s – when China maintained an undervalued yuan and ran huge surpluses, contributing to a surge of Chinese imports that harmed some U.S. industries. This period saw a hot debate over China’s currency policy and its impact on U.S. jobs. While “a strong case can be made that China was [guilty of currency manipulation] then”, Reinsch notes that “most recent data suggests China, if anything, is now trying to prop its currency up rather than force it down”. In other words, currency misalignment has at times exacerbated competitiveness problems (as with China’s peg in the early 2000s), but such misalignment is not universally the main story behind U.S. trade deficits in the postwar era. Over the last 50 years, the U.S. ran trade deficits through periods of both strong and weak dollar values, implying broader forces at work. This reinforces the view that while the dollar’s value is one piece of the puzzle, the primary drivers of the trade deficit lie in economic fundamentals and policy choices rather than an inherently overvalued currency.
Side-by-Side Comparison of the Two Views
To clarify the differences between these arguments, the table below compares key points of the “Overvalued Dollar” hypothesis and the “Lack of Competitiveness” hypothesis:
| Aspect | “Overvalued Dollar” Explanation | “Lack of Competitiveness” Explanation |
| Core Claim | The U.S. dollar’s exchange rate is too high (overvalued), primarily due to global demand for dollar assets (reserve currency status). This makes U.S. goods expensive abroad and imports cheap at home, causing persistent trade deficits and industrial decline . | The U.S. trade deficit reflects domestic economic weaknesses or choices – e.g. higher production costs, lower competitiveness, or Americans consuming more than they produce. U.S. manufacturing job losses are mainly due to wage and productivity gaps and technological change, not just currency levels . |
| Key Proponents | Stephen Miran (former Trump economic adviser) is a leading voice, arguing the dollar’s reserve role has “weighed heavily” on U.S. manufacturing . Others like economist Richard Koo and some U.S. manufacturers echo that a strong dollar unfairly handicaps industry . “Weak-dollar” advocates often call for a new Plaza Accord to realign currencies. | Many mainstream economists and institutions. Critics of the currency view include Raghuram Rajan (former IMF chief) who finds it unconvincing , Maurice Obstfeld (PIIE/Berkeley) who labels the reserve-currency/deficit link a “myth” , and trade analysts like William Reinsch . They represent a broad consensus that macro and structural factors drive the deficit. |
| Evidence Cited | Historical periods of a strong dollar correlate with widening trade gaps and factory closures. E.g., late 1990s: the dollar surged and the trade deficit doubled even as the US had budget surpluses . Studies estimate that the 1995–2002 dollar rise alone cost hundreds of thousands of U.S. manufacturing jobs . The last major effort to weaken the dollar (1985 Plaza Accord) successfully cut the dollar’s value in half and was followed by a shrinking trade deficit, which proponents cite as a positive precedent . | Long-term trends show trade deficits persisting regardless of dollar fluctuations. Over 50+ years, the U.S. has run deficits even when the dollar was relatively weak . U.S. manufacturing decline aligns with the rise of low-wage competitors (China, Mexico, etc.) and automation. For instance, the “China shock” of the 2000s hurt U.S. jobs largely due to China’s industrial ascent (enabled partly by a then-undervalued yuan) . Also, episodes like 1998–2001 demonstrate that factors like domestic demand booms or financial flows (the late-90s stock market bubble) can drive trade deficits even in the absence of fiscal deficits . |
| Policy Implications | Weaken the dollar to restore balance. Options include coordinated interventions or agreements with trading partners to depreciate the dollar , or unilateral measures to discourage foreign dollar accumulation. Miran suggests the U.S. could negotiate sharing the “burden” of the strong dollar by capturing some benefits from other countries that currently enjoy cheap exports . Tariffs can be used tactically, but only if the dollar’s value is managed in parallel (since tariffs alone may be offset by currency moves) . Overall, this camp prioritizes currency realignment as the solution to boost exports and revive manufacturing. | Improve competitiveness and rebalance macroeconomics. Recommended responses include investing in productivity and skills, fostering high-value industries, and addressing macro imbalances. For example, reducing federal budget deficits (to increase national saving) would, over time, help lower the trade deficit . Policies might also focus on fair trade enforcement (e.g. tackling foreign subsidies or IP theft) and workforce development, rather than attempting to micromanage the dollar’s value. This side sees a weaker dollar as at best a partial fix – helpful for exports, but not sufficient unless underlying cost/productivity issues are solved. |
Which View Do Economists Support Today?
While the debate continues, recent expert analysis leans strongly toward the “domestic competitiveness (and macro factors)” explanation as the dominant cause of U.S. trade deficits. Stephen Miran’s overvalued-dollar argument has influenced some policy discussions – especially in the context of former President Trump’s trade agenda – but it has faced skepticism from many economists. In the words of Raghuram Rajan, Miran’s claim that America “runs large trade deficits and struggles to compete in manufacturing because [the] dollar [is] too strong… is not a persuasive argument” . Rajan and others emphasize that attributing the entire problem to the dollar’s reserve-currency status is an oversimplification.
Multiple economists have published critiques of the overvalued-dollar thesis in the past year: for example, Maurice Obstfeld (2025) directly addressed the notion that the dollar’s reserve role forces U.S. deficits, calling this a “myth” and showing that domestic fiscal and savings decisions are more important. Likewise, William Reinsch (2024) concurs that exchange rates alone cannot explain decades-long deficits, pointing instead to wage and productivity differentials and the long-running shift of production to lower-cost countries. This mainstream consensus holds that the U.S. trade deficit is largely self-determined – driven by how much Americans spend and invest relative to their income, and by the competitiveness of U.S. firms – rather than being an externally imposed byproduct of the dollar’s popularity. In practical terms, this means experts often recommend structural and macroeconomic fixes (like boosting innovation, education, and fiscal discipline) to address trade imbalances, rather than primarily tinkering with exchange rates.
That said, the overvalued-dollar argument is not without its supporters. It resonates in manufacturing circles and among policy strategists who observe that a markedly strong dollar does hurt export industries. Even some economists who focus on trade fairness agree that a gradual dollar depreciation could help U.S. industry in the short run. The difference is that most do not see it as a silver bullet. The prevailing view is that currency values are one piece of a larger puzzle: a persistently high dollar can exacerbate trade deficits, but fundamental competitiveness and macroeconomic balance ultimately determine the long-run outcome .
Conclusion
In summary, two contrasting explanations exist for America’s trade deficit and manufacturing travails. Stephen Miran and other “weak-dollar” proponents make a compelling case that an overvalued dollar – bolstered by global reserve demand – has been a major headwind for U.S. exporters and a key driver of the trade gap. They call for policies to realign the dollar to more competitive levels. On the other side, most economists argue the trade deficit primarily reflects homegrown economic factors: the U.S. needs to produce more competitively and get its financial house in order. They caution that focusing solely on the dollar could distract from tackling deeper issues like productivity, skills, and saving rates.
Recent expert analyses and the weight of economic research tend to support the latter view, that lack of competitiveness and macro imbalances are the root causes of U.S. trade deficits. The “overvalued dollar” is seen more as a symptom or contributing factor than the sole cause. As Obstfeld notes, foreign and domestic policies can affect trade flows, but they are “not principal drivers” of the overall deficit imbalance . Ultimately, a balanced approach recognizing both perspectives may be prudent: addressing legitimate concerns about dollar misalignment (especially when due to other countries’ actions or market distortions) while also strengthening the underlying competitiveness of U.S. production. This combination would ensure that any exchange rate adjustments translate into sustainable gains for American manufacturing and a healthier trade position in the long run.
Sources:
• Miran, Stephen. “A User’s Guide to Restructuring the Global Trading System.” Hudson Bay Capital research paper (2020) – argues the dollar’s reserve status causes overvaluation and U.S. trade imbalances .
• Rajan, Raghuram G. “Trumponomics’ Exorbitant Burden.” Project Syndicate (Mar 11, 2025) – critiques Miran’s argument as unconvincing .
• Obstfeld, Maurice. “The U.S. Trade Deficit: Myths and Realities.” Brookings Papers on Economic Activity (Mar 2025) – finds trade deficits stem from macro factors (e.g. low savings, fiscal deficits) and calls the reserve-dollar deficit link a “myth” .
• Reinsch, William Alan. “Putting the Dollar in Perspective.” CSIS Commentary – Back & Forth: Dollar Valuation (Oct 2024) – argues higher labor costs, slow productivity, and technology are bigger causes of U.S. manufacturing loss than currency value .
• Koo, Richard. “The Dollar and Social Divisions in the United States.” CSIS Commentary – Back & Forth: Dollar Valuation (Oct 2024) – presents the case that an overvalued dollar (due to free capital flows) has undermined U.S. industry, analogous to Miran’s view .
• Bloomberg News. “Dollar Drop Clouds Debate on Who Pays for Tariffs.” Bloomberg (Sept 2019) – notes manufacturers often complain a strong dollar makes U.S. exports less competitive .
• Economic Policy Institute. “The High Dollar’s Effect on U.S. Manufacturing.” EPI Report (2003) – empirical study quantifying job losses from the late-1990s dollar rise .
