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UPSC CURRENT AFFAIRS – 24th March 2025

Home / UPSC / Current Affairs / What is the ‘Mar-a-Lago Accord’ and dollar devaluation plan

What is the ‘Mar-a-Lago Accord’ and dollar devaluation plan

What is the ‘Mar-a-Lago Accord’ and dollar devaluation plan

Why in News?

The Trump administration’s economic strategy aims to transform the US into a global manufacturing powerhouse by addressing trade deficits through tariffs and potential dollar devaluation, reminiscent of the 1985 Plaza Accord.

What is the ‘Mar-a-Lago Accord’ and dollar devaluation plan

Introduction

  • President Trump’s overarching economic objective is to transform the US into a global manufacturing powerhouse and address the persistent trade imbalance.
  • In 2024, the US recorded a trade deficit exceeding $1 trillion, marking the fourth consecutive year of trillion-dollar deficits.
  • This chronic trade imbalance suggests that the US manufactures relatively fewer goods domestically, leading to lower levels of job creation.
  • Despite these trade deficits, the US has historically maintained low unemployment rates.
  • Therefore, Trump’s focus is less on job creation and more on boosting domestic manufacturing and reducing trade deficits.

The Role of the Dollar’s Exchange Rate

  • A primary reason Americans prefer imported goods is their affordability, a direct consequence of the US dollar’s strong purchasing power.
  • The dollar’s strength stems from the global trust it enjoys as both a store of value and a medium of exchange.
  • Several factors contribute to this trust, including the US economy’s strength, the independence of the Federal Reserve, and its commitment to maintaining price stability.
  • As a result, central banks worldwide hold US dollars as foreign exchange reserves, and about 50% of all international transactions are conducted in dollars.
  • The continuous demand for US dollars increases its exchange rate, further enhancing its purchasing power. This, in turn, makes imported goods cheaper for Americans, discouraging domestic production and contributing to trade deficits.

Approaches to Boosting Manufacturing and Reducing Trade Deficits

To counter the negative impact of a strong dollar, the Trump administration has two main policy options:

  • Imposing Tariffs on Trade Partners

Trump’s administration has aggressively implemented tariffs, aiming to:

    • Reduce demand for imports by making them more expensive.
    • Encourage foreign firms to establish manufacturing operations in the US.

However, this strategy carries risks:

    • Higher import prices burden US consumers rather than foreign businesses.
    • Retaliatory tariffs from other countries can trigger full-scale trade wars, disrupting supply chains and escalating costs.
    • Some countries may counter tariffs by devaluing their own currencies, effectively negating the tariff impact.
  • Devaluing the US Dollar
    • An alternative approach involves lowering the value of the US dollar relative to other currencies.
    • If other nations were to sell off their dollar reserves and buy their own currencies, the increased supply of dollars in the market would weaken its value.
    • A weaker dollar would enhance the competitiveness of US exports, encouraging domestic manufacturing.

Historical Precedent: The Plaza Accord of 1985

  • In response to a similar situation, the US signed the Plaza Accord in 1985 with Japan, Germany, France, and the UK.
  • The agreement successfully devalued the dollar, reducing trade deficits in the short term.
  • However, its long-term impact varied.
  • Japan, in particular, suffered as the rising yen hurt its export-driven economy, contributing to an economic bubble and subsequent stagnation.

Challenges in Implementing a Modern-Day 'Mar-a-Lago Accord'

A contemporary Plaza Accord-like agreement—sometimes referred to as a Mar-a-Lago Accord—would be much harder to achieve due to several factors:

  • Japan’s Cautionary Tale: Countries may resist repeating Japan’s experience of economic downturn following a currency revaluation.
  • Complex Global Trade Dynamics: Unlike 1985’s G-5, today’s global trade involves the G20, complicating coordination efforts.
  • China’s Role: Unlike previous trade adversaries (Germany and Japan), China is both a trade and military rival to the US, making negotiations politically sensitive.
  • Massive Currency Markets: Currency markets today handle an estimated $7.5 trillion in daily transactions—five times the volume of the late 1980s—making any meaningful dollar devaluation a monumental task.
  • Trump’s Aggressive Tactics: Convincing global leaders to accept a weaker dollar would require diplomacy, yet Trump’s confrontational approach through tariffs may alienate potential allies.

Conclusion

  • The devaluation of the US dollar remains a complex and controversial policy option.
  • While it could enhance US export competitiveness and reduce trade deficits, the geopolitical and economic implications make it difficult to execute.
  • Whether Trump can orchestrate a currency devaluation through global negotiations remains to be seen, but his aggressive tariff strategy suggests a willingness to push the global economic order toward such a shift.

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