A Mar-a-Lago Accord could benefit China

The provisional trade deal reached by China and the United States in Geneva last month exceeded expectations, with the two sides agreeing to roll back for 90 days the majority of tariffs and other countermeasures they had imposed in the preceding weeks. To be sure, a number of tariffs remain – including all those the US imposed on China during Donald Trump’s first presidency – and little progress was made in resolving underlying disagreements, such as over fentanyl flows into the US. But with more talks set to take place (amid and despite accusations by both sides that the provisional agreement has been violated), a robust agreement may well be in the offing.

To understand what such an agreement might look like, it is worth considering the grievances behind Trump’s tariff policy. Conventional economic theory holds that, in a flexible exchange-rate system, changes in a currency’s value should lead to a stable trade balance in the issuing economy. But, as experience shows, a number of factors can disrupt this dynamic. In the case of the dollar, it is very easy to pin down the main one: its status as the world’s dominant reserve currency.

As the economist Robert Triffin explained in 1960, unless the country that provides the world’s reserve currency runs a current-account deficit, the world loses its largest source of liquidity for reserves, with catastrophic consequences for economic growth and stability. But the ever-expanding deficit can undermine confidence in the reserve-issuing country – what is known as the Triffin dilemma.

The Trump administration’s chief complaint is that permanent demand for dollars keeps the currency strong, even when the US Federal Reserve pursues very accommodative interest-rate policies, as was the case for well over a decade after the 2008 global financial crisis. Given this, improving America’s export competitiveness – and, thus, its trade balance – requires policy intervention.

To this end, the Trump administration has floated the idea of a “Mar-a-Lago Accord,” inspired by the 1985 Plaza Accord, under which the five largest industrialised economies agreed to devalue the US dollar relative to the Japanese yen and the German Deutschmark. The new iteration – the brainchild of Stephen Miran, now the chair of Trump’s Council of Economic Advisers – would be negotiated at Trump’s Mar-a-Lago resort in Florida, rather than the Plaza Hotel in New York City.

But getting your trading partners to help you devalue your currency vis-à-vis theirs is no easy feat. That is why, as Miran argued last year, negotiations would have to be preceded by “punitive tariffs.” Countries would be so desperate to get the tariffs reversed, the logic went, that they would agree to whatever Trump demanded.

But America’s trading partners have good reason to be open to a Mar-a-Lago Accord. Since the world needs a reserve currency – no alternative global monetary arrangement has so far proved successful – America’s provision of it amounts to a global public good. One can thus think of a coordinated dollar devaluation as the price the rest of the world must pay in exchange for that good.

Perhaps more important, other major currencies’ appreciation may not be all bad for the countries that issue them. This is certainly true for China. At a time when slowing income growth is undermining business and consumer confidence, a stronger renminbi would almost instantly make people feel richer. This wealth effect would provide a major boost to consumption – one of the government’s key priorities – and be complemented by a slowdown in export growth (since Chinese goods would cost more abroad). As China’s external imbalances declined, so would tensions with its major trading partners.

By how much should the renminbi appreciate? While China’s economy is already 1.3 times the size of America’s in terms of purchasing power parity, it is only 65% the size of the US economy at the current exchange rate. This means that, in theory, there is room for the renminbi to appreciate by 50% against the dollar, though this is probably not realistic. A more reasonable, achievable target would be a one-time appreciation of 15-20%.

A Mar-a-Lago Accord could also benefit China in other ways. Because it would do so much good for the US – not least by increasing Chinese investment in the US (which could support reindustrialisation) – China would leverage it to persuade Trump to eliminate the 20% tariff on Chinese goods he introduced during his first term.

It is easy to view US-China engagement as a zero-sum game. But mutually beneficial agreements are entirely possible. Perhaps unexpectedly, a Mar-a-Lago Accord could be one of them.

Yao Yang is Liberal Arts Chair Professor at the China Center for Economic Research and the National School of Dev\elopment at Peking University.