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A coat of arms at Mar-a-Lago Club in Palm Beach, Florida (Don Emmert/AFP via Getty Images)

Unpacking the Mar-a-Lago Accord

The idea is unlikely to deliver the reduced deficits and bring back good jobs that are the primary motivation.

Jenny Gordon

26 March 20254 min read

The Mar-a-Lago Accord is an idea floated by Stephen Miran, recently appointed Chairman of the US Council of Economic Advisers. Such a deal, Miran claims, would address the US current account and fiscal deficits without having to do the hard work of raising tax revenue or lowering spending.

Like the 1985 Plaza Accord, part of the proposed solution is to force the rest of the world to appreciate their currencies to improve US export competitiveness. You can already see the effort here to appeal to the instincts of Donald Trump, named for the president’s personal Florida retreat. The Mar-a-Lago Accord idea also envisions that foreign governments holding US Treasuries would convert these to 100-year bonds. The mechanism for achieving these objectives is to threaten trade and investment partners with tariffs and withdrawal of the US security umbrella.

Along with the proposals to establish a US sovereign wealth fund financed by revaluing US gold reserves to market prices and the cryptocurrency stabilisation fund, the consequences are likely to be profoundly disruptive to the global financial system. These proposals are also unlikely to deliver the reduced deficits and bring back good jobs that are the primary motivation.

The logic is flawed for at least five reasons.

Making manufacturing more competitive, one of Trump’s touchstones, is not just about a weaker US dollar, it is also about investment.

First, the math is impossible unless there is a major shift in resources from the non-tradable to the tradable sector in the United States. The manufacturing investment required for import replacement and to expand exports has to be financed. For almost five decades, the United States has been a net borrower from the rest of the world – its current account deficit reflects this imbalance in US savings and investment. To reduce the current account deficit, the United States has to reduce the capital account surplus. This means borrowing less from the rest of the world.

Making manufacturing more competitive, one of Trump’s touchstones, is not just about a weaker US dollar, it is also about investment. The irony is that unless the US government can reduce the budget deficit, or encourage Americans to save more and consume less, or divert investment from other business sectors, this manufacturing investment must be financed by borrowings from abroad, which at least temporarily makes the US dollar stronger. Yet a weaker US dollar is seen as the mechanism to boost US competitiveness.

Second, even if the Mar-a-Lago Accord idea and the Trump tariff agenda are eventually successful in promoting manufacturing, this will not bring back well-paid jobs in depressed areas. Labour-replacing technology and changes in consumption patterns with population ageing and rising incomes have done as much as trade, if not more, to change the pattern of employment in the United States.

Blaming the reserve currency status for a failure of US governments to support their people through inevitable structural adjustment is like the blind man describing an elephant, focusing on one part with no regard for the rest. While it may be true, as Miran says, that “this overvaluation has weighed heavily on the American manufacturing sector while benefiting financialised sectors of the economy in manners that benefit wealthy Americans”, this ignores the growth of the US tech sector, which has made the United States a more attractive investment destination, and driven the overall shift in demand away from goods towards services.

Third, the forced conversion of US Treasuries held in official reserves to a long-term bond will reduce the liquidity value of US Treasuries and accelerate the movement away from the US dollar as the reserve currency. The deep secondary market for US Treasuries and the dominance of the US dollar in trade and financial flows has been an important element in American exceptionalism. The reserve currency role has allowed the US to maintain much larger fiscal deficits without suffering much higher interest rates or seeing their currency collapse as investors rush for the door. Liz Truss’s short-lived career as the UK prime minister can attest to the costs imposed by financial markets once they decide that a fiscal policy is unsustainable. The United States has not faced the same market discipline. The Mar-a-Lago Accord would be a step towards removing this source of US exceptionalism.

Fourth, Trump, and others in his administration, have no desire to lose the US reserve currency status. In addition to a lower cost of borrowing, the role of the US dollar in the global traded financial system provides the United States with considerable power to levy sanctions on other countries. Reflecting this value, Trump and past administrations have pushed back on efforts by other countries to reduce their dependence on the US dollar.

Fifth, a Mar-a-Lago Accord idea assumes that economic coercion and gunboat diplomacy will force trade and investment partner countries to strengthen their currencies and accept US debt restructuring. But Trump’s treatment of allies will hardly provide reassurance that complying with such an accord will buy stability. Even if quite a few countries do comply, it will not solve the US deficit problem. International cooperation to push back on the Mar-a-Lago Accord idea is sorely needed – as much for the US people as for the rest of the world.

About the author

Jenny Gordon

Dr Jenny Gordon is a Nonresident Fellow at the Lowy Institute and also a Honorary Professor at the Centre for Social Research and Methods at the Australian National University.

Topics

United States Economy