It would make imports more expensive and inflation harder to control, and it wouldn't promote exports as well as other policy options. According to Politico, the details have not been fully worked out. However, possible tactics include weakening the dollar unilaterally or threatening other countries with tariffs if they do not strengthen their respective currencies.

It's an appealing idea to those whose major concern is out-exporting economic rivals. In reality, this plan would raise prices for Americans and create international economic chaos. It would also fail to achieve the goal of sustainably boosting exports.

To start, let's consider a critical concept in international economics: the impossible trinity. According to this principle, a country cannot have all three of the following at the same time: a fixed exchange rate, free movement of capital or investment, and monetary sovereignty (the ability to conduct monetary policy independently). It can only pick a maximum of two.

Since 1971, the United States has chosen free capital flows and monetary sovereignty while letting exchange rates float based on market fundamentals. This choice is the norm among large, developed economies. To weaken the dollar to some desired rate vis-\u00e0-vis other currencies means fixing the exchange rate. That means either free movement of capital or monetary sovereignty will have to go.

Suppose the government instructed the Fed to start buying euros in financial markets with newly created dollars to weaken the dollar against the euro. European goods originally priced in euros would become more expensive in terms of dollars. The United States is the largest goods importer in the world, importing $3.2 trillion worth in 2022. A dollar devaluation would make those imports a lot more expensive.

While some commentators claim that the United States does not produce enough manufactured goods anymore, my Mercatus Center colleague Christine McDaniel has pointed out that half of U.S. imports consist of raw materials, intermediate goods, and capital goods, which go to producing final goods that Americans use or that are exported. Make no mistake, a dollar devaluation would be felt both by U.S. consumers and producers.

Restricting capital movement means deterring foreign investment in your country. Investment is what ultimately fuels growth, so to discourage it is a bad strategy. However, in this scenario, allowing free capital flows sacrifices the ability to use monetary policy to stabilize inflation, which would now be rising because of the devaluation. Neither restricting capital movement nor forfeiting monetary policy would be a good option for the United States.

All of this analysis also assumes no retaliation from other countries. That is naïve. If the U.S. devalued its currency or raised tariffs, other countries would respond. The trade war with China that started under the Trump administration has largely continued under the Biden administration. A 2019 New York Fed study estimated that the tariffs cost American households about $830 per year. Even if such costs were worth it because China is a major rival engaging in unfair trade practices, a dollar devaluation would also adversely affect and inspire retaliation from allies such as the euro-zone countries and Japan.

Finally, while a devaluation would affect the nominal exchange rate – the price of a foreign currency in terms of a domestic currency – what really matters for boosting exports in a sustainable way is the real exchange rate, or the nominal rate adjusted by the price level in each country.

Again, a devaluation is an expansionary monetary policy that, all else equal, will translate into higher inflation and a higher price level. Therefore, while the devaluation will permanently affect the nominal exchange rate, it will not permanently affect the real exchange rate.

To permanently reduce the real exchange rate, a country needs to boost its savings rate. More savings means less government borrowing, which leads to lower interest rates and more available capital for investment. More investment leads to more production of goods, which can be exported. This is why a country's current account, which measures its trade surplus or deficit, equals its level of domestic savings minus its level of domestic investment. It is also why economist Scott Sumner has argued that debates about currency manipulation should be reframed as debates about savings manipulation.

In the 1970s and 1980s, several Latin American countries including Argentina, Mexico, and Brazil engaged in currency devaluations. These devaluations did little to improve their exports, and each country suffered from high inflation. More recently, Argentina's current balance has been negative for eight of the last ten years despite a rapidly deteriorating peso.

Now, consider Germany, which is known for running large trade surpluses. Since Germany is part of the euro zone, it has no currency to manipulate. However, with a conservative fiscal policy and the Hartz reforms of 2003, which made its labor market more competitive, Germany reduced its real exchange rate to be a competitive exporter.

In the 2000s, the United States' trade deficit ballooned, and many economists attributed this to the China shock as Chinese imports to the United States rose. However, Germany saw a rising trade surplus during this time. The difference in real exchange rates in these countries explains these different outcomes.

Trade deficits are not inherently harmful. But if American policy-makers think it is desirable to promote exports, they should focus more on boosting domestic savings and making our economy more productive. A beggar-thy-neighbor policy of currency devaluation would only lead to economic pain and turmoil both in the United States and abroad.

A ‘beggar-thy-neighbor' policy of currency devaluation would only lead to economic pain and turmoil both in the United States and abroad.

Patrick Horan is a research fellow at the Mercatus Center at George Mason University.