The consensus at the Toronto economic summit to reaffirm a floor for the dollar reflects a true hardening at the Treasury and the Fed against further devaluations to manage trade flows. There is a sense that for the time being everything's under control, economic expansion is proceeding at a stately pace, and the bias can shift to chipping away at inflation pressures. The G-7 has obviously accepted the implications of this bias, i.e., a stronger dollar. The mere fact that the markets appear satisfied that these forces are at work in this direction to a degree contributes to a self-fulfilling prophecy. Everywhere we hear "the dollar is undervalued." A shift from other assets to the dollar buoys U.S. stocks and bonds and puts downward pressure on the price of gold. This kind of snugging seems appropriate and without great risk, which makes it an easy decision to arrive at. The effect on trade statistics should be politically beneficial, decreasing the nominal value of U.S. imports. As the trade bill comes back for debate this summer, the climate for discussion will be improved.
There will be an amendment proposed to the trade bill in the Senate to prevent the transfer of authority from the President to the U.S. Trade Representative. The most ardent advocates of such an amendment, the western Republicans, have it in the works now. Malcolm Wallop of Wyoming, Rudy Boschwitz of Minnesota, and Dan Evans of Washington are leading the effort so far. The amendment will get a great deal of attention, I think, and force a political division between free-traders and protectionists. Both presidential candidates will be on the spot, asked the simple question: As President, would you prefer to retain control over U.S. trade sanctions against our trading partners, or do you want the U.S.T.R. to have that responsibility?
I spoke to Michael Boskin the other day about this issue, he being the Stanford economics professor who is generally assumed to be the likely CEA chairman in a Bush Administration. Boskin volunteered that he believes the authority transfer is "the worst single feature of the bill," and that he had expressed this view at the May gathering of the Bush team in Kennebunkport. Boskin said he would recommend to the Vice President support of a Senate amendment to clarify this point, that retaining authority over trade actions "fits perfectly with the call for a line-item veto," to gather more authority in the executive branch over budget matters. As a result, Bush is going to be faced with a dilemma, as Treasury Secretary Baker will soon make the move to campaign chairman. Although some free trade strategists think Bush has to be pinned down before Baker comes aboard, my guess is that Baker will ultimately give way on this issue and hope to move the rest of the trade bill without it. The focus of attention on this single amendment would draw the attention of the President and conservative party leaders generally. Free traders among the liberal Democrats would be able to respond as well. As it is, several members of the Bush team besides Boskin are sympathetic to the idea and seem mainly concerned about Jim Baker's position.
Although the trade bill would be no bargain even with this important change, it would have about as many pluses as minuses. And the relaxed standards on injury and relief that would be so troublesome if power were transferred to the bureaucracy would be moot if the President retained authority. He could still kill any trade action by ignoring it.
These varied developments this week have been most welcome, although it will still take a major campaign to win a free-trade amendment in the Senate.