What is the ‘Mar-a-Lago Accord,’ the next wacky scheme from Trump’s America?

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John Rapley is a contributing columnist for The Globe and Mail. He is an author and academic whose books include Why Empires Fall and Twilight of the Money Gods.

Just what is the Mar-a-Lago Accord, the supposed big move the Trump administration is pondering to alter the global financial architecture? U.S. President Donald Trump himself hasn’t mentioned it but the idea is circulating in his government, and his Treasury Secretary apparently favours it.

The idea is named after Mr. Trump’s Florida resort and the last implementation of such a plan, the so-called Plaza Accord of 1985. The basic problem, as proponents see it, is that the dollar is too expensive. Reflecting the strong growth of the American economy at a time most other Western economies were stuck in the doldrums, the U.S. dollar has risen against a basket of other major currencies by some 40 per cent since the 2008 financial crisis. That has made American exports expensive for foreigners and imported goods cheap for Americans. Put it all together and you have a rising trade deficit that now exceeds US$1-trillion a year.

The solution, as proponents see it, is an accord with America’s trading partners to revalue the world’s major currencies, making U.S. exports cheaper and imports more expensive. There is precedent for this. In 1985, the Reagan Administration negotiated the Plaza Accord (after the New York hotel where it was agreed) with Japan, France, Britain and West Germany, strengthening their currencies vis-à-vis the dollar in order to reduce the U.S. trade deficit.

But in an administration riven by in-fighting, the Mar-a-Lago Accord, which was written by Stephen Miran, Mr. Trump’s nominee to chair his Council of Economic Advisers, wrestles with its own many contradictions – weakening the dollar yet keeping it strong enough to remain the world’s reserve currency, raising import prices yet reducing inflation, reducing the trade deficit yet keeping the U.S.’s reserves full.

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The biggest contradiction of all is with his boss: Mr. Miran concluded his proposal by saying that Mr. Trump’s high regard for markets would ensure that “policy will proceed in a gradual way that attempts to minimize any unwanted market consequences,” whereas we’re now being told the shock-and-awe tactics doing just the opposite to markets are all part of Mr. Trump’s plan. The President’s economic team seem to be constantly rewriting their narrative to accommodate his daily mood swings.

And contradictions aren’t the only thing wrong with the Mar-a-Lago Accord.

The plan for devaluing the U.S. dollar would involve foreign governments swapping some of their reserve dollars for long-term bonds, thus freeing up cash to buy other currencies (including their own) and so raising their value relative to the greenback. If unorthodox from the perspective of mainstream economic theory, the proposal is nonetheless getting attention.

So far, so good. The trouble is, there are enough flies in this ointment it’s becoming a paste. First off, the Plaza Accord was a diplomatic deal among allies who broadly agreed on what the problem was. The Treasury Secretary then was James Baker, a skilled diplomat who was already working on a plan to enable Latin American countries to emerge from the 1980s debt crisis. In contrast, Mr. Trump’s idea of diplomacy appears to be sitting foreign leaders down in the Oval Office for a televised humiliation.

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Moreover, there’s less international agreement than there was in 1985 that a currency accord would be a good thing. China will probably resist it, but it’s not clear the Europeans will go along either. Thus the White House talks of using a carrot-and-stick approach to force their trading partners into line, offering military protection and reduced tariffs on countries that sign up. But as we’ve already seen, American promises to allies don’t have the street value they once did, and Mr. Trump brandishes tariff threats so freely nobody could be sure he’ll stick to his pledges.

As well, the world economy has changed a lot since 1985. Then, any country’s manufactured goods would have been sourced mostly locally. Today, supply chains are globally integrated, with finished goods having components from all over the world, so making the dollar cheaper will make goods more, not less, expensive. Just ask the North American auto industry.

A dollar devaluation could drive up U.S. inflation. Because the U.S. isn’t a trade-dependent economy, it might only raise inflation by a few tenths of a percentage point. But it would be enough to keep upward pressure on interest rates, slowing the economy.

Such a deal as the Mar-a-Lago Accord would also run the risk of reducing the dollar’s role as the global reserve currency, something Mr. Trump doesn’t want to happen. A cavalier approach to other countries’ deposits could make them think twice about parking their funds stateside in the future and make them look at other options.

Ultimately, the strong dollar is merely a symptom, not the disease. The U.S.’s massive trade deficit results from the fact that country has been living beyond its means for years. With national debt increasing at twice the rate of economic growth, the U.S. consumes more than it produces – and funds it using those currency reserves built up by other countries. To restore that balance it would need to either cut spending, or increase taxes, either of which would slow economic growth rather than rev it up, as Mr. Trump promised.

None of this means a Mar-a-Lago Accord won’t happen. The second Trump administration is proving so mercurial, it’s become almost impossible to anticipate what it will do, so nothing can be ruled out. However, events may well overtake it. If the stock market crashes, the White House will have bigger problems to deal with. Meanwhile the dollar is weakening already, which may reflect other countries already diversifying their reserves.

Addressing this through co-operation rather than conflict would require a lot of patience and attention to detail. Neither appear to figure among Donald Trump’s strengths. Keep your eyes open for a Mar-a-Lago Accord, but don’t stop blinking.