The Economy: The Dollar: A Power Play Unfolds

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That meant that the dollar was no longer as good as gold. Thus foreigners had to sell their dollars in money markets for whatever they could get. Since a surfeit of dollars was sloshing around the world already, they could not expect to get much. In effect the dollar had been devalued.

The move will help the U.S. increase its exports, since American-produced computers, heavy machinery, jet planes, farm goods and other items will now be cheaper overseas. Over the long haul, the dollar devaluation will benefit countries from which the U.S. buys goods because Americans will have to pay more dollars for the things they import. In the short run, however, countries such as Germany and Japan, which now hold $27 billion as part of their national reserves, will take a beating. The value of their dollar assets is expected to shrink, perhaps by as much as 12% to 15%, as the prices of their own currencies rise. The only way foreign holders of dollars will be able to get full value for them is by spending them for American goods or services, or investing in U.S. securities.

Economic Imperialism. In one sense the monetary crisis was clearly the most pressing problem. But the 10% surtax on U.S. imports foreshadowed potentially far more dangerous consequences. Protective tariffs in the early 1930s divided the world into trade blocs that brought international commerce almost to a standstill and gave a major impetus to the growth of economic imperialism in Europe and the Far East. For the past 25 years, the U.S. has championed free trade and economic internationalism. Observed the London Daily Telegraph: "The danger of Mr. Nixon's approach to the dollar's longstanding problems is that it is self-evidently protectionist and as such invites retaliation."

The surtax breaks both the letter and the spirit of the international General Agreement on Tariffs and Trade. As a result, the U.S. now finds itself defending actions of a sort that it has criticized others for in the past. The 55-member GATT council is scheduled to meet in an emergency session this week to deal with the potentially explosive situation.

To justify the surtax, the U.S. has cited GATT Article 12, which allows temporary restrictions in case of severe balance of payments deficits. But the provision permits only quotas, not surtaxes. Thus, the U.S. is relying largely on a precedent set by Britain in 1964 when it posted a 15% import surtax (later reduced to 10%) and kept it for two years.

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