The Nixon Shock and the Trading System: The difference between the Nixon and Trump experiences.

• Author: Irwin, Douglas

The famous August 1971 weekend at Camp David that Jeffrey Garten brings to life is best remembered for the closing of the gold window, effectively marking the end of the Bretton Woods system, and the imposition of wage and price controls.

An often overlooked but key part of the Nixon Shock was the decision to impose a 10 percent surcharge on all foreign goods imported into the United States. The purpose of the surcharge was not to protect domestic firms from foreign competition, a traditional objective of import duties. Rather, the goal was to move the exchange rate--an attempt to force other countries, mainly Japan, to revalue their currencies against the dollar.

Although the surcharge was temporary (it was removed in December 1971), the incident illustrates the recurring connection between exchange rates and trade policy that we see play out to this day.

The backstory to U.S. President Richard Nixon's decision to impose an import surcharge was the slide in the U.S. trade balance from surplus to deficit. American policymakers feared that the United States was losing its "competitiveness" vis-a-vis other countries, particularly Japan and Germany. Those countries had been clients whom the United States sought to rebuild after World War II, but had now become competitors in the production of manufactured goods.

Although the trade deficit was miniscule, its appearance was considered an alarming development at the time. The dollar had become overvalued due to the increase in domestic prices and the slower productivity growth in the United States relative to its trade partners. The impact on the trade balance could not be relieved by a devaluation because the dollar was the world's reserve currency. As the anchor of the international monetary system, other countries could revalue or devalue their currencies against the dollar, but the United States could not devalue the dollar against other currencies. And other countries were reluctant to revalue their currencies against the dollar because they did not want to jeopardize the competitive position of their export industries.

U.S. Treasury Secretary John Connally--who memorably stated that "the foreigners are out to screw us; our job is to screw them first"--proposed the surcharge and was the driving force behind its adoption. President Nixon liked the idea--"the import duty delights me"--because it was a way of striking back against other countries and extracting concessions from them. The...