A new Plaza Accord?

by Ila Patnaik and Ajay Shah
Business Standard, 14 April 2025

With Trump, protectionism went from an extremist idea in US politics into reality. This has helped other ideas in the US right wing gain more prominence. One of them is the notion that a grand deal will be negotiated -- The Mar-a-lago Accord -- that will change international finance and monetary arrangements.

Stephen Miran wrote A User's Guide to Restructuring the Global Trading System in November 2024. He now chairs Trump's Council of Economic Advisors. The US dollar plays a special role in the international financial system, one that generates persistent USD overvaluation and a persistent US current account deficit (i.e. capital import). This has an adverse impact upon exports and employment in the US.

A treaty is sought whereby many countries work together to induce a USD devaluation. To fix intuition, we should think of the objective as a 20 per cent devaluation of the USD as seen in the Nominal Broad US Dollar index (DTWEXBGS in FRED).

There is an echo of `The Plaza Accord' of 1985 here. Then, too, the US felt there was a problem with persistent USD overvaluation. What happened there? The major countries got together, came to an agreement, and then engaged in some signalling and some coordinated intervention in the currency market. This kicked off a 40 to 50 per cent depreciation of the USD, primarily against the Yen and the Deutsche Mark.

We are, of course, not in the precise situation of 1985, and any attempted `Mar-a-Lago accord' will diverge from this in many ways. We should ask: What is the place of the USD in the post-tariffs world, and could a Mar-a-Lago accord that resembles the Plaza Accord come about?

  1. Sustained USD overvaluation, owing to strong capital inflows, was based on respect for American institutions. The US was the safe haven because persons all over the world trusted in American institutions. Through the first 83 days of the Trump-2 regime, the world has become more skeptical about American institutions. It looks a bit like an emerging market. The most important exchange rate where we see this is the USD/EUR exchange rate. Ordinarily, the introduction of a tariff (which reduces imports) should generate USD appreciation. Instead, the USD has gone from 0.97 on 20 January to 0.88 today, a depreciation of 9\%. Looking more broadly, DTWEXBGS has gone down by 4\%.
    The interest rate for US long bonds has gone up and the interest rate for German long bonds has declined. This is very unusual for a global crisis environment where private persons worldwide respond with a "flight to safety" to the US.
    To the extent that the role of the US as a safe haven declines, some of the problem of USD overvaluation has been solved, and the need for an Accord is diminished.
  2. Who is the coalition of the willing that can work on a project like this? In 1985, the two key partners were Germany and Japan. Both countries have a feeling of gratitude towards the US, owing to their history. The US established the constitutional arrangements in Germany and Japan after a short period of occupation after 1945, and got both countries on their path to success. Both countries were part of the Western alliance in 1985.
    Conditions today are different. A key player in any future agreement has to be China, which has no such feelings towards the US. In fact, the Chinese economy is steeped in gloom, and would find it hard to absorb economic stress in the way Japan and Germany in 1985 did owing to the Plaza Accord.
  3. In 1985, the global currency market had relatively limited depth, and it was possible for first world countries to engage in market manipulation of this market. The liquidity of the global currency markets, for major currency pairs like the USD/EUR, has grown to an extent that central bank intervention is now infeasible.
    In 1985, central bank had greater space for arbitrary actions, and made bigger mistakes in monetary policy. In the following years, DM monetary policy frameworks have improved. The US Fed has not done currency trading since 1993. Inflation targeting is everywhere. This reduces the discretion of central banks: currency manipulation by the central bank kicks off offsetting actions in order to uphold the inflation target, which defeats the purpose of currency manipulation.
  4. The US of 1985 (the Reagan team) had old style advanced economy capabilities in economics and foreign policy. These capabilities are not found in the US federal government today. It is hard for the US to now negotiate when there is a track record of reneging on promises, and repeatedly reversing policy goals.
  5. In 1985, the path to negotiation for the Plaza Accord involved the danger that there was protectionist sentiment in the US which needed to be staved off. This created conditions where all parties could be brought together. Now, the US has imposed tariffs, retreated from the Western alliance, and offended China. It will require extreme diplomatic skill to bring about a G7+China agreement under these conditions, particularly when two of the eight countries have populist/nationalist leaders.
  6. The objective -- a 20% decline in a broad USD index -- is tantamount to a significant decline in the purchasing power in the US (and a lot of inflation), alongside gains in employment and exports. It is not clear that there would be adequate political support for this from the mass of working persons who would see their purchases become more expensive.

Pulling these six reasons together, we think a `Mar-a-lago Summit' might be a useful propaganda device (and revenue stream) for Mr. Trump. It is unlikely to matter. We should instead keep our eyes focused on the most interesting phenomenon in the world economy today: the extent to which the USD is retreating from its safe haven role as measured by the USD/EUR rate and the US 30 year bond interest rate.

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