Joe Biden was inaugurated as the 46th president of the United States on Jan. 20. However, two rumors accompanied his steps to the White House.
First, his finance minister, Janet Yellen, has emphasized her commitment not to interfere with the US dollar. She prefers to allow the market to determine the value of the currency.
Yellen's statement has given rise to various interpretations. It could be an initial signal that Biden's economic policies will tend to be pro-market, based on the interaction of supply and demand.
Market forces will determine the value of the dollar. Exchange rate adjustments in the market reflect variations in the economic performance of each country and facilitate efficient adjustments in the global economy.
Yellen, a former Federal Reserve chief, has probably already anticipated the second rumor. The commencement of vaccination in the US raises optimism about a faster-than-expected economic recovery in the second half of this year. This has triggered discourse about the US central bank gradually reducing its bond-buying program to sustain the nation’s economic recovery.
The two policies above, if they are really implemented, will undoubtedly shake the global market. The first-round impact will work directly on the commodity markets. Import-export activities with the US will fluctuate following fluctuations in the exchange rate of the domestic currency against US dollar.
The import-export activities among countries that use the US dollar as the basis of payment will also be affected. Again, the volume of trade will fluctuate in accordance with the dynamics of US dollar. If the dollar strengthens, exporters will suffer and importers will benefit.
This profit-loss situation also triggered a trade war between China and the US during the Trump administration. Trump tackled the deficit in the US trade balance with China by increasing import duties. In essence, Trump wanted to prove the accusation that China was deliberately weakening the yuan to achieve a surplus.
The second-round impact will operate on global financial markets. The US central bank, sooner or later, will rebalance its balance sheet. The high ownership of government bonds to finance the COVID-19 pandemic will be gradually reduced by selling them on the global market.
US government bonds are seen as a risk-free asset and are therefore attractive to global market players. The dollar, which has been invested in emerging markets, will move quickly towards the US. The phenomenon of the dollar “coming home” is a necessity with all its negative effects.
The adverse effect is most complicated when the owners of the fund play in both markets. The owners of the fund remove their money from the commodity market to the financial market. Conversely, funds in financial markets will migrate when commodity markets promise higher yields.
The thesis above seems close to reality. It is not a coincidence that the global financial crisis that hit financial markets in 2008 occurred amid the commodity boom. The rise of global financial markets from the crisis appears to have accelerated the end of the commodity boom era.
How about Indonesia? If both Biden’s economic policy scenarios prove correct, Indonesia will face flight of foreign capital which in the short term will depreciate rupiah. Imports of raw materials, equipment and machinery will shrink, which will further affect production capacity.
However, if the US real sector quickly recovers and grows, Indonesia can seize export opportunities and offset the pressure on the rupiah’s depreciation. Also, Indonesian products can fill the role Chinese products that are subject to high tariffs. Indonesia's non-oil and gas export share to the US ranks second after China.
In another scenario, Chinese products that should be destined for the US will be transferred to other countries, including Indonesia. Indonesia's imports from China rank the highest. As a consequence, the trade deficit with China will be enlarged, which may not be covered by an increase in the trade surplus from the US.
Within the above logic flow, strengthening trade between countries in the same region has the potential to be increased, through ASEAN for example. The agreement on the use of local currency is the basis for economic growth and regional stabilization without too much dependence on the US dollar.
Furthermore, the diversification of export destination countries deserves attention. The expansion of the export market deserves to be directed outside the traditional countries that have existed so far. North Africa, the Middle East, Eastern Europe and Latin America are wide open to become potential markets for Indonesian products.
In a broader scope, if Indonesia remains willing to play in the international market, increasing competitiveness is nonnegotiable. The increase in exports should not only be triggered by the weakening of the domestic currency, but must be also supported by the intrinsic superiority of its export products.
Strengthening the domestic market appears to be the safest solution to various sources of external turmoil. Domestic consumers must be protected so that their purchasing power remains strong and they are able to absorb domestic production, instead of consuming more expensive imported products.
The four options above unfortunately are difficult to realize anytime soon. Perhaps the 61st US treasury secretary, John Connally, was right when said, “The dollar is our currency, but it is your problem.”
The writer is a professor of economics at the State University of Jakarta School of Economics and is a research director at the Socio-Economic and Educational Business Institute, Jakarta.
Disclaimer: The opinions expressed in this article are those of the author and do not reflect the official stance of The Jakarta Post.