Tariffs + stronger dollar = trouble for Trump's trade policy Boosting 'Made
in America' sector through tariffs could backfire by inflating value of US
dollar Quick Study . By Evan Horowitz Globe Staff . A hidden force threatens
President-elect Donald Trump's efforts to revitalize American manufacturing.
No, it's not congressional Republicans, though they've been openly skeptical
of his call for trade restrictions. And it's not defiant Democrats, whose
-influence in Washington is -relatively weak. It's the almighty dollar,
which is powerful enough to undermine even the best of protectionist
intentions. Try to boost the "Made in America" sector- through tariffs and
other trade restrictions and you risk a self-defeating chain reaction.
Instead of helping homegrown manufacturers, US-made goods actually- become
more expensive and imported goods get ever cheaper. The reason? Because the
value of the dollar goes up. This isn't an ironclad law, and there is lots
of room for debate over details, but the baseline idea is well established.
Here's an example of how it might work, using Trump's favorite trade
villain: China. During the campaign, Trump decried China as a currency
manipulator and an unscrupulous trading partner, threatening to retaliate
with a tariff on Chinese imports of up to 45 percent. That's a substantial
slap, enough to profoundly disrupt the Chinese economy. But imagine that you
live in China, or you're an investor who owns lots of Chinese currency. The
minute you start to believe Trump's plans to impose a punitive tariff,
you'll want to trade those Chinese yuan for something less risky - like yen,
euros, or maybe even dollars. Nor will you be alone. Investors everywhere
will look to sell their yuan. And that will drive down the yuan's value,
because what's true of physical goods is true of currencies too: Eager
sellers means lower prices. Now, when the value of China's currency falls,
so does the value of Chinese goods. Each US dollar suddenly buys more
Chinese-made clothes, steel, toys - you name it. That gives Americans a new
reason to buy stuff from China: It's cheaper. No matter that the whole point
of the original tariff was to boost the fortunes of US manufacturers. Here's
the kicker: As the yuan- drops in value, the dollar is likely to rise. And a
stronger dollar is bad for US exporters, since it effectively raises the
prices of their products overseas. Note that none of this even accounts for
the possibility that US tariffs against China or Mexico could spark an
all-out trade war in which other countries impose their own tariffs. That
would greatly magnify the damage. If these risks sounds too theoretical -
the kind of thing you're more likely to find in a textbook than in the real
world - look at Mexico. Since Trump's election, the value of the Mexican
peso has fallen to a record low, driven down by fear of coming trade
restrictions and Trump's high-profile efforts to keep US companies like
Carrier from setting up shop across the southern border. Yet, perversely,
that weak currency actually makes Mexican-made goods more affordable,
compared with US-made products. It's possible to make too much of this trap.
For one thing, there are other reasons to support a tariff regime. It raises
much-needed money, which could be directed toward programs for displaced
workers. Also, there is some uncertainty about whether a wide tariff regime
would be entirely self-defeating - or just mostly self-defeating. Maybe the
dollar would rise somewhat, but not quite enough to offset the full effect.
In that case, an "America-first" trade policy might still provide some
benefits for domestic manufacturers and American workers, but it's hard to
be precise, since we have so little historical guidance. Trade restrictions
used to be common, but in that era most countries were still on the gold
standard - which left little room for offsetting currency fluctuations. Even
allowing for this uncertainty, the takeaway is clear. If Trump wants to
nurture US manufacturing with an America-first trade policy, he has to worry
about something more than a costly trade war. He had better hope the dollar
doesn't rise too much as a result. Otherwise, all his efforts could be for
naught. Evan Horowitz digs through data to find information that illuminates
the policy issues facing Massachusetts and the United States. He can be
reached at evan.horowitz@xxxxxxxxx. Follow him on Twitter @GlobeHorowitz.
