Once again there’s news of more tariffs on hundreds of billions of dollars’ worth of Chinese goods. Hardly a month goes by without some new dramatic announcement about tariffs, and you can read my latest take on trade here. In conjunction with these new tariffs the USA has labelled China a currency manipulator. It seems to me that the Trump administration’s goals contradict each other and that the policies implemented to reduce the trade deficit has led to a stronger dollar, which is the opposite of what the administration wants.
The stated goal of the Americans is to reduce the trade deficit by imposing tariffs which would drive up the prices of imported Chinese goods in the USA and American consumers would shift to buying domestically produced goods. The US wouldn’t start a war it thought it would lose and it turns out that the doom prophesied by economists and in business news hasn’t come yet. I think the reason is that the US is a strong economy with a large consumer base and a lot of resources, in other words it has great prospects for surviving without trade. It seems that the markets agree with this view as many currencies have lost ground against the dollar, probably because the American economy will do just fine even through the trade war. Currencies are fickle and it is difficult to predict how they will move with many factors at play, and I don’t know enough to say if China manipulates the Yuan or not, but there are organic reasons for why a currency could lose in price against another. If your goal is to reduce your trade deficit having a weak currency is good as it makes your products cheaper to import for others, but if you want to keep your currency weak you need to consistently pursue policy options which lead to a weaker currency.
At the heart of the issue there seems to be a disconnect between the administration in Washington and reality, trade isn’t an issue which one can solve so easily. Labelling another country a currency manipulator and imposing tariffs on foreign goods are not going to change America’s trade patterns. Current account surpluses or deficits are due to structural factors, and changing something like that would, in my view, require more domestic reforms than aggressive rhetoric and tariffs. In order for the US to have a current account surplus the administration should try to make enthused about buying American, hopefully without resorting to regressive taxation which hit low income earners the most.
The trade war is destructive, perhaps not on the scale that wonks like me initially thought but destructive none the less. It would be wise to look over what the administration’s priorities are so that the trade war hasn’t been waged for nothing as they are incredibly unlikely to actually convert their trade deficit in to a surplus.
Thank you for reading and comeback next week for a new post, you can read my previous posts on trade here and you can follow me on twitter here. I'd appreciate it if you could recommend the blog to a friend or coworker if you like it.
Written by Karl Johansson, Founder of Ipoleco
Cover Photo by Vladislav Reshetnyak from Pexels