Trump’s plans threatened by strong dollar conundrum

President-elect’s policies are driving up the currency to their own detriment

by: Sam Fleming and Shawn Donnan in Washington

Donald Trump railed against the effects of an overly strong dollar during the election campaign, warning about the damage it did to US companies’ competitiveness. Unfortunately for the president-elect, his own victory on November 8 has proven to be a catalyst for an even more expensive US currency — in part because of stimulus plans Mr Trump is pursuing. 

America’s growing strong dollar conundrum poses a threat to Mr Trump’s vows to slash the trade deficit. Some leading analysts fear the elevated currency could prompt the incoming administration to lash out with protectionist measures as it attempts to prove it is fighting for US exporters’ interests, with China the likely focal point of early clashes. 

“It looks like a slow motion train wreck to me,” said David Dollar, a former US Treasury official in China who is now at Brookings. The Trump plans for tax cuts and infrastructure spending were likely to help drive up both interest rates and the dollar and cause the US trade deficit to continue widening, he said. “I’m not sure it’s rational to set reducing the US trade deficit as an objective. But if you do then this policy package does not seem to get us to a more balanced trade situation.” 
Since the election the trade-weighted dollar is up about 3.3 per cent. With the incoming administration advocating policies that would boost the budget deficit, something that could prompt the US Federal Reserve to accelerate its rate-lifting plans, analysts including William Cline, a senior fellow at the Peterson Institute for International Economics, see further currency gains ahead. 

He estimates in a new research report that as of mid-November the dollar was overvalued by roughly 11 per cent, and argues that fiscal stimulus and associated interest rate increases risk yet further increases in the dollar. The US current account deficit is on track to widen from 2.7 per cent of gross domestic product this year to nearly 4 per cent by 2021. 

Pledges to tackle the trade deficit were a central feature of Mr Trump’s campaign: a September report by advisers Peter Navarro and Wilbur Ross, his nominee to be commerce secretary, claimed that eliminating the deficit would lead to a surge in growth — a notion heavily criticised by economists. Mr Trump warned of the damage from a high exchange rate: “It sounds good to say ‘we have a strong dollar’. But that’s about where it stops,” he said at one point. 

Some officials fear that with his stimulus and the surging dollar Mr Trump could be creating swings in exchange rates that would lead him to blame trading partners such as China or the EU, heightening the temptation to resort to protectionist policies. 

The US can weather currency strength much better than many other major economies because of the relatively small role exports play in the economy. But that does not change the fact that a strong dollar would make Mr Trump’s stated goal of attracting manufacturing jobs back to the US more difficult and hurt US competitiveness. 

“The main concern that many people should be focusing on is that you could have the beginning of a trade war with the surge in the dollar,” said a senior European trade official. 
Relations with China provide an early test. Having said he will brand the country a currency manipulator soon after taking office, Mr Trump this month accused China of hurting the US with a “devaluation”. Yet while the renminbi has depreciated against the dollar since earlier this year, the Chinese authorities have recently been intervening to prevent even steeper declines in the currency. 

China faces “severe pressures for weakening as capital flows out,” said Matthew Goodman, senior adviser for Asian economics at the Center for Strategic and International Studies.

Branding the country a currency manipulator “would not materially change the dollar’s trajectory,” he said. “As many people have said it doesn’t have much meaning in legal or practical terms.” 

Such a move would also be hard under the current criteria set by the US Treasury: a bilateral trade surplus with the US worth more than $20bn, a current account trade surplus more than 3 per cent of GDP and sustained intervention by its authorities in one direction in currency markets. China currently only meets the first two criteria. 

That said, “these are not God-given criteria,” said Eswar Prasad, a former IMF China expert now at Cornell University. “If President Trump says China is manipulating its currency then that is official administration policy and the simplest way to square that circle could be for Treasury to drop its third criteria and focus only on the first two.” 

Mr Trump has a number of options if he wants to go after China. The current law would call for intensified dialogue with China — or negotiations — should the administration find Beijing to be a currency manipulator. If that did not lead anywhere it would call for possible sanctions including excluding Chinese companies from government procurement contracts, something that would have negligible impact on China. 

Another response could be to declare a balance of payments emergency and invoke a 1974 law that would allow the president to unilaterally impose tariffs up to 15 per cent or other restrictions on Chinese goods for up to 150 days. That measure could potentially be extended for up to a year without congressional action. But it would be a dramatic gesture and would hurt US consumers as much as China. 

Robert Kahn, a senior fellow at the Council on Foreign Relations, said the hope would be that if the US does frame China as a currency manipulator it would be a prelude to discussions on a new policy framework between the two countries. An alternative was that it ends up being “the first shot in a painful trade war”.

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