Ground down
Our Big Mac index will sadden America’s burger-lovers
Trump’s tariffs have brought a double serving of pain
Illustration: Fortunate JoaquinAmerica’s import duties just keep rising.
On August 1st levies on more than 20 countries, plus the European Union, will take effect unless they negotiate deals in the meantime.
On July 14th President Donald Trump said that he would impose “secondary tariffs” of 100% on countries doing business with Russia, should it fail to reach a peace agreement with Ukraine in 50 days.
Such threats should be taken with a heavy pinch of salt: Mr Trump has form for backing down if markets become turbulent.
But the trend is clear.
America’s average effective tariff rate has already risen to 17%, from 2.5% last year.
Among the wrongs Mr Trump hopes to right with his levies—from Russia’s war on Ukraine to a “witch hunt” against Jair Bolsonaro, Brazil’s former president—one looms largest.
Other countries exploit America, in its president’s view, by persistently selling more to Americans than they buy from them.
Some maintain trade surpluses, thinks Mr Trump, by manipulating their currencies to make exports artificially cheap.
Six months after his return to the White House, how successful has he been in curbing this foul play?
It is, perhaps, too meaty a question to be answered by studying burgers.
Still, let us try.
For almost four decades The Economist has been producing the Big Mac index, which uses the prices of its eponymous delicacy around the world to construct a quick-and-dirty guide to exchange-rate distortions.
The theory is that currencies should have “purchasing-power parity”, meaning their exchange rates should adjust to ensure each can buy the same amount of stuff.
Comparing the prices of Big Macs is convenient because the burger is essentially the same in every country (notable exceptions include Israel, where it is served without cheese, and India, where the “Maharaja Mac” is made from chicken).
Purchasing-power parity suggests that, with a Taiwanese Big Mac costing 78 Taiwanese dollars and an American one $6.01, the currencies’ exchange rate should be the ratio of the two prices.
Hence $1 should buy NT$13. In reality, it buys NT$29.
The Big Mac index therefore concludes that the Taiwanese dollar is greatly undervalued against the greenback, by some 56%.
Few currencies are as undervalued as the Taiwanese dollar, though the Indian rupee (56%) and Indonesian rupiah (57%) are even more so.
It might nevertheless seem surprising that so many have stayed cheap (see chart).
The American dollar has, after all, fallen by 10% against a basket of other currencies since a peak in January, when we last updated the Big Mac index.
To those, like Mr Trump, who might have hoped this drop would make American exports more competitive, the dollar’s enduring expensiveness (in burger-purchasing-power terms) is dispiriting.
Particularly notable are the troublemaking countries that America’s Treasury Department monitors for potential currency manipulation.
It chooses these based on bilateral trade surpluses with America, broader surpluses with the world and one-sided intervention in the foreign-exchange market.
Mr Trump will be cheered to see that the European countries on the list (Germany, Ireland and Switzerland) have seen their currencies become markedly more expensive versus the dollar.
But the others are China, Japan, Singapore, South Korea, Taiwan and Vietnam.
None of their currencies has become more than marginally less undervalued since January.
Most are now even cheaper.
What explains the trend?
Even as the dollar has weakened on the foreign-exchange market, the price of an American Big Mac has risen—from $5.79 in January to $6.01 today.
Burger prices in the Asian countries on the Treasury’s monitoring list, meanwhile, have remained constant.
Their currencies might now buy more dollars than previously, but those dollars buy less stuff.
In purchasing-power terms, that offsets the change in exchange rates.
There is a parable here for Mr Trump. His treasury secretary, Scott Bessent, used to say the dollar would strengthen after tariffs were imposed, offsetting the impact of higher duties on American consumers.
Instead, it weakened, as international investors lost a measure of confidence in the White House’s policymaking.
The result is that Americans will be hit by the double whammy of higher taxes and a weaker currency when buying imports.
Hints of this are already showing up in consumer prices, which rose by 2.7% in the year to June.
Burger-lovers or not, Americans are being squeezed, while their currency becomes no more competitive.
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