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A strong dollar is not good for Trump’s America

During his campaign, the president-elect was warning that a stronger dollar would diminish the competitiveness of US companies. But his election victory became a catalyst for an even stronger dollar. Partly because of his plans for expensive stimulus measures and state protectionism (here's the place where libertarians cringe).

Ironically, a stronger dollar would prevent Trump from staying true to his promise to curb trade deficit. Some analysts are worried that this could compel him to follow through on his threats of more protectionist measures, starting with China.

Trump's plans to cut taxes while increasing the spending for infrastructure would likely raise the interest rates and cause the dollar to soar, deepening the US deficit in the process. I'm not sure it's rational to aim for cutting trade deficit in these circumstances. If you do it, this package of policies would lead to a shaky trade situation.

The dollar has risen by more than 3% since the election. If the new policies increase the budget deficit, the Fed could accelerate their plans of raising the interest rates, which in turn could pump up the dollar even more. Some reports claim the US currency is already extremely overvalued, and the expectation is for it to keep growing because of fiscal stimulus and the expected interest-rate hike. This would increase current deficit from 2.7% of the GDP to more than 4% by 2021.

The reason for making the trade deficit a priority issue is that Trump's aides believe its cutting could bring economic growth. The US is generally more capable of dealing with too strong currency than most other countries, because exports play a relatively minor role for the economy. But that doesn't change the fact that a strong dollar would significantly impede Trump's task of restoring jobs and bringing production back to America. Because it would hit the country's competitiveness.

The main concern is that a trade war could ensue over currency growth. Given his stated intention to declare China a currency manipulator, Trump's accusations of China of hurting the US economy by devaluing their currency are hardly a surprise. Indeed, the yuan has lost a lot of value against the dollar since the beginning of the year, but the Chinese government has intervened lately to prevent sharper dips in their currency.

The fact is, China is severely pressured to squeeze its currency because of the serious exodus of capitals – not so much because they want to hurt America (which is China's primary trade partner, after all). Just naming China an evil currency manipulator won't change the trajectory of the dollar. If Trump is determined to go after China, the law says he should initiate intensive negotiations with them first. And only if these fail, he could impose sanctions: banning Chinese companies from any contracts for public projects in the US, etc. Which would have a limited effect on China, because they've already spread their investment tentacles across the world (Africa comes to mind).

Another option would be to declare a state of emergency in terms of fiscal balance, as per a 1974 law that would allow the president to unilaterally impose tariffs up to 15%, plus other restrictions on Chinese goods (for a maximum of 150 days). Beyond that deadline, the measure could be extended by one more year without Congressional sanction. But all of that would be just to dramatic, and would inevitably hit the US consumers.

The hope is that if the US declares China a currency manipulator, this would trigger negotiations for crafting a new framework of policies between the two countries. The alternative is a rather painful and protracted trade war. In this sense, Trump is playing a risky gambit (one of many) that could either bring big benefits or send the economy spiraling down in the long run.

Source: Talk politics.

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