Realist, not conformist analysis of the latest financial, business and political news

Trump Admin Is Making Big Mistake – Tariffs On Undervalued Currencies

The Trump Administration is aiming to revive a Bill Clinton era power which is to impose tariffs upon goods from a country with an undervalued currency. This is obviously stupid from the American consumers’ point of view because such an undervaluation benefits them, they get cheap goods. The people who pay this cost are the consumers in the country with the undervaluation, they gain expensive imports from that very same currency rate.

So, think it through. Imagine it’s China doing this. The people who gain are American citizens, the people who lose are Chinese citizens and residents. And it’s the American government complaining about this? Sheesh.

But that’s still what they want to do:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] The Trump administration is proposing tariffs on goods from countries found to have undervalued currencies, in a move that would further escalate its assault on global trading rules. The proposal, laid out in a Federal Register notice released on Thursday, would let U.S.-based companies seek anti-subsidy tariffs on products from countries found by the U.S. Treasury Department to be engaging in competitive devaluation of their currencies. Currently no country in the world meets that criteria. [/perfectpullquote]

And more on this same point:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””] The notice released Thursday by the Commerce Department, which administers the quasi-judicial process that determines the imposition of what are known as “countervailing duties,” says it would defer to Treasury in determining whether any currency was deemed undervalued. It also specifically says the move is not aimed at any central bank action that results in currency swings. “In determining whether there has been government action on the exchange rate that undervalues the currency, we do not intend in the normal course to include monetary and related credit policy of an independent central bank or monetary authority,” Commerce said. [/perfectpullquote]

And here’s the actual proposal itself:

[perfectpullquote align=”full” bordertop=”false” cite=”” link=”” color=”” class=”” size=””]In general terms, the currency undervaluation benefit calculation requires an
identification of what the currency’s value should be, absent the undervaluation. To do this, one method is to employ the concept of an equilibrium “real effective exchange rate” (REER) or its equivalent, consistent with International Monetary Fund (IMF) methodologies. For the purposes of this rule, equilibrium REER is defined as the REER that would lead to an appropriate level for external balance over the medium term. This equilibrium REER or its equivalent would be employed in the following two-step benefit analysis.[/perfectpullquote]

That’s actually insane. It’s saying that no country should ever run a trade deficit or surplus, that the exchange rate must move to where trade in goods and services is in balance. But whether or not there’s a trade surplus or deficit isn’t driven by trade. It’s driven by the gap between domestic savings and domestic investment. By whether a country is importing capital or exporting it.

It’s the capital account which drives the current account and that’s what gives us the balance of payments. So, to target the trade balance is insane. For example, a poor country should be running a trade deficit. For that is an indication that it’s importing capital, which is exactly what it should be doing. A lack of capital being a synonym for being a poor place.

But then, you know, we’ve all been saying for a long time that Trump – and Navarro, Lighthizer – doesn’t get trade, hasn’t the first clue.

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