What’s a dollar worth? Too much, if Donald Trump is to be believed. Trump has said that the strong dollar means that “nobody wants to buy our product because it’s too expensive”. Meanwhile, other countries “keep their currencies weak” to give their exports a boost.
Given this adversarial view of global trade, in which America is continually being taken advantage of by export economies with artificially weak currencies, we can appreciate the logic of a trade war. If other countries’ exports are too cheap, tariffs are a simple and direct way to address the issue.
Trump has also repeatedly said he will implement tariffs.
So perhaps the only thing left to explain is why the markets seem surprised that Trump moved to actually implement broad tariffs.
The predictable irony: the dollar surged on the tariff news, as currencies of major exporters to the US took a nosedive, with the Canadian dollar, Chinese yuan and Mexican peso all under pressure.
Global FX fallout
For now, Trump’s tariffs seem anything but laser targeted.
The UK government insists that terms of trade between the US and UK are fair, and there would be no cause for tariffs. For the moment, the GBP seems to have weathered the tariff storm.
Emmanuel Macron stressed that if the US imposes tariffs on the EU, the bloc “will have to make itself respected and therefore react”.
In South Africa, the rand fell in the wake of Trump’s threat to suspend aid in response to the country’s recent land appropriation act.
While the scope and scale of US tariffs remains unpredictable, some countries are in an especially vulnerable position. For instance, as an important link in the chain between goods moving between China and the United States, Vietnam could find itself under pressure if targeted by tariffs. The country has seen a record fall of its currency against the USD, with a commensurate growth in exports to the United States.
What now?
In the immediate aftermath of Trump’s announcement, Canada vowed retaliatory tariffs, while Mexico signalled its intention to fight back.
However, there are now signs of moderation. Mexican President Claudia Sheinbaum announced that she and Trump have agreed to put tariffs on hold for a month. Canada and the US reached a similar agreement.
Are we seeing a détente before the trade war begins in earnest? For now, the watchword remains unpredictability.
Some effects are direct. China, unsurprisingly, has unveiled additional tariffs on US imports.
But Trump’s big shakeup could have long-lasting structural consequences. As Bloomberg’s JP Spinetto argues, deep uncertainty about free trade can be damaging enough: “If the free trade agreement in North America … is permanently put into question by the US, there is no point in establishing new factories south of the border to serve the American market. Companies would be better off building capabilities in Texas, Alabama or South Carolina than establishing supply chains in Mexico even if they can get cheaper costs in the Latin American nation.”
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