Donald Trump’s tariffs reflect his view that the US trade deficit is damaging to US workers, and to US manufacturing jobs in particular. Alongside his tariff-wielding demands for more balanced trade, he has also expressed the view that the US dollar is too strong. A weaker dollar would, on this view, go a long way to addressing the imbalances the US trade deficit is associated with. Even the “reserve currency” status of the US dollar is coming to be seen in some Trump circles as more of a burden than a blessing.
In the past there have been concerted international efforts to induce dollar depreciation, of which perhaps the most notorious and successful was the Plaza Accord of 1985, in which the major Western European governments, along with Japan and the US, agreed to intervene directly in currency markets to depreciate the dollar against those non-dollar currencies. So perhaps in principle Trump could secure a dollar depreciation if he could get enough economic partners on board.
Matters are not straightforward, however. For a start, anything that devalues the dollar is going to raise US inflation – if only for the brute reason that the price of imports will go up.
Second, currency strength is ultimately a consequence of relative attractiveness for capital location. In a floating exchange rate regime (which is what the US has) trade imbalances are the consequence of capital allocation imbalances (in this case it being more attractive for foreigners to invest in the US than it is for US investors to invest abroad). A floating exchange rate is stable when the inflow of monies balances the outflow. So if there is a net inflow of monies from net capital investment, then if the currency is stable and the domestic money supply is stable (no inflation or deflation), that net investment inflow must be balanced by a net outflow of monies for trade and invisibles. So in order for the trade deficit to fall on a sustained basis, Trump must make it relatively less attractive to invest in the US – that’s simply a matter of maths.
Donald Trump’s tariffs reflect his view that the US trade deficit is damaging to US workers, and to US manufacturing jobs in particular. Alongside his tariff-wielding demands for more balanced trade, he has also expressed the view that the US dollar is too strong. A weaker dollar would, on this view, go a long way to addressing the imbalances the US trade deficit is associated with. Even the “reserve currency” status of the US dollar is coming to be seen in some Trump circles as more of a burden than a blessing.
In the past there have been concerted international efforts to induce dollar depreciation, of which perhaps the most notorious and successful was the Plaza Accord of 1985, in which the major Western European governments, along with Japan and the US, agreed to intervene directly in currency markets to depreciate the dollar against those non-dollar currencies. So perhaps in principle Trump could secure a dollar depreciation if he could get enough economic partners on board.
Matters are not straightforward, however. For a start, anything that devalues the dollar is going to raise US inflation – if only for the brute reason that the price of imports will go up.
Second, currency strength is ultimately a consequence of relative attractiveness for capital location. In a floating exchange rate regime (which is what the US has) trade imbalances are the consequence of capital allocation imbalances (in this case it being more attractive for foreigners to invest in the US than it is for US investors to invest abroad). A floating exchange rate is stable when the inflow of monies balances the outflow. So if there is a net inflow of monies from net capital investment, then if the currency is stable and the domestic money supply is stable (no inflation or deflation), that net investment inflow must be balanced by a net outflow of monies for trade and invisibles. So in order for the trade deficit to fall on a sustained basis, Trump must make it relatively less attractive to invest in the US – that’s simply a matter of maths.