One of the many justifications President Donald Trump has deployed on behalf of his new tariffs is that they’ll reduce the trade deficit over time. The argument is that taxing imports will boost domestic production, so American consumers buy more American goods, and American producers can sell more to consumers overseas.
But a big problem with that argument is that tariffs will have unintended consequences for the value of the dollar.
If an importer wants to buy goods from another country, the importer typically has to buy them in that foreign country’s currency.
“So if we want to buy some cheese from the Netherlands, we need some euros to buy the cheese with because that’s what they sell it in,” said Ed Gresser, vice president and director of trade and global markets at the Progressive Policy Institute.
Gresser said if the U.S. government slaps a tariff on that cheese, it becomes more expensive. Consumers buy less of it, which means grocery stores will stock less.
“The demand for euros has gone down relative to the dollar,” Gresser said.
And lower demand for euros pushes down the currency’s value relative to others. “That would then lead to a stronger dollar,” said Kathryn Dominguez, an economics professor at the University of Michigan.
So far this year, the dollar’s value has been ticking down. Dominguez said that’s in large part because importers have been trying to bring in extra goods ahead of the president’s tariffs.
“We’ve actually been buying more imports, therefore needing more foreign currency, therefore driving up the value of foreign currency relative to the dollar,” Dominguez said.
But once new tariffs start taking a bite out of imports, the dollar’s value is likely to strengthen again. And that will make American exports more expensive for foreign buyers.
“Meaning that now, U.S. goods, denominated in dollars, would be less competitive relative to goods denominated in other currencies,” Dominguez said.
That’s when American companies are likely to turn their attention to selling more goods to domestic consumers. They might even open up new factories and create new jobs.
But there’s a big tradeoff to keep in mind, said Oleg Itskhoki, an economics professor at Harvard University. “Some jobs would be lost because it will be unprofitable to export because of the stronger value of the dollar,” he said.
Meanwhile, other countries that follow the U.S. lead and slap tariffs on American goods will end up turning inward too.
“The Canadian factories will turn to service the Canadian consumers, instead of exporting to the United States, but the U.S. will be able to export less goods all around the world because of the stronger dollar,” Itskhoki said.
Itskhoki said what we’re talking about is a less efficient global economy.
“We started in equilibrium, when it was efficient to produce in Canada for the American market,” Itskhoki said. “You lose efficiency as a result. And that’s the tax that consumers are paying at the end of the day.”
That’s a tax that causes prices to rise and economic growth to stall.
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