What Will the Border Tax Do to the Dollar?

Trump appears to be going full speed ahead in his plans to reduce immigration, send illegals home and impose a border tax on US companies that manufacture offshore and import back into the USA. Forex traders wonder what will the border tax do to the US dollar. Bloomberg writes that the border tax will be a questionable catalyst for the dollar.

In one of his first major pronouncements as president, Trump told business leaders Monday “if you go to another country” and cut U.S. jobs “we are going to be imposing a very major border tax” on that product. While a border tax could spark a dollar rally in the short term, any improved purchasing power for Americans would probably be cancelled out by retaliation from other nations, according to currency analysts at firms ranging from Citigroup Inc. to Bank of America Corp.

The target of this policy will be US companies that manufacture offshore. But if this policy works and brings jobs back to the USA it will mean loss of jobs in other nations. These nations may choose to raise trade barriers to products coming from the USA which will be the start of a trade war. When global trade falls it leads to recession or even depression. Experts expect the initial dollar response to this policy to be a two to four percent rise in the value of the USD versus a basket of currencies. On the outside there is the possibility of a ten to twenty percent rise. But if and when other nations retaliate all dollar gains will evaporate.

Will There Be a Trade War?

The border tax for things manufactured in Mexico is one thing but a border tax for items manufactured in China is another. Trump as already bullying Mexico by saying that unless they arrive in Washington to grovel at his feet and agree to pay for his border wall that they might as well not even come. He may believe that he can get by with that approach with Mexico but China is another matter. Chinese Communist leaders see knuckling under to Trump as an existential threat to their leadership. CNBC asks if a full-blown trade war with China will result from Trump’s actions and the effects of those actions on China’s currency.

For two decades, China has been one of the countries on a U.S. watch list aimed at identifying trading partners that manipulate their currencies in order to keep their exports cheap.

Complaints that Beijing kept the yuan exchange rate artificially low escalated as China’s bilateral trade surplus soared, with regular threats to label it a currency manipulator.

Washington has not taken that drastic step since the early 1990s, but U.S. President-elect Donald Trump has vowed to do so, shrugging off the prospect of exacerbated tensions between the world’s two largest economies.

China is unlikely to engage in any currency reform that is not in its own best interests and has tools such as selling US treasuries, raising tariffs on US goods and buying their airplanes and agricultural products from anyone but Boeing and US agriculture. The border tax and its fellow policies courtesy of Mr. Trump will likely lead to trade tensions or a trade war and eventually a weaker US economy and dollar.