President Trump and Treasury Secretary Mnuchin both recently indicated that they believe the US dollar should weaken against other currencies. It is important to note that the US Government like all western countries does not control the currency exchange rate as opposed to countries in southeast Asia where the government dictates/manipulates its currency exchange rates. China is famous for this, and President Trump rightfully has attacked them for this manipulation.
The impact of a weakening currency is to make your countries good cheaper as exports. Clearly, Mr. Trump believes that if the US currency weakens it will enhance US exports which is certainly a likely short-term outcome and one that could be beneficial to the US economy. As we all know, one of Mr. Trump’s major campaign themes was to assist the US economy by expanding exports.
A quick look at export data for 2017 tells us that through November 2017 U.S. exports to Mexico were $225 billion, while imports were $288 billion, with Canada our exports were $259 billion while imports were $274 billion, and with China our exports were $116 billion while imports were $461 billion.
Manipulating currency rates to expand exports is certainly not new and as I noted above we have criticized China in harsh terms for many years. The economic issue that must be addressed is if the US weakens its currency that only has a positive impact if other currencies hold theirs steady or strengthen their currencies, if they do not and fall proportionately with the US currency, then little has been achieved. It is hard to imagine that once other countries see this tactic implemented that they will, no doubt, begin to engage in currency manipulation themselves for the benefit of their own economies. This process begs the question of whether independent currency traders will follow the Trump Administration’s thoughts.
This pronouncement when coupled with Mr. Trump’s anti-trade rhetoric, including his threats to tear up NAFTA, his criticism of the EU trade pacts, the withdrawal from TPP, and other assaults on global trade would seem to indicate that he will proceed along a path that will incite trade wars. Recent reports from the Montreal round of NAFTA negotiations indicate that little progress has been made and that, in fact, the US has rejected Canadian proposals and the U.S. likewise. None of this bodes well for our economy. One of the side effects for the U.S. if we do weaken our dollar is to likely make purchasing treasury bonds less expensive which may be a good short-term result, but it may also decrease our standing as a financial safe harbor. U.S. Administration have traditionally been in favor of a strong dollar as pillar of our economic and political strength.
The single factor which may drive the rebirth of manufacturing and investment in the US is clearly the new tax law. I recently was approached by a German company that is interested in moving some portion of its facilities to the US, and indicated that when they compare the German tax rate to the US tax rate, it makes great sense to conduct business in the United States and reduce their overall tax burden. In this particular instance, it appears it would reduce their taxes by twenty percent (20%) according to the gentleman I spoke with. If this is true, then it creates a real opportunity for economic growth in the US. We may also see this occurring with Canadian companies who may well want to push their expansion into the US to take advantage of the lower tax rates, particularly where there is greater growth potential simply due to the size of the market.
Mr. Owens is a former member of Congress representing the New York 21st, a partner in Stafford Owens in Plattsburgh, NY and a Senior Advisor to Dentons to Washington, DC.
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