Does Trump really want to sacrifice the dominance of the dollar
After a few weeks of relative calm on the financial markets that followed the chaos with the duties that US President Donald Trump unleashed on Liberation Day (April 2), his impatience for visible results returned.
After learning that it was not easy to make a deal for Russia’s war against Ukraine, he was able to give up this effort. It will now turn its attention to « softer » goals: the European Union – which is now threatening a 50% duty – Harvard University.
Trump gave up the threat of imposing a 50% EU duties
By taking controversial moves in his « duties » strategy in mid -April, he briefly encouraged markets to believe that he was in line with their reaction and had a mechanism for the protection of bonds and shares. Now, however, he decided on a whim that the EU deserves to be affected by an even greater common duty than he initially suggested on April 2-although he had already issued another political declaration, which postponed the 50 % duty to July 9.
Trump’s only reason to raise the EU duties is that he has become impatient to European trade negotiators. But anyone who has participated in the long and difficult negotiations for Brexit can tell him that the EU loves to dig into the details. Europeans are highly skilled trade negotiators and would never agree to a clever deal that just allows Trump to attribute the merits for what he has achieved. After all, this would mean accepting a higher rate of the main duty – as the United States did with the United Kingdom.
| Given the size of the EU economy and the dependence of US multinational companies on it, I do not see how Trump can maintain his new aggressive position. |
If it does, the reaction to the market will probably reflect what we saw in early April, when US actions collapsed and the yield of US government bonds jumped (which is a signal for capital leak). 50 percent duty on European goods would not only have huge, negative consequences for US companies and consumers; It would also threaten one of the largest strengths of America – the export of service. It is obvious that some of the EU responding measures will be aimed at US technology companies.
Trump wants to make tanks not T -shirts
In addition, Trump’s request for major companies to move their production in the United States reflects a focus on traditional industries such as automotive industry. But there is no chance of the German government just sitting with his hands crossed and allowing his own car giants to move most of their activities in the United States.
In my own work on regional economic restoration in the UK, I have long been inspired by the American northeast. In the economic textbooks of the 1960s and 1970s, it was believed that this region was in an irreversible industrial decline, similar to Northern England and some parts of continental Europe today. But thanks to his world -class universities, Harvard, in particular, the rest of the Iron League and the Massachusetts Institute of Technology – has become one of the most dynamic and prosperous parts of the United States.
Does Trump really want to stop this growth engine?
That brings us back to the dollar. The capricious, self -destructive behavior of the Trump administration quickly undermines both the cyclical and structural perspectives in front of the green currency. Thinking about the structural country, I developed a method of assessing « fair value » (based on John Williamson’s pioneering studies on the real equilibrium values of exchange rates), which focuses on both relative prices and relative productivity.
What does this measure show us?
By undermining the avant -garde research institutions that stimulate productivity, and by pursuing policies that raise the price level (not to mention the colossal fiscal hole that lies in this tax law), Trump weakens the long -term fair value of the dollar.
Even worse, by neglecting and undermining the institutions that underlie the rule of law – and hence American democracy and economy – it raises constant doubts about US government, and hence the dollar’s suitability as a dominant reserve currency.
From the point of view of the cycle, constantly creating insecurity and new inflation risks, Trump undermines the short -term prospects of the US economy. Although part of me thinks that the dollar must certainly recover (considering how sharply it has dropped), it may also have already recovered. Time will show whether this is what we have witnessed in the last few weeks, when he stopped falling even more.
© Project Syndicate
