Macroscope | Why Donald Trump should blame the strong US dollar, not China, for its trade deficit
Neal Kimberley says given the role of the strong US dollar owing to its status as the primary reserve currency, tariffs will not help reduce the trade deficit and may backfire
In truth, the centrality of the US dollar to the world financial system, its primary reserve currency status and the reality that commodities are priced in greenbacks, makes the existence of a US trade deficit almost inevitable.
A constant demand for US dollars outside the United States should always help to underpin the currency’s value, and the stronger the greenback is relative to other currencies, the more it makes US imports of overseas goods cheaper in US dollar terms and the less competitive it makes US exports.
Indeed, Cliff Tan, the Hong Kong-based East Asian head of global markets research at MUFG Bank, wrote on June 27 that “no matter what Trump does, he can’t affect the overall US trade deficit”.
Tan applied macroeconomic theory to conclude that “for the US, its government budget deficit … must move 1-for-1 with net exports”, meaning in practical terms that if the US government budget deficit gets bigger, the trade surplus “must get smaller (or the trade deficit get bigger).”