The proposed ‘major’ border tax on goods, manufactured by the US corporations overseas is causing a lot of discussions. One of the commonly raised questions is whether the latest dollar rally is posed to continue, adding to disbalances in global economy. The dollar growth following the Trump election was based on expectations of policy changes. Border tax, reducing the US trade deficit, is expected to contributing to appreciation of the US dollar, increasing its purchasing power. This is unlikely to happen. This is unlikely to happen. Several aspects of the problem are outlined in the article, that came out on Bloomberg:
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 proposed border tax indicates reversing of the US trade policy:
For most of the past 70 years, the U.S. has been seeking to reduce barriers to free trade by lowering tariffs. About half of all industrial goods entering the U.S. come in tariff-free, and the ones that face tariffs are largely clothes, footwear and motor vehicles.
Trump’s proposed taxes on imports from nations such as China and Mexico may help initially reduce America’s trade deficit with these countries, yet it also risks raising costs for U.S. companies on imported goods and prices for America’s consumers.
The dollar is expected to rise in the short term, continuing the current trend. But the rally will not last:
The time frame matters, according to Steven Englander, global head of Group-of-10 currency strategy at Citigroup. “The incentives in the tax plan could make the U.S. dollar rise very sharply,” he said in a note. “But the payback will be brutal once these initial incentives fade.”
“There will be significant upward pressure on the dollar if you implement a policy that encourages exports and discourages imports,” Harris said. But “if the foreign governments then do the same thing, encourage their exports and discourage imports from us, then you are cancelling out the imbalance in the currency market.” (Read the full article)
Since trade policies are often mirrored, the retaliatory measures are to be expected.
“If there is any action that punishes imports to the North American market and encourages U.S. exports, you have to reflect it in a mirror action to counteract the change of incentives that this would make for activity and investment in Mexico,” Economy Minister Ildefonso Guajardo said in an interview in the newspaper El Universal on Monday. (Read full article)