One of Trump's options, to redress America's horrendous $500-billion-a-year trade deficit, is to impose a tariff. That is, a tax on imports.
For a country in our circumstances, this is surprisingly legal under WTO rules. Why? Because, in a holdover from the WTO's predecessor, the General Agreement on Tariffs and Trade (GATT), which operated in the Bretton Woods world of fixed exchange rates, temporary tariffs are permissible in response to balance-of-payment emergencies.
But the idea has recently been bruited that this would not work, because supposedly this would just cause the dollar to rise, negating the effect of the tariff.
Naturally, this is a complicated question, but there are three main reasons why this is not so:
1. This argument assumes currency values are set in a freely floating market. This is massively false today. Currency values are set by manipulators from Berlin to Beijing. The Euro is a giant currency manipulation scam for Germany. If the Renminbi isn't being manipulated this instant, it has been in the past and surely will be again. The Yen is managed.
2. This argument assumes the demand for currencies consists solely in demand for goods and services. But it also consists in demand for existing assets and debt. Which is largely driven by interest-rate differences between currencies. Which are determined, in the short run at least, by central banks, not markets. For example, the dollar soared in the early 1980s not because of a sudden drop in America's demand for imports, but because Paul Volcker's anti-inflation policy of high interest rates caused a surge in foreign demand for dollars to buy high-yielding American financial instruments.
3. Even one ignores these two facts, this argument still wouldn't entail a full offset of the tariff. The economic concept of elasticity would pretty much necessarily entail a partial offset. So even if the dollar did strengthen a bit, in response to a tariff, it wouldn't strengthen enough to wholly negate the tariff. The easiest way to grasp this is to remember than the dollar would only rise, in response to fewer dollars being spent on imports - so the rise can't even happen unless the tariff is at least partially effective.
Imposing a tariff raises a whole lot of complicated questions, and it's not something to rush into. But neither is it something to be dismissed on the mistaken idea that it simply would not have the intended effect.
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