Trump’s Dollar Devaluation Is a Very Bad Idea
Trump's Latest Protectionist Scheme is Nothing But a Path to Economic Peril
As Donald Trump seeks to recapture his former residency at 1600 Pennsylvania Avenue, the carrot of protectionism is being dangled in front of his base, rearing its ugly head as it did during the last administration. Robert Lightizer, an advisor to Mr. Trump and architect of the China trade war and likely candidate for Treasury Secretary, has joined a cohort of economic ignoramuses who erroneously believe that weakening the dollar against foreign currencies, namely the Chinese Yuan, will make U.S. exports cheaper and reduce the trade deficit. Of course, this stems from Mr. Trump's repeated ignorance and lies on trade; his ignorance manifests in his logic that the trade deficit is theft, which is inaccurate, and that other countries pay tariffs, which is another lie.
In an early morning Truth Social rant, Mr. Trump criticized the Biden administration for a strong dollar. “The Dollar has just hit a 34-year high against the Yen, a total disaster for the United States,” Mr. Trump commented. He then reminisced about his presidency, claiming, “When I was President, I spent a good deal of time telling Japan and China, in particular, you can't do that. It sounds good to stupid people, but it is a disaster for our manufacturers and others. They are actually unable to compete and will be forced to either lose lots of business, or build plants, or whatever, in the 'smart' countries.” Mr. Trump then attributed the rise of Japan and China as economic powerhouses solely to currency manipulation, which he aggressively countered, “I put limits on both (and others!), and if they violated those limits, there was hell to pay.” He then eerily warned, “Biden has let it go,” adding, “Watch them now pick apart the U.S. It will be an open field day. Don't let this happen, Crooked Joe. Wake up and smell the roses.”
Bluntly speaking, Mr. Trump's characterization of a strong dollar as a “total disaster” reveals a gross misunderstanding of currency dynamics and global economic roles. The dollar’s strength indicates a robust U.S. economy and signals investor confidence in its financial stability and growth. His other claim that the strong dollar forces U.S. manufacturers to relocate overseas for the sake of competitiveness is also utterly untruthful. Harsh regulatory environments, labor costs, supply chain logistics, and taxation—these are what drive companies away. Moreover, it stems from an antiquated worldview; modern manufacturing competitiveness is driven by innovation, quality, and efficiency, metrics where the United States overwhelmingly dominates, hence the increase of 800,000 manufacturing jobs in the last four years. Not to mention, part of the dollar's strength is due to an uptick in inflation and the Federal Reserve declining to cut interest rates in the near future.
The waves of protectionism have crashed heavily upon the shores of the world’s economies, bringing not prosperity but devastation. The discourse surrounding the devaluation of the dollar as a means to rectify trade imbalances ignites concerns that echo the grave economic errors of the past. As elucidated in Rightwise’s last column, “The Travesty of Tariffs,” by Noah Berger and myself, protectionist policies are not some magic pill for economic fortitude; they have instead served as the harbinger of reduced living standards and economic malaise. Tariffs have a detrimental impact on both domestic and international economic stability, as they epitomize the fallacious belief in the power of central planning. Central planning of our currency will likely be as successful as the central planning of anything else: not at all. There is a certain strangeness to the Republican Party, traditionally champions of laissez-faire and limited government intervention, seemingly devolving into devolved into nationalist corporatism under Mr. Trump.
Mr. Trump and his advisors believe that weakening the dollar and balancing the trade deficit does not require balancing and does not damage the price of American goods in any way. This is wrong; imports would become more expensive, hurting American consumers and businesses dependent on foreign goods, thus resulting in increased prices. Not to mention the escalation of inflationary pressures, complicating the monetary policy, and destabilizing the global financial system does not come free of consequence. There is no such thing as isolation in our globalized economy; a dollar devaluation would invite retaliatory devaluations, leading to a 'currency war' scenario in which every party loses.
Those who paid attention in macroeconomics class recall ‘the impossible trinity’ and that no country can have all three:
a fixed foreign exchange rate
free capital movement (absence of capital controls)
an independent monetary policy
Since we, the United States, can only pick two of the three, we have elected for free capital movement and an independent monetary policy; devaluation of the dollar requires letting go of either free movement of capital or dominion or independent monetary policy. Patrick Horan explained the conundrum in a column for the National Review, where he presented a hypothetical scenario under Mr. Trump’s scheme, where the government instructs the Fed to buy euros in financial markets with newly printed dollars to weaken the dollar against the Euro. He explained that European goods would become more expensive in dollars, making our annual imports, 3.2 trillion dollars worth in 2022, more expensive. Sacrificing free movement of capital would deter foreign investment in our country, as would the Biden administration’s plans to double capital gains tax to 44.6 percent, making 2024 a contest of two candidates seemingly bent on opposing the free market and economic growth.
At a time when the U.S. dollar's role as the world's reserve currency—the sole reason our country has survived the reckless fiscal irresponsibility of the last forty years—is under challenge from foreign entities such as BRICS, these actions would threaten that status. Not to mention that, amid the War in Ukraine and the Israel-Hamas conflict, our reserve currency status is the sole reason for the effective enforcement of sanctions against hostile regimes like Russia and Iran; the strength of the dollar is directly tied to national security. More importantly, any country targeted by a U.S. devaluation effort would adopt countermeasures; lowering interest rates or offering subsidies to their domestic industries would negate any benefits a second Trump administration would hope to achieve, thus rendering it nothing but harmful for the U.S. economy.
Instead of dollar devaluation, if we are to maximize the productivity and competitiveness of the U.S. economy, we should first begin on the path of fiscal hawkishness—controlling our deficits and public debt will reassure investors, strengthen our currency, and provide economic stability. Lowering corporate tax rates and eliminating the capital gains tax would lead to higher rates of investment, thus increasing production and exports and boosting domestic savings—reducing the need for borrowing, which would lower interest rates even more and allow for even more capital to be available for investment.
In sum, the dollar's devaluation poses severe risks to the U.S. economy and the broader global economic system. It’s not just a bad idea; it’s a disastrous one. With President Biden and Mr. Trump seemingly enamored with protectionism, likely due to their pandering to unions and other special interest groups, it becomes more critical for Americans to oppose such reckless gambits. The call to action is clear: uphold the dollar's integrity, embrace free trade, and steer the country and our discourse away from the shoals of economic nationalism.