Donald Trump described the dollar as “too strong” and the yuan as too low. He also went after House Speaker Paul Ryan’s tax plan as “too complicated”.
Trump got the reaction he wanted. The US dollar index declined over 1% from 101.62 to a low of 100.28.
The Wall Street Journal reports Trump Comments Send Dollar Reeling.
The dollar slid to a one-month low Tuesday after President-elect Donald Trump described the currency as “too strong” in an interview with The Wall Street Journal, casting new uncertainty onto the dollar’s postelection rally.
In the interview with the Journal, Mr. Trump said the U.S. dollar was already “too strong” in part because China holds down its currency, the yuan. “Our companies can’t compete with them now because our currency is too strong. And it’s killing us,” he said.
Mr. Trump had alluded to the dollar throughout the presidential campaign, threatening to label China a currency manipulator for weakening the yuan. But Mr. Trump’s comments were the clearest indication yet that the new administration would prefer a weaker dollar.
Mr. Trump also criticized part of the House Republicans’ corporate-tax plan, known as a border adjustment. Analysts had largely expected the plan to tax imports and exempt exports to boost the dollar.
Border Tax Proposal Against WTO Agreements
On January 5, Wall Street Journal op-ed writer Martin Feldstein spoke of the House GOP’s Good Tax Trade-Off.
“Exempting exports from corporate income taxes would strengthen the dollar and raise revenue,” said Feldstein.
The first problem is Trump does not want a stronger dollar. The second problem is Ryan’s “border tax” blueprint is against WTO rules according to University of Michigan research.
Those are not the only problems.
The Ryan blueprint combines reduced individual rates with a destination-based cash flow type business tax applicable to all businesses. The destination based Business tax at the center of the blueprint has several major problems: It is incompatible with our WTO obligations, it is incompatible with our tax treaties, and it will not solve the problems of income shifting and inversions it is designed to address. In addition, these proposals generate vexing technical problems that are not easily fixed as well as significant political problems. Finally, due to the tax rates that have been proposed, the plan is likely to generate large revenue losses and a less progressive tax system.
The research paper presents 21 pages of detailed analysis to arrive at those conclusion.
“I Don’t Love It”
The WTO discussion is now moot because Trump Warns on House Republican Tax Plan.
President-elect Donald Trump criticized a cornerstone of House Republicans’ corporate-tax plan, which they had pitched as an alternative to his proposed import tariffs, creating another point of contention between the incoming president and congressional allies.
The measure, known as border adjustment, would tax imports and exempt exports as part of a broader plan to encourage companies to locate jobs and production in the U.S. But Mr. Trump, in his first comments on the subject, called it “too complicated.”
“Anytime I hear border adjustment, I don’t love it,” Mr. Trump said in an interview with The Wall Street Journal on Friday. “Because usually it means we’re going to get adjusted into a bad deal. That’s what happens.”
Retailers and oil refiners have lined up against the measure, warning it would drive up their tax bills and force them to raise prices because they rely so heavily on imported goods.
Companies have been trying to figure out since the election how the border adjustment would affect them. The more they rely on imports—either parts or finished goods—the more vulnerable they are if the dollar doesn’t appreciate as smoothly as the economists project.
Republicans have been promoting their tax plan as an alternative to the “big border tax” that Mr. Trump proposes, which he has described as a 35% levy on goods made by companies that shift production out of the U.S. and then sell back in. Unlike the border adjustment, Mr. Trump’s suggested levy would only affect imports.
Untangling Trumps Incompatible Goals
It seems neither Trump not Congress wants a border tax, although that’s technically what Trump proposed and Ryan put together.
And if Trump just wants import taxes, those too would tend to strengthen the dollar which Trump does want.
What Does Trump Want?
- USA first, expecting no other nation will retaliate in kind.
- Import taxes which will raise the cost of imports hurting low wage earners and tend to strengthen the US dollar, neither of which Trump wants.
- A higher yuan. But China is actively attempting to support the yuan with capital controls. If China removed capital controls and floated the yuan in a market-based move Trump seems to want, the yuan could crash.
In short, Trump appears to want to have his cake and eat it too, the proverbial free lunch.
Trump seems to think he can get just that. He can’t.
Mike “Mish” Shedlock