Is fiscal war the new currency war?
President-elect Donald Trump’s threat to impose a “major” border tax on U.S. manufacturers that make products abroad to sell in the U.S. could fuel the next leg in the post-election dollar rally, some analysts reckon.
In his first post-election press conference, Trump doubled down on his proposal to impose policies aimed at boosting onshore production of U.S. goods and services through penalties on imports. “There will be a major border tax on these companies that are leaving and getting away with murder,” Trump said on Wednesday, without elaborating. “You’ve got a lot of places you can move,” he added. “As long as it’s within the U.S.”
His pronouncement on Wednesday followed a Jan 3. tweet in which the Republican castigated General Motors Co. for its Mexico car plant, channeling the “make-where-we-sell” political movement.
Trump’s tweet said: General Motors is sending Mexican made model of Chevy Cruze to U.S. car dealers-tax free across border. Make in U.S.A.or pay big border tax!
The impact of any such border-tax policy, the implementation of which would likely require an act of Congress and may be prohibited (PDF) by World Trade Organization rules, could be significant for the greenback—and for emerging markets in particular.
Policy-driven efforts to boost America’s net trade position, either through an increase in tariffs or a border-adjustment tax, could trigger a fierce appreciation of the dollar, which would tighten financial conditions across the world.
Fiscal devaluation—an attempt to boost competitiveness through changes to the tax system—could upend projections for the dollar this year, which has staged a post-election advance amid expectations of higher interest rates and fiscal stimulus.
“We believe the FX market is too sanguine about the possibility of border adjustment being included in a final [fiscal] package,” Morgan Stanley strategists led by Todd Castagno wrote in a prescient report on Tuesday.
The dollar fell while demand for U.S. Treasuries rose in the wake of Trump’s tumultuous press conference. Nevertheless, the Bloomberg Dollar Spot Index, which tracks the currency against 10 of its peers, remains 4.9% higher since the election.
In simple terms, the border-tax policy is a destination-focused corporate tax that boosts exporters while disallowing deductions for imports, which would come as a blow to retailers and automakers in particular, given the high import component in their supply chains.