How import tariffs affect the value of the dollar

In light of recent reporting by The Washington Post that President-elect Donald Trump may be planning on a more limited scope of tariffs than what he campaigned on, we saw the value of the U.S. dollar take a hit. It’s the kind of reaction we’re likely to see again and again as news breaks and announcements are made about the specifics of the kind of tariffs to expect.

When we talk about the complexities of global trade, we have to consider the trade balance — exports and imports and there’s some accounting math involved. “Your trade balance is going to be equal to the difference between domestic savings and domestic investment,” said Kris Mitchener with Santa Clara University.

We don’t have time to get into the algebra of it all, but here’s how that global economy math plays out when it comes to tariffs and currency.  

“A tariff, it’s going to raise the U.S. dollar price of, say, something like Chinese goods inside the U.S. But what simultaneously is going to happen is the U.S. dollar is going to strengthen against the RMB, the Chinese currency,” Mitchener said.

That’s because the price of the dollar adjusts quickly to any signal of where tariffs are headed.

News of lower tariffs means a lower dollar. News of higher tariffs, like on China? “The RMB is going to look cheaper in U.S. dollar terms, so the U.S. dollar is going to appreciate to partly offset the direct impact of that tariff,” he said.

And the U.S. dollar getting stronger can be good for U.S. consumers, said Olivier Jeanne with Johns Hopkins University, “because it reduces the price of imports.” Just like it’s good for U.S. tourists who travel abroad when the dollar is strong.

So who is this bad for? “It’s not a good thing if you are working for the export sector,” Jeanne said.

A stronger dollar compared to other currencies means that other countries will need more of their currency to buy U.S. products, said Colin Ward with the University of Alberta.

“And exports should go down because it’s more expensive for, say, European firms to buy U.S. goods. So the deficit should get worse,” he said.

So on the macro level, he said, if the goal is to reduce the U.S. trade deficit overall — a stronger, tariff-supported dollar doesn’t actually help.