(The opinions expressed here are those of the author, a
columnist for Reuters)
By James Saft
Feb 16 A U.S. border tax would hit growth
abroad, sending a global deflationary shock which may be
magnified if other countries take defensive steps which result
in round-robin currency depreciations.
A particular concern is that a sharp appreciation in the
dollar caused by a border tax prompts China to break its
controlled peg of the yuan, in what could be the biggest
shock to global financial stability since the crisis of the last
House Republicans, with uncertain support from President
Trump, are pushing a border adjustment tax of 20 percent on
imports while excluding export revenue from corporate taxable
income. Corporate income tax under the plan would be cut to 20
percent from 35 percent.
In theory a 20 percent import tax would push the dollar
higher by a similar amount.
Economists at UBS argue that a border tax arrangement, like
a 10 percent tariff and import subsidy, would increase U.S.
growth by 0.9 percentage point over the following 18 months but
cut growth everywhere else by 0.4 percentage point.
"The disinflationary impact abroad is larger than the
inflationary impact at home and roughly of a similar magnitude
as the oil shock of the past two years. Because the rest of the
world is four times larger than the U.S., the policy's net
nominal impact is actually negative globally," Pierre Lafourcade
and Arend Kapteyn of UBS wrote in a note to clients.
While that analysis, and much else, depends on how the
Federal Reserve reacts to such a scenario it would amount to a
significant disinflationary shock globally.
Trump may have as many as four Federal Reserve seats to
fill, giving him some influence over the monetary policy
reaction. He, and the U.S., have a lot less control over how all
of this goes down internationally. The U.S. is famously the
consumer of last resort, so exporting nations may be reluctant
to inflame what would already be a trade war.
First steps would probably be to fight the policy at the
World Trade Organization, a tactic which might or might not slow
retaliation. As ever with Trump administration policy much is
unclear: what he intends, what his Republican colleagues
actually want and what they together can bring about.
IT'S ALWAYS DIFFERENT THIS TIME
It's possible the more significant impact globally will be
from dollar strength, which, unlike other similar bouts of
dollar appreciation, will not be cushioned by a rise in exports
to the U.S. The trade-weighted dollar is already not far off
20-year highs and has risen by more than 20 percent in the past
two and a half years.
To be sure, foreign governments are less vulnerable to
dollar strength than in the past, many having built up large
reserves of dollars. Foreign corporations, particularly in
China, would see their debt burdens rise as the dollars they
have borrowed become more expensive to pay back.
Chinese nonfinancial corporations could see their debt
burdens rise to more than 190 percent of China's GDP if the
dollar rises by 20 percent, according to calculations from
Manulife Asset Management.
Brad Setser, of the Council on Foreign Relations, observes
that as China manages the yuan against a basket of currencies a
mechanical adjustment matching global currency movements might
still leave China at a relative disadvantage to other Asian
That seems unlikely, both as a domestic policy for China and
because a prospective devaluation of the yuan will turn into a
self-fulfilling prophecy, with increased legal and illegal
capital flight out of China by yuan owners wanting to front-run
losses. Remember too that exporters, who will be affected, have
perhaps more freedom to get money out of China than others.
"The risk to China comes from the potential impact of
outflows (and the policies introduced to stem outflows) on
domestic financial stability," Setser writes in his blog.
"And the risk to the world in turn comes from the trade
impact from a complete break in China's peg and a major
depreciation of the renminbi. One that overwhelms any border
China officials may be tempted or forced to let the yuan go
against the dollar to mitigate the impact of a border tax, both
in their economic relationship to the U.S. and to other
Be in no doubt, a float of the yuan will be a sharp
weakening and we will once again be talking, not about a Trump
reflation, but about global deflationary forces.
(Editing by James Dalgleish)