Washington, D.C. — Ahead of Chinese President Xi Jinping’s visit to the United States, a new issue brief from the Center for American Progress examines how President Donald Trump’s economic policies would worsen the U.S. trade deficit and cause the U.S. dollar to rise even more—further hurting the American workers that President Trump has repeatedly pledged to protect.
“Trump made reducing the trade deficit and cutting down on currency manipulation a centerpiece of his campaign. But his plans in these areas—on which he has made no real progress—will be swamped by the other pieces of his misguided economic agenda that will cause the value of the U.S. dollar to go up and the trade deficit along with it,” said Brendan V. Duke, Associate Director for Economic Policy at CAP. “The beneficiaries of massive, deficit-financed tax cuts and financial deregulation aren’t workers but rather Wall Street, big corporations, and the top 1 percent.”
Trump and his administration have hinted at various ways to address China’s alleged currency manipulation as a tactic for reversing the ballooning U.S. trade deficit that has harmed American workers and businesses, but, as CAP’s brief argues, President Trump’s agenda in other areas of economic policy would drive the value of the dollar up, fueling the very same cycle of offshoring that has helped undermine worker wages and middle-class economic security. The likely combination of tax cuts and financial deregulation will cause the dollar to appreciate, as would the very real possibility of hawkish monetary policy.
Large, deficit-financed tax cuts: International Monetary Fund research has suggested that the trade deficit rises 60 cents for every dollar the budget deficit rises. As a result, the $6 trillion Trump tax plan could cause the trade deficit to rise about $360 billion per year, while the $3 trillion House Republicans’ plan could increase the trade deficit about $180 billion per year.
Financial deregulation: Advocates for financial deregulation frequently argue that it will lead to more foreign investment in the United States, which will in turn create jobs and raise incomes. The investment resulting from financial deregulation, unfortunately, would likely turn out to be a debt-fueled bubble similar to the one that burst in 2007, which destroyed middle-class jobs, home ownership, and wealth. Research from economists at Oxford and the Bank of International Settlements also suggests that financial deregulation would cause the dollar to rise.
Hawkish monetary policy: CAP’s brief also notes that President Trump will have the opportunity to name at least three Federal Reserve Board members as well as his own Fed chair, and if these appointees share typical Republican monetary policy views, it is likely that interest rates will rise more quickly, causing more capital to flow into the United States and the dollar to appreciate further—causing the U.S. trade deficit to rise and reducing employment.
Click here to read “Trump: Making the Trade Deficit Great Again” by Brendan V. Duke.
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