On Tariffs and ‘Fairness’
Could it be a tad more complicated that the pres. thinks?
Before Pres. Trump imposed tariffs on Canada and Mexico a U.S. dollar cost a Canadian about 1.43 Canadian dollars and a Mexican about 5 pesos. He says he imposed those tariffs because those nations had higher tariffs on products from the U.S. than we had on their products. That, he insists, is “unfair.”
What about the “fairness” of exchange rates?
A defender of the president would doubtlessly say that exchange rates, unlike tariffs, are not determined by the actions of a government. In this age of ‘floating’ exchange rates they are a ‘consensus’ of the actions of buyers and sellers of currencies of nations (some for pure speculation, but most for purposes of conducting routine economic activity of all kinds internationally).
Still, the only three free-floating currencies in the world (i.e., not ‘pegged’ to any free-floating currency) that are worth more than the dollar (as of January of this year) are the British pound ($1 costs .82 pound) and the Swiss franc and the Euro ($1 costs .93 of either of those currencies). Six other currencies (all pegged to either the U.S. dollar or the British pound or, in the case of Kuwait, a ‘secret’ basket of currencies — which almost have to be the USD, BP, and Euro) are also worth more than the dollar. For the people, businesses, etc. of all other nations, one dollar costs more than a unit of that nation’s currency.
That is primarily a legacy of WWII. The U.S. came out of that conflagration as the only major economic power that had not been reduced to rubble — in terms of its economy if not, in most cases, literally. Of the other ‘developed’ nations that escaped the destructiveness of war being fought on their soil, none of those was by any stretch of the imagination a major economic power.
The U.S. was an economic Leviathan, a Gulliver among the Lilliputians, a Colossus towering over the rest of the planet. There could be no resistance to anything the U.S. wanted to do in the global economy.
The U.S. was a nonviolent Leviathan. It did not seek to invade any nation militarily. Indeed, it used its economic power to help devastated nations, including two that had been its enemies, to recover economically. The powers that were in this nation realized that the U.S., as the dominant economic power in the world, would benefit the most in the long run from a planet of prosperous nations that could trade with us.
From there the story gets quite complicated, but two consequences of that starting point that could not be otherwise were that the U.S. would have the strongest currency in the world and that for other nations to be able to be viable trading partners for this nation they would have to be allowed to carve out advantages for themselves in some way, shape, or form. For all practical purposes, tariffs were the only place that could be done.
That is how those ‘unfair’ tariffs came to be. They were a tradeoff for our globally dominant currency. Going from the ‘Bretton Woods’ system (established immediately after WWII), with a ‘fixed’ set of exchange rates in which all currencies were pegged to the dollar (which was fixed to a fixed ‘official’ price for an ounce of gold), to a ‘free-floating’ system of exchange rates (in 1971, when Pres. Nixon took the U.S. off the ‘gold standard’) did not change that basic fact of international economic existence — especially with the ‘petrodollar’: the U.S. dollar as the only currency that could be used internationally to sell/buy oil.
A case can be made that tariffs between the U.S. and the U.K. and the E.U. could be ‘revisited’ — though, in the interest of ‘fairness’ the effects of changes in tariffs on changes in exchange rates would have to be taken into account. Increasing tariffs on products from Canada and Mexico in the interests of economic ‘fairness’, without at least taking exchange rates into account, is nonsense.