Why Is Weak Dollar Policy A Natural Extension Of Trade Protectionism?

Trump's policy of wide fiscal and tight monetary policy will lead to a strong dollar, but its trade strategy also requires the us weak dollar. At present, the market only focuses on the first half, and whether we will usher in the era of weak dollar under Trump's domination in the future. This risk can not be ignored. In a recent report, Nomura Securities analyzed the related risks. "WEEX trading together" summarized its main points as follows.

"My ruling will be based on two simple rules.

Made in the United States and employed Americans.

(Trump twitter, 2016.12.29)

From election to election, Trump has never stopped emphasizing trade policy.

His trade agreement adjustment and the threat of punitive tariffs determined him to be a protectionist.

Let's take a look at the trade plan that Trump listed in June 2016, from which we can see his determination.

There are seven plans.

1 quit TPP.

2 appoint competent trade negotiators.

3 identify all violations of trade agreements and use all the laws permitted by the United States and the world to stop them.

4 inform NAFTA member states that the United States hopes to renegotiate the contents of the agreement immediately, in order to give its employees better treatment.

5 guide the Ministry of finance to identify some countries as foreign currency price manipulators.

6 guide trade representatives to identify unfavorable trade cases in China (including those in China and within WTO).

7, we should use all presidential powers to make up for the trade disputes brought about by the trade offenders' illegal activities.

To this end, the 201st and 301st chapter of the trade law and the 232nd chapter of the Trade Expansion Act (which mentioned that the president has the right to raise tariffs through parliament) may be used.

The details of the plan, especially the specific sections of the trade law, were never seen in Trump's other plans.

It can be seen that he is more interested in trade policy.

How firm is the position of the people.

In terms of his firmness, it is possible to use a policy which has not been widely discussed yet, but is likely to be mentioned in the future, that is, the weak dollar policy.

Trump's stand against TPP is known worldwide, while TPP was promoted by the Republican Party.

In the 2015 pass of TPP, Obama asked the Republicans to vote for it, so that 80% of Republican members voted for it, while 75% of the Democrats voted against it.

What's more, China's accession to the WTO is also the product of Republican policy.

Trump has always called this move "a mistake" and even after the election, "in the general direction, I will abolish the right to permanent normal trading in China".

It can be said that Trump has been doing things that are not consistent with the gestures of the Republican Party.

Is this his personal behavior or a change in the Republican position?

It may be difficult for people to link Republicans with protectionism, but in fact, before World War II, the Republican Party always had a tradition of trade protection.

In fact, the Republican founder, Abraham Lincoln, is a protectionist.

With the rise of China in recent years, the United States has lost the dominant position of the world trade system since World War II. Therefore, it is not impossible for the Republican Party to return to the position of trade protection before World War II.

The most obvious consequences of protectionist policies will be the re negotiation of trade terms and even tariff changes.

This may lead to the decline of the US dollar to offset the increase in import tax and the negative impact of the decline in US Commodity competitiveness.

Another point to note is that the dollar is now at a 15 year high.

Therefore, in the early days of Trump's administration, we may be able to see some clues about the weak dollar policy.

In the trade policy, the importance of foreign exchange policy can not be ignored, but at present it is less discussed.

In an interview in November 30, 2016, Steve Mnuchin, the incoming US Treasury Secretary, did not respond positively when asked whether he supported the strong dollar policy. Instead, he said, "I think we will focus on economic growth and create jobs. This is the highest priority at present."

As we all know, devaluation plays a significant role in improving the price competitiveness of domestic products.

Conversely, if the dollar appreciates, it will reduce the effect of Trump's trade policy to a certain extent.

Let's have another look.

Feasibility.

Before the United States adopted the weak dollar policy in the Nixon incident and the 1985 Plaza Accord, but because of the coordination and cooperation of trade partners and the monetary policy going along this direction, the feasibility of copying the same year's route is not high enough today.

On the contrary, the weak domestic currency policy adopted by emerging market countries in these years is more referential.

Although there are no matching trading partners or even monetary policy, the emerging market countries are able to weaken their currencies through capital controls, foreign exchange market intervention, and sovereign wealth funds buying foreign assets.

IMF's study of 1996 developed countries and 39 emerging market countries from 1996 to 2013 shows that intervention in the foreign exchange market has a greater impact on exchange rates than spreads.

Even Japan's former deputy Chancellor of the exchequer Ito showed that Japan, as a member of G7, earned $75 billion in 90s by intervening in the foreign exchange market by buying low and selling high USD/JPY.

Therefore, once the weak dollar policy is implemented, nothing can stop it from coming into force.

1 from the standpoint of Trump, protectionist policies will be the most likely to be put into action.

2 because of the rise of China and the change of world situation, the Republican Party may return to the position of trade protectionism before World War II.

3 trump will have many ways to implement trade protectionism policies, such as renegotiation of trade regulations or more vigorous import tariffs.

4 considering that the US dollar is at a 15 year high, the weak dollar policy may be taken into consideration.

5 unlike the Plaza Accord, this weak dollar policy may be intervened in the foreign exchange market. The national sovereignty fund is set up, or even a twitter.

There is a saying that

The decision to reduce the recall of US companies' overseas assets may cause large capital inflows, which will increase the demand for the US dollar and will have a negative effect on the weak dollar policy.

In 2005, for example, the capital inflow caused by this reason made the dollar strong.

However, it is important to note that since then, most of US companies have accumulated dollar assets, or even a large part of them will remain overseas for overseas investment.

According to Nomura Securities estimates, only 30% of foreign earnings earned by US businesses in the $3 trillion of overseas income may be foreign currency assets, and only 15% will be pferred back to the country.

That is to say, the waiver of overseas assets recall tax will not have much impact on the US dollar.

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