First is a reminder to the world that Trump continues to believe that tariffs work. Contrary to the popular narrative on Wall Street heading into the Thanksgiving holiday, Trump has not hit the pause button on tariffs as some sort of grand strategy to keep the economy humming before the election.
Second is Trump’s new rationale for his tariffs: He claims that the two South American nations are manipulating their currencies and deserve to be punished. That’s very different from what Trump said in 2018, when he first imposed tariffs on steel and aluminum imports, and it marks the latest unpredictable trade shock from the White House as business leaders are begging for more certainty.
“Brazil and Argentina have been presiding over a massive devaluation of their currencies. which is not good for our farmers,” Trump tweeted. “Therefore, effective immediately, I will restore the Tariffs on all Steel & Aluminum that is shipped into the U.S. from those countries.”
In announcing the new tariffs, Trump also called on the U.S. Federal Reserve to lower interest rates in a way that could weaken the U.S. dollar, pushing the central bank to take the type of action he has criticized other countries for doing.
Mere hours after Trump tweeted about the fresh tariffs, his commerce secretary, Wilbur Ross, warned that other nations could be next.
“They [Brazil] are not the only one where there are currency issues,” Ross said in an appearance on Fox Business.
Stocks fell as investors digested this latest twist with the Dow Jones industrial average losing 268 points. Trump initially said in March 2018 that he was putting tariffs on virtually all cheap foreign steel and aluminum coming into the U.S. market for “national security” reasons. He argued that the United States needed to keep domestic steel and aluminum production strong to build military equipment. There were a lot of objections to this rationale (especially from longtime U.S. allies such as Canada, which also faced tariffs for about a year before Trump pulled back).
While Canada and Europe balked at Trump’s metals tariffs, Brazil and Argentina caved. The two South American nations agreed to the Trump Administration’s demands to restrict how much steel and aluminum they sold the United States, through the use of a formal “quota.”
Now Trump is brushing aside national security and claiming this is all about a currency war.
“This is going to help confirm people’s beliefs that it is very, very difficult to trust President Trump to stick by a deal on trade,” said Phil Levy, an economist who worked on trade in the George W. Bush administration.
All of this is coming at a critical time. U.S. businesses have curtailed investments for the past two quarters, largely because business leaders say they are spooked by Trump’s unpredictable trade war. And U.S. manufacturing contracted in November for the fourth straight month, according to the latest Institute for Supply Management survey.
The tipping point, many chief executives say, was in late May when Trump threatened to impose tariffs on all imports from Mexico unless the Mexican government took dramatic steps to stem migration across the southern U.S. border. Suddenly tariffs were tied not just to economic security but to immigration.
Trump ultimately backed away from the tariffs after Mexican officials agreed to take “strong measures” at the border. But the threat drew an outcry from many (including GOP lawmakers), and some damage was already done, as chief executives went into wait-and-see mode. Many have sat on their cash instead of spending it.
Now Trump is showing a willingness to impose tariffs for yet another reason: currency moves, opening the door to more action, potentially against China.
Trump argues that other countries are intentionally weakening their currencies to make their goods cheaper on the world market, giving those nations a trading edge over U.S. companies. But many economists say that the U.S. dollar’s strength is a reflection of the fact that the economy is in a good place, and they point out that Trump is deviating from the precedent set by prior presidents to verbally support a strong dollar.
All eyes are on U.S.-China trade negotiations. Trump said that on Dec. 15, he would impose tariffs on even more Chinese imports, including cellphones, laptops, bike helmets and other popular products.
Trump has long railed against China for purposefully devaluing its currency and even promised to label China a “currency manipulator” as soon as he took office (something he eventually did in August 2019). Ross went out of his way on Fox Business to say China appeared to be doing better now. Still, the threat is hanging out there that other nations could be next.
Economically speaking, going from a quota on Brazilian steel to a tariff doesn’t change much. The United States will get a bit more revenue from the tariffs, but U.S. companies will probably have to eat that extra cost.
Instead, there’s a lot of confusion about why Trump is hitting Brazil and Argentina for devaluing their currencies. Argentina’s economy has been in trouble for years, and a new center-left president was just elected, another shake-up that has worried investors. Brazil’s economy has also been teetering on the edge of recession this year. As these countries have struggled, their currencies have naturally fallen in value, especially against the U.S. dollar, since the U.S. economy remains healthy.
“Currency Wars? Not really,” tweeted Nelson Barbosa, a former Brazilian finance minister. “Despite de careless statements of our Brazilian Finance Minister, the recent fluctuation in the BRL/USD exchange rate is market-driven . And the usual exchange-rate volatility in Latin America should not be an excuse for protectionism by the US.”
Monday wasn’t the first time Trump has hit a nation with higher tariffs over currency. Chad Bown, a fellow at the Peterson Institute for International Economics, pointed out that Trump increased tariffs on Turkey in August 2018 because the Turkish lira was sliding against the dollar.
But what’s different now is the scale. Brazil is the ninth-biggest economy in the world. Turkey is 19th. Similarly, Brazil is the 13th-largest U.S. trading partner in goods, according to the Office of the U.S. Trade Representative. Turkey is 32nd.
No one knows where any of this is going, but that’s the point. It’s another dose of uncertainty and a reminder that Trump is ready for a currency war on top of a trade war.