Unless US President Joe Biden lets another Democrat contest this year’s election, Republican candidate Donald Trump seems all but sure to win the White House. It’s not just opinion polls. Consider the contrast in optics: A visibly ageing Biden who looked stumped at a key debate versus a fist-pumping Trump who arose unshaken from the snick of an assassin’s bullet.
In the ‘home of the brave and land of the free,’ as the US styles itself, it’s clearly advantage Trump right now. His campaign to “Make America Great Again” has an economic aspect that the rest of us cannot ignore. Its global impact, after all, is likely to be far greater in magnitude than magnanimity.
Most strikingly, he wants a tariff of 10% on all imports and a duty of 60% on Chinese shipments. Plus, to boost American exports and shrink the US trade gap with other countries, Trump has said he wants to weaken the dollar, which would make US-made stuff cheaper in export markets.
This idea is less scandalous than his rejection of free trade, but also less feasible. So long as the American dollar remains the world’s chief reserve currency, weakening it may prove to be a mug’s game.
Nonetheless, what options would a Trump administration have? On paper, a sure-shot way to diminish a currency’s value is to debase it through oversupply. Ever since America unpegged its dollar from gold in 1971, it has had ample space for that. But then, with world trade conducted largely in dollars, global demand for the greenback has held up against great gluts of supply.
We saw this most vividly during the covid pandemic, when the US Federal Reserve opened a liquidity gusher and let its liabilities (and assets) bloat to nearly twice their size. Other central banks infused their economies with money too, but on a much smaller scale. Still, while the Fed’s action may have stoked US inflation, the dollar’s exchange value didn’t crumple.
But once the Fed started reversing its ultra-easy money policy, the greenback began to rise as investor funds from around the world flowed into American assets. In other words, the dollar’s supremacy and strength are two sides of the same coin. An alternate approach for Trump would be to go for a Plaza Accord 2.0.
In 1985, to achieve a better trade balance with its major partners (Japan and Germany, notably), Washington coaxed them to support their currencies. The hitch here is that in a world of free capital flows, trying to control a currency’s external value loosens one’s policy grip on what it’s worth at home, as local inflation gets harder to keep steady. Even so, allies are often ready to play ball.
In today’s context, though, the world’s big exporter China would probably refuse. Its record reveals the opposite: an effort to keep exports competitive by weakening its yuan in the wake of rising US barriers. Could Trump try to bully Beijing?
At most, he could push the US into tit-for-tat tactics by having its central bank buy yuan to counter China’s dollar purchases that peg the Chinese currency down. The Fed, though, has good reason not to abandon its dollar float and will probably resist the idea.
Should any of the above pan out, what would it imply for India? Although we run a trade surplus with the US, it causes no anxiety in Washington, and since we’re unlikely to come under pressure, we can expect an orderly depreciation of the rupee to survive a Trump presidency. Unless, of course, the US does something drastic—like a sovereign default. But then, that would be an odd way to make America great.