Here’s a letter to a new correspondent:
Mr. G__:
Thanks for your e-mail asking my opinion of Trump’s threat, issued yesterday, to impose 100 percent tariffs on goods that Americans import from countries that abandon the dollar as a global reserve currency.
Forget that these tariffs would inflict huge costs on all American households by raising the prices of consumer goods, and on many American businesses by raising the prices of imported raw materials, tools, and intermediate goods used as inputs in production here in the United States.
Forget that other governments would retaliate, further harming the U.S. economy and throwing the global economy into turmoil.
Forget that the very threat to take such a reckless action itself makes the dollar less attractive for foreigners to hold and use to conduct international trade – that is, makes the dollar less attractive to use as a global reserve currency.
Focus instead on the fact that Trump’s clueless outburst confirms his ignorance of trade. Here’s a man who incessantly complains about the alleged harm that Americans suffer from U.S. trade deficits, yet he’s unaware that a major reason why America regularly runs trade deficits is that the dollar is a global reserve currency. Insofar as foreigners hold dollars or use them to conduct business with each other, foreigners do not spend these dollars on American exports. In short, foreigners’ use of the dollar as a reserve currency is a major cause of U.S. trade deficits.
Informed people know what Trump doesn’t, namely, that these trade deficits are both a sign and a source of the U.S. economy’s relative strength. The fact that Trump simultaneously demands an end to U.S. trade deficits and that foreigners continue to use the dollar as a reserve currency only testifies to his deep economic ignorance.
Sincerely,
Donald J. Boudreaux
Professor of Economics
and
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA 22030
