The recent news that President-elect Donald Trump may be planning a more limited scope of tariffs has caused the value of the US dollar to drop. This reaction is expected to occur again as news breaks about the specifics of the tariffs.
When considering global trade, it’s essential to understand the concept of the trade balance, which accounts for exports and imports through mathematical calculations. According to Kris Mitchener from Santa Clara University, “the difference between domestic savings and domestic investment determines the trade balance.”
Tariffs can impact the currency. When a tariff is imposed on imported goods, such as Chinese products in the US, it causes the dollar price of those goods to rise. However, this triggers an adjustment in the dollar’s value relative to the Chinese RMB (Renminbi). The price of the dollar adjusts quickly to signal changes in tariffs.
Mitchener explains that a higher tariff, like one on China, would cause the RMB to appear cheaper in US dollar terms, leading to a stronger dollar. This, in turn, can benefit US consumers by reducing import prices. However, it’s detrimental for export sectors, as it makes imports more expensive and reduces exports.
According to Olivier Jeanne from Johns Hopkins University, a stronger dollar is beneficial for US tourists but hurts industries that rely on exporting goods. Colin Ward from the University of Alberta notes that other countries may need more of their currency to buy US products, leading to decreased exports and a worsening trade deficit.
In summary, while tariffs can benefit some aspects of the economy, such as reducing import prices, they ultimately harm sectors that export goods and worsen the overall trade deficit.
Source: https://www.marketplace.org/2025/01/06/how-import-tariffs-affect-the-value-of-the-dollar