Those who hoped President Trump would tone down his protectionist rhetoric will be unnerved six weeks into his tenure. From his meeting with business CEOs, Trump has put trade “front and center.”
So far, all is going well for the president. Markets are inching higher, and inflationary forces have picked up. However, bringing back jobs and reducing the trade deficit will be a tougher task.
A Victim of His Own Success
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Trump’s election unleashed the “animal spirits” that have been absent post-financial crisis. On the surface, this is good for the economy. The US is currently the only major country raising interest rates and enjoying an uptick in inflation.
Trump’s proposed fiscal stimulus and structural reforms have added to the optimism. Given all of this, the US is now an attractive place for investors (relative to global markets). The huge inflows into US equity markets since the election are evidence of this.
But the influx of capital has created problems for Trump. The dollar’s rise has cheapened import prices while US exports are now costlier for foreign buyers. A strong currency has weighed on GDP growth in the past and will do so again.
These conditions could result in companies leaving the US rather than returning, as Trump has promised. If the dollar continues its ascent, layoffs in export-heavy industries could follow. That would be a major headache for Trump and will force him into action. To start, he said last week there will be a “massive border tax” on imports.
But a border tax may be just the beginning. If it fails to stem offshoring, it’s possible that capital controls could be enacted. As Trump was elected on an “America first” platform, the idea would likely gain public support.
If controls are introduced, how could they affect US citizens?
Although restrictions seem unlikely, Trump has already talked about curbing cross-border money flows from certain sources.
In 2016, Trump said he would look into tightening rules on wire transfer firms, requiring them to verify whether their clients were US residents. These comments were made in regard to blocking overseas remittances sent by illegals. These curbs may seem limited at first, but they could easily be expanded once launched.
The Fed and IMF have backed the use of capital controls in certain situations. Officially, the US has opposed them since Bretton Woods. But judging by President Trump’s actions, America is on a new path.
Trump could enact such measures under the guise of protecting jobs. The controls would limit the ability of citizens to move funds in and out of the country and could be subject to caps. The that US residents send overseas every year would also be watched closely.
Businesses could see restrictions imposed on their foreign transactions. This would severely disrupt supply chains, forcing many firms to pivot to US suppliers. As foreign suppliers are often cheaper, it could hurt anemic US corporate profits. (A side note: 85% of the US manufacturing jobs that were lost over the past decades was the result of technology, not offshoring.)
Controls would differ from those that restrict outflows, which are now in place in Greece and China. US controls would also have to cover inflows and might be similar to those seen in Chile in the 1990s.
If such controls become reality, it would set a dangerous precedent. The government would be empowered to make arbitrary rulings on whether certain transfers are “endangering US jobs.” It would politicize the economy… rewarding “patriotic” firms and punishing others.
With capital controls as a potential next step along Trump’s protectionist path, how can we protect ourselves?
One Step Ahead
In six weeks, Trump has signed twelve executive orders. If the trade deficit continues to widen, capital controls could be closer than we think. That means having all of your wealth in the US might not be a wise choice.
There are many ways you can legally place your money outside the US. The most liquid option is to open a foreign bank account. For Americans, though, opening a foreign account has become increasingly difficult in recent years. This is in response to laws like FATCA, which place onerous requirements on overseas banks that have US citizens as clients.