We use a range of cookies to give you the best possible browsing experience. By continuing to use this website, you agree to our use of cookies.
You can learn more about our cookie policy here, or by following the link at the bottom of any page on our site.

Free Trading Guides
EUR/USD
Bullish
Oil - US Crude
Mixed
Wall Street
Bullish
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
Gold
Bearish
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
GBP/USD
Mixed
USD/JPY
Bullish
Low
High
of clients are net long.
of clients are net short.
Long Short

Note: Low and High figures are for the trading day.

Data provided by
More View more
Real Time News
  • Major investment bank models have touted USD selling, given the outperformance in US equities relative to its counterparts over the past month. How is this likely to impact the month-end rebalancing? Find out from @JMcQueenFX here:https://t.co/MtNrHmXZpD https://t.co/YvoHlUsdVr
  • U.S. Market Analyst at https://t.co/JsVsSmefgR, Shain Vernier covers - ✔️ Safe haven assets in volatile markets ✔️ Central banks and governments ✔️ How will commodities trade in a recession Only on Trading Global Markets Decoded #podcast. Tune in here: https://t.co/1UmEzEbwiy https://t.co/X15k6b4ZyB
  • The month of May saw equities rise across the board. The #Dow Jones and #DAX 30 will look to hold above nearby support while the #Nasdaq 100 may look to attack all-time highs. Get your #equities market update from @PeterHanksFX here: https://t.co/dQxkG68R0I https://t.co/cgfcOs14qG
  • There is a dramatic departure between yield curve pricing for a recession and other measures of near-term growth; the Q2’20 Atlanta Fed GDPNow is extremely alarming.Get your market update from @CVecchioFX here: https://t.co/eMd3T8EwDO https://t.co/56oUP6we9U
  • The #DAX has now closed the gap from the beginning of March with the index breaking above 61.8% fib at 11592. Get your DAX market update from @JMcQueenFX here: https://t.co/wr67nkxc8z https://t.co/CkxPZn1v3t
  • Emerging market currencies haven’t been treated equally by the effects of global contagion, even if most have suffered to some degree. However withdrawal of investment flows could hit them all. Get your market update from @DavidCottleFX here:https://t.co/QzNoNYgMgP https://t.co/9CV6iZt40j
  • My weekend trading video: 'S&P 500 Rises on Trump China Presser, #NFPs and Rate Decisions Ahead' https://www.dailyfx.com/forex/video/daily_news_report/2020/05/30/SP-500-Rises-on-Trump-China-Presser-NFPs-and-Rate-Decisions-Ahead.html?ref-author=Kicklighter&QPID=917719&CHID=9 https://t.co/ZvoGoibzj1
  • Hopes are high for deeper European economic integration as the continent battles back from the coronavirus slowdowns – but will it hold? What impact can this have on #Euro? Find out from @JStanleyFX here: https://t.co/b9ZWRd4cTr https://t.co/gngm5tKqjz
  • The US Dollar could rise against #ASEAN currencies such as the Singapore Dollar as US-China tensions seem to escalate. The Indian Rupee is also looking ahead of local 1Q GDP data.Get your market update from @ddubrovskyFX here:https://t.co/LkEFJViPWY https://t.co/iL7xlHLBiF
  • #Gold has a short-term bullish set-up that may play nicely with USD weakening. The longer and shorter-term path of least resistance remains higher. Get your $XAUUSD technical analysis from @PaulRobinsonFX here:https://t.co/6gt3F9LuGP https://t.co/B4MVrg8f6i
The Impact of Tariffs and Trade Wars on the US Economy and the Dollar

The Impact of Tariffs and Trade Wars on the US Economy and the Dollar

2018-03-29 15:30:00
Christopher Vecchio, CFA, Senior Strategist
Share:

Talking Points:

- US President Trump threw a wrench into markets yesterday by announcing steep tariffs on imported steel and aluminum, following up his earlier moves on solar panels and dishwashers.

- Needless to say, the US Dollar – as well as other USD-denominated assets – did not take the news kindly.

- With volatility sticking around, it's a good time to review risk management principles derived from the Traits of Successful Traders series.

Looking to learn more about how fiscal policy can impact FX markets? Check out the DailyFX Trading Guides.

This article was originally published on Friday, March 2, 2018.

US President Donald Trump shocked global markets in March by announcing his intention to introduce a 25% tariff on imported steel and a 10% tariff on imported aluminum. The initial response? The US Dollar was slammed across the board alongside US equity markets amid fears of trade wars emerging. It’s important for traders to understand the economic significance of tariffs and how they impact economies.

Price Chart 1: DXY Index 5-minute Timeframe (March 1 to 2, 2018)

The Impact of Tariffs and Trade Wars on the US Economy and the Dollar

To no surprise, US steel and aluminum industry insiders are a fan of the 25% and 10% tariffs that US , respectively. As is often the case with protectionist tariffs, prices for goods using steel and aluminum will rise for the entire economy while these insiders will capture the surplus. In this piece, we'll go in some historical examples of tariffs and their ensuing impacts.

Generally speaking, tariffs are “good in theory,” but “terrible in practice.” The theory is, “protect domestic industries,” but in practice, it means “enriching a small segment at the expense of the broader economy.” Adam Smith espoused this point in A Wealth of Nations, John Meynard Keynes in The General Theory of Unemployment, and empirical data collected over the past 400 years suggests the same conclusion…but I digress.

Protectionist Tariffs Lead to Bias, Artifice, and Corruption

There are three main takeaways why protectionism via tariffs/limiting free trade is bad:

1) Protectionism always ends up with a bias because it serves to protect “domestic producers in competition with foreign producers.” This means protectionist policies like a tariff favor industries in competition with foreign manufacturers over those that are not.

For example, tariffs on imported manufactured goods might be good for domestic US manufacturers, but they’ll be bad for anyone else, particularly US agriculture or US service jobs who are not in competition with foreign producers.

2) Protectionism, by its nature, leads to political artifice. Only those in preferred industries – with their goods protected – benefit from tariffs (profit margins are kept intact or boosted), but the costs (retaliatory tariffs from foreign governments or lack of access to cheaper, substitute goods) are shared by society. This makes it a useful tool for politicians to secure political support from say, disaffected workers who have seen their jobs move abroad for cheaper labor.

For instance, if the government slaps a tariff on imported steel, the US steel industry will notice the benefit right away while the rest of the country will perceive that they are paying more for any goods with steel in the industrial process. All of the additional surplus created is captured by the producer while the consumer foots the bill. This is bad policy on its own, but it gets substantially worse when unprotected industries plead with Congress for similar favor.

Graph 1: The Economic Effects of Tariffs (Courtesy of ThisMatter.com)

The Impact of Tariffs and Trade Wars on the US Economy and the Dollar

3) Protectionism leads directly to political corruption, as politicians become pressured to start protecting every industry. Over time, members of Congress are more or less bribed by corporate executives and titans of industry to keep the tariffs in place – they protect profit margins, after all.

Two Historical Examples of Tariffs Gone Wrong

The Tariff of Abominations of 1828 was enacted to protect Northern factories from foreign competition, but mainly, to promote US industries after the War of 1812. While this helped the nascent industrial processes, it led to market incongruities for the Southern agricultural economy. The impact on the South was so severe that it (along with another tariff in 1832) led to the 1832 Nullification Crisis in South Carolina. As history tells us, the theory that a state can threaten to nullify federal law proved to be a significant development: Southern states (starting with South Carolina) justified seceding from the Union in 1861 on such grounds.

The Smoot-Hawley Act of 1930 was a precursor to World War II, just as the Tariff of Abominations of 1828 was a precursor to the US Civil War. This was the last time that America embraced a protectionist policy, under President Herbert Hoover, levying taxes of up to 50% on imported goods. It was widely considered to be a blundering mistake that crippled global economic activity and helped accelerate the decline in the Great Depression.

The global trade freeze only ended when Congress passed the Reciprocal Trade Act of 1934, which gave the President, then FDR, the power to negotiate bilateral trade deals with other countries without Congressional approval. However, by that time that global economy had been broken for long enough to give rise to ethnic-nationalist populism in Europe.

The George W. Bush Steel Tariff of 2002

While these may be the most two prominent historical examples of trade tariffs that are 'good in theory' but 'bad in practice,' there is a more recent example in history that is a useful guide for where we are today: the 2002 steel tariff imposed by the George W. Bush administration (the EU was in existence, and China was already in the WTO).

A study on the 2002 steel tariff showed net-negative consequences for US economy, overall. You can read the report in full here, but these are the highlights:

- 200,000 Americans lost their jobs to higher steel prices during 2002. These lost jobs represent approximately $4 billion in lost wages from February to November 2002.

- More American workers lost their jobs in 2002 to higher steel prices than the total number employed by the U.S. steel industry itself (187,500 Americans were employed by U.S. steel producers in December 2002).

- One out of four (50,000) of these job losses occurred in the metal manufacturing, machinery and equipment and transportation equipment and parts sectors.

- Every U.S. state experienced employment losses from higher steel costs.

- The analysis shows that American steel consumers have borne heavy costs from higher steel prices caused by shortages, tariffs and trade remedy duties, among other factors.

How did the US Dollar fare during this time?

Price Chart 2: DXY Index Weekly Timeframe (2002 through 2005)

The Impact of Tariffs and Trade Wars on the US Economy and the Dollar

The answer: not well. And while the 2002 steel tariff was one of many factors influencing markets at that time – including the structural decline in long-term US Treasury yields – it’s hard to dismiss their sway on the perception of the direction the US economy was moving in.

Earlier today, US President Trump tweeted that “trade wars are good, and easy to win.” If this is the mindset of one of the policymakers with his hands on the levers of the US economy, traders should fully expect more tariffs to come down the pipeline – which means more volatility and tough times ahead for the US Dollar, US stocks, and US Treasuries.

Read more: Central Bank Weekly: Fed Rate Hike Odds Increase; BOC, BOE May Odds Drop

FX TRADING RESOURCES

Whether you are a new or experienced trader, DailyFX has multiple resources available to help you: an indicator for monitoring trader sentiment; quarterly trading forecasts; analytical and educational webinars held daily; trading guides to help you improve trading performance, and even one for those who are new to FX trading.

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

DISCLOSURES

News & Analysis at your fingertips.