Dollar exchange rate - trade war inflation mitigation?
Coke is raising prices and blaming the trump tariffs for increases in its production materials, including aluminum and steel, as being the cause of the price jump. Other factors in the price increase include shipping and labor costs. Coke is not the only company raising prices. Other consumables seeing price increases are diapers, tissue, and toilet paper from Proctor & Gamble. If you are a consumer, you are well aware of the price increases affecting your wallet.
In the meantime, China’s currency this week fell to a value that hasn’t been seen in over a year. If China continues this approach, they could significantly reduce the impact of President Trump’s tariffs. For example, if the tariff on Chinese products is 10%, and China’s currency is devalued by 10%, the effective price is the same, and the tariff is basically eliminated. This approach would effectively zero out the impact to imported product prices and put a halt to their inflationary effect.
However, President Trump has tweeted his indignation and outrage against China’s currency manipulation, and threatened to increase tariffs from 10% to 25%. These actions and counter-actions could take the economy, and global trade implications, into unchartered waters. If tariffs continue to increase, what will be the next countermeasure that China will attempt? Will they target and harass US companies operating in China? Will they dump US treasuries, increasing the interest rate and US debt payments?
The other effect this trade war is having, is the impact on business decisions and plans for future investments. Imagine the thousands and thousands of business decisions that are made every day. If those decisions are delayed or changed, due to the uncertainty in the global trade environment – this could end up being the most costly and significant impact – a slowdown in investment and international commerce equivalent to a worldwide recession.