By Harold James PRINCETON – While US President Donald Trump has left no doubt about his love of tariffs, the world is still waiting to see precisely what he will do. He has named China, Canada, and Mexico as his first targets, but it remains to be seen whether he wants a grand slam, or more conditional measures linked to other policy issues (such as acquiring TikTok). For now, the only certainty is that his administration will use tariffs to extract concessions where it can.
The issue is complicated, though, because tariffs interact closely with other components of economic policy such as the exchange rate. In theory, higher tariffs should reduce import demand and push up the exchange rate, ultimately making foreign goods cheaper again. This is why Trump previously claimed that tariffs do not actually cost Americans anything, on the grounds that it is America’s trade partners who pay.
But trade and exchange-rate policies are generally handled by different agencies – the Departments of Commerce and the Treasury, respectively – and conflict has frequently been a feature of their interactions. In the 1930s, the world ended up deeply divided because trade negotiators claimed that they could do nothing until exchange rates were fixed, while monetary officials argued that no exchange-rate settlement was possible until there had been a general opening of trade. In the event, protectionism escalated.
Complicating matters further, another mechanism has since come to the fore: .
