The failed North Korean missile launch and overall tensions between the US and North Korea are grabbing all of the headlines regarding Vice President Mike Pence’s trip to South Korea and Japan. But all the talk of missiles and nukes is burying the lead. It is Pence’s talk of renegotiating trade deals with South Korea and Japan that will have long term significance after the current tensions fade.
Since a new trade deal was signed with South Korea in 2012 the trade deficit between the two countries has ballooned from $11.6 billion in 2011 to $23.2 billion in 2016. The free trade agreement currently in place is extremely beneficial to South Korea’s top companies such as Samsung, Hyundai, and LG. Trump often used the example of having to purchase televisions for his properties and choosing South Korean companies as his supplier.
A two fold approach of taxing South Korean and Japanese imports while tearing down some of the regulations that stand in the way of US companies thriving in the Far East would stimulate the US economy.
The border adjusted tax plan is a portion of wide ranging tax reform that Trump campaigned on last year. However the likelihood of the plan passing on a broad scale with many countries is fading. Steve Cohn, Trump’s economic advisor and a rising star in the Trump administration, is against the plan. If the border adjusted tax can not make it through Congress, the Trump team has the option of working on trade agreements nation by nation. Pence’s trip could be the beginning of that strategy.
Meanwhile Treasury Secretary Mnuchin granted a rare interview to the Financial Times in which he covered a broad range of topics.
200 sanctions on Syria will soon be cleared and will be rolled out in the coming weeks according to Mnuchin. He also promised looming sanctions on both North Korea and Iran. He went on to say that he considers sanctions one of the most important aspects of his job. That offers a view into the foreign policy strategy of the Trump administration that we have not seen until now.
When speaking on the dollar Mnuchin hedged his words very carefully. He says that he believes that in the long run a strong dollar is good for not only the US but world economy because of its currency reserve status. But he said that Trump was not wrong in saying that a strong or over valued dollar is negative for the US economy in the short term because it hurts the US export market. Trump said recently, “…it is very, very hard to compete when you have a strong dollar and other countries are devaluing their currency.” He went on to add that he, “likes a low interest rate policy.”
The Mnuchin interview comes shortly after the Treasury department released a report stating that they are monitoring China, South Korea, Japan, Switzerland, Taiwan and Germany (as the largest economy in the Euro denominated EU) for potential currency manipulation.
The trifecta of Trump’s recent interview, Mnuchin’s interview and Pence’s Far East trip has the Trump team hoping that those countries will realize that allowing their currencies to appreciate against the US dollar is in their best interest. It is in their interest if it would quiet the talk of their country being on the list of countries included in the border adjusted tax plan.
Below is a long term view of dollar strength over the last 45 years.
The dollar spiked sharply after Trump’s election and it continued up until his inauguration. When Trump took office the dollar faded and has now returned to the level it was at before the election. The dollar’s fade has been mostly due to a rise in Asian currencies, particularly the Japanese Yen.
Experts warn that when trade imbalances are figured into the dollar’s true value, the dollar is currently overvalued at approximately 9%. As I began this article this could be a driving force behind Pence’s trip. We will be watching closely to see the how the fluid situation with trade deals and the dollar develop.