An Unintended Consequence

Throughout his Presidential campaign, candidate Donald Trump referred to the North American Free Trade Agreement (NAFTA) as “the worst trade deal ever” for the United States. He vowed to eliminate his nation’s trade deficit with its neighbor to the south.

Last week, though, the U.S. Commerce Department announced that the trade deficit between Mexico and the world’s largest economy had soared to its largest imbalance in almost a decade. And some economists believe that the worsening imbalance may be attributable, at least in part, to the verbal statements of one man:

President Trump himself.

How is this possible? Well, the President’s aggressive posture is believed to have generated fears of a trade war between the two NAFTA countries. Such a war would significantly reduce Mexico’s attractiveness as a place to do business within the global economy.

And the global financial markets sell any currency whenever they expect future events to reduce the allure of operating in its country. Trump’s tough talk, unsurprisingly, has helped drive down the value of the Mexican peso against the American dollar since he began running for office.

Nevertheless, when a nation’s currency declines in value, it becomes a less expensive location in which to manufacture products. That’s why a place like Bangladesh, which only ranks 106th among 138 countries in overall global competitiveness, continues to produce billions of dollars of ready-made garments annually for numerous global retailers.

Thus, when the President of the United States criticizes Mexico and drives down the value of its peso, he helps that nation become more cost competitive to firms around the world.

It’s an unintended consequence that illustrates the complex and intertwined nature of our global economy. As President Trump attempts to rebuild his nation’s manufacturing base, he’ll need to avoid driving down the value of his competitors’ currencies in order to achieve his goal.