The proposed border tax adjustment will act like an import tariff tax and has an interesting anomaly that it may act to increase the value of the dollar (reducing the cost of the imported goods) thus negating the cost to consumers of the tax.
This unverified anomaly reminds me of the “print and pay” anomaly where G7 countries can issue huge amounts of sovereign debt denominated in their own currency and simply print up more to make the minimum payment and thus never be at risk of defaulting. An additional twist on G7 debt or high quality G20 sovereign debt is that the worse the economy gets the greater the degree of “crowding in” (instead of “crowding out”) occurs where savers seeking safety have no choice but to engage in a bidding war to buy sovereign debt as the only safe place to store assets. Thus counterintuitively yields go down for the strongest sovereigns even though their implicit and explicit spending obligations rise while tax revenues shrink.
The phenomenon of foreign currency rates going down against the dollar in response to tariffs is logical because EM countries that were too aggressive in managing export driven programs are fundamentally shaky countries that have a hidden contingent risk of failure that became exposed when Developed countries resisted the exports of EM countries. EM exporting countries who ramped up their economy through unsound issuance of excessive debt are at risk both because of excess debt and because they relied on selling exported goods to Developed countries that should have resisted buying so many imports.
China already set a precedent in 1994 of devaluing by 50% against the dollar. Assuming they need to devalue by 25% just to reach purchasing power parity and another 25% to offset the recessionary effect of trade barriers then they will have to repeat the 1994 devaluation.
Ultimately the collective economic power of EM countries in the aggregate some of whom have wages of $1 to $5 an hour with no benefits, will be more powerful than Developed countries with steep tariffs because average wages are $27 an hour in the U.S. and then benefits are at least a third more, so a U.S. worker costs $36 an hour, roughly ten times what an EM worker costs. The strategy of multinational companies is to keep moving factories to low wage areas, so as China becomes more expensive factories will move to Bangladesh or Ethiopia, etc. as this happens these smaller countries, because they don’t use China’s policy of extreme state-sponsored excessive lending, will have less robust growth than China and greater risk of experiencing insufficient bank bailouts during crashes. These smaller countries lack the gravitas of a giant sovereign with a print and pay currency. They are dependent on dollar based loans, trading contracts, etc. so as these countries become weaker the dollar becomes stronger, making EM countries even cheaper and less able to raise prices or to engage in massive fiscal stimulation to get out of a recession.
Ironically if China has to subsidize a deeply discounted price to overcome the cost of tariffs then to pay for that China will have to tax their rich citizens who currently send their wealth abroad. This could end up being somewhat like Trump saying he will make Mexico pay for the wall, except in this case China would inadvertently pay for the trade barrier. They would basically tax their rich and use the funds to create make-work jobs for their workers that export goods at a loss. This will remove a source of financial bubbles from the Developed part of the global economy and act like a global tax to reduce consumption. Either China’s citizens will pay more taxes, indirectly, or U.S. citizens will, and in either case this removes purchasing power from the global private sector, which acts to tilt both consumer goods and investments towards recession and disinflation.
Tariffs, like Quantitative Easing, are a placebo that doesn’t work and which has deflationary side effects. They both remove either purchasing power or income from the private sector making consumers feel poorer and thus creating a lower level of consumer confidence, which in turn results in less business capital formation, less new jobs, and less consumption.
Presumably the new administration will experiment with trade barriers and this will result in more volatility and in less confidence in the markets leading to a less than positive experience for stocks and real estate. Investors need independent financial advice about the risks of tariff increases leading to deflation, recession and stock market crashes.