David Dollar said that the issue was coming from Congressional Republicans, particularly those in the House of Representatives, who are looking at a corporate tax reform.
If the Republicans in Congress manage to pass Trump’s controversial plan, this would possibly be the largest trade shakeup of the past century.
“Suppose the US imposes a 20 percent tax. In theory, the US dollar should appreciate and it won’t have as much effect on trade as many people think. But it’s hard to be sanguine about that because a 20 percent appreciation of the dollar would have a huge effect on asset prices. Many poor countries, which borrow in dollars would start transferring wealth from Americans to foreigners,” Dollar observed.
He described Trump’s planned tax reform as “hugely controversial” and said that it would hardly be passed by Congress.
There has been a lot of talk in mass media that the Trump Administration is now taking a softer approach to dealing with China.
“During his campaign Trump called China ‘a currency manipulator from day one.’ He is no longer saying that. He also spoke about a 45 percent import tariffing of Chinese goods, but he didn’t do that. And still, the proposed tax reform is really a big deal and it is something that countries like China would feel pretty unhappy with,” David Dollar said.
He added that the idea [of raising the corporate tax] against the practice of currency manipulation and price dumping, mainly by China, has been around for quite some time now and was essentially proposed by the Democratic Party.
When asked if China was prepared to respond to this, Dollar said that he thought Beijing was considering different levels of response.
“Each time the US takes some protectionist measures, the Chinese retaliate proportionally. So if the US does a trade thing, China does the same.”
He said that China’s response could vary from modest, like for example, it could stop buying soy beans from the US and switch to Brazil, to big-time, like slashing the import of US motor vehicles, aircraft, machinery, etc.
“China is a big player in the world and has a lot of tools to retaliate against the US,” said.
According to experts, the case of the proposed corporate tax reform, which is likely to be brought before the WTO, could potentially become one of the biggest trade disputes of the century. The reports about a mounting lawsuit come after Chinese regulators began examining President Trump’s possible economic protectionism measures.
Meanwhile the White House considers a new way to discourage China from undervaluing the yuan. Under the new plan the US Secretary of Commerce Wilbur Ross will be able to designate currency manipulation as an unfair subsidy.
The new law would diplomatically refer to any country employing this practice, so China would not be singled out as was proposed before.
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