The dollar doesn’t have a fixed value—it goes up and down, relative to other currencies. And if Congress passes Ryan’s plan, most economists expect the value of the dollar to go up (for reasons just complicated enough to warrant skipping over here). This will make imports cheaper—cheap enough that the new tax doesn’t really matter.
“The way I think about it, the currency adjustment is paying the tax,” Pomerleau said.
“My view is that the exchange-rate adjustment will be relatively substantial and relatively quick,” Gale agreed.
At the same time, the stronger dollar makes the prospect of tax-free exports a bit less exciting. Sure, our Pennsylvania woodworker isn’t paying any taxes on his sales to Mexico—but since the dollar has appreciated in value against the peso, Mexican decorators can’t afford to buy as many tables. So the woodworker brings in less revenue.
In short, it’s a wash. To spur domestic manufacturing growth, Trump wants to put pressure on imports. But because of the floating U.S. dollar, Paul Ryan’s plan probably won’t give it to him. He’s barking up the wrong tree.
Not that economists particularly care. “It’s possible to support a good policy for a bad reason,” Pomerleau said.
But it might be a bad policy
Not everyone is convinced the Ryan proposal will work as planned. Right now, the retail industry is in a state of hyperventilation; a number of larger importers, including Walmart and Toyota, have joined a coalition opposing the plan. Many fear the promised currency re-evaluation might arrive too slowly, or never come at all, leaving importers with a crushing tax bill.
One man who holds this belief is Rick Helfenbein, the president and CEO of the American Apparel & Footwear Association. Helfenbein help create Le Tigre; before joining AAFA, he headed the U.S. operations of a major Asian clothing manufacturer. In all his years, he’s never seen the strength of the U.S. dollar as having much of an impact on his bottom line, largely because his supply chain always accepted American currency, and rarely dealt with local fiat.
“We buy in dollars, we live in dollars, we sleep in dollars,” he said. “I think in theory, [the economists] probably get it right. But in practicality, they’re probably getting it wrong. If you phase this in over a 10- or 20-year period, maybe the currencies would have time to adjust. But the way a Trump tweet works,” and here he laughs, “they’re going to want to do this tomorrow.”
So if the American dollar doesn’t bulk up as expected, what happens? Exporters might be happy—they’ll be able to move a lot of product with no taxes. But importers will take a bath, and America imports a lot of things. The first to be hit will be clothing brands—97 percent of all clothes and 98 percent of shoes are shipped in from abroad. Faced with a big tax bill, they’ll increase prices to compensate, which will bubble up to the retailers. Customers will buy fewer clothes, and maybe some stores will close, taking their jobs with them.