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Navigating America’s Economic-Policy Shocks

NEW YORK – With a series of tax and trade moves being considered in the United States this year, emerging-market economies are likely to face devaluation pressure and volatility.

Three sources of US-fueled economic uncertainty, in particular, will rattle emerging markets in 2017.

The first is a border adjustment tax that would give tax breaks to US exporters, but impose a levy – or, equivalently, disallow deductions – on imports to the US. Both President Donald Trump and the Republican-controlled US Congress have said they favor the scheme, which has a fair chance of being enacted. Such a tax, or even the anticipation of its adoption, could drive up the US dollar’s exchange rate (which, ironically, would offset, at least partly, the improvement in the US trade imbalance for which the Trump administration may be hoping).

The second source of uncertainty is the possibility of more aggressive action on Chinese exports to the US. The Trump administration has said many times that it will confront China over what it considers unfair trade practices. Trump has openly mused about imposing a 45% tariff on Chinese imports. The introduction of anything close to that would generate downward pressure on the renminbi, given the resulting reduction in demand for Chinese exports.