Trade War Hurts The U.S. Dollar
A trade war will cause a decline in global trade and put into question the US’ ability to find sufficient demand to fund their current account deficit. In the 1930s, the US imposed huge trade tariffs to protect domestic farmers from the overproduction in Europe following WWI. President Hoover tried to help the struggling US farming industry by passing the Smoot-Hawley tariffs on agricultural products. Unfortunately, things quickly got out of control in Congress as politicians tried to out do each other by expanding the size and scope of the tariffs. The tariffs provoked a storm of retaliatory measures, (similar to what is happening today) causing a 66% decline in world trading activity between 1929 through 1934. If history repeats itself and there is once again a pronounced decline in foreign demand for US goods, we expect the US current account deficit to widen as US exports decline and imports remain stable.
And, once again, the Europeans are being so naughty! See this:
Europe - Europe has warned that they will impose their own tariffs on December 15th if the US fails to lift the steel tariffs. To show their commitment at pressuring the US, Europe has chosen to impose duties on goods from states that will be very important to President Bush in the 2004 Presidential election. Specifically, the tariffs will be on products that include citrus and rice, which come from Florida, California, Louisiana and Arkansas – all of which are swing states. So the President faces a tough decision, if he lifts the tariffs, he risks negating his pledge to revive the steel industry, but if he keeps the tariffs intact, he risks hurting his electoral votes in 2004.