Greatest threat to Trump’s dollar is Trump himself

We’re asked to use the term “scrambling” sparingly at the FT, as it suggests a degree of physical panic not always appropriate to the modest bureaucratic and corporate manoeuvres we mainly write about. But Canadian Prime Minister Justin Trudeau definitely scrambled to dine with Donald Trump at Mar-a-Lago on Friday night to plead for tariff mercy. He got a statement of positive vibes, into which we should read nothing until the president-elect acts, or until he definitely doesn’t. Today’s newsletter is on Trump’s broadside on the fictional challenge from a Brics currency, and also on the effect of his tariff threats on the furniture giant Ikea. Charted Waters is on the EU’s use of trade defence instruments. So here’s a falsifiable prediction I’d like you to make: will Trump have imposed any new tariffs on Canada by the end of January, 11 days after he takes office? A simple yes-no to [email protected].

Currency claptrap

The cry “Thar she blows!” went up on Saturday as Donald Trump surfaced with another explosive threat, this time against the Brics countries for their plans to create a currency to replace the dollar. Just two tiny issues with this gibberish. One, the Brics nations do not in fact have an alternative to the dollar. Two, they’re more likely to look for one in earnest if Trump ramps up using the dollar to coerce them.

The Brics, and particularly Russia, have a general growling resentment about the US’s control over the global payments and bank funding systems, which enables it to impose financial sanctions beyond America’s borders. They have done a bit of bilateral trading in local currencies to try to avoid said sanctions. But there are no serious plans beyond some hilariously quixotic briefing, including an idea apparently out of Moscow about a currency backed by gold which goes beyond straightforward goldbug fan fiction and is essentially just howling at the moon.

If they did want to challenge the dollar, the logical way would be to put forward one of their own currencies as a rival, but the only one of remotely plausible size is the Chinese renminbi, and no one’s about to adopt a global currency which is protected by capital controls.

OK, so enough shooting fish in a barrel. What conclusions do we draw from this? One, it underlines the failure of emerging markets to organise themselves into a coherent geoeconomic force, certainly in the financial system. (Chinese power in trade and technology, by the way, is a very different issue, which I’ll get to later this week.)

Second, as I’ve said before, Trump hasn’t decided whether he wants a dollar that dominates the global financial system or (as vice-president-elect JD Vance does) a weak dollar that benefits US exports. It is of course possible to have both, as Trade Secrets favourite Karthik Sankaran has consistently and I think correctly argued, but this level of sophistication is not where Trump or Vance are at.

So Trump is again proving my argument that he has prejudices, not a plan. Having said that, nothing is going to provide an incentive to countries finding other options to the dollar quite as much as Trump weaponising it yet further. Imposing sanctions on Iran and Russia is one thing. If Trump starts trying to cut China out of the dollar system the search for an alternative will gain urgency.

Flat-pack fretting

Of all the examples of the Trump tariff challenges so far, this one last week caught my eye. Ingka Group, the Ikea franchisee that runs 90 per cent of the furniture giant’s stores, announced a fall in earnings and said its performance would be threatened further by Trump’s tariff war.

When I spoke in September to Jon Abrahamsson Ring, the chief executive of Inter Ikea, which owns the brand and designs the products, he was clear that the American market was particularly vulnerable to trade conflict and transport interruptions.

Unlike a lot of consumer goods companies, Ikea doesn’t do a lot of labour cost arbitrage, that is producing in cheaper Asian countries and selling globally. Europe makes up 70 per cent of sales, and 70 per cent of that is produced in Europe. Heavy use of automation offsets high European labour costs. (Hence production was less affected by Covid-19 than you might have imagined: the main problems were in transport and particularly in opening the stores.)

Meanwhile, its Asian stores are similarly mainly supplied from Asia. But as Ring told me: “The Americas is the one place we need to increase regional/local production. At the moment only 10 per cent is produced in the region.”

I asked him about the threat of Trump tariffs. His answer: “We do monitor the possible impact of transatlantic trade conflict, but in reality we would be doing this anyway.”

The thing is, though, which risk exactly are you mitigating? If you’re sourcing locally because of the threat of interruptions to transatlantic or transpacific trade, then you can treat all of the Americas as a single production area and market. Buy your wood in Canada, they’ve got lots of it.

But even before Trump, the US earlier this year escalated a long-running trade dispute by nearly doubling tariffs on imports of so-called softwood lumber, challenging its long dominance in the US market. And with Trump threatening Canada with tariffs it would be bold to assume you can treat North America as a single market as you might the EU.

Charted waters

Call the EU protectionist if you like, but when it comes to trade defence (or trade remedies as the US would call it) including antidumping and antisubsidy duties, it’s actually quite a light user.

Trade links

In more depressing death-of-multilateralism news, talks have failed on a treaty to reduce plastic use. There’s still a great future in them evidently.

The FT looks at how exposed the US car industry is to the Trump tariffs.

Speaking of cars, the Chinese car company BYD is thinking again about the wisdom of building an EV plant in Mexico given Trump’s threats.

EU solidarity and the hell with it, Part I: Poland joins France in opposing the EU-Mercosur deal, reducing the chances of an emblematic victory for the forces of rule-based trade.

EU solidarity and the hell with it, Part II: like Justin Trudeau, the Dutch government is trying to get Trump’s ear on trade before he takes office.

There’s some palace politics stuff kicking around about why Trump didn’t appoint Robert Lighthizer to his administration, which I’d greet with the usual shrug.

Trade Secrets is edited by Jonathan Moules