A question for Krugman (and everyone who thinks tariffs are $ positive).

I just read Paul Krugman’s latest, and I posted this comment there so I figured I may as well post it here as well. It’s been a long-standing complaint of mine so here goes. And to new subscribers, as to why I haven’t been posting more—I have a new job, as I explain here. And the argument I make in this question can also be found here.

“An excellent piece, though I do have a question about the widely prevalent assumption that the USD will appreciate as a result of tariffs. This has indeed happened on this occasion but I can think of other occasions when it has not. For example, the imposition of steel tariffs by the Bush administration in March 2002 was a precursor to a multiyear stretch of USD weakness. Similarly, markets reacted negatively to the imposition of semiconductor tariffs on Japan in 1987, as recounted by Steve Solomon in his magisterial The Confidence Game. Indeed, much of 1987 seems to have been about the US trying to juggle market concerns over twin deficits, dollar weakness, and the periodic temptation towards heterodox trade policy, all of which would lead to (an ineffective) Louvre Accord and eventually the October crash. And this market reaction would seem to make sense. To me it seems as though tariffs can affect the exchange rate through at least three channels -- a) a reduction of the external financing requirement as imports fall, which would be currency positive b) a possible reaction to a reduction in external demand in exporting countries that takes the form of either lower interest rates and/or an acceptance/push towards weakening their currencies. But on the other side is the question of capital flows into the country imposing the tariffs. If the tariffs are seen as reducing the efficiency of capital allocation in the importing country; signaling a heightened willingness to resort to import substitution and retreat from the technological frontier; favoring less competitive sectors over more competitive sectors etc., all of these factors might reduce the willingness to send money to such a country, even if a lower external financing requirement would suggest greater m/t sustainability. The capital/financial account response really seems to be another key piece of the puzzle here.”

Voodoo Trade Policy Comes to America