US tariffs add risk premium to dollar assets: Maurice Obstfeld

WASHINGTON, D.C. – The US tariff increases are adding risk premiums to dollar-denominated assets, undermining the dollar’s role as a global safe-haven and liquidity asset, said Maurice Obstfeld, a professor emeritus of economics at the University of California, Berkeley.

The tariff hikes, announced in March and paused for 90 days, are also unlikely to resolve the fiscal deficits of the world’s largest economy and may instead prompt other countries to decouple their trade and financial systems from the US, he warned.

“If there's a lot of disruption to the dollar status, if people stop trusting the dollar and if they stop trusting the US as a responsible custodian of global economic stability, those advantages to the US go away,” he said in a recent interview with The Korea Economic Daily.

RETURN TO NORMALCY?

Obstfeld, a senior fellow of the Peterson Institute for International Economics, cautioned that the US would not be able to restore the trust it once enjoyed in the global trading system in just a few years.

“We're in the middle of a very turbulent period, and it's impossible to say when normalcy will return, if it will ever return,” he said 

RESPONSE TO STEPHEN MIRAN'S COMMENTS

The former chief economist of the International Monetary Fund rebuffed recent remarks by Stephen Miran, chairman of President Trump’s Council of Economic Advisers.

In a speech at a Hudson Institute event on April 7, Miran argued that China benefits substantially from international security and financial systems largely financed by the US, positioning the US as a victim within the current global economic structure. 

The dollar’s role as a global reserve asset has made US-made products more expensive compared to Chinese and other imports, contributing to trade deficits and weakening the US manufacturing sector, ultimately harming many working-class families, Miran argued.

However, Obstfeld noted that the US remains a beneficiary of the current trade system and continues to play a crucial role globally as the provider of the reserve currency, adding: "The global role of the dollar is an immense advantage for the US."

The professor also emphasized that there is no direct connection between the US trade deficit and the US supply of dollars to the rest of the world.

“The most obvious way and the most beneficial way to reduce the trade deficit is to narrow the federal government's fiscal deficit,” he said.

RECOVERY OF US MANUFACTURING?

Obstfeld also warns that tariff hikes will not reinvigorate the US manufacturing industry.

Even after manufacturing companies are reshored to the world's largest economy, they will not generate large numbers of jobs, except in some advanced manufacturing and services, because the US economy has become far more capital and tech-intensive.

“Strong young men earning high wages by working on the auto assembly line, as we had in the 1950s. It's just not coming back and can't be.”

NO FINALITY, NO CREDIBILITY

He advised Washington's trading partners to respond to the US tariff policies based on their specific circumstances, adding: “It has to deal with the reality that there's no finality, there's no credibility on the other side."

“Korea has to think about, basically, more regional cooperation. Like with Russia, for example," he said.

"It seems to be a good time for Korea to join the CPTPP and strengthen ties with regional partners through ASEAN and extended ASEAN countries, because a lot of countries in the region are in a similar situation.”

The CPTPP stands for the Comprehensive and Progressive Agreement for Trans-Pacific Partnership. It encompasses Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam.

Obstfeld is a co-author of “International Economics: Theory and Policy” alongside Paul Krugman, a professor at the City University of New York Graduate Center and Marc Melitz, a Harvard University professor.

He also co-authored “Foundation of International Macroeconomics” with Kenneth Rogoff, another Harvard University professor.

Write to Sangeun Lucia Lee at selee@hankyung.com

Yeonhee Kim edited this article.