Could Protectionism Actually Hurt the Dollar?

Although some Democrats claim to be in favor of protectionism to help bolster the U.S. Dollar and curb outsourcing and the trade deficit, John Rutledge, former Reagan Economic Advisor and current President of Rutledge Capital, says it may actually cause an inverse affect. Over the past year, the U.S. Dollar Index has declined sharply while falling substantially against the Euro, Pound and Chinese Yuan. The important aspect to note in these declines against other notable currencies is that only the Yen and Yuan have a significant impact on the U.S. economy because China and Japan are two of our prime exporters and trade partners. Europe and England fail to pose nearly the threat that Japan and China do should the U.S. Dollar really free-fall against those currencies, which essentially would drive up inflation.

Democrats believe protectionism will help maintain the value of the U.S. Dollar, when in fact, the opposite needs to happen to help control outsourcing and decrease the number of imports into the U.S. If the Dollar falls significantly against the Yuan and Yen, manufacturing and production in the United States will ultimately become cheaper and in theory, our manufacturing sector will actually begin to expand again to adequately supply the public with their needed goods and services. However, the only possible scenario for the USD to decline drastically enough against the Yen and Yuan is free market forces, not government regulation or policy-making.

Additionally, Rutledge went on to explain that the USD should stabilize vs. the Yuan and maintain its success with the Yen. His theory for the slowing of the USD decline against the Chinese currency was based on increased speculation on the Yuan and the theory that recent run-ups by the monetary unit have created a bubble that will likely burst at some point in the next couple years. Keeping the USD strong against the Yuan will be key for controlling inflationary pressure in the economy, but likely will continue to contribute to outsourcing and a lack of trade balance with China.

The solution to this dilemma is simple; let the Yuan run its course and lower corporate tax rates in the U.S. to make business investment and production more attractive.