U.S. dollar big part of trade puzzle

MILWAUKEE — Seemingly lost in the debate about the Trump administration’s talk of remaking U.S. trade policy is the U.S. dollar.

When the greenback is strong — as it has been for months — it can hurt U.S. companies ranging from small manufacturers to big multinationals. When the dollar’s weak, it can hurt U.S. consumers because it drives up the cost of goods coming from overseas.

Currency valuation is just one of a number of pieces that, taken together, make international trade such a contentious, complex issue.

No matter what the Trump administration — and Congress — end up doing to ultimately reshape U.S. trade policy, there will be winners and losers.

“It’s a delicate balancing act with no easy solutions,” Brian Jacobsen, an economist who is chief portfolio strategist at Wells Fargo Asset Management in Menomonee Falls, Wis., and an associate professor at Wisconsin Lutheran College, said via email. “It’s been a contentious issue since time immemorial.”

Adam Smith criticized certain trade policies in his “Wealth of Nations” treatise, “And that was in 1776,” Jacobsen said.

In terms of the U.S. dollar and trade, “The stronger dollar means consumers in the U.S. can get foreign goods at a lower price,” Jacobsen said. “It’s more profitable for foreign firms to sell into the U.S. market.

“At the same time, U.S. goods in foreign markets aren’t as price competitive,” he said. “It’s not as profitable for U.S. firms to sell into those markets.”

Consider the situation with Strohwig Industries, a manufacturer in Richfield, Wis.

Mike Retzer, controller at the company, said the firm has been losing work to Canadian competitors because of the strength of the U.S. dollar.

“The Canadian dollar is so low against us, we can’t compete,” Retzer said. “We have lost work — big tools — because of the Canadian dollar to the U.S. dollar.”

It’s more than just a lost piece of work here and there, he said.

“We’re down — way down — from two years ago, and I know a lot of manufacturers in the same boat,” Retzer said.

As of Thursday, the U.S. dollar was worth 1.32 Canadian dollars.

Fight to stay competitive

Jacobsen offered this example as a way of understanding the impact of the difference between the currencies: A U.S. manufacturer and a Canadian manufacturer each make very similar tools. In late 2012, one U.S. dollar was worth one Canadian dollar. “Let’s assume that the tools were both priced at $100 in the U.S. and 100 Canadian dollars in Canada,” Jacobsen said. “Both companies were profitable and happy. Fast forward to today. Let’s assume nothing has changed except the exchange rate. Now, $1 gets you approximately 1.30 Canadian dollars. The U.S. dollar has strengthened. The Canadian producer has to decide how to price the tool in the U.S. The producer could just keep the price the same, and it would be 30 percent more profitable, which is nice.”

Or, “the Canadian producer could lower the price all the way to $76.92 and still be just as profitable as before. In Canada, if the U.S. producer doesn’t change the price, suddenly it’s not as profitable. To stay as profitable, the firm would have to charge 130 Canadian dollars, but that’s not price competitive anymore when the Canadian produced tool is still 100 Canadian dollars.”

It’s not just Canada.

As of Thursday, one U.S. dollar was worth 6.87 Chinese yuan and 20.35 Mexican pesos.

“This is very complex, and there is no ‘right’ answer,” Joseph Daniels, an economics professor and director of the Center for Global and Economic Studies at Marquette University, said via email. “When the U.S. economy is improving relatively faster than trade partners, when U.S. interest rates are rising, one should expect a stronger dollar.”

Among other currencies, the U.S. dollar was near parity with the euro as of Thursday, with one U.S. dollar worth 0.94 euros.

When the dollar is strong, it’s not just small manufacturers that are impacted.

Consider what the strong dollar does to U.S. corporate earnings: In a strong dollar situation, the revenue American companies earn overseas in foreign currencies is worth less once it’s exchanged into U.S. dollars and applied to corporate financial statements.

Milwaukee-based ManpowerGroup, a multinational workforce staffing company that has 400,000 clients in 80 countries, said recently its 2016 earnings were reduced by 15 cents per share because of foreign currency exchange rates. While 15 cents doesn’t sound like much, it adds up to more than $10 million when multiplied by the number of Manpower shares outstanding.

Almost half of that 15-cents-a-share reduction occurred during the final quarter of 2016.

“Financial results in the quarter were significantly impacted by the stronger U.S. dollar relative to several foreign currencies compared to the prior year period,” Manpower said in a statement announcing its quarterly earnings.

Manpower earned $127.4 million during the fourth quarter of 2016 and $443.7 million for the full year 2016.

Meanwhile, Trump used a recent lunchtime meeting at the White House with Milwaukee-based Harley-Davidson Inc. executives to leave no doubt that his administration intends to remake U.S. trade policy.

“We want to make it easier for businesses to create more jobs and more factories in the United States,” Trump said. “That means we have to make America the best country on earth to do business, and that’s what we’re in the process of doing. We’re redoing NAFTA, redoing a lot of our trade deals, and we’re negotiating properly with countries — even countries that are allies.

“A lot of people (are) taking advantage of us, a lot of countries taking advantage of us, really terribly taking advantage of us,” Trump said. “We have to be treated fairly.”