Sorry to use a worn out cliché for a title, but it seems appropriate. Around the world these days, there is much talk about what I will label as “overhead costs.” In some places, these have to do with carbon taxes, and in others they include things like health care costs. This column is not about arguing the moral social correctness or incorrectness of these items, but a more fundamental issue: the relative value of one currency versus another.
The factors driving these overhead costs are myriad—some talk of social justice, others bear a deep guilt for past actions. Makes no difference here. What does make a difference is what a country actually decides to do and how that affects matters going forward.
Imbalance an industry or an economy against other economies and it will affect currency valuations. It is well known; for instance, today one sees a gigantic balance of payments problem between the United States and China. These cannot go on indefinitely. This weakens the dollar in the world currency markets. At the moment, this is helping certain sectors in the pulp and paper industry — U.S. fine papers are experiencing fairly healthy markets in a poor economy almost solely due to the relatively weak U.S. dollar (I am taking the U.S. black liquor tax credit out of the equation).
Adding overhead costs in one area of the world and not in another will affect exchange rates in a large way. These exchange rate effects will affect the profitability and viability of companies that manufacture items that can easily be imported or exported, sometimes in surprising ways. Relevant history is nearby, recent, and has been analyzed thoroughly. I speak of the experiences in Japan from about 1990 forward. In academic circles, this is studied widely, but the value can come from making sure our legislators in every country study what happened here before they pass new laws with unintended consequences. The interlinked world economy means none of us can act in isolation any longer except at our own peril.