Ironically, Trump's imposing a tariff on a particular good, like steel or aluminum, has FX implications that could undermine any benefit to overall US economic activity. This is because the tariff should result in an appreciation of the dollar, reflecting the smaller trade deficit. A stronger dollar would make other imports more competitive. Domestic industries other than those being protected by the tariff would be hurt. Conversely, from this perspective, a country that bears the brunt of a tariff should not retaliate as its other exports will benefit from a weaker currency.
At the same time, the world price of the protected good should fall, reflecting higher US production of it. Other countries that had formerly exported the good to the US would dump their output on the rest of the world market. The lower world price would partly offset the benefit of the tariff to the protected industry.
On balance, these price effects could be a negative for the US economy. Even though the tariff is larger than the price effects of a stronger dollar, there are many more commodities/services that would be impacted by the latter than those protected by the tariff.
The dollar should appreciate most against the countries that are the main suppliers of those goods, since the bi-lateral trade deficits would fall the most. The latest strength of the dollar against Canada, the biggest exporter of steel to the US, is a case in point. But, the dollar could appreciate against other countries, as well. US demand for their exports should shift toward the countries whose currency depreciated the most. There would be some sort of balancing out of the FX fall-out from the tariff.
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