The merit of this Gerard Baker column in The London Times is that it covers many of the essential issues. Its demerit is that it doesn't tackle the crucial dilemma of a hegemonic capitalist metropole national economy: and that is that a capitalist hegemon must provide the currency to oil global trade and must simultaneously ensure that it is a "hard currency" as a store of value. But these requirements mean that the US must run huge current account deficits and accumulate fiscal debts. Therefore, it must import manufactured goods and capital and export services in the form of financial, technical-managerial, and military know-how and protection.
To square this circle, the US hegemon must run a "protection racket" whereby it can ensure material manufactured supplies from its allies and be compensated by them financially for its hegemonic protection. The problem with what the Trump Administration is doing is that its protection racket is not protecting its natural allies but is hurting friend and foe equally. No good can come out of that strategy.
Trump tests America’s threshold for pain
He has already transformed American politics and upended the international strategic order. For his next act, Donald Trump is going to remake the world economic system.
Alexander the Great is said to have wept when, after barely ten years of campaigning, he realised there were no more worlds left for him to conquer. Trump has been president for only ten weeks.
His domestic political and geopolitical achievements are works in progress, of course and, as with Alexander, we may have to wait a few centuries before passing ultimate judgment. But, whether you like them or not, Trump is demonstrating what the mere exercise of personal and national political will can do when you’re an American president setting out to revolutionise the world.
Remaking the global economic order, however, even when you lead the largest economy on earth, represents a whole different set of challenges.
As with his political objectives, Trump’s economic goals owe more to instinct than to reason. Intellectuals deride governing by instinct but the most successful politicians succeed by following their gut as often as when they heed the massed conventional wisdom of experts. Trump’s instincts — that mass immigration is bad, that punishing violent criminals is good, that the US has taken on too many of the burdens of the world in the past half century — have proved politically successful at least.
With his “liberation day” announcement this week of punitive US tariffs on imports from every country in the world — up to 99 per cent in the most extreme case, and including even a 10 per cent cold slap for the penguins of the Heard and McDonald islands in Antarctica — Trump has launched America and the world on a wild, real-time, real-money test of his favourite economic idea, which most people regard as crazy.
When it comes to international economic relations, Trump has an absurdly simple instinct: that a country’s trading relationship is fundamentally a function of economic justice or injustice. If the US runs a deficit with another country, the other country must, ipso facto, be cheating, either by imposing asymmetric tariffs or in some other way favouring the products of its own producers over American goods and services. (This was literally the basic arithmetical formula, by the way, for Trump’s “reciprocal tariffs” announced this week. The taxes imposed were based, not on any actual tariff levels or trading practices by other countries, but by a simple extrapolation of the US trade deficit with those countries or, where the US has a surplus, a baseline 10 per cent tariff.) In simple economic terms, experts will tell you this makes no sense. We run a trade deficit with a country because they have things we want that we don’t have. We run a surplus with another country, because we produce things they don’t make as efficiently as we do. Even if, as is the case with the US, we run an aggregate trade deficit to the tune of more than a trillion dollars a year, that doesn’t necessarily mean the world as a whole is ripping off America.
He wants to use US power to reshape the global economy
In part it is a function of Americans’ propensity to consume more than they save (the current account deficit is numerically equal to the gap between domestic savings and investment). But also, the balance in goods and services has a flipside on the capital account. When Americans spend more on French champagne, Chinese trainers and German cars, those countries end up with a surplus of dollars, which they then invest in American assets.
So Trump’s logic may be nuts, but inside it, his economic advisers insist, there is a kernel, if not of truth, then at least of some important economic realities his plans address.
First, some countries doubtless do discriminate against US products: China has done so for years and pushing them to change with painful tariffs will produce results. But much more importantly, America’s vast trade deficit has transformed the domestic US economy. Since wages are far higher in the US than elsewhere, domestic manufacturing has gone offshore over the past 50 years. The open global economy is essentially, as you would expect, driving US wages down towards other countries’ levels. The flight of manufacturing has also left the US dangerously dependent on other countries for vital products such as steel and ships.
Trump’s advisers also argue that US industry has been further undermined by the dollar’s status as a reserve currency. Demand for the dollar for central bank reserves and to pay for most commodities, which are priced in the US currency, has overvalued it, making American products more expensive in world markets.
In short, Trump’s dubious instinct has formed the basis for the most daring assault yet on the global system, the idea that free markets should determine trade and capital flows. Trump not only wants to repatriate industry to America. He wants to use American power to reshape the global economy.
To be sure, this may yield benefits over time. There are already some signs that companies are planning to relocate industrial facilities back in the US. But the biggest deficit Trump has to worry about is the one between short-term pain and long-term gain.
It will take years to build factories in the US. In the meantime, tariffs and a falling dollar will mean Americans will pay much higher prices for their cars, their clothes, their smartphones and everything else. US businesses hit by rising import costs and retaliatory tariffs on their overseas sales will go under. Stock prices will fall further — already, more than $3 trillion in Americans’ savings has been wiped out as markets react to Trump’s trade policies. The negative impact will be felt in foreign policy too: punishing valuable allies abroad with hefty tariffs, such as Vietnam and South Korea, will complicate America’s larger strategic role of containing China.
All great leaders have understood that going with your instinct works, until it doesn’t. Trump’s own pain threshold may be higher than most.
But how much will Americans stand?
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