Trump’s tariff bombardment has torn up the rules by which Western elites have lived for the last 35 years: the rules of a globalising economy under the benign guardianship of a Pax Americana. He is openly challenging opinion makers to change their habits of thought or be swept away by the angry crowd. The opinion makers reacted predictably; the markets crashed. Rather than condemn Trump’s approach out of hand, let us pause and ask: What is the purpose of his policy? What bits of it make sense? Are tariffs the best way to achieve its aims? Or is there a better way?
Our starting point must be the President’s 2025 Trade Policy Agenda (3 March 2025). This focuses on the adverse effect of the USA’s persistent trade deficit on its manufacturing industry. Manufacturing, it claims, is the source of high wages and national defence. American manufacturing jobs have been in steep decline: from 17m in 1993 to 12.7m today. Their off-shoring to cheaper locations has caused wage stagnation, hollowed out the middle class, stalled upward social mobility, slowed down technological innovation, and left national security at the mercy of fragile supply lines.
The main cause of these dire developments, claims the Trump Agenda, is the selfishness of “globalist elites”, who, by exporting production have enriched themselves at the expense of working Americans. Unfair trade practices by competitors, like currency manipulation, charging VAT on America’s exports (EU) or stealing intellectual property (China), are mentioned but only in passing. The disease is homegrown. The aim of the Trump agenda is to replace the consumerist ideology of the globalists with a productivist philosophy. “Americans are more than just what they consume,” it proclaims; the American economy is more than one which “just moves money around”.
This rhetoric was the staple of 19th century US populists. “We shall not be crucified on a cross of gold,” thundered Democratic presidential candidate William Jennings Bryan in 1896. But does it have any relevance for today? The question can be rephrased as follows: why should a trade deficit be a problem if other countries are willing to finance it? To consume more while working less, to live beyond one’s means – has not this always been the spendthrift’s dream?
America has run a trade deficit since 1975 – that is, for 50 years. Why have other countries been willing to pay for the sybaritic American lifestyle? The answer is that the USA provides services to other countries, for which they are willing to lend it money: a kind of voluntary tax. The United States has paid most of the costs of Nato, has provided a safe haven for currency reserves, and, by its prodigious consumption, has kept the world economy booming. But the price has been the progressive overvaluation of the dollar, which has eroded America’s industrial economy and created a massively over-borrowed financial system. It would have helped mightily in understanding what they are doing had the President’s advisers spelt out that the United States faces a choice between an imperial dollar and a strong economy.
The reason is that trade rebalancing requires that Americans consume less and countries like China consume more. In the past this would have been brought about by currency realignments, such as dollar depreciation against the yuan. But standing in the way of such a “natural” rebalancing has been the strong dollar. Since no American administration can openly pledge to weaken the dollar, direct curbs on trade are left as the only method of cutting the deficit. Of these, tariffs are the oldest and clumsiest. Tariffs cut imports without increasing exports. US consumption will fall, but without an export boost the US economy will slump. If other countries retaliate, the result will be a global downturn of consumption – that is, a global slump.
In short, Trump’s tariff shock is likely to start a tariff war which will cause a world depression by reducing global demand. How it will all sort itself out is highly uncertain. Warren Buffett called tariffs “weapons of war”. When the world economy recovers it will be bristling with economic armaments, which in the past, have sometimes been the prelude to actual wars. This is certainly not what Trump the peacemaker says he wants, and the hope must be that he sees his tariffs as bargaining chips for trade agreements rather than as permanent fixtures.
There are less disruptive ways to wean the world off its dollar dependency. In 2003 Warren Buffett proposed that for every dollar’s worth of goods a US company exports, it would receive an import certificate worth a dollar, which could be sold to companies who wanted to import goods. The market in certificates would raise the cost of importing and reward exporters who could sell their certificates for a profit.
Then there is Vladimir Masch’s ingenious plan for “Compensated Free Trade”. Each year the US Administration would set a desirable ceiling, in dollars, on the overall US trade deficit. To achieve it, it would impose import limits in dollars on the main contributors to the deficit – China, Mexico, Germany, Canada, and so on. The surplus country would have to reduce its exports to its allowed quota; it could exceed it if it paid a fine equal to the excess, which could be used by the US government for investment purposes.
These ideas are reasonable attempts to align trading relations to the logic of barter, in which goods are made to exchange for goods; and money is simply a means of payment, without any influence of its own. But there is a better way of achieving the right barter terms of trade, suggested by John Maynard Keynes in his plan for an International Clearing Union in 1941. This was specifically designed to secure a “symmetry of adjustment” by preventing creditors from accumulating reserves by trading in undervalued currencies. All residual international transactions – those giving rise to surpluses and deficits in the balance of payments – would be channelled through accounts in an International Clearing Bank held in “bancor”, a new supranational currency, by member central banks.
Creditor countries – those with positive bancor balances – would be allowed or required to revalue their currencies, and charged rising rates of interest on them; persisting credit balances would be confiscated and transferred to a Reserve Fund. Debtor countries would be allowed or required to depreciate their currencies, and to prohibit capital exports. A persistently profligate member could be expelled from the union. Naturally, the USA, the chief creditor at the time, rejected this attempt to transfer its hard-earned currency reserves to a world central bank to be used for the common good.
It is widely assumed that today’s main creditor, China, would likewise veto any attempt to deprive of it of control over its surpluses, yet it was China’s central bank governor, Zhou Xiaochuan, who in March 2009 suggested that the world needed a super-sovereign currency to replace the US dollar. Zhou explicitly revived Keynes’s bancor idea to provide the necessary liquidity for expanding international trade, without creating destabilising dependencies on key currencies. He was the first official of a major economy to challenge the dollar’s dominance. The US rejected it out of hand.
But a supranational reserve currency, managed by the IMF, is a real alternative to both reliance on the dollar and the slow diversification of reserves. These ideas are illustrative of what might have been achieved, and might still be achieved, by a less rancorous, scattergun approach to a real problem. The better ways may emerge as the full effects of the Trump shock are felt. The problem of unbalanced trade exists, was complacently ignored for too long, and must be addressed. For too long, political elites were too much thought and too little action. Trump is too much action and too little thought. There must be a thoughtful but active middle way between the two.
[See also: Donald Trump’s assault on capitalism]
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