Trump’s Grand Idea
The world economy is not a perfect system where prices are determined purely by efficiency of production. Factors such as market accessibility, hidden or overt subsidies, and the relative value of currency determined by several geopolitical factors, play a role. The economy is also affected by how capital, trade and money move around the globe.
If the US is unable to compete in manufacturing, that is because the dollar is too high compared to other currencies. But why is the dollar high?
Initially, the Bretton Woods Agreement of 1944 pegged the value of dollar to the value of one ounce of gold at US$35. But the US ended the convertibility of the dollar to gold in 1971, and the dollar became the de facto world currency.
The high value of dollar is great for the wealthy in the US, but it is not so good for everyone else. It creates conditions where the wealthy from other countries also want to live here, and they bring their wealth from their home countries here and it is not always clean money.
Now the only real industries in the US are finance, real estate, entertainment, social media, and weapons. The US is not competitive at old-style things such as steel, mining, machines, and other industrial goods; in agriculture, it needs to use either seasonal or illegal workers. The US has also been hobbled by an insane degree of corruption at the highest levels as the audits of Elon Musk led DOGE are revealing.
The low value of other currencies is good for exporting countries like China for their products to the US remain cheap. But this is a recipe for the continuing decline of the US geopolitical power.
The American middle class has been hammered by this system. American school education is pretty bad, which is one reason American companies depend on hires from Asian countries for their scientific and programming jobs.
An unbalanced system
In the current situation, with the high dollar, US cannot compete at anything excepting the most advanced weapons where their cost make it difficult for other nations to manufacture them. This focus on the production of military hardware makes American policy overly militaristic at the expense of the welfare of its own citizens.
America’s share of the world economy has been falling for decades. In PPP terms, China has surpassed its GDP. As this share falls further, the demand for the global dollar will rise more in relative terms and make the US even less competitive. And that could end in a financial crash that would certainly mean the end of American hegemony.
Trump’s solution to this is in terms of tariffs. As the country that has a trading deficit, he holds a strong hand for negotiations. The idea is to force foreign governments to reduce their exports. The tariffs will be used to pay for the rebuilding of America’s infrastructure to make America more competitive, and have China, Europe and other countries pay for it.
This will also be a corrective to the internal policies of China, which has the most unbalanced trading, and force it to stimulate its internal demand and make societal reforms.
China could lower its costs further to maintain its share of the market, but its margins are low for it has prioritized cornering of the world manufacturing. It may choose to sell to the US through dummy companies in Vietnam, Indonesia, and the Philippines. But since those countries will also have tariffs slapped on their exports, this strategy will not work in the long run.
If the euro, the yen and the renminbi soften relative to the dollar, Trump would have generated revenue in terms of tariffs that he would use to reduce the income tax rate in the US and stimulate manufacturing at home.
Whatever you may think of it, this is an extremely original and audacious strategy, quite in line with his idea of taking over Gaza and rebuilding it as an out-of-the-box solution.
The money coming into the Treasury from the tariffs will be outside the control of the Congress and this will give Trump flexibility in the use of carrots and sticks in trade negotiations with other countries, allowing him to project American power more effectively across the world and compelling other nations to buy American goods.
For all you know, it may even help him in his quest for a new security architecture for North America, with Canada and Greenland integrated into the system.
