Overview
The US president has just upended global trade with an aggressive tariff policy. There is a great deal of uncertainty and controversy about the potential geopolitical and economic impact of these policies, with opposing views from different camps.
Before we get into this, we just want to clarify that we believe in free markets and global trade. Trade is largely voluntary and therefore only occurs when both parties to the trade believe that they benefit from it. Therefore, trade is not a zero-sum game. There are also many valid reasons for persistent trade imbalances between countries. Therefore, we believe that all tariffs are bad and all reciprocal tariffs are also bad. Therefore, these tariffs will harm global growth and productivity. Despite this, there is still a huge disagreement about how international trade imbalances work, what their causes are, and the impact of these tariffs on capital flows. This is also the focus of this article.
Trump's View
In Trump's view, the United States has been badly deceived by its trading partners for decades, as evidenced by the huge trade deficits of the United States. These trade deficits are caused by the protectionist policies of some of the largest trading partners of the United States, such as China, the European Union and Japan. The formula used by Trump to calculate "reciprocal tariffs" shows that Trump believes that there is no legitimate reason for the continued trade deficits, which are all caused by protectionism.
In Trump's view, these protectionist policies include:
1. Tariffs
2. Regulation that benefits domestic producers
3. Exporters such as China, Germany and Japan manipulate their currencies to fall against the US dollar
As a result of these policies, the U.S. manufacturing base has dried up, leading to dire economic conditions for American workers, who are a critical part of Trump’s “Make America Great Again” political base. By finally leveling the playing field, as he promised during his campaign, American consumers will buy more goods domestically, thereby boosting the U.S. manufacturing base and the recovery of the U.S. economy.
Petrodollar Perspective
Many people believe that Trump’s views on trade show that he does not understand economics. The fact is that Americans benefit from trade deficits. Americans benefit by consuming all the goods produced by hard-working, low-wage Asians in China, Japan, India, Thailand, Vietnam, and South Korea, and of course by consuming oil produced in the Middle East (or benefiting from lower oil prices due to Middle Eastern production). Americans win because they get all the goods, and Asian workers lose because they work all day long in difficult conditions to produce products for very little. This is actually a trick that the United States has successfully played on its trading partners for decades. The United States has somehow persuaded trade surplus countries to invest in the United States, keeping the dollar strong, and allowing this favorable situation for the United States to continue. Remember, without the gold standard, trade deficits would not cause the United States to lose its precious gold reserves. The United States can have these deficits and there will be almost no consequences. This view is almost the exact opposite of Trump’s view that the United States is a country that has been deceived.
However, this is an unsustainable situation because trade deficits accumulate over time. The only reason this has lasted so long is because the U.S. dollar is the global reserve currency. When countries export goods to the U.S., they invest their cash proceeds into dollars to sustain the Ponzi scheme. At some point, the accumulated imbalances will be so large that it all collapses, and Americans will be left with much lower real incomes. To avoid this fate, Americans should invest in gold and, of course, Bitcoin.
The United States has adopted a number of policies to try to keep the dollar as the world’s reserve currency, some of which are kept secret in order to keep this plan going for as long as possible. Some of the most nefarious policies include:
Libyan leader Colonel Gaddafi was overthrown and killed because he held a lot of gold and wanted to sell oil for gold, which would undermine the dollar’s reserve currency status. In fact, as a leaked email from Sidney Blumenthal to Hillary Clinton in 2011 speculated, Libya’s gold policy was “one of the factors that influenced” the decision to attack Libya. (France and Britain had a lot to do with this, as did the United States)
In October 2000, Iraqi President Saddam Hussein decided to stop selling oil in dollars and instead sell it in euros. This was said to be a key motivation for the US to invade Iraq and kill Saddam Hussein. So it was a lie that concerns about weapons of mass destruction and Saddam’s despicable human rights record were motivations for the invasion. It was all about the oil.
As a result of these and other aggressive foreign policies, other oil exporters such as the UAE and Saudi Arabia know that they must continue to sell their oil in dollars and invest a significant portion of the wealth accumulated from oil in dollars and U.S. assets, or they may face the wrath of the CIA and other parts of the U.S. military establishment.
This is a stark contrast to Trump’s apparent views on global trade, as he now accuses China of manipulating its currency downwards and the United States of manipulating its currency upwards, in some cases apparently using extremely nefarious means.
To highlight this apparent inconsistency, Trump recently tried to dissuade the BRICS from creating a rival currency to the dollar, which, if successful, would presumably weaken the dollar and strengthen their own currencies. Wouldn’t Trump want that? A weaker dollar would boost the manufacturing base that “makes America great again.” Trump’s recent tariff moves and now also seemingly accusing the BRICS of manipulating their currencies to increase exports to the United States seem to be a series of contradictory accusations against the BRICS. What does the United States want China to do, buy U.S. Treasuries or sell them? It’s almost as if the United States cannot tolerate China doing both. We don’t want to single out Trump here because he is the only politician who seems confused about the direction of China’s currency manipulation, many across political parties do, such as Obama and Geithner. Our view is that according to the petrodollar worldview, U.S. policy is to prop up the dollar, while China is plotting to end the dollar’s status as the global reserve currency.
This petrodollar view of global trade is probably the most popular one among our audience and Bitcoin enthusiasts. The famous analyst Luke Gromen is the main proponent of this view. According to this worldview, the situation of the US dollar is entering a highly uncertain period. In particular, the rise of the BRICS countries poses a growing threat to the hegemony of the US dollar, and the BRICS countries may gradually abandon the US dollar as their main trade and global settlement currency. As a result, the status of the US dollar as the global reserve currency may be weakened at some point, and the prices of oil, gold and even Bitcoin may rise sharply.
If one thinks this way, the impact of Trump's new tariff policy could be particularly devastating and dangerous for the United States. Exporting countries will see their trade surpluses fall, and they will no longer have large amounts of capital to invest in U.S. government bonds and other U.S. assets each year. They could then start selling existing U.S. assets to boost domestic consumption to make up for lost exports to the United States. This could be a catalyst for a U.S. Treasury debt crisis and weaken the almighty dollar.
Capital Flow Perspective
There is another view on trade imbalances that is rarely mentioned, and one that we believe has considerable merit over the petrodollar argument. Remember from Economics 101, the balance of payments (BoP) must always be balanced. This is because for every buyer of dollars there must be a seller. Therefore, if a country has a trade deficit, there must be a corresponding surplus in its capital account (the flow of financial assets), and vice versa. But who can say what is driving what? It may be that hardworking Chinese laborers produce high-quality products that Americans really want, which leads to a US trade deficit, which in turn leads to a US capital surplus. On the other hand, perhaps Chinese investors want exposure to the United States, which leads to a US capital surplus, which in turn leads to a trade deficit with China.
The argument here is more positive for the US than the petrodollar argument. The US has the best companies, which are more focused on profits and return on equity than the rest of the world. US businesses are also more meritocratic than other regions like Europe and Asia, where who you know, where you are from, your race or gender may matter more. This helps the US attract the best talent in the world. The US has the best and most innovative companies in the world, such as Google, Microsoft, Apple, Amazon, Nvidia, Meta, Open AI, Tesla, Broadcom, VISA, Netflix, etc. Global investors want to invest in these high-quality and high-growth companies.
Many Asian investors also want to move capital out of their countries to protect it from government confiscation. In contrast, the United States, at least in theory, has stronger rule of law and legal investor protections. So Trump’s view that Asian exporters have been manipulating their currencies to depreciate is simply wrong; in fact, they have been trying to manipulate their currencies to appreciate and try to prevent capital flight. According to this worldview, these characteristics lead to large surpluses on the U.S. capital account, which in turn leads to large trade deficits. So a persistent trade deficit may not be a problem, but it may be a sign of success. It depends on the driving factors.
We believe that these economic factors are more important in driving the dollar as the global reserve currency than US foreign policy in the Middle East. Killing any dictator who wants to sell oil for gold is unlikely to have that much of an impact. This is not to say that we want to defend the dishonesty and evil intentions behind US foreign policy in the Middle East. There may still be some in the US security establishment who subscribe to the petrodollar theory, even if it is a bit outdated and irrelevant now. If this is not true, there are many other dishonest theories that can be pointed out. Moreover, even if competing fiat currencies have no chance against the dollar because investment opportunities in the United States are relatively more attractive than elsewhere in the world, there is always gold to compete with. The CIA may still need to play some dirty games to stop gold. Perhaps those in power in the United States want global trade to be conducted in dollars, not to defend the value of the dollar, but simply to give US authorities more control and power over global affairs, enhancing their ability to block payments and freeze global wealth.
If you agree with this view, even if you believe that "tariffs are always a bad idea," Trump's new policy may not immediately and completely destroy the dollar's reserve currency status. Of course, it is still a tax that will hurt American companies and weaken the economy. Everyone will lose, but the dollar's hegemony may continue for a while.
in conclusion
The reality is that the global economy is complex. The petrodollar argument has merit, and trade deficits do drive capital account surpluses to some extent. On the other hand, the same situation can be viewed from multiple valid angles. It is also true that capital account surpluses drive trade deficits. It is important to understand that the driving forces are acting in both directions. For the United States, both factors are very important and analysts should not ignore them. Trump's views on trade also have merit at times, and of course some politicians believe this at times. This explains in part why some politicians can be somewhat inconsistent in the direction they say China is manipulating its currency.
That being said, we do think Trump’s views on trade are largely ineffective. Tariffs are a tax on Americans and will weaken the U.S. economy. The American middle class may have been a relative loser from globalization while the elites gained, but that doesn’t mean reversing globalization would make the American middle class a relative winner. Trump could abolish the IRS, replace the income tax with tariffs, and restore pre-1930s economic policies. If that happens, that’s another question, but we wouldn’t bet on it.
Of course, there are conspiracy theories to talk about. Trump announced these tariffs in order to deliberately collapse the economy, forcing investors to buy U.S. Treasuries to lower yields so that the U.S. can refinance its debt at a lower rate and delay the inevitable crisis of being unable to afford the interest on the debt. We think this is possible, but unlikely. Occam's razor may apply here, the simplest explanation is usually the best, and Trump just likes tariffs, he thinks tariffs are "the most beautiful word" .
