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AMERICA’S TRADE DEFICIT IS NOT AFRAID OF DONALD TRUMP  
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Yanis Varoufakis
December 2, 2024
Project Syndicate
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_ If the US president-elect’s efforts to eliminate America’s
trade deficit succeed, real-estate prices in Miami and Manhattan will
crash, the cost of servicing government debt will skyrocket and the
Dow Jones will plummet. _

, AlfvanBeem, CC0, via Wikimedia Commons

 

ATHENS – Donald Trump is as sincere as he is capable of being in his
determination to eliminate the US trade deficit. But the US trade
deficit is even more determined to remain enormous and will likely
swat aside whatever the 47th president of the United States throws at
it. Because it is hard-wired into the structure of post-Bretton Woods
America, the deficit lies beyond the means – and the ends – of
the incoming administration.

Start with the means. Trump has two hefty instruments at his disposal
in his battle with the trade balance: standard import tariffs and
Section 232 of the 1962 Trade Expansion Act, whereby the US government
can appeal to national security to justify retaliatory action against
protectionist countries or blocs. (The EU, for example, imposes a flat
special 10% tariff on all car imports, plus other administrative
restrictions, while maintaining a gigantic surplus in the US-EU car
trade.)

But neither tariffs nor Section 232 actions can reliably shrink
America’s trade deficit. To see why, suppose that Trump, who says
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he will impose 25% tariffs on Canada, China, and Mexico on his first
day in office, does use tariffs and other punitive import-restricting
measures enthusiastically. Sure enough, imports will shrink. But so
will US exports – especially when his tariffs and quotas are
combined with the large tax cuts promised to Elon Musk and his merry
band of Big Tech oligarchs.

The adverse impact of tariffs on US exports reflects the international
role of the dollar – the only currency non-Americans want to hold
even if they do not wish to buy anything from any US company. If Trump
raises tariffs to the levels he thinks are necessary to stem Chinese
and European imports and bolster his government’s revenues (allowing
him to reduce domestic taxes), money markets are bound to push the
dollar much higher – and, indeed, much, much higher if domestic tax
cuts are also introduced.

So, even if Trump’s tariffs tend to reduce imports, the rising
dollar will counteract this tendency by boosting imports and
curtailing US exports. The US trade deficit will remain more or less
intact.

That brings us to the ends of Trump’s administration. For the sake
of argument, consider the improbable scenario in which his methods
succeed in eliminating, or at least substantially shrinking,
America’s trade deficit. In that case, he would find himself
confronting a personal and political Waterloo. While working-class
voters delivered his recent victory, the people Trump considers
“his” are financiers and real-estate developers. Keeping them
happy is his calling. And there’s the rub: eliminating the US trade
deficit would destroy their fortunes.

A brief trip down memory lane shows why. After World War II, the US
maintained a trade surplus by dollarizing Europe and Japan (thus
allowing its allies to buy US exports). The dollarization of Europe
and Japan was implemented through aid (such as the Marshall Plan),
loans and, crucially, the fixed exchange rates – under the Bretton
Woods system – between the dollar, European currencies, the yen, and
gold.

This system worked splendidly so long as the US ran a trade surplus.
But with every aircraft, domestic appliance, and IBM computer Europe
and Japan bought from the US, dollars that America had sent abroad
were repatriated – thus closing the US surplus recycling loop,
rendering it sustainable.

By 1971, however, the US trade balance had turned negative. As a net
importer, the US economy was exporting more and more dollars to Europe
and Japan. At the same time, much of the Pentagon’s enormous
expenditure on the Vietnam War leaked rivers of dollars to Southeast
Asia, Japan, and even Europe. In short, a torrent of dollars was
accumulating in the vaults of central banks abroad.

The Bretton Woods system was predicated on America’s pledge to
deliver an ounce of US-owned gold to anyone willing to pay $35 for it.
In view of the flood of dollars into the hands of non-Americans,
doubts about whether the US would honor this pledge began to grow.
Like a self-fulfilling prophesy, on August 15, 1971, President Richard
Nixon withdrew that pledge and effectively blew up the postwar system
of fixed exchange rates, pushing the dollar sharply lower and the
German and Japanese currencies sharply higher.

Soon, Europe’s and Japan’s central banks were in a bind. Unable to
swap their accumulated dollars for US gold, they were also reluctant
to swap them for Deutsche Mark or yen, lest their exchange rate rise
further and deal additional blows to German and Japanese exporters.
So, they used their stashed dollars as a substitute to gold reserves
and channeled them to Wall Street through financial intermediaries to
buy US debt, real estate, and whatever equities the US authorities
allowed foreigners to purchase.

And this is how we arrived at the delicious quasi-paradox that is the
nature of America’s global hegemony today. The US trade deficit
provides European and Asian capitalists with demand for their net
exports to America and sustains the capital inflows that finance the
US government and boost US financiers and developers – Trump’s
mates.

If Trump’s efforts to eliminate the US trade deficit succeed,
real-estate prices in Miami and along New York’s Fifth Avenue will
come crashing down, the cost of servicing the government’s debt will
skyrocket and the Dow Jones will plummet. Perhaps Trump needs to be
reminded that the most vengeful of deities is one that grants him his
sincerest wish.

_YANIS VAROUFAKIS, a former finance minister of Greece, is leader of
the MeRA25 party and Professor of Economics at the University of
Athens. _

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* Donald Trump
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* trade deficit
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* Tariffs
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* dollar
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* imports
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