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 that 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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