Tariffs in Trump's eyes: the most beautiful words, the weapon to make the United States great again

Overview

The U.S. president has just subverted global trade with radical tariffs. There is a lot of uncertainty and controversy in the potential impact of these policies on geopolitical and economics, with different camps having completely opposite views.

Before we discuss this, we just want to clarify that we believe in free markets and global trade. Trade is largely voluntary, so it only happens when both parties to the trade believe they benefit from it. Therefore, trade is not a zero-sum game. There are many legitimate reasons for the persistent trade imbalance between countries. Therefore, we believe that all relevant taxes are bad, and all reciprocal tariffs are bad. Therefore, these tariffs will harm global growth and productivity. Nevertheless, there are still huge differences on how international trade imbalances work, what are the reasons for them, and the impact of these tariffs on capital flows. This is also the focus of this article.

Trump 's opinion

In Trump's view, the United States has been seriously deceived by its trading partners for decades, and the United States' huge trade deficit is proof of it. These trade deficits are caused by protectionist policies of some of the United States’ largest trading partners, such as China, the EU and Japan. The formula Trump used to calculate "reciprocal tariffs" shows that Trump believes that there is no justification for the ongoing trade deficit and is all caused by protectionism.

In Trump's view, these protectionist policies include:

1.Tariffs

2. Benefiting the supervision of domestic manufacturers

3. Exporting countries such as China, Germany and Japan manipulate their currencies to fall against the US dollar

Due to these policies, the US manufacturing foundation has dried up, which has caused American workers to face a severe economic environment, and American workers are an important part of Trump's political foundation "making America great again". By ultimately achieving fair competition, as he promised during the campaign, American consumers will buy more goods at home, thereby promoting a boom in the U.S. manufacturing base and a recovery in the U.S. economy.

Petro Dollar View

Many believe that Trump's perception of trade shows that he does not understand economics. The truth is that Americans benefit from the trade deficit. Americans benefit from consuming all the goods produced by hard-working low-wage Asians in China, Japan, India, Thailand, Vietnam and South Korea, and of course also by consuming oil produced in the Middle East (or benefiting from the decline in oil prices caused by production in the Middle East). The Americans won because they got all the goods, while the Asian workers lost because they produced the products under hard conditions all day long, but received only a small reward. This is actually a trick the United States has successfully used on its trading partners over decades. The United States has somehow convinced countries to invest in the United States and kept the dollar firm, allowing this situation that is beneficial to the United States to continue. Remember that without a gold standard, the trade deficit will not cost the United States its precious gold reserves. The United States can have these deficits and there are almost no consequences. This view is almost the exact opposite of Trump's view, who believes that the United States is a cheated country.

However, this is an unsustainable situation because the trade deficit accumulates over time. The only reason this situation lasts for so long is that the US dollar is the global reserve currency. When countries export goods to the United States, they invest cash gains into the US dollar to maintain the Ponzi scheme. At some point, the accumulated imbalance will be very large, and all of this will collapse and the actual income of Americans will be greatly reduced. To avoid this fate, Americans should invest in gold, and of course Bitcoin.

The United States has adopted several policies to try to keep the dollar in its position as a global reserve currency, and some of them are secret to keep the plan going for as long as possible. Some of the most evil policies include:

Libyan leader Colonel Gaddafi was overthrown and killed because he held a large amount of gold and wanted to sell oil in gold, which would undermine the dollar 's reserve currency status. In fact, as speculated in a leaked email from Sidney Blumenthal to Hillary Clinton in 2011, Libya’s gold policy is one of the “factors” that “influence” the decision to attack Libya. (France and the United Kingdom have a lot to do with this, and the United States is the same)

In October 2000, Iraqi President Saddam Hussein decidedto stop selling oil in US dollars and instead sell oil in euros. It is said to be a key motivation for the United States to invade Iraq and kill Saddam Hussein. So concerns about weapons of mass destruction and Saddam’s despicable human rights record were motives for the invasion, which is a lie. Everything is for oil.

Due to the above and other active foreign policies, other oil exporters such as the UAE and Saudi Arabia know that they must continue to sell oil in US dollars and invest a large portion of the wealth accumulated by the oil in US dollars and U.S. assets, otherwise they may face anger from the CIA and other departments of the U.S. military agency.

It can be seen that the above view is completely contrary to Trump's obvious view on global trade. Trump is now accusing China of manipulating its currency to depreciate, while the United States manipulates its currency to appreciate, and in some cases it has clearly used extremely evil means.

To underline this obvious inconsistency, Trump recently tried to discourage BRICS from creating a currency that competes with the US dollar, which, if successful, would probably weaken the US dollar and strengthen its own currency. Don't Trump want this? The depreciation of the dollar will promote the manufacturing foundation that “makes America great again”. Trump's recent tariff moves, and now also appears to be accusing the BRICS countries of manipulating their currency to depreciate in order to increase exports to the United States, which seems to be a series of paradoxical allegations against the BRICS countries. What does the United States hope that China will do, buy US Treasury bonds or sell US Treasury bonds? It's almost like the United States cannot tolerate China doing these two things. We don't want to fight Trump alone here because he is the only politician who seems to be confused about the direction China manipulates currency, and many in various parties do so, such as Obama and Geithner. Our view is that according to the world view of the petrodollar, the US policy is to support the US dollar, and China is planning to end the US dollar's position as a global reserve currency.

This petrodollar view on global trade is probably the most popular among our audience and Bitcoin enthusiasts. Luke Gromen, a well-known analyst, is a major supporter of this view. According to this worldview, the situation in the US dollar is entering a period of high uncertainty. In particular, the rise of the BRICS countries poses an increasingly threat to the hegemony of the US dollar, which may gradually abandon the US dollar as their main trade and global settlement currency. Therefore, the dollar's position as a global reserve currency may be weakened at some point, and the prices of oil, gold and even Bitcoin may rise sharply.

If people think so, the impact of Trump's new tariff policy may be particularly destructive and dangerous to the United States. Exporting countries will see a decline in trade surpluses, and they will no longer have a large amount of capital invested in U.S. government bonds and other U.S. assets each year. They can then start selling existing U.S. assets to boost domestic consumption to compensate for losses in exports to the United States. This could be a catalyst for the U.S. Treasury crisis and weaken the universal dollar.

Capital flow perspective

There is another view that is rarely mentioned about trade imbalances, which we believe has considerable advantages compared to the petrodollar theory. Remember Economics 101, the balance of payments (BoP) must always be balanced. This is because every buyer of the US dollar must have a seller. Therefore, if a country has a trade deficit, it must have a corresponding surplus in its capital account (flow of financial assets) and vice versa. But who can tell what is driving what? It may be that hardworking Chinese workers produce high-quality products that Americans really want, which leads to the U.S. trade deficit, which in turn leads to the U.S. capital surplus. On the other hand, perhaps Chinese investors want to reach the United States, which leads to a U.S. capital surplus, which in turn leads to a trade deficit with China.

The argument here is more positive for the United States than the petrodollar theory. The United States has the best companies, which focus more on profits and return on equity than the rest of the world. American businesses also focus more on elite management than other regions such as Europe and Asia, where it may be more important to who you know, where you come from, your race or gender. This helps the United States attract the best talent in the world. The United States 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. Investors around the world want to invest in these high-quality and high-growth companies.

Many Asian investors also want to transfer capital out of their country to protect it from government confiscation. By contrast, the United States has at least theoretically stronger rule of law and legitimate investor protection. Therefore, Trump's view that Asian exporters have been manipulating the depreciation of their own currency is completely wrong, and in fact they have been trying to manipulate the appreciation of their own currency and try to prevent capital flight. According to this worldview, these characteristics lead to huge surpluses in the U.S. capital account, which in turn leads to huge trade deficits. Therefore, a sustained trade deficit may not be a problem, but may be a sign of success. It depends on the driver.

We believe that these economic factors are more important in promoting the US dollar to become a global reserve currency than the US foreign policy in the Middle East. Killing any dictator who wants to sell oil with gold is unlikely to have that big impact. This is not to say we want to justify the dishonest and evil intentions behind the US foreign policy in the Middle East. There may still be some in the U.S. security agencies that agree with the petrodollar theory, even if it is a little dated and irrelevant right now. If this is not true, there are many other dishonest theories to point out. Furthermore, even if competitive fiat currencies don’t have a chance to fight the US dollar, as investment opportunities in the United States are more attractive than the rest of the world, there is always gold to compete with. The CIA may still need to play some dirty games to stop gold. Perhaps the U.S. powers want global trade to be carried out in the U.S. dollar, not to defend the value of the U.S. dollar, but to give U.S. authorities more control and power over global affairs and enhance their ability to prevent payments and freeze global wealth.

If you agree with this view, even if you believe that "taxes are always a bad idea", this new Trump policy may not immediately destroy the dollar's reserve currency status. Of course, this is still a tax that will damage U.S. businesses and weaken the economy, and everyone will suffer losses, but the dollar hegemony may last for some time.

in conclusion

The reality is that the global economy is complex. The petrodollar view makes sense, and the trade deficit has indeed driven capital account surplus to a certain extent. On the other hand, the same situation can be viewed from multiple effective perspectives. The statement that capital account surplus drives a trade deficit is also true. The driving force acts in both directions at the same time, and understanding this is important for understanding global trade. Both factors are very important for the United States and analysts should not ignore them. Trump's view on trade sometimes makes sense, and of course some politicians sometimes believe this. This explains to some extent why some politicians seem a little inconsistent in what they call China's currency manipulation.

That being said, we do think Trump’s view of trade is largely ineffective. Tariffs are taxes on Americans and will weaken the U.S. economy. The American middle class may be the relative loser of globalization, while the elites gain benefits, but this does not mean that reversing globalization will make the American middle class a relative winner. Trump may abolish the IRS, replace income tax with tariffs, and restore economic policies before the 1930s. If that happens, that's another problem, but we won't bet on it.

Of course, there is still conspiracy theories to be discussed. Trump announced the tariffs to deliberately collapse the economy, forcing investors to buy U.S. Treasury bonds to lower yields so that the U.S. can refinance its debt at lower interest rates and delay the inevitable crisis that cannot afford interest on debt. We think this is possible, but unlikely. Occam razor may apply to this, and the simplest explanation is usually the best, Trump just likes tariffs, which he believes are the "most beautiful word" .