In his first term, US President Donald Trump’s tariff threats were mainly rhetorical. But he now appears to be launching a huge trade war – almost inexplicably beginning with friendly neighbours and trading partners Canada and Mexico, along with China. Businesses and governments around the world are reeling from on-again, off-again tariffs, threats and other trade barriers, raising the overriding question: what does he think he’s doing?
Defenders of the tariff onslaught, including the President, have offered a range of goals, usually ultimately postulating a revival of American manufacturing, resurgence of factory production, blue-collar or vocational jobs and less reliance on supply chains dominated by China. How this will actually happen remains largely unexplained. Mr Trump is already admitting that a tariff-driven recession may be imminent, the birth pains of a glorious renewed American “greatness”.
The President isn’t guided by theoretical frameworks. Even his most ardent supporters recognise that he is essentially just transactional and categorises others as his personal friends, adversaries or those somehow in between – the patrimonialism I recently described in these pages. It’s a sure-fire formula for fostering corruption and crony-capitalism.
But senior aides, notably Treasury Secretary Scott Bessent and economic adviser Stephen Miran, have attempted to outline an ambitious plan to reshape the global economic power structure.
Their arguments – which Mr Trump may not understand (like about half of Americans, he incorrectly insists foreign countries, not primarily working-class US consumers, pay tariffs) or care about – are convoluted and, arguably, self-contradictory. They centre on two seemingly irreconcilable goals that define the proposed global restructuring.
Trumpians insist that most others have been “ripping off” Americans for decades through unfair practices. But US trade deficits are more plausibly explained, albeit without foreign villains, by chronic American savings-investment imbalances.
Since all forms of power are interrelated, they argue, economic interests should be protected by other forms of power such as military pre-eminence. All leverage should be used to compel, or even bully, other powers to accommodate a more hegemonic and mercantile Washington. Co-operate, or else …
There’s nothing innovative in Mr Trump’s goal of American pre-eminence or willingness to co-ordinate various forms of leverage. What’s radically new is this vision of a dramatically restructured, purely transactional, global trading system and abandonment of US democratic traditions as a perceived asset. Brute force solves everything.
The two seemingly contradictory goals underpinning this agenda involve the role of the dollar as the default global reserve currency. The argument correctly identifies the pre-eminence of the US dollar as the primary American economic competitive advantage juxtaposed, for example, to China’s dominance in manufacturing and international supply chains. But it simultaneously maintains that the dollar is unacceptably overvalued, harming the competitiveness of American exports.
The Trump administration proposes using all forms of potential coercion to compel other countries and multinationals to maintain the dollar as the global reserve currency while concurrently securing co-operation in devaluing it to strengthen the competitiveness of US exports, particularly manufactured goods.
Other countries must continue to buy dollars, which generally drives up its value, while simultaneously co-operating in devaluing the currency. This requires continued investment on their part but on considerably more disadvantageous terms, which would be secured by coercive threats such as withdrawal of military protection, aggressively hegemonic threats, if not actions (like Mr Trump’s territorial ambitions towards Greenland, Canada, the Panama Canal and even Gaza), and any other available US overbearing power.
This intensified hegemonic and newly mercantilist posture helps explain targeting Canada and Mexico as early aggressive tariff targets, along with China. This would have been heretofore unthinkable. Even Mr Bessent and Mr Miran suggested that their more aggressive, hegemonic and mercantilist Washington should begin by targeting adversaries.
Mr Trump’s way of doing business doesn’t, apparently, accommodate such caution. Instead, he has deliberately targeted friends and neighbours as much, if not more, than adversaries. He’s dramatically demonstrating that past co-operation and collaborative trade arrangements are suddenly meaningless. All may play, but all must pay.
This epistemological shift is bold, but risky and arguably reckless. Being almost entirely coercive, it repudiates and abandons the global system that the US painstakingly crafted after the Second World War centred on co-operation and long-term partnerships. There are few apparent carrots available now but countless sticks.
As other states and multinationals try to appear co-operative, they may begin quietly seeking refuge in alternatives. These policies thus may well hasten the downfall of the dollar’s global dominance rather than reinforce it.
Saudi Arabia may be hoping that the proposed $1 trillion in new US investments recently announced by Riyadh can secure a much-coveted new mutual defence treaty, rather than a presently non-feasible normalisation with Israel. But Riyadh may be seeking carrots that are simply not on the market.
Rather than extending new umbrellas of security as rewards for co-operating, the Trump administration appears much keener to withdraw them as punishment for not co-operating. European countries are appalled at the apparent shift of Washington’s sympathies from Ukraine to Russia. That’s unlikely to incentivise them to co-operate in simultaneously reinforcing and devaluing the dollar.
Mr Trump’s rhetoric and policies seem based on anachronistic views of manufacturing that simplistically ignore the complexity of global supply chains. What constitutes a “made in America“ automobile today is infinitely harder to define than it was, say, in the 1950s – Mr Trump’s ideal decade, he says.
And even if American manufacturing is indeed significantly revived, it may take decades before that’s evident. It’s at best a long-term venture that’s badly out of sync with the US political calendar.
Finally, it does not appear that either Mr Trump or his more cerebral subordinates have seriously considered the consequences of failure. Canada and Mexico are immediately responding with retaliatory tariffs that threaten to bring the project crashing down before it is truly under way.
If they are overestimating US coercive power or underestimating a stubborn refusal by others to simply submit despite painful consequences, they may succeed in demolishing the existing global trade and security order without establishing a functional alternative.
The new tariffs look chaotic because they are, intentionally, chaotic. If this continues and he and his colleagues have miscalculated Washington’s ability to bully friend and foe alike, Mr Trump’s legacy may be simply global economic and political chaos for the foreseeable future.