Trump versus the dollar

The United States cannot reindustrialise until it definancialises

Trump’s mass tariffs announced on so-called ‘Liberation Day’ were an aggressive attempt to force global patterns of production to change. This approach was short lived however, as the sky-high tariffs against countries like Vietnam (46%) and Bangladesh (37%) were hastily delayed in favour of a flat 10% tariff. Whilst Trump initially doubled down on his tariffs against China, increasing them to a high of 145%, he has now retreated on these too. Chinese imports into the US will now be subject to a 30% tariff.

Trump’s tariff offensive shocked the world; however, it appeared inspired by an essay written by former financier and current Chair of the Council of Economic Advisors, Stephen Miran.

In the essay, Miran argues that global imbalances in trade have caused widespread economic issues within the US, namely the decimation of US manufacturing. In response, he outlines a plan to use tariffs as leverage to negotiate a depreciation in the US dollar by convincing trading partners to diversify their reserve holdings away from US dollar denominated assets. He dubs this the ‘Mar-a-Lago Accord’.

Miran makes several heroic claims in his essay, including that because tariffs will initially result in an appreciation of the dollar, the tariffs will not be inflationary. It is on this basis he claims, as Trump has repeated, that exporters and not US consumers will pay for the tariffs.

With Trump’s retreat on tariffs it is clear that the ‘Mar-a-Lago Accord’ has failed. To be fair, whilst Miran advocates a gradual and predicable imposition of tariffs, Trump instead aggressively pursued high levels of tariffs across multiple countries. However, the failure of Miran’s plan is not because of incorrect application, but because his analysis fails to understand the foundations of dollar hegemony, its importance to US economic power, and its deep roots within the US political economy.

Under the old ‘Bretton Woods’ system of fixed exchange rates, currencies were pegged to the US dollar and the dollar was in turn pegged to gold at $35 an ounce. This meant that US dollars were as good as gold and could be held as reserves by foreign central banks. This was the source of the so-called ‘exorbitant privilege’ of the US: that whilst the rest of the world needed to exchange goods and services, or sell domestic assets, to acquire dollars to meet their international obligations (debts, imports, etc.), the US could do so by printing its own currency.

The Bretton Woods system was dismantled in 1971-73, however, the ‘exorbitant privilege’ has persisted. The dollar remains the main reserve currency, whilst most of the global trade, investment and debt continue to be denominated in dollars. The dollar’s centrality in global commerce also empowers the US’s weaponisation of finance through sanctions.

There are many mechanisms that sustain demand for the dollar. The petrodollar, that is the sale of oil in dollars, means that countries rely on acquiring dollars to meet their energy needs. Some have also argued that countries maintain dollar reserves as de facto payment for US security guarantees (the reverse of Miran’s accounts, which instead sees the security umbrella as leverage to wind down asset holdings). This latter mechanism is also under threat from Trump, following his broadside on NATO and other allies.

As Miran correctly identifies, demand for US assets is an important source of demand for the dollar, which keeps it over-valued. Export oriented economies, such as Japan, the Republic of Korea, and China, sell their exports in dollars rather than their own currencies to keep their currencies low. Of course, the surplus economies amass large amounts of dollars as a result. They then need to invest these dollars by purchasing dollar-denominated assets.

Luckily, there are many prospects for profitable investment in the US market. Indeed, US corporations are amongst the most profitable in the world, and thus much of these surpluses come back through Wall Street to be invested in US corporations. Another major destination for these surpluses is US debt. This includes US Treasury bonds, as well as consumer debt.

With such high demand for US debt, borrowing costs in the US are kept lower. Meanwhile, all this debt, both public and private, boosts US consumption and helps sustain the US trade deficit, thus maintaining a steady supply of dollars for the global system.

Put simply, US trade deficits are financed through foreign trade surpluses recycled via the US financial market. This works because the US is a trusted destination for profitable investment, and a reliable source of both safe assets (via debt) and demand (via the trade deficit).

However, what Miran fails to appreciate is that it is not just foreign demand for US assets that maintains this system, but the centrality of the US consumer in global trade. The US is all too willing to indulge in its exorbitant privilege by consuming global production at a discount, snapping up foreign assets on the cheap, and taxing its citizens at a far lower rate than is necessary to fund the Federal Government’s spending. In this way, Chinese dollar asset reserves subsidise the US’s fiscal largess on its military spending.

In short, the circulation of global capital that Miran rages against is in fact intentionally supported through US policy because it benefits the US’s global power. This critical oversight is on full display in Trump’s retreat on ‘Liberation Day’ tariffs.

The stock market reacted swiftly after the announcement, with exchanges around the world shedding trillions in wealth in a matter of hours. However, the Administration remained resolute in the face of this crisis, vowing not to waiver on its efforts to close the US’s trade deficit. What eventually broke the Administration was not the stock market – it was the US Treasury bond market.

Treasury bonds are what the US government uses to run its deficit. They are debt issued by the government of the largest, wealthiest and most productive economy in the world, and with the strongest military the world has ever seen. That is, US Treasury bonds are safe.

When a crisis hits, investors usually sell their stock (causing the stock market to crash) and rush to buy safe Treasury bonds (causing bonds prices to go up). With so many people wanting to buy US government debt, its yields (interest rates) go down. This is indeed what initially happened after Trump announced ‘Liberation Day’.

From April 8^th US Treasury bond prices began to fall and bond yields began to skyrocket, even as the stock market plunged lower. Even more concerning, the US dollar also began to depreciate against other major trading currencies, notably the Euro. This is the opposite of what Miran predicted, and eroded the basis of the dubious argument that tariffs would be paid for by exporters.

Tariffs usually result in currency appreciation because when countries import less, they are selling less of their currency on foreign exchange markets to buy the foreign currencies they need to pay foreign sellers. However, this logic only works if you are not able to buy imports in your own currency. As discussed above, most trade occurs in US dollars, so tariffs do not affect the demand for US dollars in the same way they would for other countries.

Instead, the dollar appreciated after the tariffs were first announced because foreign investors were rushing to buy ‘safe’ US assets, namely bonds. This put upward pressure on the US dollar. Therefore, the fall in the dollar from April 8th suggested that investors were losing faith in the ‘safe’ status of US assets. This was especially evident given that the depreciation of the dollar occurred alongside rising Treasury bond yields. Higher interest rates should have attracted more investors, putting upward pressure on the green back. However, higher returns were not enough to assuage falling investor confidence in the US.

Then again, the explicit goal of Miran’s master plan was to get foreign investors to move their money out of US-dollar denominated assets. No need for protracted negotiations under the threat of ratcheting tariffs. The dollar has fallen. Someone get the banner, because it’s ‘mission accomplished’.

Of course, this is precisely when the Trump Administration backed down because jeopardising dollar hegemony was never an acceptable outcome. Trump merely wants to have his cake and eat it too.  He wants to preserve the US’s exorbitant privilege, the global dominance of US financial markets, and the coercive statecraft that dollar hegemony allows while shunning the patterns of global production that sustain it.

This is not possible.

The fate of the Liberation Day tariffs is a reminder that the offshoring of US manufacturing is not a harmful side effect of globalisation, but a matter of policy of the US state; a necessary sacrifice in maintaining dollar – and therefore US – hegemony following the collapse of Bretton Woods.

The episode also demonstrates another reality of US dollar hegemony: the dominance of finance capitalism in the US political economy. The discipline enacted on Trump is all too familiar to governments in the global south (and Liz Truss) who dare pursue policies which foreign investors deem contrary to their interests. However, the US is not an emerging market desperate for capital to fund its development, but instead the most powerful state in the world.

Trump is both reacting to, and himself a reaction to, the pathologies that dollar hegemony creates within the US economy and society. These are real. However, his tariff shock is incongruent with the foundations of dollar hegemony, and the global structures of production that support it. The latest climb down on the tariffs against China was delayed but none the less inevitable. If the US wants to reindustrialise, it will first need to definancialise. This will require more than tariffs and will demand an end to dollar hegemony.