President Trump has stirred markets and the public with his herky-jerky tariff announcements. Canadians are boycotting American products, and Europe has issued reciprocal tariffs. If Trump 1.0 was a trade skirmish, then this is a full on trade total war. However, there is another side to all of this. On the right, the going narrative is that Trump is trying to crash the dollar to make the US an export economy but protect our domestic markets. I was on the phone with my Mom, and even she said, “I think Trump is trying to make a new economy. I don’t know what it is yet, but I think that’s the goal.” It's a complete reversal of free trade neoliberal economics that has dominated the global economy in multiple forms since 1947.
This economic reset is not just about trade or what Americans are buying, it is also about the underlying nature of the American economy and how to revitalize the American economy from a financialized economy and return to a more industrialized economy. I also want to mention this thread from X/Twitter because it was helpful in my understanding of the economics of this problem. Trinhnomics is great, and they were on Bloomberg this week talking about Trump's new economy. She also posted this paper from Hudson Bay Capital that is helpful to understand these dynamics and the risk.
A brief history of tariffs and trade
After WWII, the US Dollar replaced the British Pound Sterling as the world’s reserve currency, under the Bretton Woods system, gold was fixed to the dollar at $35 per ounce. Global trade between the advanced economies and those not apart from the Warsaw Pact/Iron Curtain proceeded on this basis. It is also important to note that open and free trade was used as a way to reduce conflict. The adage from Frederic Bastiat, “Troops do not often travel over borders where goods to also” applies. The European Union was the ultimate institution tasked with standardizing trade within a common market for the ease of trade among members of the bloc. For the US, globalized trade was a boon to American industry and was a way for it to cement its leadership of the free world.
In 1971, Nixon took the US off the gold standard and based our currency on oil (the petrodollar) by getting oil producing nations to agree to do all trades of oil in US dollars. The dollar was already the standard for world trade, and this cemented the dollar in that role. Historically, our system of international trade has not been a problem. America, under the Bretton Woods system, traded its trade surplus (we export more than we import) to a trade deficit (we import more than we export) to help rebuild the war-ravaged economies of Europe and Japan.
The US would continue to run trade deficits thereafter and would continue to import goods from these economies, but because there was a global demand for products, American industry was bolstered and led the world in technology. America enjoyed a deep domestic consumer market that continued to grow, and it could easily absorb both domestic production and international products as well. Tariff barriers began to fall to encourage this economic progress, and tariffs would continue to fall as the General Agreement on Trade and Tariffs (which codified the Bretton Woods system) became the World Trade Organization in 1995.
However, by the mid-1970s, other industrialized countries had begun to catch up with American technology and, in the case of Japan, began to surpass US firms. Japanese cars arrived and decimated Detroit auto-makers. Japanese steel, using cheaper electric arc furnaces, did the same to American steel companies. Tariffs were threatened at the time but were never implemented. By the 1980s, the lament that America was being economically left behind was beginning to take hold. Fast forward to 1999 when China joined the World Trade Organization and the US granted it “Most Favored Nation” trading status, the trade deficit with China exploded as American firms moved production to China in greater numbers to save on labor costs and increase profits. With no tariffs to stop the trade (under WTO rules, tariffs should not exceed 5% without arbitration) China’s economy exploded with growth in the 20th century and the American job market in manufacturing shrunk.
Globalized trade, low tariff barriers, and American military dominance contributed to the Dollar retaining reserve status but also being in demand because global trade takes place (mostly) in dollars. Trinh also has a thread particular in this economic history if you want to read more. Global trade taking place in dollars is a source of one of two of the problems the Trump administration would like to solve: the dollar is expensive.
Problem 1: The dollar is expensive
The first and most crucial concern that Trump is trying to address is the expensive nature of the US Dollar. Most international trades are settled in dollars, banks keep billions in reserve to be able to handle this business and as a result nations who participate in the global trading system keep both dollars and US treasuries (our debt) as a reserve and as a way to make money from all the dollars they get in trade.
After 1971, currencies floated and could be traded. Because there are so many dollars out there in the world, and it is in high demand for international trade, the dollar is said to be “strong” because there is demand for it and buying dollars (relative to other currencies) is expensive. If you have Euros, Yen, Swiss Francs, or other currencies, you’ll spend a lot to get ahold of dollars.
Obviously, this has benefitted the United States a great deal. We can borrow in our own currency and there is a ready market for that debt (at least for now) and it allows the US to externalize some inflation. The downside is that American exports are expensive globally, and this means that American products are less competitive than products from other countries.
The Trump administration aims to make American exports more attractive by devaluing the dollar so that American exports become cheaper despite the higher cost of labor, which means American firms can compete in the global marketplace more easily. If less global trade takes place in dollars, demand for dollars will fall and the value of the US Dollar will decrease in nominal terms, giving US firms a leg up. Any good export economy needs a cheap currency so that the goods are priced well, even with modest trade barriers.
The new dynamic would incentivize a new economy based on building things rather than making investments in production elsewhere (financialization). For Trump’s America First agenda, tariffs and a cheaper currency are essential for returning production to American shores. However, one of the things in the Hudson Bay Capital report was that the tariffs will be more effective if they are put in gradually rather than all at once, even in the face of currency devaluation.
Problem 2: Rebuilding America
American industry was fairly insulated from foreign competition in most markets due to tariffs under after World War II. Even in those years after, American industry had little competition from other countries. America had built its industrial base in the 19th and 20th centuries thanks to a tariff regime in the 1890s-1920s that kept primarily European competition out of the US market (but not entirely).
When it comes to rebuilding the American industrial base in a globalized economy, American goods face two problems: American labor is expensive and there is no ready market to buy these goods.
One of the reasons America was such an export economy during the Great Depression and into World War II and then in the post-war period was because there was a ready market for those goods. Europe and Japan had been devastated during the War and needed American goods. No such open markets for goods exists today. There is no deep consumer market ready to buy US products and given the politics of the tariffs, the US is actively hurting its international brand with close trading partners like Mexico and Canada.
The other issue is that American labor is expensive. American workers are paid the highest in the world. This means that companies face higher costs and that makes goods more expensive compared to their foreign counterparts, which means American companies margins are squeezed to nearly nothing. That is not a sustainable business model for anyone.
The idea of rebuilding America is a good one, and I’ve argued for it in the past, but it has to be in an industry that makes sense where there is margin. In this way, the Biden administration made a positive move with the CHIPS act because it focused on electronics and semiconductors where pay is high because the margin is there, and it is suitable for export. However, the jobs in that sector do need to be highly trained and are partially limited. Much of the energy within MAGA for rebuilding the American industrial base is revitalizing communities devastated by outsourcing and offshoring. The point of the tariffs is to protect American industry from cheaper imports to encourage domestic production and domestic purchasing. On paper, this seems like a good idea, but I’m not quite sure that it is going to work because we live and work in a globalized economic village. It may not be practical to make low-margin textiles in the US when it can be done (for much less) in Bangladesh and Vietnam.
Nationalism vs. Internationalism
It is apparent that President Trump is not a fan of globalization that doesn’t directly benefit the average American or our country as a whole. In the brief history of global trade I related in the first part of this article, America made a kind of economic sacrifice for the rest of the world with the benefit of being the reserve currency. However, that did come with some costs. Keeping trade lanes open is a massive security effort and is part of the reason American defense spending is the highest in the world. Ships, overseas airbases and the infrastructure to keep all of that running doesn’t come cheap. The other cost was in the eventual erosion of the industrial base and the lack of opportunities for Americans. Losing factories, steel plants and associated businesses has hollowed out America, especially in small towns through the midwest and the Rust Belt, a main area of support for President Trump.
It is clear that the Trump administration is seeking a 1920s style “America First” agenda that focuses on what enriches the American economy. The only way to reduce defense spending in a meaningful amount is to reduce America’s commitments overseas. While criticized for his police toward Europe and NATO, re-arming Europe will take a great deal of security pressure off the United States. Reshaping global trade will help reduce American commitments to keeping long supply lines open and free for trade. It also refocuses capital and investment within US borders and will lead to jobs for Americans. There are the direct jobs created, but also secondary jobs from new businesses forming to support those businesses.
Trump’s nationalist agenda stands in sharp contrast to the international agenda of the past 80 years. The US rebuilt the world after WWII, and it has created the modern global economy. It has secured it and financed it through trade deficits. It is clear that time is over and the Trump administration is conducting a general drawdown, not only of US military hegemony but also if its economic hegemony. The Trump administration wants to reshape global trade in a way that enriches, rather than spends, American treasure.
One can argue that the old system certainly enriched the US. The US GDP has been on a steady (on average) increase over the past 40 years. Post-Pandemic, the US has led advanced economies in growth despite rising inflation and cost of living. The American standard of living is the highest in the world and American companies lead market cap with only the Chinese following close behind. America leads the world in innovation and technology. President Trump is creating policy that would return the fruits of that largesse to the American shore and into the pockets of everyday people…at least that is the idea. Trump is trying to create a new kind of economy where money flows into the US rather than out (trade surplus rather than trade deficit) and one where the US is not responsible for global security due to economics.
Still another aspect of this is on the domestic side with a de-leveraging of the government through a reduction in the federal workforce, reducing the national debt and deficit, and deregulation of all sectors. Treasury Secretary Bessent has made this agenda clear in his recent remarks. The final question is whether this strategy will work or not.
Economic reset?
While I have no doubt that the Trump administration will likely win on most of their domestic agenda, tariffs and trade barriers take money out of the system and put in the pocket of the government. It is consumers in the US market that have to pay for the tariffs (not the foreign country) and for an export economy to work, American goods have to be attractive to foreign buyers. Making this reset happen is a difficult balance.
The reality is that it is simply not cost-effective for the US to move down the trade value tree. Not all products are created equal, and not all products have the same margins and value. Advanced economies tend to focus on higher value items while less advanced economies focus on lower value items. This theory of trade is best summed up as the idea that countries should make what they make well and trade for the rest. This idea has been foundational in global trade for the past 80 years.
There is no reason for the US to make t-shirts and textiles when we should be making finished manufactured goods and semiconductors. Not all manufacturing is the most productive use of the US production capacity. When it comes to national defense, there is certainly a good argument for as much of that to be on-shore as possible. I think given the reciprocal tariffs from close trading partners (Canada, Mexico, and the EU) this trade war will likely hurt American firms over the long term. How willing will they be to reduce trade barriers once again? How much business will be lost in these “tactics.”
Trump supporters will argue that it is merely a negotiating tactic, but I think the lesson from this is that Trump is trying to reset the US economy with fresh injections of credit from banks through looser lending, reducing the size of government, and creating conditions for economic success within US borders and most importantly benefitting “main street” and Wall Street, not merely Wall Street (which tended to benefit more from the old system).
The change he proposes would have the US economy look more like it did in 1925 (another time of high tariffs) than it has looked for most of the last century. I think it is important to note that the world has changed quite a bit since 1925. The economy is global, and the US has led that charge. I do not think it is easy to undo 80 years of trade liberalization. The US is part of an economic village and right now, it is making itself a trade pariah.
How is the US going to be an export economy without anyone who wants to buy the goods? In my view, I think this strategy ultimately will backfire because the global economy is simply too integrated in its current form. The pandemic showed us the weakness of that (as have the Houthi rebels) but I think using tariffs and trade barriers to reset the economy puts America at an unfair disadvantage compared to other economies and won’t deliver the results that we hope to create. It remains to be seen if the Trump administration can successfully reshape global trade in their new vision. For businesses navigating this transition, it would be wise to begin working on domestic sourcing now by working with suppliers to find replacements for overseas goods, but this process will take time and consideration. We will be seeing a new kind of American economy, but will we miss the one we had for the one we are getting?
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Cameron Cowan, Special Guest Writer and Executive Contributor
Cameron Lee Cowan M.A. MFA; provides the research, insights, and context that people crave at The Cameron Journal. His primary background is in marketing and public relations. As a market trends navigator, he has spent most of my career helping businesses get their messaging, brand positioning, and communications right. He has also helped develop new products and services, navigate the global economic village, and find ways to increase margins. Through his journalism work, he helps companies navigate market and geopolitical trends for success and growth.
