Trump, Tariffs, and Tantrums
The United States is facing a balance of payments problem, similar to the one Britain encountered post-World War II. Simply put, the U.S. imports more than it exports, leading to a consistent outflow of money from the country.
Historical Parallel: Britain’s Post-War Struggles
Before WW2, Britain’s empire functioned as a massive single market where British industries thrived, shielded from competition, in captive markets. When the empire dissolved, these industries faltered.; exports declined, imports surged, and Britain endured decades of balance of payments crises, culminating in Black Wednesday.
Similarly, the U.S. was a major exporter until the 1980s. However, Reagan-era economic reforms favored financial services over manufacturing, dismantling much of America’s industrial base. Since then, the U.S. has consistently imported more than it exports, restricting economic growth.
Trump’s Solution: Tariffs
Trump aims to reverse this trend before it becomes as bad as it was for Britain. His strategy is tariffs, starting with goods from Canada, Mexico, and China. Tariff tantrums threatening America’s closest neighbours and allies.
But how will this play out?
Scenario 1: Inflation
If Americans continue buying Canadian, Mexican, and Chinese goods at higher prices, inflation will rise, lowering standards of living.
In the short term, this is the most likely outcome.
Trump is pressuring the U.S. Federal Reserve to cut interest rates, but the central bank remains hesitant. They fear that Trumps’ tariffs will boost inflation and lower interest rates could it worse. If the public perceives that politicians —not economists—are dictating monetary policy, inflation expectations could spiral out of control. This psychological factor becomes a self-fulfilling prophecy, as consumers rush to spend before prices rise further, driving inflation even higher.
Early indicators, such as a stronger dollar and falling Wall Street values, suggest that international markets anticipate long-term inflation and higher interest rates. Cryptocurrency values are down and gold is up, reflecting broader financial uncertainty.
Scenario 2: Repatriation
Trump envisions American companies bringing production back home, creating jobs, and revitalising the economy. While there are hints that some automakers might increase U.S. production, there are big problems with this plan:
- Time and Infrastructure: Rebuilding factories and hiring workers isn’t an overnight process.
- Workforce Challenges: Trump’s plan to deport 11 million undocumented workers will create labor shortages and drive up wages. Deporting 230,000 people per month for four years would be logistically complex and economically disruptive.
- Cost Dilemmas: Companies moved production abroad to cut costs. Bringing it back means either accepting higher labour costs (and passing them on to consumers) or paying American workers less than the undocumented immigrants they aim to replace.
For Trump’s plan to succeed without long-term price increases, Americans would need to do the jobs of deported workers—and do them for less pay. It’s unlikely that Trump’s voter base in the Midwest imagined this when they supported his agenda.
Scenario 3: Substitution
As tariffs make Canadian, Chinese, and Mexican goods more expensive, American consumers can shift to U.S.-made alternatives. Expanding capacity within existing companies is faster than building new factories, potentially easing inflationary pressures.
However, the reverse is also true. Canadian, Chinese, and Mexican consumers will likely face retaliatory tariffs on U.S. products, leading them to substitute American goods with alternatives from other countries.
Trump has a big problem:
- America’s top export to Canada is cars and trucks. If tariffs make them pricier, Canadians could switch to German or Japanese cars.
- Canada’s top export to the U.S. is energy, particularly heavy crude oil. While the U.S. produces oil, its refineries are designed for heavy, sour crude—primarily imported from Canada. Alternatives like Mexico and Venezuela are under tariffs or sanctions, leaving few viable options.
In short it is easier for Canada to stop buying US goods, than it is the America to stop buying Canadian. This imbalance could worsen America’s trade deficit instead of improving it.
Marginal Propensity to Import
Economically, wealthier consumers have a higher marginal propensity to import, meaning they’re more likely to spend additional income on imported goods. Trump’s tax cuts, primarily benefiting the wealthy, will amplify this trend. Tax cuts for the rich make the balance of payments worse. Funding those tax cuts with borrowing drives inflation up.
Alternative Strategies for the U.S.
Of course there are other ways to compete other than price. America could compete on quality and design. But America isn’t really good at that any more. The US is full of Mercedes, but no-one in Germany buys Cadillacs. With the exception of Tesla most American cars are rubbish, old fashioned designs, low fuel efficiency and terrible handling. Even Tesla are rapidly being over taken by South Korean electric car manufacturers and the Cyber-truck looks like it was designed by a 14 year old boy. The same is true for lots of US products, a few brilliant companies on the East and West coast, but lots of factories elsewhere that make products the rest of the world doesn’t want.
It’s actually striking that making products the world wants is so far down Trump’s list of options, that he hasn’t even thought of it yet.
But there is another way that would make America much more competitive globally.
Cut the value of the dollar.
Reduce the value of the dollar so much that it doesn’t matter if US workers are paid more, US exports will be so much cheaper around the world. A 30% fall in value would have the other benefit of reducing the real value of US debt held by other countries. China owns $750bn of US debt, and a big reduction in the value of the dollar would “haircut” them considerably. Given Trump has a long history of reneging on debt this would be a natural solution for him.
This would almost certainly require currency controls to stop people moving huge amounts of dollars out of the country in advance, but that would be manageable. Most countries who have restrictions on the movement of goods and people in and out of the country have capital controls anyway.
Lessons from Britain
Britain solved its balance of payments crises through several measures:
- The Single Market: EU membership provided frictionless access to the world’s largest market, boosting exports.
- Invisible Exports: Industries like finance and education brought foreign currency into the UK to balance out imported goods. Remember that when you are moaning about banker’s bonuses as you drink imported wine.
- Independent Monetary Policy: Giving the Bank of England autonomy reduced political interference in monetary decisions.
- Gold Reserves: Gordon Brown’s controversial decision to sell gold reserves diversified the UK’s currency holdings, stabilizing the pound during crises.
Trump’s approach starkly contrasts with these measures, which is why I am sceptical about his chances of success.
Trump’s Real Motive?
Cash from Chaos.
Ultimately, Trump’s tariff tantrum may not be about economic success. By creating chaos, he and his inner circle stand to profit while the broader economy bears the cost. The more disruption, the more opportunities for personal financial gain. It’s not even clear how far Trump intends to go ahead with Tariffs, he vacillates daily. The value of the dollar, the US stock market and crypto are all highly volatile right now, responding to each of Trump’s tantrums. If his inner circle know what is coming next they can take advantage of these prices swings to make huge sums of money.
And if you still don’t believe that tariffs damage the American economy and it’s standing in the world?
Well they do Ron Ron Ron, they do Ron Ron
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