A lot of those trade surpluses other countries run with the U.S. gets recycled into U.S. government and corporate debt. Who buys the debt if nobody’s allowed to run surpluses with the U.S.? Be careful what you wish for. From Ian Proud at strategic-culture.su:
In the art of the deal, threatening to crash the U.S. economy would bring Trump to the table far quicker than a tariff war.
As President Trump threatens the world with sweeping tariffs, he is trying to change the fundamental laws of economics through force of will. He won’t succeed. Rather than fighting back with reciprocal tariffs, developing countries should sell off U.S. debt.
The Austrian American economist Ludwig von Mises once said that ‘the balance of payments theory forgets that the volume of trade is completely dependent on prices.’
The United States has such a gigantic trade deficit, at over $1 trillion each year, because it can buy foreign goods more cheaply than it can produce them domestically. Some countries may subsidise production to lower prices, others might export goods that are further down the value chain compared to what American producers will make.
But, stepping back, the U.S. dollar is so powerful, that it renders American exports more expensive, irrespective of any distortions created by its trading partners. This is part of the exorbitant privilege in which the U.S. dollar acts the world’s leading reserve currency, amounting to 58% of total reserves.
Foreign countries put their capital into the U.S. because it is a stable and safe, increasing the price of the dollar on foreign exchange markets because demand is always high. A strong exchange rate makes foreign imports cheaper and that helps to manage inflation in America.
President Trump clearly wants to boost his support in the blue collar heartlands of America, driving job creation in traditional American industry that has been undercut by foreign imports over many years. But he can’t have two cakes and eat them both. He can’t simultaneously slash the huge U.S. balance of payments deficit – helping blue collar workers – while at the same time maintaining the U.S. as the destination of choice for foreign capital.
That would be to defy the logic of economics.
