A simple way to look at Trump’s complex agenda
Trump wants to extract tributes from the rest of the world. But his policies could end up diminishing America’s prominence, making the respect he seeks harder to come by
Occam's razor, a problem-solving principle, suggests that given the choice between multiple explanations, the simpler, obvious one is to be preferred. Applying this approach, US President Donald Trump’s agenda does not require complex economic or political theorising. They involve three simple objectives.
The first is power. The president wants to increase his own authority, forcing others to supplicate themselves. The reciprocal tariffs require countries to make “phenomenal offers” to buy favourable treatment. NATO chief Mark Rutte’s craven flattery, including allegedly referring to Trump as “daddy”, is the behaviour expected.
The second objective flows from the president’s association of intelligence with wealth—the attitude summed up by the line, ‘If you’re so smart, how come you’re not rich.’ Many of his policies are designed to enrich the president and his funders. Examples include the first family’s own investments and trading, BlackRock’s pending acquisition of two Panamanian ports and the administration-aligned firms’ interest in TikTok’s US business. The parallel is 1990s’ Russia, where a small group of oligarchs became wealthy by looting state assets as the Soviet empire disintegrated.
The third involves Thomas Carlyle’s ‘great man of history’ theory. Trump sees himself as an extraordinary leader, possessing superior intellect and heroic courage, whose manifest destiny is to change and rule over America and the world. This is allied to nostalgia and a worldview firmly rooted in the 1980s.
A reordering of the international trading and monetary system is central to this strategy. Prior to joining the administration as chair of the Council of Economic Advisers, Stephen Miran published a proposal to lower the dollar’s value and reduce current account and fiscal deficits. Popularly known as the ‘Mar-a-Lago Accord’—a nod to the Plaza and Louvre accords of the 1980s—it includes a series of steps, including tariffs and currency adjustments to force economic concessions favourable to the US from other nations. One controversial component is a restructuring of US public debt entailing a forced exchange of some US treasuries for long-dated (100-year or perpetual), low- or zero-interest securities to lengthen maturities and provide secure funding. Alternatively foreign holders of US government bonds can place them in escrow or pay an ‘user fee’. Controls over capital movements into and out of the US are possible.
Another element is extracting tributes and territories. The proposed minerals and energy agreement with Ukraine is a brazen attempt to extract payment for ‘services provided’. A similar deal with the Congo has also been negotiated. Allies can increase defence spending, benefitting US armament manufacturers who dominate supply, or pay for American protection. A demand for stakes in semiconductor makers in return for support for Taiwan is not fanciful.
Territorial claims (over Canada, Greenland, the Panama Canal and the Gaza Riviera) alongside threats or actual military actions, such as those in Iran, in the name of national and international security seek to expand the US dominion. After all, Alexander became great by conquering much of the then known world. President Trump, who identifies with the godfathers in Mafia movies, misunderstands the opposition from affected parties and geo-political rivals.
Greek letters, equations and citations of misunderstood academic articles notwithstanding, the tariff plan looks like something an AI engine would produce. The latest threat to some trading partners is for tariffs of 25-40 percent unless their companies choose to manufacture in the US. Any reciprocal tariffs on American products or membership of the ‘anti-American’ BRICS, he warned, would trigger additional duties. The ‘90 trade deals in 90 days’ has not eventuated.
A trade war is likely. As the US has significant surpluses on the trade of services such as technology, damaging tariffs or outright bans on US services exports would hurt successful US industries. The US will be unable, in the short run, to substitute certain essential items resulting in higher prices or shortages. The assumption that overseas firms will absorb the tariffs is incorrect.
In 2016, prices of goods imported into the US did not rise because of the stronger dollar but the administration has stated it now wants a weaker currency. President Trump has threatened to punish, presumably through price controls, US car makers if they pass on the increased cost of inputs transferring the cost to businesses from consumers.
Some imports may be replaced with local production, but it would take years, increase prices and reduce choices. Re-shoring high-end manufacturing will struggle due to the lack of requisite skills given the resistance to immigration. It will not create the expected jobs as these industries are typically highly automated. Tariff revenues will end up being redirected as subsidies to many affected industries. Ultimately, national income depends on importing what you cannot produce or cannot produce at low costs.
The tariffs will benefit US’s trading partners. Barriers to exports into the US will mean producers are forced to cut prices as they divert stock to other markets as the EU has warned. Other economies will reflate shifting to domestic consumption rather than exports effectively bypassing America as the cost of accessing what President Trump calls “extraordinary economy of the United States—the number one market in the world” becomes prohibitive. Global exports to America of $3.2 trillion are not irreplaceable.
The US administration seems not to grasp that the US dollar’s dominance, rather than manufacturing, is critical to America’s position. Restructuring US debt as suggested would constitute a technical default on its obligations. MAGA would become ‘Making America Greece or Argentina’ (both defaulters on their foreign debt). This would accelerate capital flight making it more difficult to finance America’s budget and trade deficit. It risks permanent damage to US capital markets. Up to 70 percent of all funds that flow through the US market are from overseas investors recycled through American banks and asset managers because of low domestic savings.
As much of this is re-routed over time, New York’s prominence as a financial centre will diminish. Attempts to extract tribute and expand territories challenge other nations’ sovereignty. Few will pay for uncertain US protection or surrender to it.
The administration’s path, which ignores economics and history, is indeterminate. The planning and execution have been haphazard. But as Winston Churchill, to whom Trump has compared himself, observed: “The statesman who yields to war fever must realise that once the signal is given, he is no longer the master of policy but the slave of unforeseeable and uncontrollable events.”
Satyajit Das | Former banker and author of The Age of Stagnation
No comments:
Post a Comment