The method Tariffs are a familiar tool to President Trump and his team, since they were used—with success—extensively in 2018- 2019 in trade negotiations with China.
Joe Biden kept them.
Those tariffs passed with little discernible macroeconomic consequence— inflation remained stable or even declined, and GDP growth continued to perform quite well despite the Fed’s hiking cycle. It is therefore reasonable to expect tariffs once again to be a primary tool
The Core Tradeoff
Synthesizing these properties of reserve assets, if there is persistent, price-inelastic demand for reserve assets but only modestly cheaper borrowing, then America’s status as reserve currency confers the burden of an overvalued currency eroding the competitiveness of our export sector, balanced against the geopolitical advantages of achieving core national security aims at minimal cost via financial extraterritoriality.
The tradeoff is thus between export competitiveness and financial power projection. Because power projection is inextricable from the global security order America underwrites, we need to understand the question of reserve status as intertwined with national security.
America provides a global defense shield to liberal democracies, and in exchange, America receives the benefits of reserve status—and, as we are grappling with today, the burdens.
This connection helps explain why President Trump views other nations as taking advantage of America in both defense and trade simultaneously: the defense umbrella and our trade deficits are linked, through the currency. In a Triffin world, this arrangement becomes more challenging as the United States shrinks as a share of global GDP and military might.
As the economic burdens on America grow with global GDP outpacing American GDP, America finds it more difficult to underwrite global security, because the current account deficit grows and our ability to produce equipment becomes hollowed out.
The growing international deficit is a problem because of the increased strain it places on the American export sector and the socioeconomic problems that follow therefrom. That the bargain becomes less appealing in this context brings us to present, whereby there is growing consensus in America to change the relationship.
A User’s Guide to Restructuring the Global Trading System
November 2024
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