Yesterday, I outlined the broad strategic goal of US President Donald Trump’s tariff war. Broadly put, it’s about nobbling China’s cheating of the global trade system, fuelled by annual billions of intellectual property theft, leveraging slave labour and benefitting from one-sided ‘free’ trade, where Chinese exports benefit from low-tariff barriers even as China protects its own market with selectively strict trade barriers. Never forget how China bullied Australia with import bans and massive tariffs to try and silence criticism of its actions on Covid. At the same time, Trump is aiming to rebuild American industry: key to a robust defense.
The take-home is, if you’re going to hide behind America’s apron strings, well, you have to be prepared to pay for it.
This is what Europe has been doing since the end of WWII. EU countries have continually failed to meet their obligations under the NATO treaty, preferring to welch on defence and spend the money on massive welfare states instead. America spent vast sums, first rebuilding Europe (including the aggressor Germany) after its self-inflicted destruction (yet again), then shielding it from Soviet expansionism. Perfidious Europe repaid American generosity with unending sneers.
As Trump warned in his first term, the free ride is over.
Behind the Trump tariffs and the country-to-country discussions are serious global economic and defence issues which are rarely discussed.
The best economic explanation I can find for the Trump strategies is contained in a recent 41-page essay by Hudson Bay Financial senior strategist Stephen Miran.
A former senior economic adviser to the US Treasury, Miran claims that America’s status as a reserve currency is a two-edged sword. Most notably, it undermines the competitiveness of US exports.
Because America provides reserve assets to the world, there is massive global demand for US dollars and treasury securities, which is not rooted in balancing trade or in optimising risk-adjusted returns. These trillions of dollars of capital inflow artificially boost the US dollar.
Then, the US spends the money on low-priced imported goods, which decimates American manufacturing and surrounding service industries. This creates great hardship in selected geographic areas, but buoyancy in the financial sector.
Many of the countries squealing the loudest are the worst offenders themselves. China imposes 67 per cent tariffs on American imports. The EU, one of the most heavily protected markets in the world, slaps 40 per cent tariffs on imports.
In combination with the high US dollar, these protected markets grow at the expense of the US.
Accordingly, the US’s share of global GDP halved from 40 per cent of global GDP in the 1960s to 21 per cent in 2012, and has recovered slightly to its present level of 26 per cent.
Obviously, this state of affairs is unsustainable. Left unchecked, it would result in the US dollar losing reserve status, which would make the market effects of Trump’s tariffs look like the merest ripple.
The US is nowhere near this point, but unless action is taken it will become an issue, adding to the current community pain in selected areas.
Of course, having the US dollar as the world currency gives the US great financial power to sanction countries – as Russia discovered.
The natural question, of course, is: why did Trump target countries like Canada and Mexico harder than China? For the simple reason that China worked around tariffs imposed in Trump’s first term by exporting goods or components to Mexico and Canada and then re-exporting to the US after minor processing. This allowed China to effectively avoid tariffs. It also benefited those countries at, again, the United States’ expense.
At the same time, Trump didn’t fail to notice that depreciation of Chinese currency offset much of the tariff burden. Far, then, from the price hike to US consumers a screeching media-left fret about, the net cost will be negligible to Americans.
America provides a global defence shield to liberal democracies, and in exchange, America receives both the benefits and burdens of reserve status.
President Trump believes European and other countries are taking advantage of America in both defence and trade measures, creating a strain on the American export sector and the socio-economic problems which follow.
So, the simple question for NATO and AUKUS countries is: do you want to benefit from a strong America, or not? If you’re going to grumble about America as the global policemen, simply ponder the alternative.
How would you like communist China and authoritarian Russia running the show?
