Trump’s tariffs are a bad idea for the United States, and the reasons are a mixture of complex and boring, but I’m gonna try and brighten it up! It also illustrates why the US economy is in big trouble, if not today, tomorrow, because even most people inside of business don’t understand this crap. They just benefit from it while thinking they’re superheroes or whatever Elon Musk tells himself while on ketamine.
The story starts at the end of World War II. Every major economy – except one – had been bombed into ruins. After the war, the US had mind-blowing economic dominance. All roads for trade and banking ran to the US. Countries like to have a bunch of US dollars on hand to shore up their currency, so the US dollar became the de facto “global reserve currency.”
This worked well for about twenty-five years because the US economy was export-based, but eventually, the rest of the world rebuilt and started to catch up. Around 1970, American imports started to match and then exceeded exports. This meant that more dollars were going out than were coming in, which could have had incredible inflationary pressure on the United States (and, in fact, you saw some of this during the 1970s, what the Carter administration called “stagflation.”) But, starting about 1981, a bunch of bankers in the US realized that this wasn’t a tragedy but an opportunity. The US still had a privileged position in the global economy because of its post-war trade ties and de facto reserve currency status. In short, the rest of the world couldn’t afford to let the dollar fail. So, rather than try to “fix” the problem of being an import economy, they decided to shift the US economy from manufacturing to services. Importing things to the US was necessary for the US economy to work.
Now, imagine you’re a country like Germany. For well over a century, your entire economy has been based on manufacturing quality engineered products like cars and planes. Your economy is almost necessarily export-based: you sell things to other countries. By far, your biggest trade partner is… the United States. So, you hold a lot of US currency, the good ol’ dollar. Before US economic dominance, Germany would get its marks back by trading with other countries for goods and services. But, now, everywhere Germany goes, everyone is flush with dollars, too, because it is the global reserve currency. What do you do with your dollars? Theoretically, you could sit on them, but inflation makes that a losing proposition (and it is one of the reasons we allow inflation to exist; modern inflation levels would be considered a crisis at any other time.)
What you do is… buy things in the US! You buy “FIRE,” which is short for “finance, insurance, and real estate.” Your economy is feeding the United States’s economy. The US needs to do nothing except buy imports, and the more imports the US buys, the more you must invest in FIRE. And because, well, by definition, FIRE assets rise because of investment, the investment appears good to the people holding the assets. Sure, it’s all in dollars, which means that you’ve got to keep feeding the American goliath, but it’s a lot of money and there are worse places to spend it than the US. For the people who hold the assets, great! For the country? Less so.
For your country, it means there is a constant outpouring of assets into the US. In the long run, your currency gets squeezed, which is what is happening in Germany right now and what happened in Japan (another export-based economy specializing in precision engineering) twenty-something years ago. It happened in Japan first because they had fewer trading partners than Germany, so more of their economy was feeding the American Monster, which caused all kinds of economic pressures on Japan. After too many of a country’s assets are held in other hands, a country falls into stagflation. Your nation’s assets are, quite literally, held by someone else.
Getting back to Trump: he’s making it harder for countries to sell things in the United States. But the US economy is being floated by the constant sale of foreign goods into the US and the investment of those firms in US FIRE assets! If Germany sells fewer goods in the US, it has fewer US dollars to pump into the US economy. That’s why the US has been working so damn hard to destroy all trade barriers! Such a world benefits US interests!
The real risk is, well, two-fold. The first is that if the United States makes it too hard to buy and sell things there, the rest of the world will go somewhere else. The second risk is that China understands this peril to the US better than the US does. Their entire foreign policy is designed to direct foreign markets toward China. It’s the reason why they dropped Deepseek when they did. Make no mistake, that was a direct attack against American global computer service dominance.
The whole reason for the Beltway Intiative is to use Chinese currency as the reserve currency for the parts of the world that are underserved by the US. Right now, that includes Russia, which is excluded from the US banking system.
Trump’s tariffs, specifically, make it harder to sell things to the US, while China is offering its economy and currency as a reserve. It isn’t just the wrong thing to do, it is the wrong time to do it.
While – at the same time! – Trump is antagonizing our allies! He’s tossing big tariffs on Mexico and Canada, two of our closest allies! Beyond the economic harm to all three countries, how does that make Mexico and Canada feel? I know that Trump and his supporters imagine it makes them feel respectful to the US, but you can believe that only if you ignore what Mexicans and Canadians are saying. They’re pissed. It’s bullshit. Does Trump imagine that Canada and Mexico don’t want to stop drug dealers from crossing the border? But the US can’t stop them, either! The problem of international drug dealing is famously intractable. It’s complex and socially delicate. To punish Mexico and Canada for international drug dealing that the US also cannot stop in a way that won’t even help Mexico and Canada stop drug deals… it hurts. It increases resistance to all things American, which, I believe, will be the greatest harm in all of Trump’s foreign policy. As long as the economic order centered on the US was benign, people could live with it. If it is used as a cudgel by the United States? People will start looking elsewhere, and so far, China hasn’t been doing that…
The tariffs are a bad idea for the United States, mainly because it doesn’t recognize why generations of US central bankers have constructed international finance. Giving up the exalted position of the US is, in my opinion, a good idea in the long run. To do it without a plan, born of ignorance and stupidity, is worse than what we have now, however.