Abstract
Is China promoting exports by lowering theM? Or did the United States manipulate the dollar by increasing its value and using the CIA to strike down any dictators attempting to sell dollars?
Will Trump's tariff policies reduce the US of trade deficit, leading to capital outflow from the United States and threatening the dollar's global reserve currency status? Or will foreign investors still be willing to invest in the United States?
We ultimately conclude that global trade is far more complex than people imagine, US deficit is the result of multiple seemingly opposing forces.
Overview
The president has just overturned the global trade landscape with a radical and tough tariff policy. The potential geopolitical and economic impacts of these policies are full of uncertainty, with fierce debates and completely opposing views.
Before delving deeper, we need clartoify point: we support free markets and global trade. Trade is essentially voluntary, occurs only when both they parties believe they can benefit. Therefore, trade is not a zero-sum game. There are many reasons-trade imbalances. Based on this, our view is that all tariffs are harmful, and reciprocal tariffs are equally harmful... implementation of tariffs will have a negative impact on global economic growth and productivity.
Nevertheless, there are still huge differences in how international trade imbalances work, their causes, and the impact of these tariffs on capital flows. This is the focus of this article.
Trump's Perspective
In Trump's view, the United States has been "taken advantage of" by its trading partners for decades, and the huge trade deficit is proof of this. These trade deficits are the result of protectionist policies implemented by major trading partners (such as China, the EU, and Japan).
The formula Trump uses to calculate "reciprocal tariffs" indicates that he believes persistent trade deficits have no legitimate reason and are entirely caused by protectionism.
In Trump's view, these protectionist policies include:
1. Tariffs
2. Regulatory policies that favor domestic producers
3. Currency manipulation by exporting countries (such as China, Germany, and Japan) by lowering their currency exchange rates against the US dollar
Due to these policies,, US base has weakened, leading to a difficult economic environment for US workers, who are an important part of Trump's "Make America Great Again" (MAGA) political base. By fulfilling campaign promises and ultimately creating a fair competitive environment, the Trump that US consumers will buy more domestic products, thereby promoting the revival of US manufacturing and revitalizing the US economy.
Petrodollar Perspective
Many believe that Trump's view of trade indicates a of economic understanding.. fact, States has beneffrom deficits. Americans can consume goods from Asian countries such as China, Japan Japan, Thailand, Vietnam, and South Korea at prices, while consuming oil from the Middle East (East (or benefiting from low oil prices caused by Middle Eastern oil production).
This makes the makes the United United States the winner, acquiring all goods, while Asian workers become the losers, spending entire days manufacturing products under harsh conditions and receiving only meager compensation. is essentially the "magic" that United States has successfully performed on its trading decades p States has persuaded trade surplus countries to invest invest funds in the United States, thereby maintaining the dollar's strong position and allowing this situation favorable to the United to States to continue. Remember, there is no gold standard standard now, trade and defnot cause the United States to lose precious gold reserves. The United States can bear these deficits with almost no cost.
This view is almost completely opposite to Trump's view Trump believes that was the United was States was at a disadvantage in trade, therodoil dollar perspective believes that the United States is the biggest winner.
However, this situation is unsustainable because trade deficits will continue to accumulate over time. The only reason this state can last so long is that the dollar is the global reserve currency.
When other countries export goods to the United States, they will invest their cash income in the US to maintain this "Ponzi scheme" operation. However, one day, these accumulated imbalances will become too large, entire system and Americans will become poorer in actual economic levels as a result.
<2>HrOverthrowingningAddRegime Libya's Gamaddrown killed for holding large amounts of gold and planning to settle oil transactions with gold... policy that weaken the's dollar dollar's status currency In fact, according to a leaked email from Sidney Blumenthal to Hillary Clinton in 2011, Libya's gold policypwas one of the "influences" in the decision to attack Libya. (France and the United Kingdom also also played important roles in this action, not just the United States.)<2. Iraq War and Saddam's Oil Policy In October 2000, Iraqi President Saddam Hussein decided to stop settling oil transactions in US dollars and switch to euros. This was considered one of the key motives for the US invasion of Iraq and the eventual execution of Saddam. The alleged threats of weapons of mass destruction and Saddam's poor human rights record were actually just a smokescreen. The core reasons were all all related to oil and the dollar's status.As a result of these and other aggressive diplomatic policies, oil-exporting countries like the UAE and Saudi Arabia know that they must continue to settle oil transactions in US dollars and invest the large amounts of wealth accumulated from oil in US dollars and US assets, otherwise they may face the "wrath" of the US Intelligence) and other military institutions.
To highlight this contradiction, Trump recently recently tried tried to prevent the the BRICS countries fromrics a that competes with the US dollar. If the BRICS plan succeeds, it will weaken the dollar dollar's status and enhance the value of their own currencies. So the question is - shouldn't Trump want a weaker dollar? After all, a weaker dollar would benefit the the MAGA manufacturing base. However, Trump's latest tariff moves seem to accuse BRICS countriesering exchange promote the States, which is clearly a set of contradcontradictory accusations.
<>what exactly does the United States want China to do? Is it to buy US Treasury bonds or sell US Treasury bonds? It seems that no matter what China chooses, the United States cannot tolerate it. It is worth noting that we are not singling out Trump for criticism. fact,, many political figures - political regardless of party -iliation seem confused about China's monetary policy, such as Obama and Ge.Our view is that from the perspective of the petrodollar, the core of US policy is to support the US dollar's global reserve currency status, while China is preparing for the end of the dollar's reserve currency status.
This global trade perspective based on the petrodollar is possibly one of the most popular views among our readers and Bitcoin supporters. Famous analyst Luke Gromen is one of the main advocates of this perspective.
According to this worldview, the future of the US dollar is facing increasing uncertainty. Especially the rise of the BRICS countries is gradually becoming a major threat to US dollar hegemony. These countries may gradually move away from using the dollar as their primary trade and global settlement currency. Therefore, it can be foreseen that at some point, the dollar's global reserve currency status will be weakened, and the prices of oil, gold, and even Bitcoin may rise significantly as a result.
From this perspective, Trump's new tariff policy could have particularly severe and dangerous impacts on the United States. The trade surpluses of exporting countries will decrease, and they will no longer accumulate large amounts of capital each year to invest in US Treasury bonds and other US assets.
Instead, these countries may begin to sell existing US assets to increase domestic consumption and compensate for the loss of exports to the US. This chain reaction could become a catalyst for a US Treasury bond crisis and further undermine the dollar's status as a global hegemon.
Capital Flow Perspective
Besides the petrodollar theory, there is another less-mentioned view about trade imbalances that we believe is equally valuable.
Recall from an introductory economics course that the Balance of Payments (BoP) must always remain balanced. This is because every person buying dollars must correspond to someone selling dollars.
Therefore, if a country has a trade deficit, it must have a corresponding surplus in the capital account (financial asset flow), and vice versa. But the question is, what exactly drives these changes?
It could be that hardworking Chinese workers produced high-quality goods that Americans truly want, which drove the US trade deficit and subsequently led to a US capital account surplus. On the other hand, it could also be that Chinese investors want to move capital to the US, which led to a US capital account surplus, and subsequently formed a trade deficit with China.
This perspective is more optimistic about the US compared to the petrodollar theory. The US has the world's best companies, which are more focused on profits and return on equity than other regions. The US corporate culture is also more merit-based, and compared to Europe and Asia, US companies are less constrained by "networks", background, and even racial or gender influences. This culture helps the US attract the world's best talent.
The US has the world's most innovative companies, such as Google, Microsoft, Apple, Amazon, Nvidia, Meta, OpenAI, Tesla, Broadcom, Visa, Netflix, etc.
These high-quality, high-growth companies attract global investors' attention.
Moreover, many Asian investors want to transfer capital out of their countries to prevent their assets from being confiscated by the government. In comparison, the US at least theoretically has stronger rule of law and investor legal protection.
Trump's view that Asian exporting countries manipulate trade by lowering their currency exchange rates is actually completely wrong. In fact, these countries have been trying to raise their currency exchange rates to prevent capital outflows.
According to this worldview, the US capital account surplus is driven by these characteristics, which in turn leads to the US trade deficit. Therefore, persistent trade deficits may not be a problem, but might instead be a sign of success - the key is what drives this result.
In our view, these economic factors are far more important to the dollar's global reserve currency status than US diplomatic policy in the Middle East. For example, eliminating any dictator who tries to settle oil in gold may not have much practical effect. This is not to say that we want to defend the US's hypocritical and inglorious diplomatic policy in the Middle East.
Indeed, there may still be some people in US security agencies who believe in the petrodollar theory, although this theory now seems somewhat outdated and irrelevant. If this is not the case, there are many other dishonest theories that could be pointed out.
Moreover, even if competitive legal currencies cannot compete with the dollar because US investment opportunities are more attractive than other countries, gold has always been a potential competitor. The CIA may still need to take some "dirty tricks" to contain gold.
The reason US authorities may want global trade to be settled in dollars is not to protect the dollar's value, but to enhance US control over global affairs, thereby increasing its ability to freeze assets, block payments, and further expand its global power.
If you agree with this view, even if you believe that "tariffs are always a bad idea", Trump's new tariff policy may not immediately cause a devastating destruction of the dollar's reserve currency status. Of course, this is still a tax policy that will harm US businesses, weaken the economy, and cause losses to all parties, but the dollar's hegemony may still be maintained for some time.
Summary
The reality of the global economy is complex and variable. The petrodollar theory does have its rationality, and trade deficits do drive capital account surpluses to some extent. However, the same situation can be interpreted from multiple angles and makes equal sense. The view that capital account surpluses drive trade deficits is also valid. In fact, this driving force is bidirectional, and understanding this is crucial to understanding global trade.
For the United States, both of these factors are very important, and analysts should not ignore either. Additionally, Trump's views on trade have some merit in certain situations, and some politicians do believe this perspective at times. This may explain why some politicians seem contradictory when discussing China's exchange rate manipulation.
Nevertheless, we still believe that Trump's trade views are largely untenable. Tariffs are essentially a tax on Americans that will weaken the US economy. While the US middle class may have become relative "losers" in the globalization process, with more benefits flowing to the elite class, this does not mean that reversing globalization will make the middle class relative "winners".
Trump might abolish the IRS and replace income tax with tariffs, returning to economic policies from before the 1930s. If this were to happen, that would be another issue to discuss, but we do not believe this will occur.
Of course, there is a conspiracy theory worth mentioning: Trump announced these tariffs to deliberately cause an economic collapse, attracting investors to the US Treasury bond market, lowering yields, so the US can refinance at lower interest rates and delay the inevitable crisis of being unable to pay debt interest.
From our perspective, while this possibility exists, it is unlikely. Occam's razor may apply - the simplest explanation is often the best: Trump simply likes tariffs and even considers them the "most beautiful word".
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