Overview
The US President has just overturned global trade with radical tariff policies. There is significant uncertainty and controversy about the potential geopolitical and economic impacts, with completely opposite views from different camps.
Before discussing this issue, we want to clarify that we believe in free markets and global trade. Trade is largely voluntary, so it only occurs when both parties believe they benefit. Therefore, trade is not a zero-sum game. There are many legitimate reasons for ongoing trade imbalances between countries. Thus, we believe all tariffs are bad, and reciprocal tariffs are also bad. Therefore, these tariffs will harm global growth and productivity. Nevertheless, there are still huge differences about how international trade imbalances work, what their causes are, 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 severely deceived by its trading partners for decades, and the huge US trade deficit is clear evidence. These trade deficits are caused by protectionist policies of some of America's largest trading partners (such as China, the EU, and Japan). The formula Trump uses to calculate "reciprocal tariffs" indicates that Trump believes persistent trade deficits have no legitimate reason and are caused by protectionism.
In Trump's view, these protectionist policies include:
1. Tariffs
2. Regulations favoring domestic producers
3. Exporting countries like China, Germany, and Japan manipulating their currency exchange rates against the US dollar
Due to these policies, the US manufacturing base has been depleted, creating a severe economic environment for American workers, who are a crucial part of Trump's political base to "Make America Great Again". By ultimately achieving fair competition, as he promised during his campaign, American consumers will buy more goods domestically, thereby promoting the prosperity of the US manufacturing base and economic recovery.
Petrodollar Perspective
Many believe Trump's view on trade shows he doesn't understand economics. The fact is that Americans benefit from trade deficits. Americans benefit by consuming goods produced by low-wage Asian workers in China, Japan, India, Thailand, Vietnam, and South Korea, and of course by consuming oil from the Middle East (or benefiting from oil price drops caused by Middle Eastern production). Americans win because they get all the goods, while Asian workers lose because they produce products all day under harsh conditions and receive little compensation. This is actually a trick the US has successfully used against its trading partners for decades. The US somehow persuaded surplus countries to invest in the US, maintain a strong dollar, and continue this situation favorable to the US. Remember, without the gold standard, trade deficits won't make the US lose its precious gold reserves. The US can have these deficits with almost no consequences. This perspective is almost completely opposite to Trump's view that the US is a deceived country.
However, this is an unsustainable situation because trade deficits accumulate over time. The only reason this situation has lasted so long is that the dollar is the global reserve currency. When countries export goods to the US, they invest their cash earnings into dollars to maintain the Ponzi scheme. At some point, the accumulated imbalances will be so large that everything will collapse, and Americans' real income will be significantly reduced. To avoid this fate, Americans should invest in gold, and of course, Bitcoin.
The US has adopted multiple policies to try to maintain the dollar's status as the global reserve currency, and some of these policies are secret to make this plan continue as long as possible. Some of the most evil policies include:
Libyan leader Colonel Gaddafi was overthrown and killed because he held large amounts of gold and wanted to sell oil in gold, which would undermine the dollar's reserve currency status. In fact, as a leaked email from Sidney Blumenthal to Hillary Clinton in 2011 speculated, Libya's gold policy was "one of the factors" influencing the decision to attack Libya. (France and the UK were heavily involved, as was the US)
In October 2000, Iraqi President Saddam Hussein decided to stop selling oil in dollars and instead sell oil in euros. This was reportedly a key motivation for the US invasion of Iraq and killing Saddam Hussein. Thus, concerns about weapons of mass destruction and Saddam's despicable human rights record were a lie. It was all about oil.
Due to the above and other positive diplomatic policies, other oil-exporting countries like the UAE and Saudi Arabia know they must continue selling oil in dollars and invest a large portion of their oil-accumulated wealth in dollars and US assets, or they may face the wrath of the CIA and other US military institutions.
It can be seen that the above perspective is completely opposite to Trump's apparent view of global trade. Trump now accuses China of manipulating its currency's depreciation, while the US manipulates its currency's appreciation, and in some cases has clearly used extremely evil means.
To emphasize this apparent inconsistency, Trump recently tried to dissuade BRICS nations from creating a currency that would compete with the dollar, which would likely weaken the dollar and strengthen their own. Doesn't Trump want this? A weaker dollar would promote the manufacturing base of "Making America Great Again". Trump's recent tariff moves now seem to also blame BRICS nations for manipulating their currencies to depreciate and increase exports to the US, which seems to be a series of contradictory accusations against BRICS. What does the US want China to do, buy or sell US Treasury bonds? It's almost as if the US can't tolerate China doing either of these things. We don't want to single out Trump here, because he's not the only politician seemingly confused about the direction of China's currency manipulation - many people from various parties do this, such as Obama and Geithner. Our point is that from the petrodollar worldview, US policy is to support the dollar, while China is planning to end the dollar's status as the global reserve currency.
This petrodollar perspective on global trade might be the most popular view among our audience and Bitcoin enthusiasts. Renowned analyst Luke Gromen is a major supporter of this perspective. According to this worldview, the situation of the US dollar is entering a highly uncertain period. Especially the rise of BRICS nations poses an increasingly large threat to dollar hegemony, and BRICS nations might gradually abandon the dollar as their primary trade and global settlement currency. Therefore, the dollar's status as a global reserve currency might be weakened at some point, and the prices of oil, gold, and even Bitcoin might rise significantly.
If people think this way, the impact of Trump's new tariff policies could be especially destructive and dangerous for the US. Exporting countries will see their trade surpluses decline, and they will no longer invest large amounts of capital in US government bonds and other US assets each year. Then, they might start selling existing US assets to promote domestic consumption to compensate for the loss of exports to the US. This could become a catalyst for triggering a US debt crisis and weakening the almighty dollar.
Capital Flow Perspective
Regarding trade imbalances, there is another rarely mentioned viewpoint that we believe has considerable merit compared to the petrodollar theory. Remember Economics 101, the Balance of Payments (BoP) must always remain balanced. This is because every dollar buyer must have a seller. Therefore, if a country has a trade deficit, its capital account (financial asset flow) must have a corresponding surplus, and vice versa. But who can clearly explain what drives what? It could be hardworking Chinese laborers producing high-quality products that Americans truly want, leading to the US trade deficit and consequently a US capital surplus. On the other hand, perhaps Chinese investors want exposure to the US, leading to a US capital surplus and subsequently a trade deficit with China.
This argument is more positive for the US than the petrodollar theory. The US has the best companies that are more focused on profits and return on equity compared to other countries. US enterprises are also more focused on elite management than other regions like Europe and Asia, where who you know, where you're from, your race, or gender might be more important. This helps the US attract the world's best talent. The US has the world's best and most innovative companies like Google, Microsoft, Apple, Amazon, NVIDIA, Meta, Open AI, Tesla, Broadcom, VISA, Netflix, etc. Global investors want to invest in these high-quality and high-growth companies.
Many Asian investors also want to move capital out of their countries to protect themselves from government confiscation. In contrast, the US at least theoretically has stronger rule of law and legitimate investor protection. Therefore, Trump's view that Asian exporters have been manipulating their currencies to depreciate is completely wrong; in fact, they have been trying to manipulate their currencies to appreciate and trying to prevent capital flight. According to this worldview, these characteristics lead to a massive surplus in the US capital account, which in turn leads to massive trade deficits. Thus, persistent trade deficits may not be a problem but might be a sign of success. It depends on the driving factors.
We believe these economic factors are more important in driving the US dollar as a global reserve currency than US diplomatic policy in the Middle East. Killing any dictator who wants to sell oil in gold is unlikely to have such a significant impact. This is not to say we want to defend the dishonest and evil intentions behind US diplomatic policy in the Middle East. Some people in US security agencies might still subscribe to the petrodollar theory, even though it is now somewhat outdated and irrelevant. If this is not true, there are many other dishonest theories that could be pointed out. Moreover, even if competitive fiat currencies have no chance against the dollar because US investment opportunities are relatively more attractive than elsewhere in the world, gold can always compete. The CIA might still need to play some dirty games to stop gold. Perhaps US authorities want global trade to be conducted in dollars not to defend the dollar's value, but simply to give US authorities more control and power over global affairs, enhancing their ability to block payments and freeze global wealth.
If you agree with this perspective, even if you believe "tariffs are always a bad idea", Trump's new policy might not immediately completely destroy the dollar's reserve currency status. Of course, this is still a tax that will harm US businesses and weaken the economy, with everyone suffering losses, but dollar hegemony might continue for some time.
Conclusion
The reality is that the global economy is complex. The petrodollar perspective has its merits, and trade deficits do indeed drive capital account surpluses to some extent. On the other hand, the same situation can be viewed from multiple valid angles. The claim that capital account surpluses drive trade deficits is also not wrong. Driving forces work simultaneously in both directions, and understanding this is crucial for comprehending global trade. For the US, both factors are very important, and analysts should not ignore them. Trump's views on trade sometimes make sense, and some politicians occasionally believe this. This partly explains why some politicians seem contradictory in their claims about China manipulating currency.
That said, we do believe Trump's views on trade are largely ineffective. Tariffs are a tax on Americans that will weaken the US economy. The US middle class might be the relative losers of globalization, with the elite class benefiting, but this doesn't mean reversing globalization will make the US middle class relative winners. Trump might abolish the IRS and replace income tax with tariffs, reverting to economic policies from before the 1930s. If this happens, that would be another issue, but we won't bet on it.
Of course, there are conspiracy theories to discuss. Trump's announcement of these tariffs is deliberately intended to cause economic collapse, forcing investors to buy US Treasury bonds to lower yields, so the US can refinance its debt at lower interest rates and postpone the inevitable crisis of being unable to afford debt interest. We think this is possible but unlikely. Occam's razor might apply here; the simplest explanation is usually the best - Trump simply likes tariffs and considers them the "most beautiful word".
