Lessons from Trumponomics
Unless Trump addresses the role of the dollar in the international economy, there will be no revival of American manufacturing
The American economy is in dire need of reform, and American voters have long known it. Despite outward signs of health — robust growth, high salaries, and a booming stock market — America is nonetheless remarkably unbalanced. In particular, it is woefully overweight on consumption, financed by selling off assets to foreigners. This fundamental disequilibrium has caused an atrophied productive sector and enabled a ridiculously indebted government. It concentrates wealth in the financial centres that absorb foreign capital flows and among the beneficiaries of government programs. More recently, the labour market has run into trouble and growth has come exclusively from a few fashionable sectors. Trump was rare not just in recognising the economy’s imbalances, but advancing a clear program with which to combat them — yet his policies are now moving the American economy further away from where it needs to be.
The tariff program, however well-intentioned, has so far been a failure. Despite confronting a very real problem, Trump has used the wrong policy tools, and has thus damaged the very sectors of the American economy he sought to help. Politically and diplomatically, it has also proven humiliating and ineffective. It is hard to spot any impact of tariffs on the Chinese economy; the threat of further imposition did nothing to deter export controls on rare earths. Meanwhile, on the home front, the ‘One Big Beautiful Bill’ is undermining the objectives of his trade policy. It has also set off a wider panic about sovereign debt sustainability, as well as a brief tantrum in Elon Musk.
Right-wingers both in America and elsewhere should pay attention. Remaking the international economic order will be just as difficult as it is necessary. It is therefore essential to learn from this teething stage and go beyond it.
Tariffs, Industrial Policy and the Trade Deficit
The most glaring issue with Trumponomics is the tariff program. Since we last covered the tariffs (‘Where next on tariffs?’, May 2025), American manufacturing has slipped into a recession, the administration has started considering tariff relief for automakers, and the trade deficit has continued to soar.
American manufacturing is heavily integrated into global supply chains, so tariffs drive up the cost of export goods by making components more expensive. The actual application of tariffs is extremely complex, such that customs officers themselves often have no idea what to charge on a product; the same goods can end up being taxed at vastly different rates. Both of these problems foul supply chains and force businesses to delay orders. Alongside AI, rising interest rates, and post-COVID overhiring, uncertainty over tariffs is likely a contributing factor to the American job market’s slowdown, as firms delay hiring until the regulatory environment in which they are operating stabilises. Given the circumstances, it is surprising that the manufacturing sector has not shrunk more (perhaps explained by a rush of orders to build stocks in advance of tariffs), although if trade policy continues to be as chaotic and extreme, then it almost certainly will.
Sadly, the administration seems to be soldiering on with their existing strategy. Instead of rationalising tariffs at consistent lower rates, it is continuing to add layers of bureaucracy with relief programs and bailouts. There is seemingly no expectation that American manufacturing should actually be competitive without explicit, rather than implicit, government assistance. A planned deal with Japan would see Tokyo dedicate a $550 billion special fund to American industrialisation. But who would buy their products? Without changing the underlying conditions, American industry will continue to be uncompetitive. Effective industrial policy, such as having the currency adjust to create a legitimate incentive for private investment, seems to have fallen by the wayside.
Rebalancing the American economy would require adjusting the incentive structures affecting industrial competitiveness rather than propping up disadvantaged industries with handouts and tariffs. The latter encourages rent-seeking and favours established losers; the former makes competition easier and allows winners to grow even quicker. The tariff program, as it morphs into relief programs and coerced investment deals, is set to reduce rather than increase American industry’s ability to compete. Tariffs need to be rationalised at consistent low levels, and instead trade policy should take notes from established economists, including within the Trump camp, who know which measures would really target the root of the trade deficit: America’s status as a chronic capital importer, and its strong currency. Trump has long been more vocal than any other American politician in stressing that America is getting killed on trade. If he fails to do anything about it, then it will be a major blow to his credibility, and the momentum that should have been his could end up going to his opponents.
Currency Strength and Consumption
America’s strong dollar is both the how and the why of much of its economic imbalance. A stronger currency gives consumers more purchasing power to import from abroad, but makes exports more pricey for foreign consumers, and buying domestic goods less attractive for consumers at home. Thus, the historic dominance of the dollar has reshaped America’s economy to create an economy of super-consumers, whose productive capacity is inherently undermined in favour of their rivals abroad. Traditionally, a trade deficit is supposed to result in currency devaluation; the large amount of the currency circulating abroad would saturate the market, and people would stop accepting it for exports and instead use it to buy imports. However, the American dollar has historically been different, and indeed central banks were (in effect) forced to hoard USD as a hedge against balance of payments volatility, and for collateral in global trade. This is the so-called ‘exorbitant privilege’ that the USA enjoys by virtue of issuing the world’s reserve currency. However, as Trump’s election and recent national security concerns have made abundantly clear, being able to run a persistent trade deficit is not the privilege that it has been made out to be. Economist Michael Pettis has instead argued that it is an ‘exorbitant burden’.
Today, the strong dollar is maintained less by its status as the world’s reserve currency, and more through its role in allowing the world’s surplus countries to export demand and maintain the value of their excess savings. Countries like China, following an economic model pioneered in Japan and later copied by Korea and Taiwan, encourage their citizens with various policies to save very large portions of their income, resulting in a household savings rate more than six times as high as the US, at 30%. The original purpose of this policy was to allow for an ample supply of capital with which to finance investment, and thus to allow the country to develop. Such a policy made a sense in the post-Mao decades, when China had to finance the massive task of building modern industry, infrastructure, and housing for more than a billion people. Capital was extremely productive — perhaps more productive than ordinary people would be able or willing to recognise, given time preference.
But as domestic targets for investment have become increasingly oversaturated, the surplus savings are now loaned abroad or used to buy foreign assets. America is the largest destination for them, and thus the dollar plays the greatest role in accommodating them. In addition, America’s financial system absorbs huge amounts of capital from European and oil-exporting surplus countries, further juicing the dollar and disincentivising Americans from buying, or exporting, their own goods.
Rather than tariffs on imports, the most effective solution to this is therefore likely tariffs on money. Even if tariffs on goods were consistent and supply chains were completely reshored, Chinese goods in particular are still priced very cheaply to the American consumer due to a lack of currency adjustment. The imports would therefore be smuggled or rerouted through third countries. Tariffs on capital flows would be different, and allow for genuine changes in the macroeconomic incentives for production and consumption.
What’s the catch? Why has this not been done already? Parts of American society do, of course, benefit from the current arrangement. As such, if Trump wants to achieve his stated aims, some parts of American society are going to lose out.
The ‘One Big Beautiful Bill’
The only reason why America could not easily reverse its trade deficit through restricting the capital inflows juicing its currency is the fiscal deficit. American corporations and households do not run aggregate deficits, and so in the aggregate do not need to source capital from abroad. The government, however, has long taken advantage of other countries’ surplus capital to finance its deficits abroad at low interest rates. In the words of FT wizard Martin Wolf, ‘…the benefit to the US of its persistent net capital inflows is the ability to have a larger fiscal deficit and so grow its public debt. This does not look like a good bargain.’ Indeed. While the government cannot unilaterally stop borrowing without forcing capital inflows into debt bubbles (such as happened in the lead-up to 2007), a tax on capital inflows while the government continued to finance a huge deficit abroad would still permit a huge deficit in the trade account, as there would still be a surplus in the financial account.
This is the main problem with the ‘One Big Beautiful Bill’. Its most important provision, of course, was in keeping Trump’s promise on illegal immigration, primarily through funding ICE. But the huge tax cuts which it extended leave the American state running deficits almost equivalent to the entirety of its tax revenues. While Elon Musk’s drug-fuelled meltdown over this borrowing may have been embarrassing and inconsequential, it was not entirely unjustified. The American deficit, unlike Japan’s, is not financed domestically. Borrowing to fund tax cuts for wealthy boomers directly contradicts attempts to help American manufacturing and enables the continued overvaluation of the Dollar. While continuing income tax cuts could in theory help with increasing domestic savings, America’s wealthy are remarkably avid consumers. Rebalancing the tax regime to favour production over consumption this most definitely is not.
Ultimately, the ‘One Big Beautiful Bill’ gives with one hand, but takes with the other. Deficit spending is not always a bad thing. But in the context of the contemporary American economy, it directly undermines attempts to help the productive sector and rebalance the economy. Barring a deeply disruptive inflation that wipes out the value of the dollar, it will also put America’s next leader in a difficult situation. America’s fiscal headroom is rapidly shrinking, and the government spends as much on debt servicing as it does on the entire military. Even if fears of a sovereign debt crisis are likely overblown, running a deficit of such a size is inherently unsustainable over the longer term, even for the United States.
The Wages of Destruction
There is a lot of good in Trump’s economic program. Trump has consistently refused to engage with the economic suicide attempt that is unilateral decarbonisation, and has cut many useless or even explicitly destructive parts of the federal government. Immigration restrictions and deportations should shrink the pool of available labour at a time of widespread automation in industries like transportation and IT. This will benefit American workers, and ensure that they are less likely to suffer unemployment or cuts to their salary. The dollar is consistently down against other major currencies, even if this is likely due to policy instability, and stock markets are of course roaring off an AI boom (although most other stocks have seen tepid growth). Growth, as noted earlier, is strong, even if awkwardly distributed. In the words of asset manager Stephen Jen: ‘The Trump Administration wanted lower interest rates, a weaker dollar, buoyant asset markets, and no recession. So far, so good.’
However, these are reasons to go further rather than to be complacent. For dollar devaluation to benefit American producers, it will have to be combined with a rationalised and reduced tariff program; for it to be sustainable, with fiscal prudence and controls on capital flows. Immigration restrictions will benefit American workers, but job creation will likely stay muted as long as the regulatory environment remains uncertain. Even if incentive structures are allowed to adjust, there are also still regulatory challenges to the effective development of American industry. Rare earth refining, for example, was hugely impacted by classification of its waste products as radioactive contaminants, as well as the fact that China used its surplus and the lack of American capital controls to buy up firms and relocate production. Implementing capital controls will also mean substantially rethinking the way that the government finances itself over the next few years, though the USG has managed to successfully close the deficit before.
The Trump Administration has already made enormous strides. Yet in key areas of macroeconomic policy, it risks undermining its own agenda through miscalculation and inconsistency. Right-wingers across the Western world should take note. Even in elections predicated mostly on social issues, if Trump can provide a blueprint for successful economic nationalism, then so much the better. It will make building a consensus against Chinese overproduction easier and show that there is another option to the Deliveroo economies of low wages, high immigration, and deindustrialisation. But if he cannot, the Right should be able to point at where he went wrong, and provide an alternative path.
Image credits: White House, Public domain
This article was written by an anonymous Pimlico Journal contributor. Have a pitch? Send it to submissions@pimlicojournal.co.uk.
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