By Eduardo Porter
(Eduardo Porter is an editorial writer and columnist at The Washington Post. He formerly worked at the New York Times, the Wall Street Journal, Bloomberg Opinion and Notimex. He is the author of "American Poison” and “The Price of Everything.)
"I think I have figured out the four-dimensional chess President Donald Trump is playing with the rest of the world — the rationale behind the seemingly incomprehensible barrage of tariffs and other blows he has delivered to friends and foes over the past weeks.
It is not unsophisticated. But it is flawed. Notably, he wants to pummel foreigners until they stop giving money to the United States. But he still wants to keep the dollar as the reserve currency of the world. Get it?
The core idea has been lying around for a while. Most recently, it can be found in a paper circulated last year by Stephen Miran, now Trump’s chief economic adviser, who argues that the root of the trade deficit that Trump so loathes lies “in persistent dollar overvaluation that prevents the balancing of international trade.” The reason for that is that foreigners buy too many Treasury bonds.
“America runs large current account deficits not because it imports too much, but it imports too much because it must export USTs [Treasury bonds] to provide reserve assets and facilitate global growth,” Miran wrote. To recalibrate the world’s financial architecture, the United States must persuade foreigners to stop buying the bonds.
America’s political class has been besotted with this idea for a while. It was embedded in the “Nixon shock” of 1971, when the administration first freaked out about the trade deficit. President Richard M. Nixon decided to drop the dollar’s peg to gold — until then the linchpin of the global financial architecture — and impose a 10 percent “import surcharge” across the board to force other countries to revalue their currencies.
Presidential advisers at the time knew the logic of the thing was … unorthodox: The normal effect of a tariff would be to push the dollar up, curbing Americans’ demand for foreign currency to buy imports. But then, as now, coercing allies was popular. (Washington at the time was also unhappy about Western allies’ insufficient defense spending and trade barriers.) As Nixon’s treasury secretary, John Connally, put it “foreigners are out to screw us, and therefore, it’s our job to screw them first.”
So Nixon walloped the world. “It is an action to make certain that American products will not be at a disadvantage because of unfair exchange rates,” he said. “When the unfair treatment is ended, the import tax will end as well.”
In a sense, he won. Four months later, the world’s major economic players gathered at the Smithsonian Institution in Washington and agreed to revalue their currencies. And he set a precedent for others to follow. In 1985, the Reagan administration gathered representatives of the major economies at the Plaza Hotel in New York and talked them into appreciating their currencies to deal with another U.S. trade deficit.
Miran proposes even more ambitious goals. Tariffs can be deployed not only to persuade foreign governments to appreciate their currencies but also to get them to swap Treasurys for bonds of very long or even infinite duration to reduce the United States’ interest payments. They can strong-arm “allies” to help isolate China and to increase their defense spending, preferably on U.S. weapons.
Tariffs are just one weapon in the U.S. arsenal. The United States could also impose a tax — Miran likes to call it a “user fee” — on holdings of Treasury bonds by foreign governments unwilling to do Trump’s will. It could threaten to withdraw protection with its defense umbrella from countries that refuse to let their currencies rise.
It all coheres in a twisted sort of way. Trump believes the United States to be the sucker of the postwar liberal order. It picked up the tab for peace, open markets and economic stability. Yet the lion’s share of the returns accrued to a bunch of free riders that cheated on trade and never spent enough on weaponry to fund decent welfare states.
Rather than invest in a stable world order, the hegemon will now charge for its services.
But, as with many other policies that the Trump administration has dreamed up, the grand plan has a problem: The goals contradict each other. It’s difficult, to put it mildly, to persuade every other country to stop buying dollar bonds and still preserve the dollar as the reserve currency of the world, which governments and private investors rely on to preserve their wealth in times of crisis.
The dollar’s position atop the world’s currency pecking order has been immensely valuable. While Washington’s dour gray cohorts moan that inflows of foreign money push up the trade deficit, the rest of the world watches in envy as the United States raises huge sums to finance a gargantuan fiscal deficit and a Brobdingnagian debt at low rates of interest, precisely because of its ability to attract so much foreign money.
Despite its seeming orthodox consistency, the story of woe repeated by Miran and others — that foreigners are hurting America by purchasing Treasury bonds and other U.S. assets — is still kind of nuts. It’s like arguing that foreigners are at fault for the U.S. budget deficit because if they bought fewer Treasurys, money would be more expensive, and members of Congress would be more responsible about taxing and spending.
The United States, by the way, makes a pretty penny from this trade. As noted by economists Pierre-Olivier Gourinchas and Hélène Rey, “The total return (yields and capital gains) that the US has to pay to foreigners is smaller than the total return the US gets on its foreign assets.” But the story of American success goes beyond this narrow fact.
The story told by Trump’s enablers misrepresents the role foreign capital has played in America’s unparalleled success. Official foreign holdings of dollar reserves, in fact, flatlined around a decade ago. Governments account for a smaller share of foreign holdings of Treasury bonds than they used to. The main story about foreign money flowing into the United States (and bidding up the dollar) is about private capital seeking opportunities.
America’s prosperity has been built on the back of foreign capital and entrepreneurs coming to seek profit. Its world leadership depends not only on its might but on its power of attraction, which rests on the notion that it is, in the end, a fair player that abides by the rule of law.
Trump’s master plan, sophisticated though it seems, would unravel all of this. His tariffs rattled the Treasury bond market. The dollar has dropped more than 7 percent against the Swiss franc, over 4 percent against the euro and nearly 3 percent against the Japanese yen since then. Foreigners are selling U.S. assets of all flavors. They are even canceling planned vacations in the United States. The world financial system seems to be teetering on the edge of a cliff.
Doubling down by demanding, say, that countries shut out China to avoid being slapped with a tax on their Treasury bond holdings would further fuel this fire, encouraging erstwhile allies to seek other havens for their money. Though that might lead to a cheaper dollar, it would kill the goose that has underpinned the postwar prosperity enjoyed by the United States and the world."