Trump Tariff War

The end of an era

The US unveiled new tariffs, referring to it as a “declaration of economic independence.”

Tariffs are a double-edged sword. The official goals are to reduce taxes and pay down the national debt with tariff revenue while hoping that manufacturing jobs will return to the US. The supporters say this is the fair way to counter unfair trade practices by some countries such as China. However, the majority of experts are worried that it will only spark massive inflation and may lead to a recession.

This isn’t the first time the US has shaken up the entire world trading system. In the 1940s, the US created the global economic order known as the Bretton Woods system. In the 1970s, Nixon shocked the world by delinking the dollar from gold. In the 1980s, it created the neoliberal world order led by Ronald Regan.

In my opinion, the tariff war is not a random throw. It’s a part of a carefully crafted master plan to redesign the world trading system.

In the Bretton Woods system, there were three rules you would have to follow.

First, you accept the US dollar as a global trading currency.

Second, the members can rely on the US for national protection.

Third, the US will let the allies enter the US market to make profits so they can recover the destroyed economy.

It may sound like the US did a lot of favors for the allies. But actually, it was a win-win deal. The US needed its allies to become powerful and rich so the US could defeat communism and the US industries could export to emerging countries. Also, the system cemented the US dollar as the global reserve currency and the US’s military leadership over the world. Without the system, the world would have witnessed a spread of communism and nuclear dominoes. The system also allowed the US to spend a lot more than it earned due to strong demand for the US dollar worldwide.

Once communism fell, the US attempted to expand the system, which applied only to the block of US allies, for the entire world. Say hello to the neoliberal world order.

In this new order, the US lowered trade barriers (low tariffs), and investment (flexible exchange rates), so they get easy access to the massive US consumer market. Also, it promised to guarantee security for everyone – at least in rhetoric.

Sounds too good to be true? Well, the US got something in return. Thanks to the dollar’s world dominance, the US could keep pumping money into its military and maintain a high standard of living with cheap commodities from every corner of the world. The new strategy seemed like magic. It kept the US as the most powerful country by inflating the dollar, even though its share of the real economy wasn’t as significant as it was in the 1940s.

But nothing comes as free.

In return for the strong dollar, the US’s manufacturing became too expensive and eventually left the country to find more affordable sources, mostly to China.

Today, the US’s industrial power is far behind China. What if these two superpowers enter a war? China will have a massive advantage in rapid militarization.

Also, it was mostly those with more fortune that benefited the most from a strong dollar. The inequality gradually got worse and society was divided between the industrial sector and the service sector, such as IT and finance.

In hindsight, the neoliberal world order was finished long ago when the US abandoned the idea that free trade is a good thing. We’ve been pretending it is possible to restore the order.

Let’s look back at what Biden did. His administration subsidized the US industry on a massive scale. This is more like a Chinese strategy, which is directly against the playbook of neoliberalism.

I dare to say – it’s all part of the plan. The US needs to restore industrial capabilities and also maintain the dollar as the global reserve currency to remain a superpower.

How could anyone possibly pull this off?

Tariffs will grant the US negotiating leverage to enemies and friends alike. It wouldn’t have worked if the world hadn’t been relying on the US for such a long time. But we are so dependent on the US market and there is really no alternative in the foreseen future. The US has a unique negotiation position in this war.

It might be my wishful thinking (or dreadful thinking) – but I suspect all these tariffs are just to create negotiation leverage. I don’t think we’ve seen everything yet.

…It was in 1973, two years after Nixon announced the end of the Bretton Woods system, that the US and Saudi entered the petrodollar agreement.