By COMPASS
President Trump’s reciprocal tariffs have sent shockwaves around the world. In a move that is designed to deliberately disrupt the global economy, with a view to changing how the international trading system functions. Trump has long held the belief that the system was unfairly skewed in favour of America’s trading partners, at the expense of herself. In particular, he has consistently maintained that China has been engaging in currency manipulation practices, which allowed it to run massive trade surpluses with the US over a long period of time. Even though in reality it was the US that designed and imposed the rules-based international order on the rest of the world after WW2. Thereby, allowing the US to enjoy the exorbitant privilege of benefitting from the fruits of other countries, whilst offering nothing more than printed US dollars in return. Something that Trump himself would struggle to justify as a fair exchange.
So, having long held these beliefs, Trump now finds himself in a position to remake the system in his own image. The decisive victory which he achieved in the US election in November 2024 has given him the necessary power to be able to reshape not only the US economy, but also the world economy.
The plan is audacious to say the least. The Trump administration desires to bring back manufacturing to the US – particularly those industries that are critical to US national security, which were mistakenly allowed to leave American shores in the aftermath of the Nixon shock in 1971. However, they also want the US dollar to retain its international reserve currency status. The issue is that since the 1960s, conventional wisdom has been that a country cannot simultaneously run a trade surplus with all its trading partners whilst also having the strongest currency – the two are mutually exclusive. This is otherwise known as the Triffin dilemma. For a country to run a trade surplus their currency has to be weaker relative to the currencies of their trading partners, in order to make their exports more attractive, by making them cheaper. The problem that the US has had since 1971 is that the US dollar has been far and away the strongest currency, which inevitably made it prohibitively expensive for other countries to import US goods that are manufactured in the US. Hence in that time US companies have en-masse offshored their manufacturing outside of the country.
Trump now finds himself in a position to remake the system in his own image. The decisive victory which he achieved in the US election in November 2024 has given him the necessary power to be able to reshape not only the US economy, but also the world economy
Trump’s policy team effectively believes that they’ve solved this dilemma, and have devised a strategy which will compel US companies to return manufacturing to the US, whilst being able to maintain US dollar hegemony. In order for it to be successful the Trump administration has to create an economic environment which is conducive for US manufacturing to thrive. This would entail enacting major economic reforms and policy changes such as; lower corporate taxes, lower energy costs, lower input costs, upgrading US economic infrastructure, upskilling labour, driving innovation and efficiency etc. It’s a mammoth task, which will require enormous amounts of capital expenditure to make it happen.
The problem that they face are the neoliberal policies that were adopted by successive US administrations since 1971, in order to facilitate globalisation which has led to the over financialization of the US economy. The way in which the US were able to import raw materials, commodities, capital and consumer goods from the rest of the world, whilst controlling inflation was by consistently running trade deficits. In other words, buying things on credit.
It’s the US’ exorbitant privilege that makes it possible for them to run consistent trade deficits, whereas every other country in the world is forced to operate within their means, by ensuring balanced trade. The US is able to consume more than they produce, by virtue of the US dollar being the international reserve currency. The only limiting factor is that if too many dollars are created then the currency would lose its value very quickly. So, if the US were to print new dollars every time they wanted to import things then it would cause massive inflation globally and weaken the dollar because there would be an abundance of the currency in the world. So the US devised a system which would allow them to run trade deficits, but still control inflation by regulating the supply of dollars.
In 1973, the then US secretary of state Henry Kissinger negotiated in secret a deal with the Saudis that is known as the petrodollar agreement. The US offered the Saudis security guarantees in return for them denominating the sale of Saudi oil in US dollars. Thereby ensuring there would be a perpetual demand for US dollars. The process is rather simple, but quite effective. The surplus dollars that were accumulated by the Saudis would then be exchanged for US treasuries, which would allow them to generate a return in the form of interest. This would allow the US to maintain the strength of the dollar, by reducing the supply of dollars in the system through the act of borrowing. The dollars that they borrowed were then used to run future budget and trade deficits. This process came to be known as the petrodollar recycling scheme, which was then extended to all other countries. Hence, why countries that produce and export things like China, Germany, Japan, Saudi Arabia, South Korea etc. all hold large amounts of US debt. Thus, the consumption-based lifestyle that Americans have been enjoying over the last 50 odd years is entirely credit fueled, and has primarily been subsidized by the rest of the world.
It’s the US’ exorbitant privilege that makes it possible for them to run consistent trade deficits, whereas every other country in the world is forced to operate within their means, by ensuring balanced trade.
Consequently, in that time the US has accumulated enormous debts. US government debt now stands at $34trn, US private debt at $70trn, US external debt at $27trn. So, to put these extraordinary numbers into context, US total debt is now over $100trn, whilst total world debt is $300trn. This means that the US, which has a population of 340 million, and accounts for 5% of the world’s population is responsible for a third (33.3%) of the world’s total debt. This is not including future unfunded liabilities i.e. Medicare, pensions, social security etc, which are estimated to be anywhere from $100-150trn. Quite simply, the whole system has become unsustainable. The US credit card has been maxed out, and payment has come due. Except that the US can’t pay and won’t pay. So, for the US to survive, radical reforms are required, which will put it on a more sustainable path.
The US truly came to a crossroad moment on the 5th November 2024. The result of the US election would determine which path would be followed. Had Kamala Harris and the democratic party won, then the US would have continued treading along the same path. It would have been business as usual, with the US political elite pretending that everything was fine – until eventually the whole house of cards came crashing down. Instead, the American people opted to go with Donald Trump and his plan to ‘save America’.
The Centre for Muslim Political Analysis, Strategy, and Solutions (or COMPASS) is a thinktank which focuses on developing long term thinking, strategy and policy to support the progress of the Muslim world.