Just Another Powerful Country

Ever since the so-called Liberation Day when President Trump announced his draconian tariff plans markets in the United States and around the world have been on a roller coaster ride buffeted by every announcement of arbitrary changes to his previously announced policy. Markets reacted in horror at his original announcement plunging 12% only to soar the next week when he appeared to back off the implementation of his tariffs. Markets now ignore the fundamentals of economics and only hear Mr. Trump’s latest pronouncement. Pundits across social media, television and news outlets are confused. Some journalists have even questioned his sanity. Mr. Trump’s advisors from Peter Navarro, Commerce Secretary Howard Lutnick and Treasury Secretary Scott Bessent have contradictory viewpoints and struggle for the president’s attention in order to have some influence on policy decisions.

But there is one presidential advisor that has been very consistent on the rationale behind tariff policy, Stephen Miran who is Chairman of the Council of Economic Advisors in the new Trump administration. Dr. Miran has a notion that the US dollar’s status as the world’s reserve currency is more of a burden on the US than a benefit. He asserts that because the dollar is the world’s reserve currency foreigners hold more dollars (for reserves as well as for foreign trade transactions) than they would lacking the reserve status. As a result, there is less selling pressure on dollars which causes the dollar to be stronger than it should be strictly based on trade.

As I noted in my recent commentary, Who Is Ripping Off Whom (published February 14, 2025) countries with trade surpluses accumulate foreign currency that they don’t want or need so they sell that excess foreign currency. Selling pressure weakens the importer’s currency and strengthens the exporter’s currency making its exports more costly and its imports cheaper such that the trade balance will adjust. But because the dollar is stronger due to its special status as the global reserve currency, that adjustment to the balance of trade does not occur and the US consistently runs a trade deficit. Dr. Miran and President Trump believe that this persistent trade deficit has led to the hollowing out of American manufacturing that has ravaged middle America.

Dr. Miran’s preferred solution to this problem is that our trading partners voluntarily strengthen their domestic currencies (which would weaken the dollar) to help rebalance the trade flows as he noted in an essay published right after Mr. Trump’s election (A User’s Guide to Restructuring the Global Trading System, November 2024) . This would require, however, for our trading partners to take certain actions (such as raising interest rates) that would actually harm their economies in order to benefit ours. One might wonder why these trading partners, which includes some very poor countries such as Bangladesh and Cambodia, would intentionally harm their economies and their people, in order to benefit the richest most powerful country in the world.

Being a realist, Dr. Miran understands that few countries would voluntarily agree to such harmful actions. His essay, therefore, lists a number of unilateral actions that the United States could take to remedy its trade imbalance. One of these actions, currency manipulation, would require the Federal Reserve to subordinate its congressionally required mandates of stable prices and full employment, to the orders of the White House. And even if the White house could bring the Fed to heel, Dr. Miran points out numerous limitations to currency manipulations that make this approach less appealing.

But tariffs are a different matter. They are powerful tools that can be used to wreak havoc on market participants in both the public and private sectors that cannot reach an accommodation with President Trump’s demands. Dr. Miran recommended a graduated introduction of tariffs in order to minimize market disruption, which is not what President Trump chose to do. Tariffs are arbitrary and can be adapted to address issues with each country. And these tariffs do not have to be strictly trade related as was the case of the 25% fentanyl tariffs President Trump imposed on Canada and Mexico. In fact, Dr. Miran’s essay lists more than ten other reasons that could justify the imposition of tariffs in varying degrees, none of which are economic in nature. To him (and presumably President Trump) trade and security are inherently intertwined. Dr. Miran asserts, “Such a system (of tariffs) can embody the view that national security and trade are joined at the hip. Trade terms can be a means of procuring better security outcomes and burden sharing. Countries that want to be inside the defense umbrella must also be inside the fair trade umbrella.”

Hoover Institute fellow, John Cochran, stated in a recent publication of his Grumpy Economist column (Tariffs, saving, and investment, April 13, 2025) that he did not think that tariffs would solve the underlying problem of persistent trade deficits. As he sees it, the dollar’s reserve status means that foreign entities hold large amounts of dollars. Some of these dollars stay offshore in the form of Eurodollar deposits which makes up a large part of the international banking system. But most of the dollars are invested in US securities, primarily US Treasuries. If those foreign held dollars were put into productive investments that would work to reduce the manufacturing problem in the US. But the fact of the matter is that US Treasuries fund our government’s massive fiscal deficits. And what is the principal cause of government deficits? Entitlement payments to Americans. In other words, consumers. Consumers who use those entitlements to purchase things much of which comes from our trading partners and therefore increases the trade deficit. The solution to our problem is to fix our fiscal problems and not blame others for problems we created. So, if tariffs are not effective tools for rebalancing trade, what are they? Tariffs are economic weapons designed to recreate a neo-mercantilist world order where great powers reign supreme in their zones of interest.

President Trump has often belabored NATO members for not carrying their fair share of the defense burden. And while you may disagree with his notions on international trade, it is clear that the United States has borne an outsized share of the blood and treasure needed to keep the world safe. But why did America do that at such great cost? We did it because, based on our values and principles, it was the right thing to do. Presumably, President Trump believes such values and principles are for suckers and losers. He believes that the US should be compensated for its role as leader of the free world.

But cajoling countries to compensate the United States through trade relations, currency manipulation, tariffs and other mechanisms instead of common interests based on shared values and a common culture may not be the best way to assure the peace. Mr. Trump views international relations as nothing more than a series of financial transactions. He thought he could end the conflict between Russia and Ukraine in 24 hours by offering each side a deal. He misjudged both Putin and Zelenskyy because he views them as sharing his viewpoint. But no combination of profits or financial sanctions can resolve the differences between those countries. Any deal between those countries will take months or even years and will require continuous US involvement or, like Secretary of State Marco Rubio said, we can walk away.

Dr. Marin’s (and Mr. Trumps’s) tariff program assumes that other countries will be cowed into submission by the wealth and power of the United States But President Trump’s pugnacious threats are already having unintended consequences. Pierre Trudeau’s almost completely moribund Liberal Party has been given new life by Mr. Trump’s tariffs. China is threatening retaliatory tariffs on American products and is threatening its other trading partners if they succumb to Mr. Trump’s anti-China demands. The European Union is also threatening retaliatory tariffs as well. School yard bullies do not do well when people call their bluff. Especially when everybody calls their bluff.

The founders knew that America was different. Emblazoned on the great seal of the United States are the words, “A new order for the ages.” President Trump is trying to recreate an old order, a world order dominated by great powers as existed in the seventeenth and eighteenth centuries. America is not great because it has wealth and power. Other countries are also rich and powerful. America is great because of its founding principles and values. I am proud to be an American because of those values and principles. If that makes me a sucker and a loser, so be it.