Progressives and conservatives alike have denounced President Trump’s plan to impose reciprocal tariffs on nations that tax American imports, citing the potential costs to U.S. consumers. These critics overlook how tariffs are just one part of the administration’s broader economic strategy.
The Trump administration has three objectives related to America’s position in the international monetary system. First, it wants to maintain but reduce the financial burdens associated with the U.S.’s leading role. Second, it wants to get our national debt on a more sustainable path. Third, it wants to restore America’s industrial capacity.
These objectives are coherent only if one understands the global financial system. The U.S. dollar is the world’s reserve currency, and the U.S. Treasury security is the global reserve asset. This means, respectively, that the dollar is the primary currency used in international trade, and that foreign central banks and other institutions store wealth in terms of dollars with Treasury securities.
America’s central role in the world economy benefits us in several ways. It relaxes constraints on the federal government’s ability to borrow, for example, and allows Washington to use financial sanctions against foreign enemies rather than military force.
But these benefits come with costs. One such cost is that the dollar, because of its reserve status, tends to be overvalued. This makes foreign goods cheaper for U.S. consumers, but it also makes foreign labor and production cheaper for reasons unrelated to comparative advantage—a dynamic that has hollowed out America’s industrial base.
Another consequence of America’s role in the system is that it encourages us to accumulate debt. As foreign countries’ economies grow, so does their demand for reserves. If the U.S. doesn’t supply enough debt to meet that growing demand, our borrowing costs decline, which motivates politicians to run larger deficits.
If the Trump administration wants to reduce these costs and achieve its objectives, it must reform the international monetary system and devalue the dollar. That will require some degree of international cooperation. Other countries won’t be eager to participate, though, since devaluing the dollar or encouraging the use of longer-duration Treasury bonds imposes costs on them.
Tariffs can bring those countries to the table. While imposing duties on imports will raise prices for American consumers, it will also appreciate the value of the dollar, offsetting at least some of the cost to consumers and generating revenue for the U.S. government. Because the appreciation of the dollar shifts part of the burden of the tariffs onto foreign exporters, policymakers might be willing to tolerate a short-run appreciation if it is used to facilitate the negotiation of a longer-term depreciation. America’s willingness to deploy tariffs also signals that it will endure some costs to get what it wants, which could encourage other nations to negotiate.
Trump’s plan is not without precedent. In the early 1970s, it was clear that the Bretton Woods agreement had become unsustainable. The dollar was overvalued, and the U.S.’s European allies were unwilling to revalue their currencies. President Richard Nixon’s advisors convinced him to close the gold window in a bid to encourage the Europeans to negotiate. Though no durable agreement was ever fully implemented to restore the Bretton Woods system, in the years that followed, the Nixon, Ford, and Carter administrations collectively established the U.S. in its current position in the international monetary system, allowing America to maintain its leadership and dominant dollar.
Today, we face similar problems. The administration believes that the dollar is overvalued, and the system itself seems unsustainable. Given those realities, Americans should expect U.S. policymakers to behave like their predecessors. Tariffs might generate some revenue in the short run, but their larger effect—bringing countries to the negotiating table—could help the Trump administration achieve its long-term objectives.
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