It is not blind revenge against the US’s trading partners. The end game appears to be a new global financial order. From Moneyweb.
President Donald Trump’s fusillade of tariffs against the US’s trading partners appears vengeful and potentially self-defeating, but there’s more to it than meets the eye.
Last week he introduced 10% tariffs on all goods entering the US, with higher reciprocal tariffs on “the worst offenders” deemed to have imposed punitively high trade barriers on US goods. SA was hit with 31% tariffs, China 34%, Japan 24% and South Korea 25%.
Read:
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The 31% imposed on SA was supposedly half the average tariff SA levies on US goods, though the actual average is closer to 7.5%.
The impact on global financial markets was painful, with the Nasdaq down 6% and the Dow shedding 4% while import-reliant stocks such as Apple and Nike got hammered.
A useful understanding of what’s going on comes from a reading of a paper entitled A User’s Guide to Restructuring the Global Trading System written by Trump’s new chair of the Council of Economic Advisers (CEA), Stephen Miran, previously chief strategist at Hudson Bay Capital.
The 41-page paper, published in November 2024, argues that the US dollar’s role as the world’s reserve currency has both benefits and disadvantages.
The dollar remains consistently overvalued and that makes US exports less competitive abroad while working to the advantage of countries like China.
The benefit is that US consumers get cheap Chinese goods, the downside is that goods once made in the US are now made abroad.
Dissention in the ranks?
Miran’s thesis is contradicted by US Treasury Secretary Scott Bessent, who favours a strong dollar.
That perhaps hints at some policy dissension within the administration, though Trump is clearly borrowing at least some of Miran’s prescripts.
If Trump wants to reshore manufacturing plants to the US, a radical restructuring of the global trading system is required, and tariffs are one tool to accomplish this.
“Tariffs provide revenue, and if offset by currency adjustments, present minimal inflationary or otherwise adverse side effects, consistent with the experience in 2018-2019 [during Trump’s previous tenure as president],” writes Miran.
The dollar’s overvaluation stems from its role as the world’s reserve currency. Countries pay for imported goods with US dollars, requiring central banks to hold sufficient of these in reserve, usually in the form of highly liquid short-term treasury bills (T-bills). Countries like China and Japan hold a mixture of T-bills and longer-dated US Treasury bonds, which earn higher interest but are also subject to bigger fluctuations when the US adjusts interest rates.
The net result of this is demand for US-dollar “reserve assets “in the form of bonds and T-bills, coupled with the dollar’s safe haven status, reinforces its overvaluation.
Michael Kokalari, chief economist at Vina Capital, notes that the number of manufacturing jobs in the US plunged by about five million in the decade after China joined the World Trade Organisation.
The US manufacturing sector never recovered from this, despite a near trebling in the size of the US economy since then.
Miran’s proposal is to use tariffs as a negotiation tool to drive down the US dollar’s value, which would make the reshoring of factories to the US commercially attractive.
‘Mar-a-Lago Accord’
Tariffs are perhaps also being used to coerce trading partners into what Miran calls a Mar-a-Lago Accord.
There is precedent for this. The Plaza Accord of 1985 was an agreement between the US, France, Germany, Japan and the UK to steadily weaken the dollar, though this was halted two years later with the Louvre Accord of 1987. Though the economic benefits of this are disputed, there was a significant depreciation of the US dollar against the Japanese yen and German Deutschmark during this period, to the benefit of US exporters.
Read: ‘Mar-a-Lago Accord’ chatter is getting Wall Street’s attention
As things stand, there is little incentive for China to voluntarily agree to strengthen its currency and so shift the balance of trade more to the US.
“Japan, the UK, and potentially Canada and Mexico, might prove more amenable to currency intervention, but aren’t large enough in today’s global economy to accomplish the desired end,” writes Miran.
“Instead, recall that President Trump views tariffs as generating negotiating leverage for making deals,” he adds.
“It is easier to imagine that after a series of punitive tariffs, trading partners like Europe and China become more receptive to some manner of currency accord in exchange for a reduction of tariffs.”
The proposed Mar-a-Lago Accord envisions three punitive measures to compel countries to come to the table:
- Tariffs;
- Removing the US security blanket for countries that do not participate; and
- Taxing the interest payments of US treasury securities held by central banks that do not play ball.
It appears that, with tariffs, we are in the first phase of this global realignment. Europe and other US allies reliant on its security could then find that blanket removed – as Europe is currently finding out.
The impact of the tariffs on SA is already evident, with the rand trading this week at R19.36 to the US dollar as many local exporters confront the prospects of an evaporating US market.
What could go wrong?
Trump’s shotgun approach to tariffs has been condemned by many as potentially self-defeating. This is reflected in the stock market selloff and the dollar’s rout against the euro last week.
JPMorgan now sees a 60% chance of a global recession by year-end, up from 40% previously, with US GDP growth forecasts cut to 1.7% for 2025 by Goldman Sachs.
Peter Schiff of Euro Pacific Asset Management sees capital fleeing the US for Europe over the next few years.
Inflation expectations in the US have shot up. US Vice President JD Vance says the tariffs are part of a longer-term game to boost manufacturing. Nomura Securities predicts underlying US inflation could hit 4.7% in 2025, driven by immediate price pressures. This compares with the current 2.8%.
According to Miran, increasing tariffs gradually would avoid inflation spikes. In 2018-2019, Trump increased tariffs on China by an effective 17.9 percentage points, while the Chinese renminbi depreciated 13.7%, resulting in a roughly 4.1% increase in US dollar import prices. In other words, the currency move offset more than three-quarters of the tariff increase.
Miran recommended increasing tariffs at 2% increments to get China to the negotiating table, but Trump appears to have ditched that advice by opting for a 34% tariff missile.
Miran also advocates encouraging central banks to switch from shorter-dated T-bills to longer-dated T-bonds, some with maturities as long as 100 years, to prevent a spike in US interest rates arising from the Mar-a-Lago Accord and the associated inflation dangers. This would theoretically prompt many central banks to sell US dollars and buy back their own currencies, so creating the dollar weakness that the Miran thesis advocates.
The problem with holding long-dated T-bonds is that these investments are tied up for decades and their values are prone to dramatic swings depending on changes in interest rates.
This is the same situation that sank Silicon Valley Bank in 2023.
It bought supposedly “safe” long-dated US government bonds with depositors’ money, but the value of those bonds tanked when US interest rates rose. The bank was unable to realise enough from the sale of these assets to repay depositors.
The solution to this problem was the so-called “Bank Term Funding Program (BTFP)”, introduced by the US Federal Reserve in 2023, which essentially enabled banks to borrow against the face, not the market, value of the long-term T-bonds they hold. This allowed banks to borrow to cover unrealised losses, and probably saved other banks from the same fate as Silicon Valley Bank.
Prospects?
Will Trump’s gambit succeed? Perhaps.
There’s talk from some countries of cutting tariffs on US goods, while China and Europe, although willing to negotiate, are showing no signs of yielding just yet.
It’s worth noting that the US dollar is nearly 7% weaker against the euro since Trump took office, so in that sense, the plan is working out.
Many economists believe the US dollar is still 20-25% overvalued, so there’s a long way to go before that target is reached.
