Overview

The U.S. President has just disrupted global trade with radical tariff policies. There is a great deal of uncertainty and controversy regarding the potential geopolitical and economic impacts of these policies, with starkly opposing views from different camps.

Before discussing this issue, we want to clarify that we believe in free markets and global trade. Trade is largely voluntary and occurs only when both parties believe they benefit from it. Therefore, trade is not a zero-sum game. There are many legitimate reasons for ongoing trade imbalances between countries. Thus, we believe that all tariffs are bad, and all reciprocal tariffs are also bad. Consequently, these tariffs will harm global growth and productivity. Nevertheless, there remains significant disagreement about how international trade imbalances work, what causes them, and the impact of these tariffs on capital flows. This is also the focus of this article.

Trump's Perspective

In Trump's view, the U.S. has been severely deceived by its trading partners for decades, with the massive trade deficit serving as evidence. These trade deficits are caused by the protectionist policies of some of America's largest trading partners, such as China, the EU, and Japan. The formula Trump uses to calculate "reciprocal tariffs" indicates that he believes the ongoing trade deficits have no legitimate justification and are entirely due to protectionism.

In Trump's view, these protectionist policies include:

1. Tariffs
2. Regulations favoring domestic producers
3. Currency manipulation by exporting countries like China, Germany, and Japan, which leads to a depreciation of their currencies against the dollar

Due to these policies, the U.S. manufacturing base has eroded, resulting in a harsh economic environment for American workers, who are a crucial part of Trump's political base of "Making America Great Again." By ultimately achieving fair competition, as he promised during his campaign, American consumers will buy more goods domestically, thereby promoting the prosperity of the U.S. manufacturing base and the recovery of the American economy.

Petrodollar Perspective

Many believe that Trump's views on trade indicate a lack of understanding of economics. The fact is, Americans benefit from trade deficits. Americans benefit by consuming all the goods produced by low-wage Asian workers in China, Japan, India, Thailand, Vietnam, and South Korea, and of course, by consuming oil produced in the Middle East (or benefiting from the drop in oil prices caused by Middle Eastern production). Americans win because they get all the goods, while Asian workers lose because they produce products under harsh conditions all day for very little pay. This is essentially a trick that the U.S. has successfully played on its trading partners for decades. The U.S. somehow persuades surplus countries to invest in the U.S., keeping the dollar strong and allowing this favorable situation for the U.S. to continue. Remember, without the gold standard, trade deficits do not cause the U.S. to lose its precious gold reserves. The U.S. can have these deficits with almost no consequences. This perspective is almost entirely opposite to Trump's view, which sees the U.S. as a deceived nation.

However, this is an unsustainable situation, as trade deficits accumulate over time. The only reason this situation has persisted for so long is that the dollar is the global reserve currency. When countries export goods to the U.S., they invest their cash earnings in dollars to maintain the Ponzi scheme. At some point, the accumulated imbalances will become so large that everything will collapse, and the real income of Americans will significantly decrease. To avoid this fate, Americans should invest in gold and, of course, Bitcoin.

The U.S. has implemented several policies to try to maintain the dollar's status as the global reserve currency, some of which are secretive. Some of the most nefarious policies include:

Colonel Gaddafi of Libya was overthrown and killed because he held a large amount of gold and wanted to sell oil in gold, which would undermine the dollar's reserve currency status. In fact, as speculated in a leaked email from Sidney Blumenthal to Hillary Clinton in 2011, Libya's gold policy was "one of the factors" influencing the decision to attack Libya. (France and the UK were heavily involved, as was the U.S.)

In October 2000, Iraqi President Saddam Hussein decided to stop selling oil in dollars and instead sell oil in euros. This was reportedly a key motivation for the U.S. invasion of Iraq and the killing of Saddam Hussein. Thus, concerns about weapons of mass destruction and Saddam's abysmal human rights record were a lie. It was all about oil.

Because of the above and other proactive foreign policies, other oil-exporting countries like the UAE and Saudi Arabia know they must continue to sell oil in dollars and invest a large portion of the wealth accumulated from oil in dollars and U.S. assets, or they may face the wrath of the CIA and other branches of the U.S. military.

It is clear that the above views are in stark contrast to Trump's apparent view of global trade. Trump now accuses China of manipulating its currency to devalue it, while the U.S. manipulates its currency to appreciate it, and in some cases, it is evident that extremely nefarious means have been used.

To emphasize this apparent inconsistency, Trump recently attempted to dissuade BRICS nations from creating a currency that competes with the dollar, which, if successful, would likely weaken the dollar and strengthen their currencies. Doesn't Trump want that? A devaluation of the dollar would promote the manufacturing base of "Making America Great Again." Trump has recently taken tariff actions and now seems to be accusing BRICS nations of manipulating their currencies to devalue them to increase exports to the U.S., which appears to be a series of contradictory accusations against BRICS. What does the U.S. want China to do, buy U.S. Treasury bonds or sell U.S. Treasury bonds? It is almost as if the U.S. cannot tolerate China doing either. We do not want to single out Trump here, as he is the only politician who seems confused about China's currency manipulation, as many from both parties do, such as Obama and Geithner. Our point is that, from the perspective of the petrodollar, U.S. policies are aimed at supporting the dollar, while China is planning to end the dollar's status as the global reserve currency.

This petrodollar perspective on global trade may be the most popular view among our audience and Bitcoin enthusiasts. Notable analyst Luke Gromen is a major proponent of this view. According to this worldview, the dollar is entering a period of high uncertainty. In particular, the rise of BRICS poses an increasing threat to dollar hegemony, as BRICS may gradually abandon the dollar as their primary trade and global settlement currency. Therefore, the dollar's status as the global reserve currency may be weakened at some point, and the prices of oil, gold, and even Bitcoin could rise significantly.

If people think this way, the impact of Trump's new tariff policy could be particularly destructive and dangerous for the U.S. Exporting countries will see their trade surpluses decline, and they will no longer have large capital investments in U.S. government bonds and other U.S. assets each year. They may then begin to sell existing U.S. assets to promote domestic consumption to make up for the loss of exports to the U.S. This could become a catalyst for a U.S. debt crisis and weaken the almighty dollar.

Capital Flow Perspective

There is another perspective on trade imbalances that is rarely mentioned, and we believe it has considerable merit compared to the petrodollar theory. Remember Economics 101: the balance of payments (BoP) must always balance. This is because every buyer of dollars must have a seller. Therefore, if a country has a trade deficit, there must be a corresponding surplus in its capital account (financial asset flows), and vice versa. But who can clearly say what is driving what? It could be that hardworking Chinese laborers are producing the high-quality products that Americans really want, leading to the U.S. trade deficit, which in turn leads to a U.S. capital surplus. On the other hand, perhaps Chinese investors want access to the U.S., leading to a U.S. capital surplus, which in turn leads to a trade deficit with China.

The argument here is more positive for the U.S. than the petrodollar theory. The U.S. has the best companies, which focus more on profits and return on equity compared to companies in other countries. U.S. companies also prioritize elite management more than other regions like Europe and Asia, where who you know, where you come from, and your race or gender may matter more. This helps the U.S. attract the best talent in the world. The U.S. has some of the best and most innovative companies in the world, such as Google, Microsoft, Apple, Amazon, Nvidia, Meta, OpenAI, Tesla, Broadcom, VISA, Netflix, and others. Global investors want to invest in these high-quality, high-growth companies.

Many Asian investors also want to move capital out of their countries to protect it from government confiscation. In contrast, the U.S. has, at least in theory, stronger rule of law and legitimate investor protections. Therefore, Trump's view that Asian exporters have been manipulating their currencies to devalue them is completely wrong; in fact, they have been trying to manipulate their currencies to appreciate and prevent capital flight. According to this worldview, these characteristics lead to a massive surplus in the U.S. capital account, which in turn leads to a massive trade deficit. Therefore, a persistent trade deficit may not be a problem but rather a sign of success. It depends on the driving factors.

We believe these economic factors are more important in driving the dollar's status as the global reserve currency than U.S. foreign policy in the Middle East. Killing any dictator who wants to sell oil in gold is unlikely to have such a significant impact. This is not to say we want to defend the dishonest and nefarious intentions behind U.S. foreign policy in the Middle East. There may still be some in U.S. security agencies who subscribe to the petrodollar theory, even if it is somewhat outdated and irrelevant now. If this is not true, then there are many other dishonest theories to point out. Furthermore, even if competitive fiat currencies have no chance against the dollar because U.S. investment opportunities are relatively more attractive than elsewhere in the world, there is always gold to compete with it. The CIA may still need to play some dirty games to stop gold. Perhaps U.S. authorities want global trade to be conducted in dollars, not to defend the dollar's value, but simply to give U.S. authorities more control and power over global affairs, enhancing their ability to block payments and freeze global wealth.

If you subscribe to this view, even if you believe that "tariffs are always a bad idea," Trump's new policy may not immediately destroy the dollar's status as the reserve currency. Of course, it is still a tax that will harm U.S. businesses and weaken the economy, causing losses for everyone, but dollar hegemony may persist for a while.

Conclusion

The reality is that the global economy is complex. The petrodollar perspective has its merits, and trade deficits do indeed drive capital account surpluses to some extent. On the other hand, the same situation can be viewed from multiple valid angles. The assertion that capital account surpluses drive trade deficits is also correct. The driving forces operate in both directions, and understanding this is crucial for understanding global trade. Both factors are very important for the U.S., and analysts should not overlook them. Trump's views on trade sometimes have a degree of validity, and certainly, some politicians believe this at times. This somewhat explains why some politicians appear somewhat contradictory in their statements about China's currency manipulation.

That said, we do believe that Trump's views on trade are largely ineffective. Tariffs are a tax on Americans that will weaken the U.S. economy. The American middle class may be the relative losers of globalization, while the elite benefit, but that does not mean reversing globalization will make the American middle class relative winners. Trump may abolish the IRS and replace income tax with tariffs, restoring economic policies from before the 1930s. If that happens, that is another issue, but we would not bet on it.

Of course, there are conspiracy theories to discuss. Trump announced these tariffs to deliberately cause an economic collapse, forcing investors to buy U.S. Treasury bonds to lower yields, allowing the U.S. to refinance its debt at lower rates and delay the inevitable crisis of being unable to afford interest on its debt. We think this is possible, but not very likely. Occam's razor may apply here; the simplest explanation is often the best, and Trump simply likes tariffs, believing they are the “most beautiful word”.

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