Many people view Donald Trump as a villain. But is he also a fool? In the answer lies the likely course of his trade strategies after, say, July.
It’s absolutely impossible that he doesn’t understand the economic impact of higher tariffs. They are blindingly obvious.
The most important of these is the effect that a stronger dollar will have on other currencies. They will weaken because the demand for them will decrease. Trump is being told by some economists that he should tax inflows to weaken the dollar! Talk about nuts.
This sounds bad but actually a weaker currency means cheaper exports. Thus, depending on how much a currency weakens, the effect of the higher tariff will be negated.
Trump surely knows this. After all he saw it happen in 2018 in China’s case. He raised tariffs on some Chinese products and the renminbi weakened. In the end the impact on Chinese exports to the US was negligible. So the same question once again: why is he doing this tariffs thing? And the answer has to be that it’s a tactic, and not a strategy. A tactic has short term objectives while a strategy seeks to achieve longer term goals.
In cricketing terms what Trump is doing is what Mark Greatbatch of New Zealand started in the 1992 World Cup: score as fast as you can in the first 15 overs and take the game away from the opposition by the 20th. Later Sanath Jaisuriya and Kaluwitharana of Sri Lanka did the same thing with massive success.
It’s a tactic that’s used in war also. If you are planning to invade you start by massive artillery barrage and aerial bombing. It usually works by seriously damaging enemy morale. Colin Powell who commanded the US attack on Kuwait in 1991 called it a ‘shock and awe’ tactic.
The gorilla in the room
But what works for cricket and the military need not necessarily work for the economy. Financial markets can go into wildly gyrating disarray. That’s fine except the consequences can be very severe for the dollar. History bears witness. The problem today is that two successive presidents, Messrs Trump and Biden, over nearly a decade, have done things that have led to countries questioning the very basis of dollar dominance: the trust they can place in the dollar as the global reserve currency.
Trump’s current tariffs policy will only deepen that distrust. The loser will be America because its emphasis on tactics over strategy.
This, however, isn’t the first time it is emphasising short term tactics over long term strategy. The first time was in 1971 when another Republican president, Richard Nixon, arbitrarily and suddenly, announced that America would no longer back its currency with gold. The world was sold short.
The shock was so strong and deep that two years later it led to another massive jolt. It emboldened the oil producing countries of the Middle East, OPEC, to double the price of oil. It took a decade and a half for the global economy to recover from these two shocks of 1971 and 1973.
There was massive turmoil in the financial markets and although the dollar eventually re-established its primacy, it took 15 years. The fact that there was no rival currency also helped.
But that was then. Now there is the yuan/renminbi knocking at the door. China today has exactly what the US has always had, money and muscle. It will take time to give serious competition to the dollar but not as long as it took for the pound sterling to be dethroned, which was 75 years. And that slow eviction was because Britain had huge colonies which had no choice but to use the sterling.
What to expect
As mentioned above, Trump knows all this. He surely must. So the question really is how long will it be before he stops these shock and awe tactics.
Most likely it will happen when he can conclude that he has done enough to satisfy his core constituency which would have got its cheap thrills. But those thrills will cost America massive reputational damage.
Given the speed at which he is making announcements it is reasonable to assume that it will happen sooner rather than later, say by July or August. This “I will huff and I will puff and I will blow your house down” policy is good until the third little pig builds a house of bricks that can’t be blown away.
He could have established the new order — isolation — by then and can turn to consolidating it because if he doesn’t, his bullying will start looking like bluster and bluff.
His tactics would have succeeded thus but it’s highly probable that the strategy will fail. America won’t become great again because of the colossal loss of trust and reputation.
