This is an audio transcript of the Rachman Review podcast episode: ‘US systems unravel under Trump’
Gideon Rachman
Hello and welcome to the Rachman Review. I’m Gideon Rachman, chief foreign affairs commentator of the Financial Times. This week’s podcast is about Donald Trump and tariffs and about the Trump administration’s whirlwind assault on various bits of the American government, from shutting down the USAID agency to Elon Musk’s seizure of the Treasury payment system.
My guest is Daniel Drezner, a professor at The Fletcher School at Tufts University in the US. He’s a specialist on economic statecraft. President Trump’s trade wars are taking the world economy in an entirely new direction. So where will it all end?
Donald Trump voice clip
It’s time for our great industries to come back to America. I want them back to America. This is the first of many. And you know what I mean by that. We’re going to be doing others on other subjects, topics. Protecting our steel and aluminium industries is a must. And today I’m simplifying our tariffs on steel and aluminium so that everyone can understand exactly what it means. It’s 25 per cent . . .
Gideon Rachman
It’s hard to keep pace with all President Trump’s tariff announcements. Threats against Canada and Mexico were announced and then paused. Tariffs have been increased on China and the 25 per cent tax on all imports of steel and aluminium into the US has also been announced with a promise of more measures to come. All of this has an effect not just on the global economy, but also on America’s relationship with its allies who are learning to expect the unexpected. As you’ll hear, one possibility that Dan Drezner is already considering is that the US might refuse to make payments on its debts to foreign creditors. But we started our conversation with the tariffs. What is President Trump trying to achieve?
Daniel Drezner
I think the problem is is that Don Trump is trying to do multiple things with them, and those things are contradictory. But first, I would agree with you. The line I always use about Trump and tariffs is that Donald Trump thinks about tariffs the way the father in My Big Fat Greek Wedding thinks about Windex. That character thought Windex could do everything. It could cure everything. Trump believes the tariffs can do everything, and he’s talked about them in three different ways. And the problem is those three different ways are mutually contradictory.
First, he talks about tariffs as a tool of coercion. He thinks that because the US runs trade deficits with so many different countries, we’re getting screwed over in the international system. All we have to do is raise tariffs or threaten to raise tariffs and we can get countries do what we want. We’ve seen this play out. Even in his second term, in the first couple of weeks with Colombia and Canada and Mexico. But there are two other things that Donald Trump likes to talk about with tariffs. He believes tariffs are a great tool of economic protectionism. His favourite president is William McKinley. He constantly brings up McKinley’s tariffs. He thinks that if the United States erects high tariff barriers, it’ll promote more industry in the United States. More things will be home-made.
The third thing that Trump loves about tariffs is that they are taxes. And he talks about all of the tax revenue that can be gained by raising higher tariffs. And it’s true. Income increased when Trump raised tariffs during his first term. But the problem is you can’t do all three of these things. If you believe that tariffs are a tool of coercion, then if the other side gives in, you have to lower the tariffs. And if you lower the tariffs, they cease to function as a tool of protection or as a tool of raising revenue.
Gideon Rachman
So with these warring concepts in Trump’s mind, do you have any expectation that he’ll resolve the contradiction and use them in one way or another?
Daniel Drezner
No, I don’t know if in his own mind he’s got this resolved. It does seem that if the first three weeks of this administration are any guide, he likes the coercion more than he likes the protection or the revenue. And that might be for political reasons, which is that actually imposing tariffs is costly. It raises prices. Trump constantly says the foreigners pay for it. Economists will explain ad nauseam that that’s not true, that consumers will pay a higher price. And I think he doesn’t want to see consumer prices go up.
The advantage of sort of loudly threatening tariffs and then backing down at even the most token concession that’s made — which, by the way, is what Mexico and Canada did. They didn’t offer anything meaningful. They basically just repledged what they pledged back in December — is that he can claim, see, I was willing to throw US economic might around, all these countries caved. I once again have accomplished America First foreign policy. And he has a variety of media outlets that will echo that claim.
Gideon Rachman
Do you think we’re going to see this similar pattern play out with the EU? Because he’s made it very clear that the EU is next in line, and it’s not clear to me what the EU can offer. We can’t send troops to the border. Fentanyl doesn’t appear to come from the European Union. So how does that one play out?
Daniel Drezner
I think that what actually plays out with tariffs being implemented, to tell you the truth. I think because in Trump’s mind, the European Union is a different category of actor than Canada or Mexico. With Canada or Mexico, Trump plays the role of bully. He recognises that the US has significant asymmetric power over those countries as well as Colombia. The European Union, he views as an economic threat. He has said multiple times that he looks at the European Union as a competitor, equal to some extent to China or Russia, because it’s a single economic entity that’s not quite the size of the United States, but roughly the size of the United States. So I think he looks to take the European Union down a peg.
Gideon Rachman
And if you have to advise the Europeans on how to react, well, firstly, how do you think they will react and how do you think they should react?
Daniel Drezner
I mean, one way to react, obviously, is to prepare a list of counter-tariffs. What are the things that you can restrict in terms of US exports that causes US producers some pain? We saw this in the first round when, if you remember, I think there were tariffs targeted at, you know, Mitch McConnell’s state of Kentucky. There were high taxes placed on bourbon because that’s where it’s manufactured in the United States. So that’s one thing. The second thing, if the EU is serious about this, in some extent they’ve already done it, is to sign more trade deals with other countries. In other words, to try to redirect trade away from the United States and towards the Mercosur countries or Latin American countries where you signed trade deals, one with Australia. I would actually suggest that the EU start talking to the Trans-Pacific Partnership as a way of reaching an accommodation with them. That’s the most obvious way to respond.
The other way to go is it’s what I call the glowing orb solution, which is can you find a flashy but token concession to give to Trump that Trump can then parade around to his supporters to say, see, I got the European Union to give in.
Gideon Rachman
Yeah. Do you think there’s a glowing orb somewhere in the cupboard in Brussels? What could that be?
Daniel Drezner
I’m trying to think now of things like renaming some building the Donald Trump Memorial Building for Transatlantic Co-operation. I know that sounds absurd . . .
Gideon Rachman
But people do think of absurd things. I mean, like the British are thinking the royal family are our trump card. You know, give him a meeting with Prince William, stay in the Buckingham Palace.
Daniel Drezner
Or think about the Polish. If memory serves me, in his first term they wanted to name a fort Fort Trump. So that sort of stuff. Give him a royal sceptre of some kind. What you want to do is give him trinkets that he can then claim as trophies.
Gideon Rachman
Yeah, and you said we saw how the EU reacted in the first term. So if it’s just a story we’re familiar with, or do you think that something more fundamental is shifting in the second term in the whole way that America interacts economically with the world?
Daniel Drezner
I think there are two stories on this. The first is is that Donald Trump has a limited playbook. I mean, he has a couple of moves that he goes to every time. And so in that sense, this is déjà vu. He threatened tariffs during the first term. He’s going to do it again in the second term. The difference this time around in the United States is he has far fewer constraints on his ability to act. So in some cases, the threats might prove a little more credible. But also, as I said before, I think he wants to find deals. He wants to claim that he’s a dealmaker. And so if he can negotiate something where he can claim it as a win, he will absolutely do that. The difference this time around is that the world is a little different than it was in 2017. China and Russia are feeling a lot more emboldened. The Brics as a grouping feel a lot more emboldened. The US is no longer a reliable hegemon. We’re shuttering USAID as we’re having this conversation. In a lot of ways, what Donald Trump is pursuing is what I call Humpty Dumpty foreign policy, in that you’re not going to be able to put it back together again.
Gideon Rachman
Why not? I mean, you know, let’s say the Democrats come back in four years’ time. Can’t they just say, OK, we’re going to properly fund USAID; we’re going to put those programs back in place?
Daniel Drezner
Sure. And for the rest of the world, this will sound like déjà vu, because this is what Joe Biden promised when he was elected in 2020, saying America is back. The problem is they’re also keenly aware that maybe in 2032, JD Vance gets elected or Tom Cotton or someone else. So the fact is, you can no longer count on the US ability to credibly commit to anything any more in world politics. And that’s essentially the fundamental problem. The US has a dense network of alliances and partners, and all of those allies and partners are going to be looking at the United States now and realising we can no longer trust you and we need to prepare and hedge for when you act out.
Gideon Rachman
So does all of this play to the advantage of China?
Daniel Drezner
Yes, it absolutely does. China’s been going through it over the last five years. It’s not like China’s necessarily had a great couple of years. Their economy is slowing. They throttled Covid, but at an appalling cost. Their economy is slowing down. But, you know, in international relations, it’s always a relative game. And so China is now going to be able to go to the rest of the world and say, look, we’re not the ones trying to break the international system now. We want to have more trade. We want to have more investment. It’s the United States that’s acting crazy. You maybe can’t completely trust us, but we’re not going to try to blow up the system.
Gideon Rachman
Yeah. How does that turn into a Chinese strategy. Is it just a waiting game, basically, watching America do that work for them?
Daniel Drezner
Yeah. The fundamental rule of international politics is that if you see your rival punching itself in the face repeatedly, why join in? Just let them exhaust themselves. So if I was China and I was dealing with this, the way you do it is by saying, look, we’re open for business. You want to sign trade deals with us, you want to sign partnerships with us, we are happy to do that. And you engage in a light touch. Because, again, what you’re trying to do is set yourself up as the counterpoint, as the doppelgänger to an increasingly bellicose and apparently territorially expansionist United States.
Gideon Rachman
Yeah. And one of the things that Trump does seem keenly aware of, other than tariffs, is he said that losing the dollar’s reserve status would be the equivalent of losing a war. And one of the things we did see China and Russia attempt to do in recent years was at least experiment with trying to get the Brics or get other organisations to stop using the dollar quite as much as they’re doing. The things that are happening right now. How does that affect that question?
Daniel Drezner
It’s possible, but this is where Trump is not wrong in that the US has overwhelming strength and the weight of history in terms of having the dollar be the reserve currency. The United States continues to have the deepest, largest capital markets in the world. Because the US issues so much debt, we have a lot of securities that are also denominated in dollars. For anyone to try to challenge the dollar’s standing as a reserve currency, you would need to be able to provide all of these things. And this is where I do think that’s a step too far, even now for China. They’re not prepared yet to do that. What would be interesting is if the United States continues to act in a truly capricious manner, will you start seeing, let’s say, the European Union and China trying to fashion some sort of common response? You saw this briefly, if you remember, when the US withdrew from JCPOA . . .
Gideon Rachman
That’s the Iran nuclear deal.
Daniel Drezner
Right. And reimpose sanctions on Iran. You’re trying to create this thing called Instex, which was an alternative payments mechanism to get something to run. That wound up crashing and burning. It didn’t really work very well and in no small part because of the Iranians. But you could argue it’s a trial run for potentially Europe or other countries trying to create alternative payments mechanisms that no longer rely on the dollar and no longer rely on correspondent banking accounts in the United States.
Gideon Rachman
Interesting. But of course, Europe has its own dilemma vis-à-vis China, because I think one of the really striking things over the last four years for me was when the Biden administration and the European Commission really worked much more closely together on what they call de-risking western economic strategy with China. And the Europeans did that partly because the Americans persuaded them to, but partly because they also began to fear China’s intentions and began to fear China’s impact on the European economy and China’s backing for Russia. So, I mean, if the Europeans moved closer to China, aren’t they kind of cutting off their nose to spite their face, making another tactical blunder?
Daniel Drezner
That’s certainly possible. But then the question becomes, if you’re Europe, who is the more capricious partner going forward? Is it a United States under Donald Trump or is it a China under Xi Jinping? And that’s a legitimate question. There’s not an obvious answer. But the very fact that you can say it’s not an obvious answer is kind of an appalling statement to make from a transatlantic perspective.
Gideon Rachman
So do you think we’re really possibly witnessing the death of the transatlantic partnership that really underpinned international relations since the end of the second world war?
Daniel Drezner
I do, unfortunately. You know, it is possible that it can be revived. And as anyone who has spent some years on this planet I’ve seen the transatlantic relationship wax and wane over the years. But this is a fundamental rupture that is different from what we have seen in previous go rounds.
Gideon Rachman
And the rupture being based on what? The tariff threats, the attitudes to Nato and the attitudes to international law?
Daniel Drezner
It’s the whole megillah. It’s the fact that, again, US credible commitments no longer apply. And also US credible commitments no longer apply in a world in which there is a peer competitor to the United States, and that being China.
Gideon Rachman
So when we said they’re dying, I mean, are we still in a state of flux?
Daniel Drezner
Yes, very much so. We’re only a couple of weeks into the second Trump administration. You know, I’m old enough to remember when George W Bush was elected president, his first term was viewed as wildly revisionist in terms of what he was doing to the international order. People forget that his second term was essentially walking back a lot of what he did during his first term. In theory, that could happen this time around. I’m extremely pessimistic that will actually be the case, though.
Gideon Rachman
Yeah, but just give me a sense then of the pessimism and the mood in the United States. I mean, you come from one of the big East Coast universities, the kinds of places that Trump and Trump Maga world are deeply suspicious of.
Daniel Drezner
Yes, I’m a coastal elite. (Laughter)
Gideon Rachman
And as a coastal elite, do you feel we talked about the international system but that the US system is unravelling?
Daniel Drezner
It’s definitely unravelling. The problem is is a lot of what you’re seeing this administration do, both in terms of Elon Musk rooting around in federal payment systems and the General Services Administration and the Office of Personnel Management, it’s not clear that this is in any way legal, the folding of USAID into the State Department that violates the law of Congress. All of these things are illegal. But for them to actually be stopped, you need Congress to actually say, hey, you’re stepping on our institutional prerogatives in a lot of instances. And the Republicans control Congress and they have indicated little discontent with what Trump is doing. And so you can violate the law if no one has any interest in prosecuting you for it. And that’s essentially what Trump is doing at this point.
Gideon Rachman
What is the prospect of any accountability? I mean, as you say, Musk appears to be violating the law.
Daniel Drezner
Right. There are courts and you’ve seen the federal courts intervene to execute stays of government action. So it’s not like Trump is going to succeed at everything. But bear in mind that in the end, if Congress is unwilling to step up, the only other arbiter is the Supreme Court. And this is a Supreme Court that has demonstrated remarkable deference to presidential authority in recent years. So I am not terribly optimistic about their check on executive branch over-reach. It’s worth remembering that even during the first term, when Trump implemented the Muslim ban within a week of coming in, the Supreme Court stated, but really their rulings indicated you wrote this horribly, write it better so we can approve it. And that’s in some ways what I expect the second term will be like, where a court that is even more conservative than it was in 2017 basically enabling the Trump administration to do legally what it wants to do anyway.
Gideon Rachman
OK. So the Supreme Court’s not going to stop him. Congress isn’t going to stop him.
Daniel Drezner
The bureaucracy is definitely not going to stop him.
Gideon Rachman
No, because the bureaucracy is being gutted right now. What about the markets?
Daniel Drezner
The markets remain the only short-term check on Donald Trump. But think about what happened a week ago when Trump was threatening to impose tariffs on Mexico and Canada, which is the markets did react badly to that right up until the moment where there was a 30-day stay, and then the markets actually celebrated and went up. There are few things that the markets will actually punish Donald Trump on if there is a risk of defaulting on the debt, for example, or if Trump says we’re only going to pay domestic creditors on the debt, we’re not going to pay (inaudible) anything that makes . . .
Gideon Rachman
Is that even possible? Do you think he might do that?
Daniel Drezner
I think that getting access to Treasuries payment system is in fact a step towards doing that. I’m not necessarily sure they’re going to, but that would certainly enable them to actually implement a program where they only pay domestic creditors or . . .
Gideon Rachman
Have you heard that as an idea that’s floating around?
Daniel Drezner
Yes, I have. But it’s been floated around by critics. I’m not saying that they’re absolutely going to do that, but it’s now theoretically possible in a way that I don’t think anyone had previously considered.
Gideon Rachman
Because they have access to the computer.
Daniel Drezner
Exactly.
Gideon Rachman
And I suppose Trump, with his real estate developer hat on, would think, well, I defaulted on debts all the time. It’s just part of a renegotiation.
Daniel Drezner
Exactly. How many times has Donald Trump declared bankruptcy? Four, five, I think I’ve lost track. I think for him, the idea that the US declaring bankruptcy and then saying, well, we’re just going to reorder our debts, he sees no difference in terms of that. Obviously, everyone else would and there would be massive ramifications. But I can’t rule out entirely the possibility that Trump views this as a threat to sort of, I don’t know, lower interest rates or reschedule debt payments or what have you.
Gideon Rachman
But if he were to do that, the foreign buyers of American debt would run for the doors and you’ll have a massive crisis.
Daniel Drezner
That’s correct. Yes, you would have a massive crisis.
Gideon Rachman
And then you really would have the dollar’s reserve currency status in question (overlapping speech).
Daniel Drezner
Correct. But here’s the thing about Donald Trump and Elon Musk. Everything they’ve done so far in the second term is along the lines of we need to move fast and break things and it’s better to take action and then apologise rather than ask for permission. That works right up until the moment that you do something that is truly and utterly catastrophic. And so my concern going forward is that they will try to do something like this, not realising the catastrophe they are inviting.
Gideon Rachman
Right. That’s almost a good point to end. But I do have a couple of questions, though, because there are a few remaining what they call grown-ups around. Scott Bessent, you know, hedge fund manager, Treasury secretary. And one of the questions that I keep asking myself watching all of this is at what point do these (inaudible) say, yeah, I can’t really go along with this? I mean, in terms of foreign policy, I can’t believe that anybody around Trump, Rubio or Waltz thinks that turning Gaza into part of the United States is a good idea or possible even. I mean, we’re in the realms of psychology here, but also politics. Do you think you might get people internally dropping away or even trying to put a hold to this?
Daniel Drezner
It’s always worth remembering that the burn rate on working for Donald Trump is incredibly high. We saw that in the first term. There was a tremendous amount of churn. So it’s possible that folks will leave. What I don’t think you’re going to see all that much, however, is those people publicly voicing opposition, because if there’s one thing that Donald Trump has demonstrated over and over and over again, it is that he is really good at pointing his ire at anyone within the Republican party who opposes him, and those people don’t survive politically. And so to the Marco Rubios or Scott Bessents of the world, the question is, do they want to stay within the fold even if they have almost no autonomy, or do they want to be sent out a disgrace? And I think for most of them, they’ve made their choice. They’ve already agreed to serve in this administration. They knew what this was going to be like.
Gideon Rachman
Really?
Daniel Drezner
Yeah.
Gideon Rachman
OK. So last constraint, a final straw to clutch at: the American people. Because if you look at how a lot of these ideas poll, they’re not very popular.
Daniel Drezner
No. No, they’re not. The fundamental check on Donald Trump’s power is going to be take a look and see what happens. There are special elections that are going to be held to replace the members of the House that have accepted jobs in the administration is Elise Stefanik in New York and Michael Waltz in Florida. Also, they have to replace Matt Gaetz’s seat as well. These are all incredibly GOP-leaning districts. If it turns out that Democrats win one of those three seats, that should be a warning shot across the bow for Republicans in the Trump administration. And then there’s obviously the midterms. And, you know, it’s worth remembering public opinion is thermostatic. If there is any sort of economic turmoil that happens for the next two years, you would expect Democrats to do well. They’ve always done well in off-year elections in the age of Donald Trump. But that’s a long ways away.
Gideon Rachman
Two years, they can do a lot of damage.
Daniel Drezner
Yes. We’re only talking about the damage done after three weeks. Imagine where we will be in January of 2027.
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Gideon Rachman
That was Prof Dan Drezner of The Fletcher School of law and diplomacy, ending this edition of the Rachman Review. Thanks for listening. And please join me again next week.