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Last week I attempted what some condemn as the “sanewashing” of the Trump administration’s international economic policies. In other words, I asked whether there might be logic and evidence underlying what members of his administration, notably Stephen Miran, chair of the council of economic advisers, argue.
Berkeley professor Brad DeLong counters that this is irrelevant: “To do deals, you need your counterparties to regard you as a deal-keeper. Donald Trump demonstrates, every day, that he is not.” I agree — and said so.
Yet, one can still ask whether significant policy issues can be seen here and, if so, what one might do about them. Thus, Scott Bessent, Treasury secretary, argued earlier this month that, in addition to providing global security, “The [US] . . . provides reserve assets, serves as a consumer of first and last resort, and absorbs excess supply in the face of insufficient demand in other country’s domestic models. This system is not sustainable.” Similarly, Miran argues the dollar has been chronically overvalued, which “has weighed heavily on the American manufacturing sector while benefiting financialized sectors of the economy” to the benefit of wealthier Americans.
Miran’s starting point is with Robert Triffin’s argument from the 1960s that the demand for foreign currency reserves has created the overvaluation and associated trade and current account deficits. Yet this is not the only way for countries to accumulate currency reserves. As Maurice Obstfeld, former chief economist of the IMF, argues in a blog for the Peterson Institute for International Economics, foreigners could substitute other foreign assets for holdings in the US. Nor are reserves the sole reason for foreigners to buy US assets. As Paul Krugman notes, they may just want US assets.
Nevertheless, the demand for reserves has occasionally been an important factor in the global balance of payments. Their total value jumped almost seven-fold from 1999 to 2014. This was driven in large part by the desire of emerging economies to protect themselves from future financial crises. But, in the case of China, much the largest single holder, it was also caused by the desire to find an outlet for its excess savings and to generate export-led growth of manufacturing. Meanwhile, the Eurozone, one of Trump’s other targets, has increased its reserves by a mere $72bn between late 1999 and late 2024. (See charts.)
More fundamental forces than the wish to accumulate reserves are also at work. These are differences in propensities to save and invest. Some countries have surpluses of savings over investment and so will run current account surpluses and matching capital account deficits — and vice versa.
This is not necessarily problematic. But problems might arise. One is that the system for intermediating capital across the world generates crises. The only countries that can safely manage such crises are ones whose domestic money is also a trusted reserve currency. That has been one good reason why policymakers in emerging countries often seek to run current account surpluses.
Yet another reason is that if a country runs such surpluses it will also produce surpluses of tradeable goods and services over domestic consumption and vice versa. So, it is no accident that economies with high savings rates, such as China, Germany and Japan, have relatively large manufacturing sectors, while the US and UK are in the opposite position (though another factor for the latter is that they are good at producing exportable services, which then reduces manufactured exports).
In general, then, countries obsessed with manufacturing tend also to be surplus-obsessed mercantilists. So, the mercantilists in this administration, including Trump, are not wrong: if the US had a current account surplus, its manufacturing sector would indeed be bigger. But they are dead wrong to believe this is just about reserves. They also do not properly address the necessary conditions for such a rebalancing.
If the US is to eliminate its current account deficit without sacrificing investment, it will need to raise its savings rate by at least 3 per cent of GDP (or some $850bn). This would be close to half of the fiscal deficit. As it happens, according to Kimberly Clausing of the Peterson Institute of International Economics, a revenue-maximising, across-the-board tariff at 50 per cent could generate $780bn a year. Moreover, such a tariff could also improve the US terms of trade, by lowering the relative prices of imports. But it would be regressive and have negative effects on global and domestic economic activity, including by harming competitive US exporters. In any case, Trump seems incurably uninterested in such an across-the-board policy.
So, the big question remains: how do Trump technocrats expect the needed macroeconomic adjustments to occur? The proposals they have made are half-baked. Plans for forced conversion of externally-held public debt and depreciation do not make sense, unless the aim is to use the inflation tax. The US tried this in the 1970s: it ended badly!
More important, what is this for? Yes, if the current account deficit could be eliminated, the manufacturing sector would be a bit bigger. But the parts that matter for security or any other deeper purpose would not necessarily be the ones that grew. Moreover, nothing can prevent a long-term decline in the share of employment in manufacturing. Manufacturing is going the way of farming: rising productivity will win.
Even at its most sophisticated, then, Trumponomics is irrelevant and incoherent. The real-life version is worse.
