There’s a lot of confusion about President Donald Trump’s extensive tariffs. This is mainly due to the media’s ignorance of basic economics. The result has been largely hysterical headlines about $3,000 iPhones and drastic increases in clothing and grocery bills, as if the full tariff rates will be passed on entirely to consumers. Past experience shows the truth is more complex. Suppliers and manufacturers often swallow the tariffs, especially when retailers like Walmart pressure them to absorb the added costs.
The media’s obsessive focus on possible price increases obscures the sound economic reasons for President Trump’s push to establish new global trade rules. World Trade Organization rules have failed abysmally in their chief goal of achieving “a more prosperous, peaceful and accountable economic world.”
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I hate to introduce economic jargon so early in a column, but the WTO has created permanent financial instability because of imbalances in America’s “current account deficit.”
A little explanation is in order. The current account deficit measures more than what a country imports and exports. That’s because a country that exports more, such as China or Germany, accumulates surplus money. Conversely, a country like the United States that imports more than it exports not only doesn’t accumulate any surplus from trade, but it has to borrow money (take on debt) because of its current account deficit.
Our current account deficit now stands at over $1.13 trillion. Foreign countries often reinvest that money here, partially to produce income through direct investments but also to jigger exchange rates through central bank purchases of U.S. bonds and currency to keep the price of their exports low, and maintain their surpluses.
What happens when an export-dependent country such as China or Germany pumps all that excess trade money into purchases of U.S. dollars or assets?
One result is the Great Recession of 2008-2009, which was caused by trade imbalances. More than six million Americans homes were foreclosed on, twenty-six million Americans lost their jobs and businesses like Lehman Brothers collapsed in the most severe financial crisis in history. The U.S. government spent $2.3 trillion to mop up the damage from the Great Recession and prevent it from becoming a Great Depression. American households lost an estimated $19.2 trillion in wealth because of the financial crisis.
Another result is asset inflation in the debtor nation. From house prices to the stock market, America has experienced massive asset inflation under the WTO rules, especially since China joined in 2001.
Martin Wolf, an Oxford-trained economist who writes for the Financial Times, saw it coming. In 2007, he was hard at work on a book called “Fixing Global Finance.” Published in 2008, just as the crisis hit, Wolf cautioned that “the performance of the financial system has been the Achilles Heel of the era of globalization” and urged reforms. Wolf recommended that China and Germany increase domestic demand to rebalance global trade.
It didn’t happen.
Instead, China went all-out to increase its exports. Xi Jinping used the surplus capital from trade imbalances to build the world’s biggest navy, enlarge his stockpile of nuclear weapons, and modernize the People’s Liberation Army so that it can defeat the United States in battle.
China is at the center of the Tariff War because of the damage it has inflicted on our defense industrial base and economy. This has been well-documented by economists as varied as MIT’s David Autor and Harvard Ph.D economist Peter Navarro. China believes that the U.S. is already in permanent decline and that by 2027, its military will be ready to invade Taiwan.
We also have domestic fiscal reasons for changing the terms of trade. In the first quarter of this century, the U.S. National Debt rose from under $6 trillion in 2000 to more than $36 trillion today. Our costly wars in Iraq and Afghanistan, the Great Recession, the Wuhan virus pandemic, Biden’s Green Energy blow-out, and absorbing twelve million immigrants in a mere four years have saddled our economy with an unimaginable level of debt. The U.S. is in a precarious financial position to weather another crisis, let alone spend what it will take to win a major war.
That’s why Trump is bargaining over tariff rates, even if the trade-off is for our trading partners to commit to buying more U.S. goods and services or make cash payments to Uncle Sam to level the financial playing field. If he’s successful, he’ll make U.S. manufacturing more competitive and onshore our defense industrial base, restore international financial stability, and reduce our dependence on extended supply chains. This is crucial because our Navy no longer has enough ships to protect international shipping, the U.S. homeland, and Taiwan simultaneously.
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That’s also why DOGE works at a blistering pace to rein in waste, fraud, and abuse. It’s why federal workers are being laid off and Trump’s Office of Management and Budget is recommending massive budget cuts. America needs less spending and more revenue, more guns and less butter.
What’s at stake is preserving the West’s precarious world order by remaking the global economy. By ramrodding NATO allies into spending more on defense, building up our manufacturing base, and reducing our current account deficit, Trump may be able to deter Xi Jinping from his China dream of reshaping the postwar global order in its own image. If Trump’s trade gambit works, China will have to rethink its assessment that America’s better days are behind it.
John B. Roberts II is a former international political strategist and executive producer of The McLaughlin Group. He was a Reagan White House aide, holds an M.A. in philosophy, politics, and economics from Oxford University, and is currently an author and artist. His website is www.jbrobertsauthor.com