A Multidimensional Perspective on Global Trade

Recently, the U.S. President introduced a series of radical tariff policies, sparking widespread discussions globally about their geopolitical and economic impacts. The potential consequences of these policies are fraught with uncertainties, and opinions from various parties are sharply divided.

Before discussing this complex topic, it is important to emphasize the significance of free markets and global trade. Trade is essentially a voluntary act between two parties, and it only occurs when all parties involved believe they can benefit from it. Therefore, trade is not a zero-sum game. The long-standing trade imbalances between countries also have their rationale. Based on this idea, we believe that any form of tariffs is harmful, including so-called "reciprocal tariffs." These tariff measures inevitably damage global economic growth and productivity. Nevertheless, there remains a significant divergence in academia and policy circles regarding the mechanisms, roots of international trade imbalances, and the impact of tariffs on capital flows. This article will focus on exploring these issues.

The President's Trade Perspective

In the President's view, the United States has been unfairly treated by its trading partners for many years, and the huge trade deficit is clear evidence of this. He believes that these deficits mainly stem from the protectionist policies of major trading partners such as China, the European Union, and Japan. The method the President uses to calculate "reciprocal tariffs" indicates that he believes the ongoing trade deficit has no legitimate justification and is entirely the result of protectionism.

In the eyes of the president, these protectionist policies mainly include:

1. Tariff barriers
2. Regulatory measures that favor domestic producers
3. Some exporting countries manipulate exchange rates to lower their currency's exchange rate against the US dollar.

He believes that these policies have led to a shrinking manufacturing base in the United States, putting American workers in a severe economic situation. The American worker demographic is a key supporter of the president's "Make America Great Again" political ideology. He promises to revitalize American manufacturing and promote economic recovery by achieving fair competition and encouraging American consumers to buy more domestic products.

Dollar Hegemony Theory

Many people believe that the president's views on trade reflect his misunderstanding of economics. In fact, the United States benefits greatly from trade deficits. American consumers enjoy products produced with cheap labor in places like Asia, as well as low oil prices brought by Middle Eastern oil. From this perspective, America is the winner, while the hard-working yet poorly paid Asian workers are the losers. For years, the U.S. has successfully persuaded countries with trade surpluses to invest their surpluses in the U.S., maintaining a strong dollar and perpetuating this favorable situation for America. It is worth noting that after the abolition of the gold standard, trade deficits no longer lead to a loss of U.S. gold reserves. The U.S. can maintain trade deficits for an extended period with little impact. This viewpoint is in stark contrast to the president's opinion.

However, this situation is not a long-term solution, as trade deficits will accumulate over time. The U.S. dollar, as the global reserve currency, is key to maintaining this scenario. Countries invest their earnings from exports to the U.S. in dollar-denominated assets, sustaining this Ponzi scheme. But with the accumulation of imbalances, this system will eventually collapse, and the real income of Americans will decline significantly. To mitigate this risk, some suggest investing in assets such as gold and Bitcoin.

To maintain the global reserve currency status of the US dollar, the United States has implemented several policies, some of which are carried out in secret. Some more extreme viewpoints suggest that the US is even willing to use military means to uphold the dollar hegemony, such as overthrowing regimes that attempt to settle oil transactions in gold or euros.

This view sharply contrasts with the president's perspective on global trade. The president accuses certain countries of manipulating their currencies to devalue them, while the United States has actually been trying to maintain the appreciation of the dollar, sometimes even resorting to extreme measures.

This obvious contradiction is further highlighted by the president's recent attempts to dissuade BRICS nations from creating a competing currency. If BRICS succeeds, it would weaken the dollar and strengthen other currencies. Isn't this exactly what the president hopes for? The depreciation of the dollar should benefit the revitalization of American manufacturing. The president's accusations against BRICS seem contradictory: on one hand, he accuses them of manipulating exchange rates to devalue currencies to increase exports to the U.S., while on the other hand, he worries about them creating a competing currency. What does the U.S. really want other countries to do? Continue buying U.S. Treasury bonds or sell off American assets? This contradictory attitude is not unique to the president; many politicians have shown similar confusion.

According to the theory of dollar hegemony, the policy goal of the United States is to support the dollar, while some countries are attempting to end the dollar's status as the global reserve currency. This viewpoint is quite popular among Bitcoin enthusiasts. Some analysts believe that the dollar is facing a highly uncertain situation, especially as the rise of BRICS countries poses an increasing threat to dollar hegemony. They may gradually abandon the dollar as their primary trade and global settlement currency. Therefore, the dollar's status as a global reserve currency may be weakened, leading to a significant increase in the prices of oil, gold, and even Bitcoin.

In this context, the new tariff policy may cause particularly severe damage to the United States. The decline in trade surpluses for exporting countries will reduce their investment in U.S. government bonds and other U.S. assets. They may begin to sell existing U.S. assets to boost domestic consumption and make up for losses in exports to the U.S. This could trigger a U.S. debt crisis, which in turn would weaken the position of the dollar.

Capital Flow Perspective

There is another less mentioned but noteworthy perspective regarding trade imbalance. According to the balance of payments principle, if a country experiences a trade deficit, its capital account will inevitably show a corresponding surplus, and vice versa. But what exactly drives this process? Is it the high-quality products from countries like China that lead to the U.S. trade deficit, which in turn triggers a capital surplus? Or is it the global demand for U.S. assets that causes a capital surplus, which then leads to a trade deficit?

This viewpoint is more positive than the theory of dollar hegemony. The United States has the best companies in the world, which focus more on profit and return on equity. American corporate culture also emphasizes elite management rather than personal relationships or backgrounds. This helps attract top talent from around the world. The U.S. is home to the world's most innovative tech companies, such as Google, Apple, and Amazon, which have captured the attention of global investors.

Many overseas investors also hope to transfer their capital to the United States, where the rule of law is more sound and investor protection is more complete. Therefore, the president believes that the view that certain countries have been manipulating their currencies to devalue them may be incorrect; in fact, these countries have been striving to prevent capital outflows. According to this perspective, the ongoing trade deficit in the United States may not be a problem, but rather a sign of success.

We believe that these economic factors may have a more significant impact on the dollar becoming the global reserve currency than geopolitical factors. Even if other fiat currencies struggle to challenge the dollar's status, gold remains a potential competitor. Some argue that U.S. authorities may still need to adopt some unconventional measures to maintain the dollar's status, not to defend the dollar's value, but to retain control over global affairs and enhance their ability to block payments and freeze global assets.

If one agrees with this view, even if tariff policies are undesirable, they are unlikely to immediately destroy the dollar's status as a reserve currency. Of course, tariffs as a form of taxation will still harm American businesses and weaken the economy, but the dollar's hegemony may continue for a while.

Summary

The global economy is an extremely complex system. The theory of dollar hegemony has its rationale, and trade deficits have indeed driven capital account surpluses to some extent. However, at the same time, capital account surpluses have also driven trade deficits. These two forces act simultaneously and influence each other. For the United States, both factors are crucial, and neither should be overlooked in analysis. The president's views on trade have certain merits in some aspects, which also explains why some politicians appear contradictory when discussing currency manipulation.

Nevertheless, we believe that the president's overall view on trade has serious flaws. Tariffs are essentially a tax on Americans, which will weaken the U.S. economy. While the American middle class may be relative losers in globalization, reversing globalization will not make them winners. The president may wish to abolish income tax in favor of tariffs, reverting to economic policies prior to the 1930s. However, this possibility is extremely slim.

Of course, there are some conspiracy theories worth mentioning. Some believe that the president announced these tariffs to deliberately trigger an economic recession, forcing investors to buy U.S. Treasury bonds to lower yields, thereby allowing the U.S. to refinance its debt at lower interest rates and delay a debt crisis. Although this claim is not without possibility, the probability is low. According to Occam's Razor, the simplest explanation is usually the best— the president simply has a preference for tariff policies.