This week the president took aim at the trade imbalance and missed the bull’s-eye completely. Of course, it is hard to hit the bull’s-eye when you are aimed at the wrong target. His steel and aluminum tariffs will not result in a better U.S. trade balance but ultimately will cause the U.S. dollar to rise and exports to fall.
Why? Because the U.S. dollar is the world’s reserve currency. That means that other countries need dollars for their international trade, which means that the U.S. has to supply those dollars. This is done through current-account deficits in U.S. trade. Oh, and we also get to run huge federal deficits and have the rest of the world buy up our deficit-funding bonds.
The right target? That would require a difficult and complicated strategy to replace the dollar as the world’s reserve currency. Here there are two prime options: First, either turn the IMF into a world central bank issuing paper reserves, which would be arbitrary and political, since the IMF produces no goods, or second, adopt a modernized gold standard. This alternative has been proposed by Jacques Rueff, Lew Lehrman, and Jack Kemp.
But the big question now is how long, and how much damage, will be done by the incipient trade war that President Trump has triggered in a misbegotten effort to reduce the U.S. current-account imbalance. Maybe cooler heads and more creative policy options will put a halt to this war before too much damage is done to jobs, growth, and the international trading system.