The writer is non-resident senior visiting fellow at New York University’s Center for Global Affairs.
Donald Trump says many things. So many things. Often enough, they contradict.
Advertisement
Consider his recent pronouncement on the dollar standard. On his social media page on November 30, Mr Trump wrote: “There is no chance that the BRICS will replace the U.S. Dollar in International Trade, and any Country that tries should wave goodbye to America.” The threat he’s making is clear: if Russia, China or anyone else tries to replace the dollar, they will face a 100% tariff on exports to the US.
He really doesn’t get it, does he? Here’s why this makes no sense.
The dollar has two global roles: the world’s primary reserve currency and the world’s primary exchange currency. There are signs some countries want to move away from the greenback. The IMF’s Currency Composition of Official Foreign Exchange Reserves shows a falling dollar share of central bank reserves. Other currencies, and gold, are filling the gap. Meanwhile, the Chinese renminbi is becoming more important in cross-border trade. Disrupting the global trade system with new tariffs hardly protects the dollar standard. It would simply make dollars harder to come by for foreign countries already worried about their future availability.
The incoming US president cannot punish the already-departing BRICS by pushing them farther away.
Second, the BRICS — which now comprises 10 countries — are not only thinking about economic growth. They are thinking about economic security. In the long run, this makes Mr Trump’s threats against their export earnings somewhat hollow. All too often the significance of the BRICS (and their plans) are dismissed by the west. But consider this: the BRICS account for some 45% of the global population and 35% of gross domestic product. Ultimately, why would the BRICS worry about less US trade? Their aim is to reduce it anyway.
More on the Trump presidency's international impact:
Advertisement
Third, let’s not fall into the trap of overestimating presidential influence. Three dollar-related forces are out of White House control: national debt, central banks and capital markets. In fact, the US national debt is essentially out of anyone’s control. Which brave Congress could possibly reverse the US debt trajectory? Meanwhile, most foreign central banks cannot be controlled, not even by their home governments. They will or will not hold dollars. And regarding markets, if Mr Trump slaps 100% tariffs on anyone, international capital will respond, perhaps unkindly. Who knows how long the dollar smile — FX traders’ parlance for capital moving to the US in both good times and bad — will last?
Here’s the bottom line. Despite their best efforts, some things are outside the hands of economic policy-makers. Often enough, these things include the economy.
All this means president Trump can have one or the other: a global dollar plus the imported deflation that entails (think the rust belt). Or a protected US economy with all the financial fragmentation that implies. Imagine competing currency blocs. To his credit, Mr Trump is the sole US politician to grasp (or admit) that the US trade system unsustainably exported US jobs. That said, it’s odd he isn’t also the sole US politician to understand why: using a domestic currency as a global currency has distorted the international financial system and US domestic economy, too.
Mr Trump’s social media blasts might pull something off. Just as the dollar defies supply and demand, he defies logic. The cajoling in which he specialises may warn BRICS off their scheme, or their scheme may fail. Creating a new currency area isn’t easy. Ask Europe. Or Latin America. But here’s the point. The US economist-in-chief doesn’t understand economics. Investors take note. The Trump obsessed with tariffs, and the Trump obsessed with the dollar, will simply not be friends.
Do you want more FDI stories delivered directly to your inbox? Subscribe to our newsletters.