Tariffs Won’t Save the US Dollar

Mises Wire

This article is republished from The Mises Institute under a Creative Commons licence. Read the original article.

Tags: Financial Markets, Monetary Policy, Protectionism and Free Trade, U.S. Economy

12/26/2024 • Mises Wire • Vincent Cook

In a November 30 Truth Social post, President-elect Trump threatened BRICS states—Brazil, Russia, India, China, South Africa, Iran, Ethiopia, Egypt, and the United Arab Emirates, plus more states in the process of joining—with 100 percent tariffs on their exports to America if they dared to attempt replacing the US dollar as an international trade currency:

The idea that the BRICS Countries are trying to move away from the Dollar while we stand by and watch is OVER. We require a commitment from these Countries that they will neither create a new BRICS Currency, nor back any other Currency to replace the mighty U.S. Dollar or, they will face 100 percent Tariffs, and should expect to say goodbye to selling into the wonderful U.S. Economy. They can go find another “sucker!” 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.

When one examines international trade data in detail, however, some curious anomalies in Trump’s statements become evident. For one thing, the world needs the BRICS economies for both merchandise exports and imports far more than the world needs America. China (including Hong Kong) all by itself is a bigger importer and far bigger exporter of goods than America. America only accounts for 13 percent of the world’s merchandise imports and less than 9 percent of its merchandise exports. If the world’s economy were to fragment into rival currency/trade blocs, most countries outside of North America would regard access to BRICS markets, not to America’s markets, as being a higher priority.

A NAFTA bloc and its US dollar would be competing on unfavorable terms with a BRICS bloc, a Euro bloc, and maybe a Japanese-led bloc for access to the natural resources and other factors of the less-industrialized countries. Fears of being cut off from natural resources, in turn, incentivizes hostile blocs to turn into hostile military alliances, and for their trade and currency wars to turn into world wars.

For another thing, Trump’s threats mean nothing to states that are already under severe sanctions like Russia and Iran. They export practically nothing to America. It is Chinese manufacturers who have the most to lose by the BRICS bloc antagonizing Trump, with their annual export revenues on the order of $450 billion at stake (about 3/4ths of all BRICS exports to America). However, Chinese dictator Xi has undoubtedly calculated that China’s economy is likely going to be targeted by American statists anyway, so he has every incentive to preemptively create a sanctions-proof international medium of exchange in spite of risks to export markets, just as BRICS has already created an independent wire payments system and an independent multinational credit institution to bypass American-aligned institutions. Trump’s brazen threat only provides more evidence that the American government is not a trustworthy steward of an international monetary system, and thus makes migration away from a dollar-dominated system towards some sort of alternative money even more urgent and compelling for every state that fears arousing Washington’s ire.

Yet another odd thing about Trump’s threat is that trade barriers hurt Americans as well as foreigners. It is not simply that case that big box retailers are filled from floor to ceiling with inexpensive Chinese-made consumer goods that Americans can’t seem to get enough of. The data show that China is a critical supplier of electronics and machinery too, something which American businesses depend heavily on for their own productivity. Tariffs do nothing to address the root causes of America’s deindustrialization, but suddenly cutting off access to Chinese-made capital goods and forcing diversions of scarce inputs to sectors where America lacks comparative advantages to make up for lost imports means tremendous losses of productivity and real incomes for American workers. Tariffs can certainly accelerate the deindustrialization process and the decline of the middle class and make dollar-denominated accounts and assets even more unattractive to foreigners. Carrying out Trump’s threat would be spectacularly counterproductive for the Americans who voted for Trump.

To be sure, a fragmentation of the world’s economy into rival blocs hurts everyone, not just Americans, so Trump’s threat might just be a bluff to gain an advantage in trade negotiations, and won’t do any real damage unless his bluff gets called. Even as a mere negotiating ploy, Trump’s demands don’t make sense. What Trump doesn’t seem to understand is that the continual creation of fiat dollars and dollar substitutes out of thin air hurts everyone too. Continued dependency of the world on fiat dollars is not an acceptable outcome, not even for Americans. Using threats of economic chaos to try to keep the current failing system in place is madness.

Not only are America’s predatory elites (who happen to be fiercely anti-Trump) ruthlessly exploiting the entire world with what former French President Valéry Giscard d’Estaing famously called the American government’s “exorbitant privilege” of fiat dollar creation to commandeer the productivity of others, the use of dollar-denominated US Treasury securities as the principal reserve asset for the world’s banking system means that this system is at risk of a catastrophic collapse in the event of a dollar hyperinflation. The dollar’s role as the leading trade currency is a mere by product of the foreign demand for dollar-denominated US Treasury securities. It is this dubious choice of reserve asset as a substitute for gold that poses an existential hyperinflationary threat to the entire global monetary system.

With the fiat US dollar having lost well over 98 percent of its purchasing power in terms of gold since President Nixon cut the last links to gold in 1971, calling it “mighty” as Trump did, is a gross exaggeration. The US dollar in its current form is not mighty, it is an absolute disgrace. It is doomed to failure even without an overt challenge from the BRICS states. Some heavy fiscal distress followed by a sudden loss of confidence in our ever-inflating dollar would be quite sufficient to bring it down and all dollar-dependent currencies along with it. A dollar hyperinflation under the present system is the single greatest man-made risk threatening the continuity of civilization apart from a nuclear war. Imagine a world where all the world’s supply chains are broken and even the “essential businesses” are all shut down everywhere due to all money becoming worthless.

Instead of vainly defending the fragile monetary status quo with threats of economic destructionism, Trump should be leading America—and as much of the rest of the world as he can—away from the fiat dollar and back towards a decentralized gold standard, or better yet, towards an improved, decentralized gold standard that is coupled to a 100 percent reserve rule for all risk-free money substitutes. Americans too need a better form of money than the fiat dollar. To the extent that America’s enemies can find a way to escape a failing fiat dollar by turning towards some sort of basket of gold and fiat currencies, is it wise for America not to implement an even better gold-based monetary reform of its own, and encourage its allies to do the same? Instead of fearing international monetary competition and attempting to hide from it, why not try to win the competition by coming up with an even better form of money?

While many economists outside the Austrian school may scoff at calls for sound money and concerns about hyperinflation risks, it is curious that their misguided allegiance to “empirical” and econometric methods has not led them ponder the dreadful history of the hundreds of fiat money experiments that have been tried and have invariably failed over the past millennium, beginning with the very first example of a fiat currency dating from exactly 1,000 years ago in China. Surely even those who are immune to the indisputable logic of purposeful action must concede that, in all the historical records available to us, tariffs and other more severe interventions have never been successful in saving fiat monies from the scourge of continual depreciations (usually over a span of decades) followed by utter oblivion and economy-wide chaos. Only a transition back to precious metals has ever averted a hyperinflationary disaster. There isn’t the slightest indication that the dollar differs from these historical precedents in any important respect, aside from the fact that the threat of monetary destruction is now universal. A restoration of gold backing for the dollar, not tariffs, is the only viable plan for making the US dollar great again.