Breaking the Conveyor Belt

On January 26, less than a week after his inauguration, Donald Trump took a break from a day of rest and relaxation at his Miami golf course to post on social media that Colombia would face vicious “emergency” tariffs unless the country accepted two planes of deportees. President Gustavo Petro initially balked before giving in—but even that initial hesitation had by the end of the month made him less popular among Colombians than Trump himself. The country depends on access to American markets; it can’t afford even modest brinkmanship with the US. 

This early victory no doubt swelled Trump’s confidence, not least because he was shooting from the hip. At the time, most of his cabinet had not even been confirmed. His commerce secretary, Howard Lutnick, and US trade representative, Jamieson Greer, wouldn’t be through the nomination process until late February, and his chairman of the Council of Economic Advisers, Stephen Miran, not until mid-March.

The next six weeks of policy reflected the same scattershot impulsiveness. In February Trump announced tariffs on Mexico, Canada, and China, only to delay those for Mexico and Canada once Mexico promised to send troops to the border. In March, two days after the tariffs were finally implemented, Trump revealed that there would be exemptions for “USMCA goods” from Mexico (i.e., all goods covered by the free trade deal Trump negotiated in his first term) and auto parts from Canada, one of the country’s largest export items to the US. The tariffs on China targeting de minimis imports (those worth less than $800) were rolled back when it turned out that the Post Office might not have the administrative capacity to collect them. It was a confusing time for everyone, and apparently for the Trump administration itself, full of reversals, delays, and exceptions. 

Then came “Liberation Day.” Working from the assumption that the US’s trade deficit with a given country represents the “sum of all cheating,” on April 2 the administration imposed tariffs on all its trade partners, using a by now infamous formula: simply dividing the US’s trade deficit with each country by twice its imports from that country—with a minimum of 10 percent. The resulting policy was far more extreme, and far crueler, than almost all observers expected. Cambodia was hit by 49 percent levies, Serbia by 37 percent, South Africa by 30 percent. Stock exchanges all over the world immediately panicked. Only under the looming threat of a bond market meltdown and a Depression did Trump temporarily lower these “reciprocal” tariffs to 10 percent across the board—even as he escalated his tariffs on China, which as of this writing remain at a staggering 145 percent. 

Should we expect a gale of chaos to continue blowing through American tariff policy for the next four years? Yes, we should. By imposing punitive tariffs and threatening to retract America’s security umbrella, Trump hopes to coerce the world into sharing what he sees as the burdens of providing public goods like the global dollar system and military protection. Within Trump’s White House, at least three factions are vying for influence on these matters. Peter Navarro, Trump’s senior counselor for trade and manufacturing, holds the most aggressive and hawkish views. The titles of his books, like The Coming China Wars (2006) and Death by China (2011), give a flavor of his approach, as does a document he circulated within the White House during Trump’s first term alleging that a “weakened manufacturing base” would cause a “higher abortion rate,” a “lower fertility rate,” and “increased spousal abuse.” The administration’s more technocratic figures, such as Miran and J.D. Vance, have a clearer set of goals and a more coherent, but still predatory, worldview. Their thinking rests on a nationalist critique of global finance, which they blame for deindustrialization and the long-term unemployment left unaddressed after 2008. Both camps are in tension with Elon Musk, the South African industrialist, whose multinational corporations will suffer from trade conflicts. At the moment, however, Navarro seems to be ascendant. 

The global trading system that Trump desires to radically reshape has a very long history. It took more than a century to build, and has provided the US with a unique place in the world economy. In the late nineteenth century republican farmers built a strong protectionist state that nurtured powerful financial markets and internationally competitive industries. Liberal businessmen took over that system in the middle of the twentieth century and forged a global free trade regime to win the cold war. Now, more than three decades after the end of that conflict, Trump wants to renegotiate the system yet again. What does he hope to achieve? What tools does he have to do it? And is it possible?

1.

Imagine a great conveyor belt stretching between the United States and Germany. In the factories of Stuttgart and Munich, German businesses manufacture vehicles, machinery, and pharmaceuticals, which they export to America at a profit. They deposit those profits into American banks for safekeeping, leading to lower interest rates, a stronger dollar, and profits for American financial institutions. Those financial institutions, in turn, lend money to American consumers. The consumers, finally, use that money to buy German goods—and the conveyor belt comes full circle. 

German exports are competitive in the US for two reasons: German unions committed to full employment hold wages down relative to productivity, making products cheaper to produce there; and the strong dollar makes it easier for US consumers to buy German than the other way around. The financial sector grows, even as American factories decline. Dollar assets accumulate on German balance sheets, while dollar liabilities accumulate on American ones. The elites in both countries gain; the masses in both countries face wage stagnation as the price of keeping the conveyor belt going. 

The conveyor belt both depends on and generates inequality. In Germany, wages need to grow slower than productivity so the country can remain competitive on exports; in America, workers and the government alike need to borrow to keep consumption and employment growing. The most spectacular way to break the machine would be for German and American workers to unite and force a new, more equitable economic relationship among laborers, factory owners, and banks, above all by raising wages. Germany would consume more and add to—rather than subtract from—global aggregate demand, while America would be less addicted to debt and less in thrall to Wall Street. But in the absence of a global labor movement, there are coordination problems. Fragmented and divided by national borders, nobody wants to make the first move. In any case, until very recently German workers felt secure enough with the status quo that they didn’t want to risk high levels of unemployment just because of America’s self-diagnosed problems with debt and deindustrialization.

The image works with many countries in Germany’s place. Each has its own local twist on how it works: China’s one-party state, Saudi Arabia’s oil deposits. But any country with an export surplus that it recycles through the dollar system participates in a version of this conveyor belt. 

The part played by the US, however, is unique. According to the World Bank, Americans spent $22.5 trillion on consumption in 2023, out of a global consumer market of about $77.5 trillion. Comparisons like this are tricky, since translating between currencies isn’t straightforward, but by any calculation America’s roughly 29 percent of global consumption far exceeds its 4 percent share of the global population. In global debt markets, too, America plays a wildly outsized part. Anyone looking for reliable stores of value that are easy to buy or sell will find a ready supply in the US dollar. American household borrowing ($18 trillion) outruns European household borrowing (€8.4 trillion), and sovereign debt markets show a similar disproportion, with US federal debt ($36 trillion) swamping European debt (€13 trillion issued by individual countries, plus less than €1 trillion issued collectively). American consumers and finance organize and add to global aggregate demand like nowhere else on the planet.

When Donald Trump looks out at this system, he sees the US as a victim. The nation’s cyclopean size gives it leverage over its trading partners, and by failing to use that leverage against them, Trump believes, it has been allowing itself to get ripped off. In 1987, when the hot topic was rapid Japanese growth, he took out a full-page ad in The New York Times for an open letter saying exactly that:

For decades, Japan and other nations have been taking advantage of the United States.… Over the years, the Japanese, unimpeded by the huge costs of defending themselves (as long as the United Sates will do it for free), have built a strong and vibrant economy with unprecedented surpluses. They have brilliantly managed to maintain a weak yen against a strong dollar. This, coupled with our monumental spending for their, and others, defense, has moved Japan to the forefront of world economies.

His target changes as US trade deficits do, but his answer is the same every time: the US just needs strong leadership willing to use that leverage to extract rents from other countries. “Make Japan, Saudi Arabia, and others pay for the protection we extend as allies. Let’s help our farmers, our sick, our homeless by taking from some of the greatest profit machines ever created—machines created and nurtured by us.” 

This is the logic of a protection racket. Trump was largely diverted from acting on it in his first term: Gary Cohn, the director of the National Economic Council, and Steven Mnuchin, the treasury secretary, both alumni of Goldman Sachs, were widely reported at the time to have steered the president away from reshaping global trade and toward passing new tax cuts and deregulation. Cohn resigned when Trump finally did put tariffs on steel, while Mnuchin stayed on and pressed for exemptions. Now his top advisers all seem unable or unwilling to constrain him.

*

Unlike a real conveyor belt, this one wasn’t designed; it evolved across a century and a half through a series of unintended consequences and shifting coalitions. In his book Clashing Over Commerce, the economist Douglas Irwin identifies three distinct periods of American trade policy.¹ From the Founding to the Civil War, the federal government used tariffs to collect revenue in the absence of other forms of taxation; from the Civil War to the New Deal, it used them to restrict foreign competition and protect domestic firms; and from the New Deal to the first Trump administration, it lowered them strategically through negotiated reciprocity agreements with allies to create a free-trade world. 

The protectionist vision that dominated the late nineteenth century was first articulated in the 1850s within the precincts of the then-emergent Republican Party.² Its architects, such as Henry Carey and Justin Morrill, argued that tariffs designed to protect America’s infant industries would allow urban firms to grow, thereby creating demand for farm products. As long as the “home market” was booming from industrialization, farmers would be better off selling to it directly rather than relying on fickle and unaccountable foreign markets.

This set of ideas was so successful that, by a century later, it had undone itself. Initially Southerners objected, since they sold slave-grown cotton to European textile mills and would therefore be hurt by any retaliation to US tariffs, but the vision of a self-sustaining domestic economy had mass appeal in the North. The Civil War decided the issue: tariffs were raised, and America did indeed industrialize. Econometricians think that, far from being strategic and targeted, the tariffs protected inefficient producers and led to waste—not surprising, since they were the product of Congressional horse-trading. Yet protectionism allowed millions of Americans to experiment with industrialization, raising the manufacturing sector’s output, employment, and number of firms. The national market remained competitive for many other sectors too, though, and within that crucible some businesses became technological leaders. The most successful grew up to become capital-intensive, export-oriented firms, and by the 1930s they were joining cotton planters in the Democratic Party’s crusade to shift away from protectionism and embrace free trade.³

Northern farmers, too, were victims of their own success. Despite booming demand, supply grew even faster, crashing agricultural prices all around the world. That made it harder for farmers to make their mortgage payments. Small farmers failed, medium and large farmers consolidated, and the world urbanized. Two great deflationary waves, from 1870 to 1900 and 1920 to 1940, drowned farmers in a sea of debt. Governments in continental Europe tried to use tariffs to protect their farmers against American grain and compensated industrial workers for the higher food prices with a welfare state. 

The same formula wouldn’t protect American farmers, however, since they were the source of the excess supply. Instead American farmers demanded and received government intervention to secure better access to credit. (Sociologists such as Sarah Quinn have pointed out that it is much easier to expand access to credit than it is to make explicit political decisions about reallocating resources.)⁴ Federal credit policies made American financial markets some of the deepest, safest, and most liquid on the planet. These were the component parts of the great conveyor belt.

*

What started as a republican nationalist alliance of farmers and infant industries generated, over the course of a century, a liberal internationalist coalition of financiers and big businesses, anchored by capital-intensive, internationally oriented firms in the Northeast. Their international orientation meant that these firms cared a great deal about global developments, while their high capital-intensity widened their room to bargain on labor issues. European fascism and bolshevism were graver threats to their bottom line than were minimum wage laws.

Over the 1930s this coalition was therefore able to recruit a broad base of workers by making concessions to the labor movement, such as the Social Security and Wagner Acts. In the 1940s its leaders supported the US entry into World War II even before Pearl Harbor, and favored a confrontational stance toward the Soviet Union that quickly turned into the cold war. Whether out of fear that European governments would retreat into economic nationalism if left to their own devices or out of concern that the threat of communist subversion would take away their foreign markets, the internationalist coalition was willing to pay for extensive military buildup and foreign aid—in the form of the Marshall Plan and NATO—if it meant keeping global capitalism intact. Indeed they were eager to, since military Keynesianism solved the domestic problem of underemployment, too. The historian Tim Barker quotes Paul Nitze, an investment banker–turned–planner in Truman’s State Department, gushing: “Korea came along and saved us.”

The internationalists didn’t go unchallenged. An alternative coalition of smaller, labor-intensive, domestically oriented, often less technologically advanced firms—and the workers who depended on their success—objected first to the New Deal and then to foreign entanglements. “America First” was their slogan. Unionization and the Marshall Plan might make sense to investment bankers in Manhattan, but what did a construction company in suburban Cincinnati care about whether Germany was divided one way or two? 

At the head of the nationalist republican bloc was the Ohio senator Robert Taft. Like Trump, Taft thought European businessmen could—and should—pay to defend their private property themselves against the attacks of domestic socialists and Russian communists. If America had an obligation in world affairs, he believed, it was in Asia, where weaker states actually needed help against communist subversion. But in the main Taft thought the US should maintain moderately high tariff walls and stay aloof from world affairs that didn’t directly concern it. Liberal crusades beyond our borders would require a standing army—itself a direct threat to classical republican principles—which in turn would require high levels of taxation. 

Taft worried, too, about other measures for which liberals were calling to make a high-pressure mixed economy work, like price controls and the socialization of investment, on the grounds that they threatened private property. Meanwhile, he argued, if the US became the global police, it would eventually be transformed into a “garrison state.” The best way to prevent that was to preserve Congress’s traditional prerogatives over the budget and war. Checks and balances, filibustering, and logrolling—and the gridlock they produced—were features, not bugs, of America’s constitutional system.

*

Taft’s wing of the GOP lost the fight over tariffs in the course of the consolidation of the New Deal. The turning point arrived with the Reciprocal Trade Agreements Act of 1934, which granted the president the authority to negotiate tariff reductions directly with other countries, bypassing the legislative chaos that had defined earlier eras. A generation later the Trade Expansion Act of 1962 further empowered the executive branch to lower tariffs, and in the 1970s a series of laws did still more to expand presidential discretion over trade barriers.⁵ At the time, few imagined these laws would be used to raise tariffs—but the result was a legal structure that, decades later, enabled Trump to unilaterally do just that.

One consequence of all this was that the US did become a “garrison state.” World War II’s high income taxes stuck around, the dollar became the global reserve currency, the military went to Korea and Vietnam, NATO permanently committed the US to European defense, and those free trade powers were used to lower tariffs and cement cold war alliances.⁶ Favorable American trade policies toward Japan and South Korea, for instance, were meant to strengthen anticommunist allies in Asia so they could serve as a counterweight to China and North Korea.

Whenever military spending surged, it led to full employment, chronic inflation, and wage gains, which eroded the international competitiveness of America’s exports and put pressure on companies that relied heavily on low-paid workers. Taft was hardly innocent in this drift away from republican liberty and toward militarism. His major legislative victory was the Taft-Hartley Act (1947), which suppressed organized labor—the one social base that might have offered a realistic alternative to cold war liberalism prior to the McCarthyite purges (which Taft also supported).

On the other side of the Atlantic, Europe built on its welfarist and corporatist traditions to offer workers a deal: keep wage demands down in return for full employment and social insurance.⁷ With low labor costs and high education levels, exports boomed. Other countries joined the export bonanza, most notably Japan, whose companies—Toyota, Nikon, Sony—became household names. Throughout the “development decade” of the 1960s all sorts of states hopped on the conveyor belt.

For more than two decades after World War II, the Bretton Woods system ensured that almost all noncommunist currencies had their exchange rates with the dollar fixed, giving investors a degree of predictability. After that system fell apart in 1971, however, currencies began to float according to supply and demand. American military buildups led to a stronger dollar, which made imports cheaper for domestic consumers but made American exports more expensive for foreigners. Each time America’s military adventured abroad, domestic production of consumer goods was squeezed. As a consequence, industries hit by import competition like textiles, autos, and steel made increasingly loud calls for protectionist relief during wars, but they were defeated each time.⁸

The American industrial base slowly eroded. Multinational corporations’ foreign subsidiaries built factories abroad: General Electric in western Europe, Tonka Toys in Mexico.⁹ Vertically integrated firms dis-integrated, keeping their intellectual property while relying increasingly on complex global supply chains to avoid labor strife at home. The countries that ran an export surplus with the US then recycled their profits into the dollar system, raising demand for the dollar, appreciating the exchange rate, and thus further eroding the international competitiveness of US industry.¹⁰

The system didn’t work automatically; it required constant attention and management. In the early 1980s, having resolved to maintain the dollar’s value and fight inflation, Federal Reserve Chairman Paul Volcker dramatically hiked interest rates. This strengthened the US dollar, since high rates attracted foreign capital. By 1985 dollar strength had gone far enough, and the Reagan administration negotiated the “Plaza Accord” with its major trading partners to coordinate depreciation against currencies like the yen and Deutsche Mark. When Japanese growth slowed in the 1990s, a “reverse Plaza” agreement between the US and Japan followed, driving the value of the dollar back up. 

The 1980s Latin American debt crisis that followed from Volcker and the 1997 Asian financial crisis rocked the system yet again. The IMF stepped in to help only on the condition that countries go through brutal “structural adjustment programs” to liberalize their policies on finance and trade. In response, and to avoid such painful episodes in the future, central banks in emerging markets sought to bolster their reserves, increasing demand for dollar-denominated assets like US Treasury securities. Organized labor groups defected from the internationalist coalition’s push for free trade, but they weren’t strong enough to overcome the bipartisan consensus in favor of it. Negotiations for what eventually became the North American Free Trade Agreement and the World Trade Organization began under Reagan, continued through Bush, and were completed and passed by Clinton—the capstone to decades of momentum toward free trade.

Americans got something magical: easy access to cheap goods and assets from abroad in exchange for nothing more than paper dollars. A French finance minister dubbed this the US’s “exorbitant privilege.” But by the late twentieth century Taft’s nightmares had come true. Income taxes and debt paid for a standing army to act as policeman for the world, and a free-trade world order pushed by corporate internationalists had created a global dollar system that facilitated the deindustrialization of America. 

That wouldn’t have been so bad if postindustrial labor had been organized, but thanks to Taft-Hartley it wasn’t. And it wouldn’t have been so bad if America had a welfare state. But such a state would require redistributing resources, and the American constitutional system is so riddled with veto points—legislation can fail in either house of the bicameral legislature or die under filibuster, while presidential candidates have to clear fundraising hurdles, not to mention the electoral college—that well-funded opposition groups have had an easy time shooting down such proposals. As industry declined, wages stagnated, and to fill the gap Americans borrowed money.

2.

The Biden administration tried to take on this system in a productive way. It accepted that America’s function as financial center meant channeling global surpluses, and yet it wanted the conveyor belt to lead not through consumer debt and asset bubbles but rather through public investments in public goods. The original vision of Build Back Better was public investment in the service sector, finally orienting our politics around the economy of the future, with funding for childcare, community college, and nursing-home reform. It was defeated in Congress, unable to get past Joe Manchin’s veto despite all the contortions and concessions Biden was willing to make. It was Russia’s invasion of Ukraine, as Andrew Yamakawa Elrod has argued, that “put spending back on the agenda.” What passed was what Elrod calls the “national security synthesis”: strategic investments in manufacturing to enable more aggressive confrontation with Russia and China. It was a convoluted system with many intermediaries that voters evidently didn’t understand or appreciate. And it too was defeated, this time at the polls. 

Now it is the Trump administration’s turn to monkey with the conveyor belt. What do they plan to do with it? The Washington Post has reported that even his advisers didn’t know what Trump would do until the last minute on “Liberation Day.” Starting in January, Trump had set his team to work figuring out various tariff plans to reduce the trade deficit and restore American manufacturing jobs. Miran, Greer, and Lutnick drew up detailed schedules for country-specific tariffs. 

In hopes of preparing for what might be coming, media commentators and corporate decisionmakers fixated on Miran’s nationalist critique of global finance from last November, “A User’s Guide to Restructuring the Global Trading System.” It was, in effect, a technical elaboration on Trump’s 1987 letter to The New York Times: use tariffs, dollar dominance, and security arrangements to extract rent from the rest of the world. For now, however, it represents a road not taken. Just three hours before the announcement on Liberation Day, the Post reported, Trump instead chose to pursue a more simplistic deficit-based formula, which matched one that Navarro had proposed several years ago. 

Trump didn’t have a political mandate for such an extreme move. Polling shows that the top issues on swing voters’ minds were inflation, immigration, and Kamala Harris’s alleged preoccupation with “cultural issues” like transgender rights—not trade deficits or manufacturing employment. Trump’s platform in 2024 called for 10 percent universal tariffs and “up to 60 percent on China.” Perhaps extrapolating from his first trade war with China, which ended when the PRC promised to purchase more American energy and agricultural products, voters underestimated the impact of his second. In any case, Trump’s initial tariffs on Canada and Mexico immediately went far beyond what he had proposed, and the current 145 percent tariffs on China are more than double his most ambitious promise during the campaign. Nor is the party willing to control Trump: Republicans in the House blocked attempts to reassert Congressional control over tariff policy.

The hard core of Trump’s elite support comes from what the historian Patrick Wyman calls the “American gentry,” a class of “salt-of-the-earth millionaires” who derive their wealth from asset ownership: “a bunch of McDonald’s franchises in Jackson, Mississippi; a beef-processing plant in Lubbock, Texas; a construction company in Billings, Montana; commercial properties in Portland, Maine; or a car dealership in western North Carolina.” This cohort is in a sense a throwback to the Taft nationalists, but the most that can be said is that their interests permit reordering global trade, rather than require it.

All of his other elite constituents are suffering from his policies. The Trump administration has been particularly brutal toward the oil industry, home to some of its biggest supporters in the business community: Trump has broken the sector’s once-unassailable profit margins by simultaneously pressuring OPEC to raise supply and shocking the world with tariffs. Large retailers like Walmart, Best Buy, and Target, which depend on cheap foreign products, were among the most vocally frightened by the tariff plans. Musk, meanwhile, has extensive business in China, with a new “megapack” battery factory that just opened next to his Shanghai gigafactory. His business plan also depends, for that matter, on AI and autonomous cars, and therefore on microchips made by the Taiwan Semiconductor Manufacturing Corporation. For Musk, then, conflict with China—whether in trade or over Taiwan—is disastrous. 

Nor is there a good economic reason for Trump and his team to be so fixated on manufacturing. Much as productivity growth in agriculture eventually led to the decline of the farm economy, since fewer farmers were needed to satisfy all the demand for their products, so productivity growth in manufacturing has led to a falling share of industrial workers in global employment. The United Nations estimates that in 1991 more than 14 percent of workers were industrial; by 2014 fewer than 12 percent of them were. The trend is slow but the implication is clear: service work, not industrial work, is the future. The Trump administration’s fixation on raising manufacturing employment is the twenty-first-century equivalent to a twentieth-century government desperately trying to keep its workforce agrarian. They are fighting over shares of a shrinking pie. 

And yet even if his obsession with manufacturing made sense, Trump’s monomaniacal commitment to using tariffs to achieve his aims would be irrational. By 2024 the Biden administration’s subsidies and investments in the manufacturing sector were leading to a construction boom for new plants and equipment. They were famously targeted at traditionally Republican districts to make them more bipartisan and harder to roll back. But Trump has unilaterally canceled large swaths of that agenda, arguing that tariffs will achieve the same aims. The only result has been a sharp decline in constructing for manufacturing and uncertainty for investors. 

Most importantly, the only way America has a chance at competing internationally in the most advanced industries is to train enough engineers to develop new technologies. By turning the biomedical complex over to Robert F. Kennedy Jr., promising to abolish the Department of Education, and attacking universities over free speech, in large part by withholding research grants, Trump has set back American science by generations. The only explanation for these moves is personal grievance. Indeed, on the whole, Trump’s trade war is better explained not as an economic endeavor but as a culture war, grounded in right-wing resentments and driven by his uniquely personalist form of rule. 

*

Trump is operating independently not just of the voters and the donor class but also of the traditional economic experts. Those who do have his ear have enabled him rather than held him back. In the first administration, nationalists with credentials like Navarro’s Harvard economics Ph.D. were hard to come by. (At the time, Vanity Fair reported that Jared Kushner found Navarro not by networking or reputation but by browsing Amazon.) Moreover, they were balanced by representatives from the traditional business-internationalist wing of the GOP, like Cohn and Mnuchin. The equilibrium between these factions has shifted dramatically since Trump’s first term. Last year Navarro was willing to go to jail for refusing to testify under subpoena to the Congressional committee investigating January 6. He became one of Trump’s most trusted advisers, apparently able to overrule the more technocratic elements of the administration (not to mention its vestigial internationalist wing, Musk).

That technocratic faction, meanwhile, has also tilted toward nationalism. In Trump’s first term his Council of Economic Advisers (CEA) was chaired by Kevin Hassett, a mainline neoliberal straight out of the American Enterprise Institute, focused on cutting taxes and willing to defend the economic benefits of immigration from the alt-right. Although Hassett has returned to the White House for the second term, the Post has reported that he was not even in the room when the final decision on tariffs was made. Trump selected Miran, by contrast, in part on the basis of his arguments about reshaping global trade and finance, which drew criticism from the likes of AEI. 

The result of these realignments was that “Liberation Day” was much harsher than anyone predicted. Soon many of Trump’s advisers began running away from responsibility. “I wasn’t involved in the calculations of the numbers,” Bessent told CNBC. “CEA was involved in calculating a variety of means of estimating approaches to thinking about non-tariff barriers,” Miran said at the Hudson Institute. “The president chose to go with a formula relating to closing trade deficits suggested by someone else in the administration.”

Trump was willing to countenance a stock market decline and even a recession. “He’s at the peak of just not giving a fuck anymore,” one insider told the Post. It was the bond market that seems to have shocked him out of complacency, finally moving him to enact the ninety-day pause on everything but the universal 10 percent tariffs and an escalation of those on China. Typically when investors flee stocks they go to bonds; as equities decline, Treasuries rise. This is dollar dominance in action—when investors want safety, even safety from a US recession, they go to safe assets denominated in dollars, like US Treasury securities. In this case, however, the shock was so huge that both fell simultaneously in the week after the tariffs were announced. 

Indeed, even the value of the dollar against other currencies fell in foreign exchange markets, indicating not just a recessionary shock to trade patterns but perhaps something even more unsettling for the global financial system: the dollar may no longer be the safe haven for investors in a crisis. Investors weren’t just ditching American stocks and Treasuries, they were ditching the dollar itself. It is too early to say for sure, but these patterns are unprecedented. By simply making America unpredictable and untrustworthy, Trump may be eroding the safety on which dollar dominance depends, even if all the tariffs were to disappear tomorrow.

*

Still, ditching the dollar is easier said than done. What stores of value would everyone use instead? Consider the case of Russia, one of the countries with the greatest incentive to try to find ways out of the global dollar system. After Russia invaded Crimea in 2014, the Russian central bank shifted its reserve holdings out of direct dollar holdings in the US and into dollars held in other countries and other currencies. But even this “Fortress Russia” strategy couldn’t avoid the dollar completely. And what replaced those dollars? Mostly yen and euros, the latter of which are now frozen as the EU debates whether or not to fully confiscate them so they can be channeled to Ukraine. Not much of an alternative to the dollar system after all, at least for the West’s geopolitical rivals, who would be the first ones out the door if dollar dominance truly did collapse. More to the point, the yen and euro, as attractive as they are, don’t exist in sufficient quantities to replace the dollar as the world’s preferred safe store of value.

At least, they don’t yet. That might eventually change as a result of the new nationalists’ other plan for global reform: European self-defense. Continental rearmament will require deficit finance on an enormous scale. European Commission president Ursula von der Leyen’s “ReArm Europe” plan proposes €800 billion in new defense spending; German conservatives, traditionally the bulwark of European austerity, have already made preparations for issuing additional debt. In the short term, Germany’s shift away from austerity will move the global trading system toward balance, especially since so much of that spending will be on procuring arms from America rather than additional defense production in Europe—a boost to American manufacturing. Over the medium-to-long term, however, a more geopolitically independent Europe issuing large quantities of safe, Euro-denominated public debt would start to reduce dollar dominance, opening the door to a world with realistic alternatives to the dollar system. Significant hurdles remain: Europe would need to manage a stronger currency, rising debt, and exporter pushback—issues that its own veto-ridden constitutional structure may struggle to resolve. Still, security is a powerful unifying force, and Trump has impressed on European leaders that they need to provide it for themselves.

Meanwhile Miran is taking the lead in attempting to open up new avenues for the president to exercise his will on the global economy. Miran’s diagnosis is that the dollar is structurally overvalued, a problem that tariffs are ill-suited to solve; a far simpler solution would be to cut the Gordian Knot and pursue devaluation directly through monetary policy. Ditto for fears that the bond market might malfunction in response to high tariffs: if the executive branch could control monetary policy directly, Trump could use those tools to stabilize markets when they react badly to his policies.

This is not traditionally an option because the Federal Reserve has operated as an independent federal agency since the 1950s. Presidents appoint the Board of Governors with the approval of the Senate; twelve regional Federal Reserve Banks elect their own presidents, and they take turns serving with the Board on the Federal Open Market Committee, which determines monetary policy. Once appointed, the Board has autonomy for decisions about interest rates and lending. According to the Supreme Court, in a 1935 case known as Humphrey’s Executor, the president can’t fire the heads of independent agencies except “for cause”—that is, he can’t fire them simply over disagreements about politics or policy, only due to “inefficiency, neglect of duty, or malfeasance in office.” 

And yet the courts have recently been chipping away at Humphrey’s Executor. Major cases in 2010, 2020, and 2021 have narrowed the scope of the protections it provides; and in the most recent case, Consumers’ Research v. Consumer Product Safety Commission (2024), the fifth circuit court explicitly expressed doubts about the rationale behind Humphrey’s Executor, inviting the Supreme Court to review the precedent. Upon assuming office, Trump fired members of the Federal Trade Commission, the Merit Systems Protection Board, and the National Labor Relations Board. After a lower court ruled that Trump’s actions in the latter two instances had been illegal, on April 9 Justice Roberts issued a stay, allowing the firing to go ahead while the case makes its way up to the Supreme Court. If the Court does overturn Humphrey’s, then the way will be cleared for Trump to take control of the Fed and use it as an even more powerful lever for commanding markets in nationalist directions.

Between precipitating the tariff shock, damaging the dollar’s reputation for safety, inducing deficit-financed military spending in Europe by abandoning and humiliating allies, and possibly creating a politicized Federal Reserve, Trump is radically rewiring the global political economy, all without a mandate or clear constituency, by sheer force of personality alone. The last time a Republican tried to withdraw from the burdens of empire and remake the global order, his name was Taft, and he lost. Trump may yet succeed—not by building a new consensus, but by breaking the system until no one can hold it together.