Indices of economic uncertainty have skyrocketed above even the 2020 pandemic or the 2008 global financial crisis, as Donald Trump intensifies his trade war, said Gillian Tett in the FT. It could yet get worse. Amid all the tariff shocks, there is another question hovering. “Could Trump’s assault on free trade lead to attacks on free capital flows too?” Put another way, “might tariffs on goods be a prelude to tariffs on money”?
Until recently, the notion would have seemed crazy. After all, foreign capital inflows benefit both US companies and the public purse, helping to fund America’s $36 trillion national debt. But an opposite theory, advanced by the maverick economist Michael Pettis, has gained traction among “a trio” of influential Trump advisers. A new plan dubbed the “Mar-a-Lago accord”, after Trump’s Florida resort – and reportedly supported by Vice-President J.D. Vance, treasury secretary Scott Bessent and the chair of the Council of Economic Advisers, Stephen Miran – wouldn’t just upend US economic policy, but completely “reset global trade and finance”.
The basic problem, as proponents see it, is that the US dollar is too expensive, said John Rapley in The Globe and Mail (Canada). Having risen by some 40% against other major currencies since the 2008 crisis, it has made US exports expensive for foreigners and imports cheap for Americans. “Put it all together and you have a rising trade deficit that now exceeds $1 trillion a year.”
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Supporters of devaluation cite a 1985 precedent, when the Reagan administration negotiated the Plaza Accord with Britain, Japan, France and West Germany to strengthen their currencies against the dollar. But this is a completely different beast. For a start, it is unlikely to be consensual: China would resist, and probably the Europeans too. And while the 1985 deal merely weakened the dollar, the Mar-a-Lago plan includes a possible US debt restructuring too – potentially forcing foreign governments to swap some of their reserve dollars for long-term bonds, using Trump’s favourite “carrot-and-stick” tactics.
The accord is riven with contradictions. It advises weakening the dollar, yet keeping it strong enough to remain the world’s reserve currency; and raising import prices, yet reducing inflation. Even Miran, its author, concedes the risks are “substantial”, said Ruth Sunderland in the Daily Mail. The plan may become “a blueprint for Maga” – or may never see the light of day. But even if other nations agree on the need for such a fundamental rebalancing, is a mercurial president who thinks “he can bully, abuse and alienate friends and foes with impunity” really “the man to carry it out”?
