The road to improving the income of the poorest Americans lies in preparing them for the demands of the modern labor market. However, President Trump’s announcements lack programs that would enhance their qualifications, improve the education system, and invest in the infrastructure of areas most affected by poverty.
President Donald Trump’s statements often contain ambiguous bravado, which can be perceived as arrogance. This risks obscuring his long-term strategic goals that occasionally emerge in his declarations. By focusing on details (the trees), commentators may overlook the broader context (the forest). Therefore, I will focus on the key ideas driving the president’s long-term economic aspirations.
Trump’s economic worldview is based on two main theses: (i) the most urgent economic challenge for America is reversing deindustrialization caused by trade imbalances, which in turn stem from a structurally high dollar exchange rate; (ii) the dollar must remain the world’s primary reserve asset.
The Basis of Trump’s Economic Thinking
The starting point for the president is his belief that over the past few decades, America has become poorer relative to both highly developed Europe and the rapidly growing economies of Asia and the Middle East. From this perspective, the declining share of the industrial sector’s added value in the country’s total income (around 10% in the U.S.) explains why millions of Americans do not earn even a subsistence-level income. This impoverishment results directly from excessive imports, which displace domestic production and, consequently, well-paid jobs. According to this binary perspective, a trade deficit (more precisely, a current account deficit) brings losses, while a surplus would bring benefits.
Following this logic, the U.S. trade deficit stems from the unfair monetary policies of its trading partners. This happens because foreign central banks, by purchasing dollars, intervene in currency markets and thus weaken their own currencies. The structural undervaluation of the yen, pound, euro, Swiss franc, renminbi, and other currencies makes imports from these countries to the U.S. cheaper, deepening the deficit. If the issuer of the reserve currency (the Federal Reserve) adjusts its money supply to meet transactional and investment demand as well as the economic policies of other countries, it (in a sense) loses sovereignty over its own economic policy.
Valéry Giscard d’Estaing, former president of France, once complained that the U.S. enjoyed “exorbitant privilege” from issuing its currency as the world’s reserve money. Now, Donald Trump argues that this privilege comes at an exorbitant cost to the United States. At the same time, Trump firmly rejects the possibility of the world abandoning the dollar as a reserve asset. In other words, the U.S. president wants two things at once: the attribute (the dollar as a reserve asset) and its absence (control over the dollar’s valuation at will).
If the above interpretation correctly reflects Trump’s thinking, let us analyze its economic coherence based on facts and historical context.
The U.S. Trade Balance in Historical Context
The United States had a current account deficit for the first 80 years of the 19th century, a surplus for the next 90 years, and a deficit again for the past 50 years. Extensive research shows that the current account balance is influenced by many factors, including the stage of economic development (industrialization), non-residents’ preferences for investing in domestic assets, and the comparative advantages of the national economy relative to the rest of the world.
During its first century, the U.S. imported everything: capital (negative balance), people (immigration), and know-how (technology absorption). This stage of development (industrialization) was historically strongly correlated with trade deficits in almost all countries worldwide. The U.S. is no exception.
The current U.S. current account deficit is largely explained by another factor—residents’ preferences for saving and non-residents’ preferences for investing. In other words, the current account balance should be viewed more in terms of imbalances between savings and investment (financial flows) rather than trade imbalances (flows of goods and services).
This nuance seems to escape the president, but his intuition is heading in the right direction. As a businessman, Donald Trump understands financial accounting. He knows that the U.S. net international investment position deteriorated from equilibrium in 1990 to a deficit of $16 trillion in 2022. This position represents the difference between foreign assets held by U.S. residents and U.S. assets held by foreigners. This means that non-residents control a significant portion of the American economy and profit from it. From Trump’s American perspective, these profits are “losses”—just as the current account deficit is a “loss.” Trump lamented decades ago about the amount of interest and dividends paid to non-residents by American firms and the government.
Trump’s concern seems valid in some ways. If income grows slower than debt servicing costs, a solvency crisis could occur. Trump believes that the negative U.S. international investment position is already so large that it will grow faster than national income. Thus, he worries that increasing demand for American assets (growth in the negative U.S. international position) will further strengthen the dollar. If I understand Trump correctly, as a businessman, he is highly sensitive to insolvency spirals. He has stated that he has filed for legal bankruptcy protection four times (others claim six). Trump fears that a potential panic spiral could lead to national insolvency. In this regard, he is correct.
The Role of the Dollar in Trump’s Strategy
This brings us to the dollar, which, in the president’s worldview, is the epicenter of the problem. As I mentioned earlier, according to Trump, the “greenback” is structurally too expensive due to its role as a reserve asset.
If the dollar is overvalued, who should bear the burden of its correction? Trump understands that a floating exchange rate regime does not allow for currency market control. Logically, then, the correction lies in the hands of foreign central banks. If they manipulated their currencies before, they can now intervene in the opposite direction, eliminating the alleged undervaluation of their money.
The path to reducing the structural trade deficit and improving the negative net international investment position involves, among other factors, interest rate levels. A cheaper dollar would reduce interest rate arbitrage against the United States (weakening capital inflows). The same cheaper dollar would also reduce the current account deficit.
This reasoning is logically sound, but reversing the trend will be difficult to implement for several reasons:
- The official reserves of only the world’s richest markets amount to at least $8 trillion (Eurozone: $300 billion, Switzerland: $800 billion, Asia: $6.5 trillion, Middle East: $500 billion). Such large-scale interventions would shake asset markets, destabilizing the global economy.
- The current account deficit today is more a result of income levels and investment and savings preferences than of exchange rate levels. It is unclear whether a dramatic and prolonged dollar depreciation would balance the U.S. external finances.
- Deindustrialization, in my view, stems from a structural shift in consumer demand from goods to services. This trend is observed worldwide—from Germany, Poland, and Korea to China and even less developed countries.
The road to improving the well-being of the poorest lies in preparing them for the demands of the modern labor market. However, Trump’s statements lack programs to enhance Americans’ qualifications, improve the education system, and invest in the infrastructure of poverty-stricken areas.
In his pursuit of goals, Trump is aware of his power. This includes the threat of tariffs or withdrawing security guarantees from countries whose policies he wants to change. Tariffs are a strong instrument because a potential trade war favors the U.S., given its low average tariff rate (3.4% according to the WTO). This asymmetry gives Trump leverage to intimidate and create uncertainty among negotiators.
We are at the very early stages of a broad and ambitious plan to rebuild a vast country that, according to Trump, is “declining.” While the president understands some threats well, it will be difficult for him to fulfill his campaign promises given his announced plans. The scale of his proposed reforms is so “astronomically large” that universal success is doubtful.
Dr. Krzysztof Błędowski
