BitMEX: Trump's Trade View Doesn't Hold Water, He Just Likes Tariffs

Original Title: What Causes America's Trade Deficit?

Original Source: BitMEX Research

Original Translation: Deep Tide TechFlow

Abstract

Did China promote exports by suppressing the value of the Renminbi? Or did the United States manipulate the dollar by increasing its value and using the Central Intelligence Agency (CIA) to thwart any dictators trying to sell off the dollar?

Will Trump's tariff policy reduce America's trade deficit, causing capital to flow out of the United States and threatening the dollar's global reserve currency status? Or do foreign investors still want to invest in the United States regardless?

We ultimately conclude: Global trade is far more complex than people imagine, and America's trade deficit is the result of multiple seemingly contradictory forces working together.

Overview

The U.S. President has just overturned the global trade landscape with a radical and aggressive tariff policy. The geopolitical and economic impacts of these policies are fraught with uncertainty, leading to intense debates and starkly contrasting views.

Before delving into the discussion, it is important to clarify one point: we support free markets and global trade. Trade is fundamentally voluntary, and trade occurs only when both parties believe they can benefit from it. Therefore, trade is not a zero-sum game. There are many valid reasons for long-standing trade imbalances between nations. Based on this, our view is that all tariffs are harmful, and all reciprocal tariffs are equally harmful. The implementation of tariffs will have a negative impact on global economic growth and productivity.

Nevertheless, there is still significant disagreement on how international trade imbalances operate, their causes, and the impact of these tariffs on capital flows. These are the focus of this article.

Trump's View

In Trump's view, the United States has been "taken advantage of" by its trading partners for decades, and America's massive trade deficit is proof of this. These trade deficits are the result of some major trading partners (such as China, the European Union, and Japan) implementing protectionist policies.

The formula Trump uses to calculate "reciprocal tariffs" indicates that he believes the ongoing trade deficits have no valid reasons and are entirely caused by protectionism.

In Trump's view, these protectionist policies include:

1. Tariffs

2. Regulatory policies favoring domestic producers

3. Currency manipulation by exporting countries (such as China, Germany, and Japan) through suppressing their own currency against the US dollar

Due to these policies, the US manufacturing base has been severely weakened, leading American workers to face a challenging economic environment. These workers are a key part of Trump's Make America Great Again (MAGA) political base. By fulfilling his promises during the campaign, ultimately achieving a fair competitive environment, Trump believes American consumers will buy more domestic products, thus driving a resurgence in American manufacturing and revitalizing the US economy.

Petrodollar Perspective

Many believe that Trump's view on trade indicates a lack of understanding of economics. In fact, the US has benefited greatly from trade deficits. Americans have been able to consume goods from Asian countries such as China, Japan, India, Thailand, Vietnam, and South Korea at low prices, while also consuming oil produced in the Middle East (or benefiting from low oil prices due to Middle East oil production).

This has made the US a winner, obtaining all goods, while Asian workers have been losers, spending long hours in harsh conditions manufacturing products for meager wages. This is essentially the "economic magic" that the US has successfully exercised over its trading partners for decades.

The US has somehow convinced trade surplus countries to invest their funds in the US, maintaining the strength of the dollar and allowing this favorable situation for the US to continue. Remember, there is no longer a gold standard, so trade deficits do not lead to the US losing precious gold reserves. The US can sustain these deficits with almost no cost.

This view is almost the opposite of Trump's perspective. Trump believes that the US has been taken advantage of in trade, while the petrodollar perspective sees the US as the biggest winner.

However, this situation is not sustainable, as trade deficits will accumulate over time. The only reason this state of affairs has been able to persist for so long is that the dollar is the global reserve currency.

When other countries export goods to the US, they invest their cash inflows in dollars to keep this "Ponzi scheme" running. However, one day, these accumulated imbalances will become too large, and the whole system will collapse, making Americans materially poorer.

To avoid this fate, Americans should invest in gold, and of course, Bitcoin.

In order to maintain the US dollar's status as the global reserve currency for as long as possible, the United States has pursued multiple policies, some of which were conducted in secrecy. Some of the most controversial and secretive examples of these policies include:

Overthrow of the Gaddafi Regime

Libyan leader Muammar Gaddafi was overthrown and killed due to his possession of a large amount of gold and his plans to conduct oil transactions using gold as settlement. This policy, if implemented, would have undermined the US dollar's status as the global reserve currency. In fact, according to a leaked email from Sidney Blumenthal to Hillary Clinton in 2011, Libya's gold policy was speculated to be an "influence" in the decision to attack Libya. (France and the UK also played significant roles in this action, not just the US.)

Iraq War and Saddam's Oil Policy

In October 2000, Iraqi President Saddam Hussein decided to stop settling oil trades in US dollars and instead switch to the euro. This was considered a key motive for the US invasion of Iraq and ultimately the execution of Saddam. The so-called threat of weapons of mass destruction and Saddam's egregious human rights record were actually just a smokescreen. The core reasons behind all of this were related to oil and the dollar's status.

Due to the above and some other aggressive foreign policies, oil-exporting countries like the UAE and Saudi Arabia are well aware that they must continue to settle oil trades in US dollars and invest the vast wealth accumulated from oil in US dollars and assets, or else they may incur the wrath of the CIA and other military institutions.

It is evident that the above views are completely opposite to Trump's superficial view on global trade. Trump accuses China of currency manipulation through currency devaluation, but in reality, the US is the one artificially inflating the dollar through various means, some of which are highly controversial and even malicious.

To highlight this contradiction, Trump recently attempted to hinder the BRICS nations from creating a currency to compete with the dollar. If the BRICS nations' plan succeeds, it would weaken the dollar's status while enhancing the value of their own currency. So the question arises—shouldn't Trump want a weaker dollar? After all, a weaker dollar would benefit the revitalization of the US manufacturing base under "Make America Great Again" (MAGA). However, Trump's latest tariff measures seem to once again accuse BRICS nations of promoting exports to the US by devaluing their currencies, which is clearly a self-contradictory accusation.

So, what does the US actually want China to do? Does it want China to buy US Treasury bonds, or to sell them? It seems that the US is intolerant of either choice China makes. It's worth noting that we are not singling out Trump for criticism. In fact, many politicians—regardless of party affiliation—seem to be puzzled by China's currency policy, as statements similar to those of Obama and Geithner have been made.

Our view is that, from the perspective of the Petrodollar, the core of U.S. policy is to support the U.S. dollar's global reserve currency status, while China is preparing for the end of the U.S. dollar's reserve currency status.

This Petrodollar-based global trade perspective may be one of the most popular views among our readers and Bitcoin supporters. Renowned analyst Luke Gromen is one of the main advocates of this view.

According to this worldview, the future of the U.S. dollar is facing increasing uncertainty. In particular, the rise of the BRICS countries is gradually becoming a significant threat to U.S. dollar hegemony. These countries may gradually move away from the U.S. dollar as their primary trade and global settlement currency. Therefore, it can be foreseen that at some point the U.S. dollar's global reserve currency status will be weakened, and the prices of oil, gold, and even Bitcoin may consequently rise significantly.

From this perspective, Trump's new tariff policy may have a particularly severe and dangerous impact on the United States. Exporting countries will see a reduction in their trade surplus, and they will no longer accumulate large amounts of capital each year to invest in U.S. Treasury bonds and other U.S. assets.

Instead, these countries may start selling off existing U.S. assets to increase domestic consumption, offsetting the losses from reduced exports to the U.S. This chain reaction could become a catalyst for triggering a U.S. debt crisis and further weaken the U.S. dollar's position as the global hegemon.

Capital Flow Perspective

In addition to the Petrodollar theory, there is another perspective on trade imbalances that is less mentioned but, in our opinion, equally valuable.

Recalling an introductory economics course, the Balance of Payments must always remain balanced. This is because every person buying the dollar must correspond to someone selling the dollar.

Therefore, if a country has a trade deficit, it must have a surplus on the capital account (financial asset flow) correspondingly, and vice versa. But the question is, what is driving these changes?

It may be that diligent Chinese workers produce high-quality goods that Americans truly want, driving the U.S. trade deficit, which in turn leads to a surplus in the U.S. capital account. On the other hand, it could also be that Chinese investors want to invest capital in the U.S., leading to a surplus in the U.S. capital account, and subsequently creating a trade deficit with China.

This perspective is more optimistic about the U.S. compared to the Petrodollar theory. The U.S. has the world's best companies, which are more focused on profit and return on equity than companies in other parts of the world. The U.S. corporate culture is also more ability-driven, and compared to regions like Europe and Asia, U.S. companies are less influenced by "networks," background, or even race or gender. This culture helps the U.S. attract the world's best talents.

The United States is home to some of the world's most innovative companies, such as Google, Microsoft, Apple, Amazon, Nvidia, Meta, OpenAI, Tesla, Broadcom, Visa, Netflix, and more.

These high-quality, high-growth enterprises have attracted the attention of global investors.

Additionally, many Asian investors seek to move capital out of their home countries to prevent asset seizure by their governments. In contrast, the United States at least theoretically has stronger rule of law and investor legal protection.

Trump's view that Asian export countries manipulate trade by devaluing their currencies is actually completely wrong. In reality, these countries have been trying to raise their currency values to prevent capital outflows.

According to this worldview, the United States' capital account surplus is driven by these characteristics, leading to the U.S. trade deficit. Therefore, a persistent trade deficit may not necessarily be a problem but rather a sign of success—the key is what is driving that outcome.

In our view, these economic factors are far more important than the impact of U.S. foreign policy in the Middle East on the dollar's global reserve currency status. For example, eliminating dictators who attempt to settle oil in gold may not have much practical effect. This is not to defend the hypocrisy and unglamorous foreign policy of the United States in the Middle East.

Indeed, there may still be some within U.S. security institutions who adhere to the petrodollar theory, although this theory now seems somewhat outdated and irrelevant. If that were not the case, many other dishonest theories could still be pointed out.

Moreover, even if a competitive legal tender cannot compete with the dollar because U.S. investment opportunities are more attractive than in other countries, gold remains a potential competitor. The CIA may still need to take some "dirty tricks" to curb gold.

The U.S. authorities may wish global trade to be settled in dollars not to protect the dollar's value, but to enhance U.S. control over global affairs, strengthen its asset freezing and payment blocking capabilities, and further expand its global power.

If you agree with this view, even if you believe "tariffs are always a bad idea," Trump's new tariff policy may not immediately have a devastating impact on the dollar's reserve currency status. Of course, this is still a tax policy that will harm U.S. businesses, weaken the economy, and cause damage to all parties, but perhaps the dominance of the dollar can still be maintained for some time.

Summary

The reality of the global economy is complex and ever-changing. While the Petrodollar theory does have its validity, the trade deficit has indeed driven the capital account surplus to some extent. However, the same situation can be interpreted from multiple perspectives, each with its own logic. The view that the capital account surplus drives the trade deficit is equally valid. In fact, this driving force is two-way, and understanding this is crucial to grasping global trade.

For the United States, both of these factors are very significant, and analysts should not overlook either side. Furthermore, Trump's views on trade do hold some merit in certain situations, as some politicians have indeed subscribed to this view at times. This may explain why some politicians appear somewhat contradictory when discussing China's currency manipulation.

Nevertheless, we still believe that Trump's trade views are largely untenable. Tariffs essentially act as a tax on Americans and will weaken the U.S. economy. While the American middle class may have become a relative "loser" in the process of globalization, with more gains flowing to the elite, this does not mean that reversing globalization would make the middle class a relative "winner."

Trump may indeed abolish the Internal Revenue Service (IRS), replace income tax with tariffs, and revert to pre-1930s economic policies. If so, that would be another issue to discuss, but we do not believe this scenario is likely to unfold.

Of course, there is another conspiracy theory worth mentioning: Trump's imposition of these tariffs is intentionally aimed at causing an economic collapse to attract investors into the U.S. Treasury market, lower yields, and enable the U.S. to refinance at lower rates, postponing the inevitable crisis caused by an inability to pay debt interest.

From our viewpoint, while this possibility exists, it is less probable. The principle of Occam's Razor may apply—the simplest explanation is usually the best: Trump simply likes tariffs, believing them to be the "most beautiful word."

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