As Trump plots a radical reshaping of global economics, allies must prepare for betrayal, chaos—and painful consequences.
In a recent podcast interview with Ezra Klein of The New York Times, Gillian Tett of the Financial Times fell into what has become a common trap: “sanewashing” the economic policies of US President Donald Trump’s second administration.
“On the one hand, they want to ensure that the dollar remains supreme as a global reserve currency and that the dollar-based financial system continues to dominate,” she explained. “But at the same time, they also think that the dollar is overvalued by virtue of the fact that it is the world’s reserve currency, which means that people keep buying dollars and so that pushes up the value.”
Thus, the Trumpists want a “Mar-a-Lago Accord” whereby other countries help to weaken the dollar in exchange for tariff relief, military protection, and so forth. Ultimately, countries would fall into one of three buckets: green (friends), red (foes), or yellow (partial alignment). “It’s extraordinarily bold,” Tett tells us. “You can’t lose sight of the fact that there are people who do want to re-engineer the global financial and economic system, and they do have quite a coherent plan.”
Do they, though? If the idea is to promote US manufacturing through dollar-manipulation agreements without blowing up more important sources of American prosperity, that would indeed require a coherent plan. The Trumpists would need to remind people that Trump hated the North American Free Trade Agreement and already demanded that Canada and Mexico help him fix it during his first term. The resulting US-Mexico-Canada Agreement (USMCA) put those countries into the green bucket. The task now would be to persuade other countries to do the same: to come to Mar-a-Lago, kiss the ring, and agree to analogous deals.
But that is not what is happening. On the contrary, Trump has been most abusive toward Mexico and Canada. Hardly a day goes by without him issuing some new threat, insult, or announcement of another tariff. Such are the rewards bestowed on those who play ball and get themselves into the green bucket. Even if his apologists were correct that he is emulating Richard Nixon’s “madman theory” to frighten others into compliance, his behavior makes no strategic sense.
If you are any other national leader, what should you do? It might not hurt to talk to Trump; to make noises that sound nice to his ears; to praise his sagacity and create the appearance of affinity. But what you absolutely must not do is change your policy – on anything – unless you get a large, irreversible benefit up front. And even then, you should prepare in advance to make it very painful for Trump to break whatever deal he announces with you.
Given that Trump has already violated the terms of the USMCA, other countries have zero incentive to do what he demands. If you are vulnerable to the kind of unilateral punishment that Trump can mete out, you do have a problem. But the solution is not to work with Trump; it is to remove the problem.
Thus, Mexico should already be seeking to deepen its trade with Europe and China, which command some of the technologically sophisticated portions of the globalized value-chains upon which the Mexican economy relies. It also should be exploring ways to impose maximum pain on Trump and his constituents (but not on America overall) if needed.
Similarly, Canada should already be working to link the resource-rich parts of its economy to China and Europe. That means abandoning any plans for new infrastructure to take resources south, and coming up with a new development strategy for Ontario. For 150 years, the southern swath of the province has been an integral part of America’s Midwest manufacturing complex. Both sides have benefited enormously. But divorce is now necessary. It is only a matter of time before Trump, desperate for TV airtime, does something to weaponize the relationship. The fact that doing so will harm Americans more than Canadians does not matter to him.
The rest of the world is already considering how to minimize the risk from Trump’s America, which will soon find itself in a position analogous to post-Brexit Britain. Withdrawing from the European Union for no good reason is estimated to have made the United Kingdom 10% poorer than it would have been – and the costs continue to mount. Will the US face a similar fate? Whatever the case, the important thing to remember is that the die has been cast. The dam has already broken. The flood has begun.
Could it be reversed? One is reminded of Ronald Reagan’s second term. After the Iran-Contra scandal, the White House announced, in February 1987, that former Senator Howard Baker would serve as Chief of Staff. He brought “instant credibility” as a “fair,” “honest,” and “decent” public servant. His appointment was good for Reagan and good for the country. From then on, Reagan would make public appearances, shake hands, and give speeches, while Baker ran the executive branch. He became, in a word, America’s regent.
A similar arrangement is the best we can hope for from Trump’s second presidency. The only problem is finding someone who is willing – and, more important, able – to play such a role.
J Bradford DeLong, a former US Assistant Secretary of the Treasury, is Professor of Economics at the University of California at Berkeley and a Research Associate at the National Bureau for Economic Research.