The world is trying to make sense of the Trump tariffs. Is there a grand design and strategy, or is it all instinct and improvisation? But much more important is the question of what will now happen, as new possibilities emerge from the shock effect of the tariff announcements and from subsequent moves and counter-moves.
For many, the United States is behaving erratically and imprudently, not least by lashing out at its allies and partners and by confusing financial markets. It’s risking its credibility by engaging in what appear to be irrational and self-harming actions that have already generated systemic financial shocks. Confidence in US leadership and economic rationality is being shaken.
To judge what might happen next, one must see the through-line—namely, Trump’s long-held grievance about what he sees as unfair global economic arrangements and widespread freeriding on the US, and his willingness to deploy all instruments of power to set this right. For Trump, the functioning of the global financial and trading system has seen the US incur the costs of entrenched trade deficits, hollowing out of the US industrial base and overvaluation of its currency, a consequence of the reserve status of the US dollar and US Treasury bonds.
At the same time, the cost of underpinning global security since 1945, through the so-called Pax Americana, has been borne disproportionately by the US taxpayer, who now carries US$36 trillion in federal debt. For the first time in its history, the US is spending more on debt interest than on defence. Meanwhile, allies and partners, with few exceptions, have minimised their defence spending wherever possible.
It is clear that Trump will no longer tolerate a situation where other countries gladly consume the security that the US produces, at significant cost to US taxpayers, without contributing materially to that security and while enjoying the prosperity it brings.
Bargains regarding prosperity and security are often intertwined. The 1944 Bretton Woods agreement was negotiated at a time when the postwar security order was being shaped. The deal ended in August 1971, when President Richard Nixon suspended the US dollar’s convertibility to gold and introduced a 10 percent import tax to compensate for ‘unfair exchange rates’—overvaluation of the US dollar. In September 1985 in what became known as the Plaza Accord, the US agreed with leading western economies that the US dollar would be devalued in a managed fashion to tackle a mounting US trade deficit. All the while, the US kept up its end of the bargain in protecting allies and partners.
We should not be surprised that from time to time, the US might deploy its enormous strategic and financial power to reset the terms of global prosperity and security. Whether by design or otherwise, we appear to be in another such moment.
Through the shock of the Trump tariffs, the US has created for itself an extraordinary opportunity to restructure the global trading and financial system, with two twin objectives in mind. These are to increase the relative gains from that system for Americans and to reallocate the costs of Pax Americana, so that they are borne more by allies and partners and less by US taxpayers.
To this end, the US should pursue a new global agreement, which might be called the Pax Americana Accord. It should bring all issues to the table in the process, so we are not dealing later with other, related shocks—say, with US currency or debt issues—or with doubts over US alliance commitments.
The best way to do this, in a way that would take maximum advantage of the opening that the tariff shock has created, would be for Trump to call an urgent meeting of what might be termed the ‘G7+’. This would not be a meeting whose objective would be to craft and issue a worthy but forgettable communique. Terms would be set out and agreed in outline, under the threat of total trade war. The details could then be hammered out over the remaining balance of the 90-day pause period.
The G7+ would consist of the US, Germany, Japan, Britain, France, Italy and Canada (as G7 members), along with India, Brazil, South Korea, Australia, Mexico, Indonesia (representing itself and the rest of Southeast Asia) and the European Union (in its own right and also representing the 24 non-G7 EU members). The G7+ would represent 67 percent of global GDP. Others, such as Turkey, Saudi Arabia, Switzerland, Argentina, the United Arab Emirates and Israel, could sign on to the new accord at a later date, as might Taiwan.
The meeting would agree the broad outlines of a Pax Americana accord, which would ultimately address and, as necessary, resolve the following issues:
—US chronic trade deficits and US complaints about tariff and non-tariff barriers to its exports;
—China’s deliberate manufacturing overcapacity, which is creating global trade and financial imbalances, unacceptable supply chain dependencies and a dangerous capacity for rapid war production, all endangering the security and economic resilience of the US and its allies and partners;
—China’s re-exports to the US by way of countries such as Mexico, Vietnam and Indonesia, which would have to be blocked, lest China evade what will be crippling US tariffs and other trade barriers (if a US-China deal cannot be separately done);
—Technological de-risking in relation to Chinese goods and services, to prevent China from gaining security advantages by passing high-risk technology into foreign economies;
—The enduring role of the US dollar as the world’s reserve currency, a global public good that the US provides;
—Long-term funding of the US Treasury, whereby US debt underpins global security (by paying for US military capabilities, another global public good) but where others who consume that security also enjoy income returns as debtholders and are not liable for the recapitalisation of those capabilities;
—US concerns about its industrial base, the strength of which also underpins global security and so represents another global public good;
—Defence spending of US allies and partners, most of which will need to build greater capacity to defend themselves without having to rely on US forces, at least in the early stages of a war;
—Potential for co-production of defence capability, in which allies and partners make larger contributions to US development programs; and
—Strategic reservation of critical minerals and other tangible assets by US allies and partners and the granting to the US of concessional access to these assets.
This is an ambitious agenda. A Pax Americana accord would address US trade grievances but more importantly would better spread the costs and risks of global security. It would reset the terms of Pax Americana such that it could be sustained. The US would be reassured about its strategic solvency, and allies and partners would take an active stake.
This would require negotiation of complex deals and arrangements. Achieving it would mean treading a narrow path. Careful and precise execution would be required, especially to reassure financial markets, which are always inclined to lose their minds during periods of uncertainty. If only we had a modern-day James Baker, the driving force behind the 1985 Plaza Accord. With the mandate of Reagan, who set the direction without managing the details, Baker deployed US power through velvety diplomacy in pursuit of US interests, knowing that US allies and partners would always prefer to deal with America, even when it was having a bad day. Has their attitude changed from Baker’s time? We are likely to find out over the next 90 days.
China will have to brought into any accord at some point. The underlying problems that have led us to this point are largely a consequence of Beijing’s strategy of concentrating industrial power in China. This has stunted development of a services-based economy in China, distorted global trade and supply chains, hollowed out Western industrial bases, delayed the industrialisation of the Global South and created national security and economic resilience risks for the US, its allies, partners and others.
Through a concerted strategy, as sketched out here, global trade could be rebalanced such that China would have to divest itself of overcapacity, including to the benefit of less developed countries.
By reallocating the costs of Pax Americana, the US would gain more financial and strategic resources to deal with the risk of China’s growing power and its strategic ambitions. It would be sustainably solvent, sitting at the centre of a reformed global system of prosperity and security. That would be worth the volatility of recent days. Whether we have arrived here through great cunning or as a consequence of instinct and improvisation does not matter much. What matters is the art of getting the deal done.
