As we watch Trump blow up the international economic model, we should at least agree with him that the model needs to change. For too long, we have relied on the US as ‘consumer of last resort’, a model that was created in the 1970s and entrenched by Thatcherism and Reaganomics. Sure, the model imploded in 2007-8, and bank bailouts and the ensuing austerity made things worse, but it had already been broken by the export-led Asian miracle economies of the 1980s:
The Post-Keynesian accounting approach ‘shared by Godley, Baker, Hudson, Keen and others was predictively successful for the 2007-8 crisis, and also the theoretically most developed’ (Bezemer 2010). But since 2008, China has diversified both its export markets and its investments, mimicking the long-running 'exorbitant privilege' of capital exports by the US, and we need to look beyond stock-flow consistent models.
To fully grasp this Trump moment, I suggest we look back to the interwar period. Then, Keynes proposed a system of multilateral clearing for trade imbalances. Creditor and debtors would be charged for racking up large surpluses and deficits, but with smaller tariffs (5-10%) on creditors. Adjustment would come by allowing debtors to competitively devalue and re-build their industrial base, accompanied by a ban on capital exports. In part, China's economic miracle was built by limiting US capital exports - but without the headwinds of US tariffs and a devaluation of the US Dollar.
There is a deal to be done, therefore, and one that will save the world from a different threat - climate inaction. We should accept Trump's assertion that the US Dollar needs to devalue, and that tariffs may be necessary to encourage surplus countries to make reciprocal investments in the US. But that should be conditional on the US accepting restrictions on their capital exports - US firms should not be investing in Taiwan, or in new oil projects outside of its borders. We could go further, and seize this opportunity to ban all new investments in fossil fuel extraction. It may not be possible to stop Trump investing in shale gas domestically, but a ban will mean that countries investing more rapidly in the energy transition will benefit first.
There is a deal to be done, therefore, and one that will save the world from a different threat - climate inaction. We should accept Trump's assertion that the US Dollar needs to devalue, and that tariffs may be necessary to encourage surplus countries to make reciprocal investments in the US. But that should be conditional on the US accepting restrictions on their capital exports - US firms should not be investing in Taiwan, or in new oil projects outside of its borders. We could go further, and seize this opportunity to ban all new investments in fossil fuel extraction. It may not be possible to stop Trump investing in shale gas domestically, but a ban will mean that countries investing more rapidly in the energy transition will benefit first.
There are other lesson from Keynes, too. Trump's tariff rates are way too high, and the lesson from Europe in the 1930s is that retaliatory tariffs make things worse - contributing to inflation and nationalism. Cooler heads are needed, as well as a cooler planet. Yes, the international economic model is broken; and yes, too, there is a deal to be done.
