March 24, 2025 ☼ The Intersection ☼ geoeconomics ☼ foreign policy
The Trump administration is using sovereign power in the economic domain to achieve political goals
This is from The Intersection column that appears every other Monday in Mint.
Some of Donald Trump’s reasons for imposing tariffs on some countries are understandable even if their fitness for purpose is debatable. Demanding that Mexico impose tighter border controls, Europe raise defence expenditure and China prevent fentanyl smuggling or else suffer economic punishment is coercive diplomacy. A good threat comprises of a promise of punishment if the demand is not met and — importantly — non-punishment if it is conceded. If Washington proceeds to impose tariffs on Mexico, Europe and China despite their concessions, it is not coercive diplomacy. It is something else.
Other reasons are dogmatic. Trump has been clear that Europe, Canada, China and the rest of the world have been unfairly benefiting from the global economic system at the United States’ expense. He is convinced that tariffs will prevent this and make America great and rich again. In this view, tariffs are not coercive diplomacy but the categorical solution to redressing the unfairness that the United States suffers at the hands of the world. He flatly rejects the argument that tariffs will in fact be paid by American firms and passed on to American consumers. But he also accepts that the US economy will go through some pain but it’ll be worth it. Even if the struggling Washington officialdom manages to translate Trump’s vision of reciprocal tariffs into implementable policy, it is unclear that he will withdraw this policy if other countries drop their import tariffs.
It is hard to be certain, but I think that the new establishment around Trump is coalescing around an geo-economic agenda that connects tariffs, the US dollar and security in a, well, unconventional manner. Stephen Miran, chairman of the US president’s council of economic advisors, wrote a manifesto last November arguing that the combination of globalisation and the dollar’s status as reserve currency has deindustrialised the United States, enriched China and allowed the world to free-ride on America’s defence expenditure. In response, he calls for the United States to first impose tariffs gradually but certainly and subsequently devalue US dollar even if it means losing the reserve currency status.
Like Miran, Robert Lighthizer, a former US trade representative, characterises trade deficits as a transfer of wealth from the US to China, Europe and other countries. To the argument that the US gets goods for the money it pays out, Miran and Lighthizer say that those goods ought to have been produced in the US in the first place. The powerful dollar — and unfairly undervalued renminbi and other currencies — ensure that more and more manufacturing moves out of the US, resulting in lost jobs and slower growth. Meanwhile, as Lighthizer contends, the inflow of foreign capital into the United States has contributed to the financialisation of the US economy, exacerbating income inequality and devastation of middle America.
Now, there are a number of questionable assumptions and contradictions in this line of thinking. It is also not clear if the conceptual framework offered by Miran and others is a rationalisation of Trump’s pronouncements or the impetus. For instance, Trump has been vocal about maintaining the dollar’s reserve currency status while Miran makes the case for its dilution. Be that as it may, it is not my intention to debate the economic logic of Washington’s plans. Rather, the point is that we must interpret Trump’s policies not from the lens of economics but from that of economic statecraft.
Economics is the science of human behaviour. Economic statecraft is about the use of sovereign power in the economic domain to achieve political objectives. An economist will reject a trade war because it is a lose-lose proposition, and the US might lose more — both in absolute and relative terms — than the target country. A practitioner of economic statecraft could decide that a trade war is the best option at hand, if other options are costlier. The measure of success is whether or not the political goal is achieved, regardless of the economic costs involved. David Baldwin, a scholar of economic statecraft wrote that “Although economic policy instruments may be used to pursue economic ends, their use is not confined to such aims… the distinguishing characteristic of economic statecraft lies not in its goals but rather in the ‘peculiar nature of its means.’”
It is important for India’s policymakers, economists and analysts to understand this. Trump has indicated that if a recession is the price the US has to pay to make America great again, then he is willing to pay it. It is riskier to believe that he will act ‘rationally’ and prevent a recession than to proceed with the assumption that he doesn’t care — at this time — about market indices and quarterly GDP numbers. His political goals are likely to change in the future when he feels the political consequences of his economic decisions. We will then have to respond accordingly.
The ideal approach for India is to use the upheaval to carry out essential reforms that would otherwise be difficult to do, in a sort of inverse domestic economic statecraft. It would then matter a little less where Washington goes with its tariff juggernaut.
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