A gun is on the negotiating table

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The international financial markets are the closest thing we have to a global consensus view on economics. And the wisdom of this crowd is usually greater than that of your average politician.

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Whether Trump wins or loses will depend on what he does next. Will the President fold? Short answer: no. Tariffs define him. They are where he differs from all the other leaders of the Right.

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What I think he may end up doing instead is follow the thinking of the two smartest people in his economic team — the ones he ignored on tariffs. They are Scott Bessent, the treasury secretary, and Stephen Miran, chairman of his Council of Economic Advisers.

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Miran’s version is more nuanced. Last November, he wrote a much-quoted paper, in which he pleaded for a far more cautious approach, one in which the administration would announce the tariffs but implement them only gradually. For Miran, the tariffs are a gun on the negotiating table — ideally not to be used.

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China and Germany have systematically suppressed consumption and investment; their policies have been designed to support exports and reduce imports. Germany mostly imports what it needs for its own industries — raw materials like oil and gas — as well as intermediate goods. If it is hit by a tariff, it will maintain the trade imbalance by importing even less. But if Germany were hit by a falling dollar, this game would no longer work: the imports would get cheaper, and the exports more expensive. Miran’s idea is that you hit them with a combination of both.

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The system was under attack even before Trump set fire to it. The return of geopolitics is not conducive to a world in which all the cars are made in Germany, and all the smartphones in China. Trump is not the only leader who wants to reshore industries. Joe Biden started this with his Inflation Reduction Act. Emmanuel Macron has similar plans.

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If Trump manages to defy the economists and get the dollar devalued by, say, 20% against the major trading partners, he can lean back, declare victory and gradually reduce the tariffs.

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