Source: Hengqin Smart Finance Research Institute
The tariff war launched by the new Trump administration against the world on April 2 has almost destroyed the achievements of the global free trade system in the past 80 years since the war in just one month.
For China, this tariff war mainly involves three levels of problems: the first level is the tariff war itself. The key question behind it is whether it is the purpose or means of the Trump administration? The second level is the adjustment of the world order, that is, the structural adjustment problems accumulated by the unsustainable "super globalization", how will it reshape the global trade, monetary and financial order; the third level is the reconstruction of global civilization, which involves the form of competition and coexistence of human multiple civilizations.
At present, people seem to be more concerned about who will win or lose in this tariff war, or in other words, "who will collapse first", and pay little attention to the deeper meaning behind it. There is little in-depth thinking about how China should respond to the drastic changes in the external environment, or there is no time to think seriously. In other words, under the premise of serious imbalance in the global economy and unsustainable "super globalization", how should the existing economic structure and growth model formed with the help of this environment be adjusted and transformed to maintain the sustainable growth of China's economy, social progress and sustainable rise (avoid interruption of rise)? This is a major issue that we should seriously and conscientiously consider.
The first question we need to think about is what kind of new world order Trump is trying to build? What is our relationship with this new order? And how can we respond to the challenges of the external environment through comprehensive and in-depth reforms?
This tariff war has almost exceeded the expectations and imagination of all economists, because it is completely inconsistent with the basic logic of economics. This also means that for this epic global game, a multidisciplinary and comprehensive analysis must be conducted. At the very least, it must be thought of according to the logic of international political economics. Any analysis of a single discipline may be pale and powerless. Here, we mainly discuss three aspects: First, what exactly does Trump want to do? Second, how is he going to do it? Third, how should we respond?
The first question: The strategic goals of the new Trump administration
First, we need to figure out what problem Trump sees?
Simply put, the "super globalization" that started in the 1980s and reached its climax in the 1990s and the early 21st century is unsustainable. That is, the path of the United States expanding domestic demand with fiscal deficits and debts and providing full employment and a higher level of economic equilibrium for the world through trade deficits is unsustainable. The global multilateral free trade system built by the United States after World War II based on Roosevelt's global multilateralism concept and the strategic needs of the "Cold War" has cost the United States a huge price. For this "external equilibrium", many "internal equilibriums" have to be sacrificed. As a result, the domestic rich and poor are polarized, social divisions, and political polarization are becoming increasingly polarized, and populism is rising. Trump's two terms in office are the political manifestations of this increasingly serious "internal imbalance". Therefore, Trump's simplicity and rudeness are superficial. In essence, he has seen the key to the problems facing the United States: So far, the global economic, political and security order that the United States has built after World War II is being shaken in the face of strong competition after China's participation. This problem is not cyclical, but structural. Because of this, even if Trump steps down in four or eight years, no matter who is in power, this problem must be solved. The strategic goal will not change, only the means will change.
In the view of the new Trump administration, its launching of a tariff war is based on both historical experience and theoretical logic.
From historical experience, on the one hand, tariffs accounted for more than 80% of the federal government's fiscal revenue in the United States for most of the first half of the 19th century. Although it began to decline after the Civil War, it still exceeded 40% by the end of the 19th century, and tariff revenue still accounted for 45% of the federal total revenue in 1913. Since the Sixteenth Amendment to the Constitution passed in 1913 established the legality of federal income tax, the United States established the Internal Revenue Service. The Underwood Tariff Act of the same year lowered the tariff rate, and income tax began to replace tariffs as the main source of federal government fiscal revenue. The proportion of tariff revenue dropped to 28% by 1916, and was less than 5% after World War I. Although the Smoot-Hawley Tariff Act of 1930 increased tariffs, the Great Depression during the same period caused a sharp drop in trade volume, and tariff revenue actually declined. The subsequent "New Deal of Roosevelt" expanded the proportion of consumption tax and social security tax in fiscal revenue. For Trump, one of the connotations of the so-called MAGA is to restore the United States to the state of using tariffs as the mainstay of federal fiscal revenue during the rise of the United States in the 19th century. This can not only punish trading partners for so-called "unfair trade" and make them spit out a lot of "invasion of American interests", but also quickly make up for the fiscal deficit, implement its promise to reduce corporate taxes, and force foreign capital to invest directly in the United States to revitalize the manufacturing industry. At the same time, the historical lessons of the collapse of the Spanish Empire in the 16th and 17th centuries impressed Trump and his ruling team. In the 16th century, Spain imported as much as 200 tons of gold and 18,000 tons of silver from the Americas. This foreign wealth had at least two consequences: First, Spain became a pure consumer country by exporting currency. The "hollowed-out" economic structure that was highly dependent on imports led to a large-scale outflow of gold and silver, which prompted the development of the manufactured goods industry in hostile countries such as the Netherlands and the United Kingdom, and made the country increasingly powerful; second, in order to support the wars with France, the Netherlands and the United Kingdom, Spain was forced to use financial innovation - borrowing and overdrafting by mortgaging future fiscal revenue to obtain war resources, but years of war led to a high debt of the government, which eventually went bankrupt and declined. The lessons of the "hollowing-out" and excessive "financialization" of the Spanish Empire's economy have made the United States, which is now facing a similar situation, particularly anxious. Avoiding the fate of the decline of the Spanish Empire has become a high consensus of the new Trump administration.
On the other hand, based on recent experience, the new Trump administration believes that although the first Trump administration's tariff increase on China between 2018 and 2019 achieved certain results, it was cracked by China through large-scale re-export trade, so the "loophole" must be fully repaired. According to the U.S. Bureau of Labor Statistics (BLS), after the United States imposed a 17.9% tariff on China in 2018, the core CPI rose slightly, only -0.3-0.6%, and did not trigger significant inflation. However, the U.S. tariff increase on China has promoted the development of China's re-export trade. Although the U.S. trade deficit with China declined slightly from 2017 to 2019 (down by about US$30 billion, a decrease of less than 10%), its trade deficit with Vietnam and Mexico increased by 45% and 23% respectively during the same period. As a result, the trade imbalance has not been improved, and the outflow of manufacturing is still intensifying, with weak employment growth. This is also an important reason why the new Trump administration has imposed high tariffs on Vietnam, Mexico, Cambodia and other countries.
Theoretically, the new Trump administration is trying to completely negate neoliberalism and the "super globalization" it dominates, and return to the logic of Keynesianism, that is, to achieve "limited and controllable globalization" under state management.
Since the 1980s, under the guidance of neoliberal thought, the US economy has become increasingly highly financialized, while the outsourcing business of multinational corporations has developed rapidly. Especially after the dramatic changes in Eastern Europe in the late 1980s and the disintegration of the Soviet Union in the early 1990s, inspired by the slogan and concept of the so-called "end of history", globalization has made unprecedented progress in both connotation and scope. In terms of connotation, the free trade rules centered on industrial products under the GATT framework have been replaced by the expansion of trade rules under the WTO framework. Rules such as services, agriculture, subsidies, intellectual property rights, health and animal and plant quarantine standards, which were previously regarded as domestic policies, have become global trade rules of the WTO; at the same time, private capital flows that were prohibited under the Bretton Woods system have been fully liberalized, and international financial institutions have promoted their regulatory rules and standards to the world, even to the micro-indicators such as the capital adequacy ratio of domestic banks and other financial institutions in member countries. Some EU members have gone further and took the lead in controlling exchange rate fluctuations between each other and finally adopted a single currency. In terms of the applicable objects of globalization, trade liberalization, which was originally mainly based on industrialized countries, has expanded to almost all countries, and the values, political systems and national economic policy systems on which trade liberalization relies have become increasingly diverse. This kind of globalization is called "super globalization". It was marked by the establishment of the World Trade Organization (WTO), the signing of the US-Canada-Mexico Free Trade Agreement and China's accession to the WTO in 2001. It reached its climax in the 1990s and early 21st century.
However, this feast of "super globalization" has exposed more and more problems. In summary, it faces at least three paradoxes: the first paradox is that although it has generally narrowed the gap in economic development levels among countries, it has widened the domestic income (rich and poor) gap among countries, especially the United States, its main promoter. Populism is a social and political reaction (movement) to this "super globalization". The second paradox is that the conflict between corporate interests and national interests has expanded comprehensively. Generally speaking, under closed economic conditions, corporate interests and national interests are often consistent, but globalization has changed the original community of interests between the two. Multinational companies seeking to freely allocate resources on a global scale have retained a large amount of corporate profits in the host country, resulting in a large-scale transfer of employment for workers who are less mobile than international capital. In fact, the trade deficit of capital exporting countries is the result of this transfer of production capacity (employment opportunities). The biggest beneficiaries are financial capital and industrial capital outsourced by transnational outsourcing, and ordinary traditional industry workers have to bear its costs and social consequences. The third paradox is that the contradictions and conflicts between the rules of "super globalization" and the different institutional preferences of various countries are becoming increasingly difficult to reconcile. On the one hand, the widening gap between the rich and the poor in the country, especially the intensified unemployment in the "Rust Belt", has led to increasingly serious social divisions in the United States. The political elites have turned the unemployment problem, which was originally mainly caused by technological progress and the overseas transfer of multinational companies' industries, to the so-called "distributive justice" and "social dumping" issues, that is, distinguishing the low wages caused by low productivity from the situation of reducing costs by ignoring and violating labor rights, and emphasizing that the "unfair competition" caused by differences in rules in the latter is the root cause of the increasingly serious unemployment in the United States. This is also an important connotation of the Trump administration's pursuit of "fair trade". On the other hand, Dani Rodrik's "triple dilemma" of globalization has a great influence on the Trump administration and its members, that is, "super globalization", democracy and national sovereignty cannot be achieved at the same time, and at most two of the three can be achieved. In fact, Rodrik's "Blockchain Trilemma" of globalization originated from Karl Polanyi's "market disembedding" theory, that is, the economic activities of human society (market economy) are embedded in society and cannot be disembedded, because production is part of the broad economy, and the economy is part of the broader social body. The market is not the ultimate goal, but a means to achieve the ultimate goal. Therefore, in Rodrik's view, globalization and its development should be placed on the basis of new political realities and technological conditions, and the demands of liberal democracy should be given an important position. In other words, the demands of social democracy should be placed above the demands of international trade and investment to avoid market "disembedding" in order to achieve and maintain an open global economy and pursue "controllable globalization."
Obviously, China and the United States, as the world's largest manufacturing country and the world's largest consumer country, are facing serious and unsustainable structural problems. This is not only reflected in the specific data of the two countries' balance of payments statements, but also from the point of view that both sides are trying to become like each other, the global imbalance problem is unsustainable.
In late April, U.S. Treasury Secretary Bessant and Vice President Vance each made two very important speeches. The information they revealed was extremely important and basically outlined the basic strategic intention of the United States in launching this tariff war.
There are several points worth noting in Scott Bessant's speech during the International Monetary Fund (IMF) Spring Meetings in late April: First, the core goal of the IMF and the World Bank (WB) should be to resolve the problem of global economic imbalances, first of all to restore the global monetary system, and both must demonstrate "clear leadership"; second, the "America First" emphasized by the Trump administration does not mean that the United States will go it alone, nor does it mean that the United States will retreat in these two institutions. On the contrary, the United States must strengthen its leadership in these two institutions; third, global imbalances are very obvious in the field of trade. The huge and persistent trade deficits faced by the United States are the result of an unfair trade system. Hollowing out and manufacturing recession are important issues facing the national security of the United States. Global trade imbalances are unsustainable for the United States, and they are equally unsustainable for other economies; fourth, China In particular, "rebalancing" is needed. China needs to change, and the United States can help China achieve "rebalancing" because the United States itself also needs "rebalancing"; fifth, global economic relations should reflect security partnerships, and only between security partners can truly mutually beneficial trade be carried out; sixth, regarding the reform of the IMF and the WB, it was pointed out that the IMF suffered from "mission deviation", deviated from the track of promoting global monetary cooperation and financial stability, and invested a lot of energy and resources in climate change, gender and social issues. These practices squeezed out a lot of work that should have been invested in macroeconomic stability and coordination. The WB must suspend lending to countries that are no longer developing countries, and should set a timetable for those countries that have long met the "graduation standards", especially China. It is absurd to treat the world's second largest economy as a developing country, and so on.
Compared with Bessant's speech focusing on the international monetary system and its institutions, Vice President Vance's speech in Jaipur, India on April 23 was more global and strategic, and basically outlined the strategic framework of the new Trump administration's foreign relations. The core content is that the United States is not engaged in "isolationism", but to build a "selective" globalization based on trust in values. Only those trading partners with the same values and international partners that respect labor rights - they do not lower wages to increase exports, but cherish the efforts of workers - can work with the United States to build a trade cooperation relationship based on fairness and common interests. This new global trade system can achieve three "reals", namely "real balance", "real openness" and "real stability and fairness". It is worth noting that on April 7, not long before Vance's speech, Vietnam began to implement the most stringent new rules on origin supervision in history for China's re-export trade to the United States through Vietnam: the commodity penetration tracking system was activated. Even if a small screw is imported from China, assembled into a mobile phone in Vietnam and exported to the United States, the system will automatically mark the entire supply chain and synchronize the relevant data to the U.S. Customs. At the same time, the new regulations require that the local value-added ratio of products be increased from 30% to 40%. Some industries such as electronics and textiles are even required to reach more than 50%, and companies are required to "prove their innocence": purchase invoices, factory production line videos, labor costs and other materials must be retained for at least three years to be ready for random inspections at any time; once a company is spot-checked, it must prepare all evidence chain materials within 48 hours; if fraud is found, it will be fined more than 50% of the value of the goods, or even have the goods confiscated. Even if the products have already entered the United States, they will be fined according to the highest tariff amount.
Obviously, if we combine the speeches of Bessant and Vance with the US government's comprehensive blockade of China's re-export trade, it is not difficult to find that the new Trump administration has changed from the trading principle of only focusing on interests during the previous administration to a comprehensive strategic principle that incorporates the Democratic Party's "values alliance" concept, showing the core framework of the "limited and controllable globalization" it is trying to build: "values consensus + system compatibility + industrial chain certification". This will become the foundation of the global trade, investment and monetary system that the United States is trying to build.
It is not difficult to see that what Trump wants is not an ordinary deal. Don't misjudge him, let alone underestimate him. What he is trying to do is to reshape the rules of globalization. His main strategic goals are three: (1) to solve the fiscal deficit, eliminate the trade deficit, promote the return of manufacturing, and increase employment; (2) to change the multilateral rules of the WTO into limited, controllable multilateral rules or even unilateral rules, and to shape the IMF and the WB into tools to continue to maintain the hegemony of the US dollar; (3) to isolate and contain China. The so-called "limited and controllable globalization" is essentially seeking to build a new "de-Sinicized" globalization. In this sense, as I have emphasized for many years, the United States is not engaged in "de-globalization" or "anti-globalization" in the traditional sense, but is trying to create a new round of so-called "higher rules and institutional standards" that excludes China. This means that the consensus between the world's two largest economies on "free trade" and "globalization" has long disappeared. The biggest risk facing the world today is not "de-globalization" but "globalization division."
The second question: What will the Trump administration do next?
The speeches of Bessant and especially Vance reveal Trump's overall strategic moves. Here, I mainly focus on the field of international monetary finance and analyze the policy measures that the Trump administration may take next. Because behind tariffs or trade are more complex and critical monetary and financial issues.
First of all, it should be pointed out that Western civilization in the second half of the 20th century was mainly built on the following four systems (world order): first, the security balance under the "Cold War" pattern; second, the Bretton Woods system - an international monetary system with the "double peg" of gold, US dollar and various currencies as its core; third, a global multilateral trade system based on the "unfair rules" of the United States' voluntary transfer of interests, in order to unite its allies and promote their economic recovery and growth, and maintain the "Cold War" alliance and security balance; fourth, the establishment, development and expansion of the market economic order under the free democratic system, which prompted "former enemies" such as Japan and Federal Germany to achieve post-war economic recovery, prosperity and economic growth, and led the world economy into the post-war "golden age".
Among the above-mentioned institutional foundations, the Bretton Woods system and the subsequent US dollar system are the most critical. The collapse of the Bretton Woods system in the early 1970s is also an important background for the current major changes. During the collapse of the Bretton Woods system and the subsequent formation of the US dollar system, the "financial country" and "trading country" (the former has a reserve currency and a developed financial market, while the latter does not have a reserve currency and needs to rely on exports to earn international reserve currencies, and its financial market is underdeveloped) formed by the highly financialized US economic structure and the overseas industrial transfer of multinational corporations (shaping the global industrial chain) since the 1980s have exacerbated the global economic imbalance. In other words, the important premise for the smooth operation of the US dollar system is the global economic imbalance, that is, the United States, as the issuer of international reserve currencies, must provide the final commodity market for the global "trading countries". This market provides a large amount of commodity dollars earned by "trading countries" while lowering their domestic consumer prices. In the form of investing in various US financial products (treasury bonds, corporate bonds, stocks, etc.), the "trading countries" will flow into the United States in the form of investing in various US financial products (treasury bonds, corporate bonds, stocks, etc.), lowering market interest rates and making up for trade deficits. This balance of payments structure, which uses capital account surplus to make up for current account deficit, is still unable to fill the trade deficit, and has formed a "double deficit" situation in which fiscal deficit and trade deficit are intertwined for a long time.
The transformation of the United States from a manufacturing power to a financial country after the war was the result of the shift of the dominant economic thought and logic of the United States from Keynesianism to neoliberalism. In this process, the market order and rules of the United States and other developed countries were inconsistent, and contradictions and conflicts often occurred. Although other developed countries, including Japan and the Federal Republic of Germany, adopted market economic rules, they maintained the Keynesian market order expansion with their own characteristics, focusing on social responsibility and social protection in the process of market order expansion. The imbalance (symmetry) of the expansion of market order and its rules among major developed countries was also an important source of global trade imbalances in the 1980s. It was also in this context that the logical contradiction between financial liberalization and trade liberalization under the dollar system became increasingly obvious.
As early as the 1940s, Karl Polanyi realized that balance of power cannot ensure peace, and peace is achieved through international finance; international finance is the core of the most complex system ever produced in human history. Later, Robert Gilpin discovered that every international monetary system depends on a specific political order. In this sense, the dollar system after the Bretton Woods system is also unsustainable in the face of the rapid rise of latecomer powers and fierce competition. The "super globalization" that has been in full swing since the 1990s is likely to be a "brief moment" in human history.
From this perspective, the tariff war launched by Trump is just the first shot in his attempt to reshape the global economic order. Although it may last for some time, it is just a means and leverage for him to put pressure on his opponents. What follows is not only the reshaping of the global trade system, but also the reconstruction of the current international monetary system, because whether in the international community or at home, the imposition of high tariffs will inevitably touch upon many issues in the monetary and financial fields, and will be backfired to varying degrees. In fact, the most important constraint on Trump's tariff war is not the game with other major powers, but the US capital market and the monetary policy choices of the Federal Reserve, because the financial resistance to Trump's high tariffs is very large and will even increase. On the one hand, high tariff policies may trigger inflation. Although there are different predictions about the final development of inflation in the United States, if inflation continues and hovers at a high level, it will inevitably have a significant impact on the consumption capacity of the American people, the patience of voters, and the monetary policy choices of the Federal Reserve. On the other hand, after the Trump administration imposed tariffs on April 2, the US stock, US dollar, and US bond markets "killed together", especially the sharp drop in US bonds, which is enough to show the huge pressure of the market voting with its feet. The yield on US Treasury bonds soared 50 basis points to 4.49% in the week after Trump announced the so-called "reciprocal tariffs". The last time a similar weekly increase occurred was during the 9/11 terrorist attacks in 2001. The impact on the stability and fiscal security of the US financial system is undoubtedly huge. If high tariffs continue for a long time, they may even form a vicious circle: the decline in US Treasury prices leads to an increase in yields, which increases the pressure on interest rates and the burden of government interest expenditures. The part of fiscal revenue that is increased by the tariffs in the short term is likely to be swallowed up by the increase in government fiscal expenditures caused by financial market factors. If the government needs to issue more new bonds to make up for the fiscal deficit, it will need to pay higher interest costs... Therefore, Trump's policy of imposing tariffs will be constrained by monetary and financial issues both in the international community and at home. How he will respond and solve this problem deserves our close attention. In fact, the reason why major powers, including China, dare to "go against" the United States in this tariff war is largely due to the judgment that the Trump administration will not be able to withstand the many domestic pressures in the short term, because time is no longer on Trump's side - the biennial midterm elections and the quadrennial general elections will increase the Trump administration's policy anxiety and the possibility of policy adjustments.
Behind trade is finance. The Trump administration is trying to reshape not only the global trade system, but also the international monetary system. In any case, Trump's confidence in wielding the tariff stick during his first and second terms in office lies in the "soft power" of the US dollar system and the "hard power" of the US security field. Moreover, whether the tariff war can be smoothly implemented is also constrained by monetary and financial issues. How to resolve the policy conflict between trade imbalances and monetary and financial imbalances is an urgent issue that the Trump administration has to face. The new Trump administration's response to these issues, as well as the reaction of the US capital market and the choice of the Federal Reserve's monetary policy, will have a huge spillover effect and reshape the international monetary system.
Stephen Miran, as Chairman of the White House Council of Economic Advisers, published the User's Guide to Reconstructing the Global Trade System (hereinafter referred to as the Milan Report) in November 2024. In this regard, I recently published an article entitled "Can You Have Your Paws and Have Your Paws at the Same Time: A Review of Milan's "New Dollar System Concept"" at the invitation of China Foreign Exchange Magazine. Here, I will briefly introduce the core ideas.
Although the title of the Milan Report is "Reconstructing the Global Trade System", its theoretical discussions and policy proposals are concentrated in the field of currency and finance, and to a large extent outline the strategic vision of the new Trump administration in the field of international currency and finance:
First, we should pay close attention to the policy contradictions and coordination between trade imbalances and monetary and financial imbalances in the process of the Trump administration's efforts to revive the manufacturing industry with American interests at the core and achieve a "fairer competitive" position with other countries. The administration is trying to increase fiscal revenue through high tariffs while using currency depreciation to offset the adverse effects of high tariffs, such as inflation.
Second, the United States attempts to form a "new dollar system" through unilateral or "limited multilateral" policy coordination, while maintaining the dollar's status as an international reserve currency. This system has two main differences compared to the existing dollar system: first, the United States must not only become the world's most important market provider, but also the world's most important provider of manufacturing production capacity, changing the existing balance of payments structure that uses capital account surpluses to offset current account deficits and still has a large deficit; second, it openly links the security system with the international financial system, forcing major trading partners, especially allies, to support the dollar hegemony.
Third, the United States openly demands that its trading partners, especially its allies, share the costs of the United States in global trade, finance and security. It uses trade costs (imposing high tariffs), financial costs (converting short-term Treasury bonds into long-term ones) and security costs (providing or withdrawing protective umbrellas) to form a mutually supporting "cost-shifting system", coercing trading partners, holders of U.S. Treasury bonds and its allies to enter this system, thereby forming a new "structural power" - a "new dollar system" that combines the security and financial advantages of the U.S. dollar.
Fourth, regarding China as its main strategic competitor, it attempts to put China in a situation where it either has to cooperate (invest in the United States in manufacturing and support the dollar) or fall into so-called economic turmoil due to tariff pressure, etc. In almost all areas, it attempts to force its allies and other countries to take sides, alienate their economic exchanges with China and its deepening development, and isolate China.
The report focuses on two issues. One is how to resolve the policy conflict between trade imbalance and monetary and financial imbalance under the premise of trying to start the revitalization of the US manufacturing industry with high tariffs, so that the "fish" of high tariffs and the "bear's paw" of the adjustment (depreciation) of the US dollar value can be obtained at the same time. The other is to resolve the contradiction of maintaining the power advantage of the US dollar system while avoiding the credit damage of the US dollar that may be caused by the depreciation of the US dollar. A core point of the "Milan Report" is that the reason why the United States has a huge current account deficit is not because it imports too much, but because it must export US Treasury bonds - to make up for the current account deficit through capital account surpluses, and at the same time provide reserve assets for the world. Therefore, it emphasizes that the "root of the economic problems faced by the United States lies in the US dollar", and the key to solving the problem lies in breaking the long-term overvaluation of the US dollar and asymmetric trade conditions.
In order to ease the policy conflict between trade equilibrium and financial equilibrium, the Milan Report provides two main policy options: first, to use tariffs as a "negotiation tool" to improve trade conditions and use it as a "lever" to force opponents to surrender in the financial field; second, to directly link monetary and financial issues with security issues and use the United States' security advantages to force opponents to enter the "new dollar system" it has built. One of the purposes of the "Milan Report" is to worry that Trump, who is a "layman" in monetary and financial issues, will use raising tariffs as the ultimate goal of his domestic and foreign policies. Therefore, it reminds the Trump administration not to use tariffs as an end, but as a means to force opponents to support the restoration of competitiveness of the US manufacturing industry and maintain the continued operation of the dollar system. The report gives high tariffs a dual utility goal: first, as a "negotiation tool", it can not only put pressure on opponents once, but also adopt a strategy of gradual and continuous pressure to force opponents to do things that they are unwilling to do and are in the interests of the United States; second, as a comprehensive policy combination, Milan specifically recommends that the Trump administration should combine bilateral trade agreements (tariff policies), monetary policies and security factors for comprehensive consideration. In this way, tariff measures can not only be used as a negotiating tool, but also as a "lever" to pry opponents into making policy choices that tend to maximize the interests of the United States, forcing them - whether allies, trading partners or the most important strategic competitors - to share the costs of the United States' global strategy. Moreover, tariff policies will not only have a "pressure" effect, but also play an "incentive" function, that is, for those who act in accordance with the wishes of the US government, measures can be taken to delay the implementation, reduce or cancel tariffs, in order to induce and encourage opponents to be willing to comply with the strategic wishes of the United States.
The report pays special attention to the policy measures of imposing high tariffs on China, attempting to use them to play the role of "coercion" and "leverage". In its view, on the one hand, the high tariff measures on Chinese imports can trigger the Chinese monetary authorities to adjust the exchange rate (depreciation) and trigger market (such as stock market) fluctuations; on the other hand, through high tariffs - Milan hinted that the United States will build a global tariff barrier around China - suppress China's position and influence in the global industrial chain, and the ultimate goal is to force China to take a more cooperative stance, leverage it to increase its investment in the US manufacturing industry, and continue to hold US Treasury bonds to support the US dollar system.
Regarding the "new dollar system", the report designed a "Mar-a-Lago Accord" framework that uses tariffs as a "lever" to pry other major economies into the currency negotiation process set by it. It has two pillars: first, in order to avoid the adverse effects of short-term Treasury bond market fluctuations under the current dollar system, the term of "Treasury bond exports" is prolonged - issuing "century bonds" - to ensure lower market interest rates, which is conducive to the sustainability of debt financing. At the same time, due to the reduction in the holdings of dollar reserve holders, it will help their currencies appreciate (the dollar depreciates); second, it is to link the safety umbrella with the international monetary system, supplemented by the use of the Federal Reserve's "global central bank" status, to provide swap quotas to the other party in times of crisis, sufficient short-term dollar liquidity guarantees and other incentives, to hedge the risks of holding long-term "century bonds", and to build a "new dollar system" with the "safe zone" as the core scope. The specific contents of this system include three aspects: first, the safe zone is regarded as a public product, so that the countries in it must finance it by purchasing U.S. Treasury bonds; second, the safe zone is regarded as a capital product, which prolongs the maturity of U.S. Treasury bonds and advocates that the best financing method is to issue "century bonds" rather than short-term Treasury bonds; third, the safe zone is subject to rigid constraints, namely the so-called "barbed wire". Unless the participating countries replace short-term Treasury bonds with long-term Treasury bonds, the United States will use high tariffs to keep them out.
In order to realize the concept of "new dollar system", the "Milan Report" particularly emphasizes that the US government can choose between "unilateral currency plan" and "multilateral currency plan". The former is mainly to impose a "reserve tax", that is, to impose a fee on the use of US Treasury bonds held by foreign officials, such as withholding a part of interest payments (levying interest tax). In order to avoid the risk of large-scale reserve selling caused by such tax measures, the report recommends taking two foreign policy steps: one is to implement it step by step; the other is to treat different countries differently like tariffs. The background of Milan's proposal of this policy is that most of the US dollar reserves are currently in the hands of countries in East Asia, the Middle East and other regions. Their relationship with the United States is complex and delicate, so it is necessary to force them to hold US dollar reserves for a long time by imposing a "reserve tax". To this end, the report believes that the United States should first implement the policy of increasing tariffs and then use monetary tools. In this way, the effect of tariffs as a negotiation tool can be fully utilized, and the reduction and cancellation of tariffs can also be used as incentives to induce other countries to reach a monetary agreement with the United States. The Milan Report does not spend much time on the "multilateral monetary solution". While pointing out that it will cause the US dollar exchange rate and long-term Treasury bond yields to fall simultaneously rather than move in opposite directions, it emphasizes the complexity and difficulty of multi-country coordination and believes that the US government should openly adopt a policy combination of "stick" (tariffs) plus "carrot" (security protection).
In short, the core goal of this "new dollar system" is to implement high tariffs and devalue the dollar to promote the return of manufacturing and increase employment, while offsetting the resulting inflationary pressure and ensuring the dollar's existing international reserve currency status. Such a cost-shifting and burden-sharing strategy that combines trade, currency and security can kill two birds with one stone. However, the problem is that currency issues are far more complicated than trade issues, and have richer connotations of international political and economic games. If the Trump administration really does this, it will cause great damage to the current dollar system and have unpredictable consequences for the global economic system.
First, the United States will no longer be merely a global market provider of final goods, using capital account surpluses (exporting U.S. Treasury bonds) to make up for current account deficits, but will instead be a powerful global provider of high-end manufacturing products, striving for trade balance or even a surplus and capital account surplus. Regardless of whether this international balance of payments policy concept can be truly realized, it will have a huge impact on the current global economic system. On the one hand, it means that the export-oriented economic growth model of the world's major manufacturing countries has come to an end, and the difficulties of their economic growth and structural adjustment will have a great negative effect on world economic growth; on the other hand, the segmentation of the world economy will turn from a trend into a reality, and will have a significant reshaping effect on the global trade, investment and monetary and financial systems.
Secondly, the so-called "new dollar system" ties the future of the dollar to the security umbrella, which will produce a significant "security lock-in" effect. On the one hand, only those countries and regions that strongly need the security protection of the United States are willing or able to enter the dollar system, which is nothing less than an artificial "barbed wire fence" for the exercise of the dollar's international monetary power, making those countries and regions that are unwilling or do not need the security protection of the United States face the high insecurity of the dollar and the US financial market, and even have to leave the dollar system and look for other alternatives. On the other hand, the practice of closely linking the dollar's reserve currency status with national security issues has existed as early as the Bretton Woods system. In the 1960s, the United States used various monetary diplomacy actions to ensure that major allies such as the Federal Republic of Germany used their current account surpluses to purchase US Treasury bonds to support the Bretton Woods system. However, similar policy actions at that time were behind the scenes, rather than deliberately public policy options. More importantly, the new Trump administration faces a policy difficulty, namely, exchange rate policy is different from trade policy. Exchange rate policy and administrative intervention in this policy are not only difficult to achieve the same results as trade policy, but are also very likely to undermine and reduce the international attractiveness (credit) of dollar-denominated assets, leading to obstructed capital inflows and increased capital outflows, which will undermine the sustainability of the dollar system's external liabilities and lead to a surge in inflation.
Finally, the long-term export of US Treasury bonds will greatly erode and weaken the status and function of the US Treasury market as the anchor of global risk-free assets, which will not only lead to a serious shortage of global liquidity, but also affect the liquidity of dollar-denominated assets, thus causing great damage to the sustainability of US external liabilities. It should be noted that maintaining the sustainability of external liabilities is the core interest of the US dollar system and US hegemony.
So far, the reason why the US dollar and its priced assets cannot be replaced is that the United States has a developed financial market with breadth and depth, which can provide global investors with financial assets that are both safe and liquid. If the Trump administration really builds the so-called "new dollar system" in the direction of the "Milan Report", it will have a huge impact on the current dollar system. On the one hand, replacing short-term debt with long-term debt will affect the liquidity of the dollar system; on the other hand, whether to accept US security protection as a condition for integration into the system will undoubtedly accelerate the process of "de-dollarization". Both will cause great damage to the international reputation of the US dollar that has been accumulated for a long time. The imminent problem is the inflow of funds. Once international funds question the safety of US financial assets, they will seek safer and higher-quality investment places.
The impact of reshaping the international monetary system based on the "Milan Report" is no less than the "Nixon Shock" in the 1970s. Both are serious "default actions". However, the target of this shock is no longer the Bretton Woods system with strict discipline, but the relatively more flexible US dollar system. This adjustment is likely to trigger strong resistance from the international community, and even lead to more intense de-dollarization actions, accelerating the development of the international monetary system towards regionalization - the three major currency zones of the US dollar, the euro and the RMB.
Of course, the extent to which the proposed "Mar-a-Lago Agreement" can damage the US dollar system still needs to be rationally observed. It should be pointed out that, on the one hand, the international monetary system is a typical "hierarchical system". Even if there are problems with the "top currency", it does not mean that it will decline rapidly. Monetary history shows that the decline of international currencies is a very long process. As far as the most recent international currency replacement is concerned, although the US GDP exceeded that of the UK as early as 1890, it took more than half a century for the US dollar to truly replace the British pound as the top international currency. During this period, the two world wars and the Great Depression destroyed and damaged the British economy, turning Britain from a creditor country into a debtor country and getting deeper and deeper. Today, although Trump's various actions have caused international capital's concerns about the credit of the US dollar to rise sharply, and may damage the "commodity dollar return mechanism" of the US dollar system, the "dollar pricing mechanism for oil transactions" and especially the "local currency pricing mechanism for foreign debt" (for related concepts, see Li Xiao's "Double Shock: The Future of Great Power Games and the Future World Economy" Chapter 2 "Why the United States Dominates the World", or Li Xiao: "The Financial Logic and Rights of the US Dollar System - The Monetary and Financial Background and Thinking of the Sino-US Trade Dispute", published in "International Economic Review" No. 6, 2018) are unlikely to be harmed in the short term; for a long time, more than 80% of the United States' long-term and short-term external liabilities have been denominated in US dollars issued by itself. It can be said that only when the United States has to denominate its own debts in foreign currencies at a similar proportion can it be said that the US dollar is truly in decline. Otherwise, it is not easy to say that the US dollar is in decline. More importantly, as long as the legal environment, rules and institutional system of the US financial market are not destroyed, the depth and breadth of the financial market can continue to expand (cannot be replaced), and the US's ability to innovate in science and technology (the driving force of foreign capital inflow) is not damaged, its ability to inflow capital and allocate global resources cannot be replaced. It should be noted that an important difference between the international monetary system and the international trade system is that in the international monetary system, the top currency status and other secondary currency status are not a relationship of rise and fall. The decline of the top currency status does not mean that the status of other currencies will automatically rise. Even if the United States has a "credit deficit", it does not mean that other major countries have a "credit surplus" (this is the reason for the recent surge in gold prices). Whether it is the euro or the renminbi, how the second and third tier currencies can achieve the deepening development of the financial market is the core of the currency competition among major countries.
It is worth noting that the currency depreciation issue that the "Milan Report" focuses on is becoming a reality. The recent phenomenon that international capital has flowed into other capital markets due to the panic caused by the tariff war, leading to the appreciation of non-US currencies, has attracted great attention from the international community, and the topic of the US dollar entering a new round of depreciation (harvesting) cycle has become hot again. Looking through the phenomenon to the essence, the purpose of the new Trump administration to launch a tariff war against the world at the same time is by no means as simple as making up for the fiscal deficit and pursuing the so-called "fair trade". There is a high possibility that a set of combined punches is hidden behind it: using the panic of the trade war and the turmoil in the financial market caused by high tariffs, through capital outflows, it can force the Federal Reserve to cut interest rates and induce the depreciation of the US dollar, catering to the Trump administration's goals of reducing trade deficits, promoting the return of manufacturing, and stabilizing employment, while forcing its major trading partners to appreciate their currencies and put pressure on them in terms of trade and exchange rates. Therefore, Trump is not as simple and crude as people think, and the "Milan Report" is by no means empty talk.
The third question: How will China respond?
For China today, it should try to avoid three strategic misunderstandings in dealing with the Trump administration’s tariff war:
The first misunderstanding is to misunderstand the Trump administration's negotiation with China under internal and external pressure, especially the resilience of the global industrial chain, as "final victory". It should be noted that, apart from specific constraints such as the constraints of the financial system, the tariff war launched by Trump generally faces three "resilience" challenges, namely the American democratic system, the global industrial chain and China's own economic development and its reform prospects. Sooner or later, the Trump administration will have to negotiate with China, which is the result of the combined effect of multiple domestic and foreign factors. However, it should be pointed out that this "soft decoupling" action, which is forced to be done, does not mean that the United States has changed its strategic concept of "hard decoupling" with China and building a "de-Sinicized" globalization.
The second misunderstanding is to be obsessed with tactical issues such as "who called first" or how to win the tariff war, while ignoring more grand and long-term strategic issues. China should take a responsible position for itself and the "community with a shared future for mankind" and actively think about how to promote global macroeconomic coordination as a responsible major country, including bilateral and multilateral negotiations with Western developed countries, emerging economies and developing countries led by the United States, and work together to avoid the collapse of the global trade system. Don't use the attitude of five thousand years of civilization despising two hundred years of civilization to deal with the game between yourself and the world's most powerful country today. It should be known that the industrial revolution and the modernization of the Western world after World War II were achieved without China's direct and active participation. The world economic recovery, growth and prosperity after World War II were also achieved without the participation of the former planned economies such as the Soviet Union, Eastern Europe and China. The result was China's reform and opening up, the dramatic changes in Eastern Europe and the disintegration of the former Soviet Union. Historical experience has proved that the construction of a new, more just, more coordinated and more stable global trade and monetary system was promoted by the major powers through repeated fights and talks. The climax of globalization that began in the 1990s was driven by the joint efforts and division of labor between China and the United States. Therefore, according to normal logic, the solution to the structural contradictions of "super globalization" also requires the joint efforts of the two countries. This is not only conducive to the construction of a "community with a shared future for mankind", but also conducive to China's continued progress on the track of reform and opening up, and to promoting the adjustment and transformation of its own economic growth model through internal and external efforts, and is more conducive to avoiding the fate of "globalization division" or isolation.
The third misunderstanding is to be misled by illusory concepts like the "Kindleberger Trap". China is far from the current situation of the United States in the 1930s, which had the ability to fully challenge the British Empire but deliberately avoided it. We should not think that we can take advantage of Trump's disruption of the world order to compete with him or even replace him in leading the world. On the contrary, we should seriously analyze the historical experience and lessons of the great power game in each period of the collapse of the international order in the past 500 years, stabilize our position, maintain our composure, and concentrate on doing our own things.
As mentioned above, the core problem of Trump's tariff war is that he found that "super globalization" is unsustainable and increasingly disadvantageous to the United States. In the face of the strong rise and competition of China as a heterogeneous civilization, it is better to cut the Gordian knot as soon as possible. To be realistic, "super globalization" is also unsustainable for China: economic growth driven by external demand must shift to economic growth centered on "dual circulation" or driven by domestic demand.
In general, the unsustainability of this "super globalization" is mainly manifested in two aspects: First, in terms of scale, there is a huge gap in the scale of global production capacity supply and demand between China and the United States. The two countries' share of global GDP, manufacturing value added and consumption are 19%, 32% and 12% respectively: China, 24%, 15% and 29% respectively. China's manufacturing output is 10 percentage points higher than consumption, while the United States' consumption is 14 percentage points higher than output. Due to the different statistical calibers of China and the United States, the proportion of each other's trade deficit with each other in their foreign trade deficit is different: In 2024, China's trade surplus with the United States accounted for 36.39% of its global trade surplus (China Customs statistics), while the United States' trade deficit with China accounted for 28.69% of its total foreign deficit (U.S. Bureau of Economic Analysis data). Although this data has dropped significantly compared with ten years ago, it is still considerable. Secondly, the conflict between the rules and systems of the two sides is becoming increasingly fierce. It is undeniable that the "super globalization" that began in the 1990s was triggered by the neoliberal policy that defeated the seemingly powerful Soviet Union without fighting in the "Cold War". As mentioned earlier, under the guidance of the complacent "end of history" and the laissez-faire market economy logic, "super globalization" made its debut. However, this process implies a huge gap in rules and systems between China and the United States. With the rapid rise of China, the conflict between the rules and systems of China and the United States has become increasingly apparent and more intense.
Here, we need to briefly review the background of the formation of the rules of the Bretton Woods system. The rise of fascism and Nazism in the 1930s was largely the product of the "second wave" of globalization (I call the globalization from the Age of Exploration to the Industrial Revolution, specifically the Napoleonic Wars in 1815, the "first wave", the period from then to the outbreak of the First World War in 1914 as the "second wave", and the globalization since 1945 as the "third wave"). It can be said that they were born in the process of resisting globalization since the end of the 19th century. One of the core systems of the "second wave" of globalization is the gold standard. The gold standard requires that the economic policies of various countries be subject to a fixed gold parity and operate effectively under the conditions of free capital flow. In order to ensure that this parity mechanism is not destroyed, the economic policies of various countries, especially monetary policies, have to sacrifice their internal equilibrium for external equilibrium, thereby losing policy autonomy. Therefore, in order to have more gold reserves, countries took two paths: adopting mercantilist policies internally, reducing imports and expanding exports through high tariff barriers, and strengthening national strength by establishing, plundering and competing for colonies externally, which eventually led to the outbreak of World War I. As Keynes criticized in his book "The Economic Consequences of the Contract", the Treaty of Versailles, as a treaty for the victorious countries to exploit the defeated countries, not only did not ease the conflicts of interest between countries and enhance international coordination, but instead increased the contradictions and differences between countries. Finally, when the great crisis of 1929 came, the fierce conflict of interests made the major powers unwilling to give in. In June 1930, the United States took the lead in passing the protectionist "Smoot-Hawley Tariff Act". Subsequently, major capitalist countries such as Britain and France established trade barriers centered on themselves and divided the world market. As a result, the London International Economic Conference in 1933 failed due to the failure to reach international coordination. Its serious political consequence was that the latecomer countries that lost the international market fell into a deep economic crisis, the middle class went bankrupt, and the fascist and Nazi forces rose rapidly, which eventually led to the outbreak of World War II. Drawing on this painful historical lesson, the guiding principle of the Bretton Woods system is that countries within the system need to have a certain amount of autonomous policy space. Here, Keynes's argument for restricting the flow of private capital is reflected. In order to prevent the free flow of private capital from destroying the autonomous policy space of various countries, the Bretton Woods system only allows official capital flows for the purpose of maintaining the stability of the fixed exchange rate system. Of course, Keynes' more important contribution to saving capitalism is to advocate that the operation of the capitalist economy needs to be intervened, regulated and managed by the state.
The rise of China's economy over the past 40 years is largely the product of its integration into the international economic system dominated by the United States and the improvement of its status in the dollar system. An important consequence of China's accession to the WTO is that in the wave of "super globalization" led by the United States, it still participates in the process of globalization according to the rules of the Bretton Woods system rather than "super globalization". In other words, China does not believe in the "denationalization" concept of "super globalization", but relies on restricting capital flows, maintaining its own socialist system with Chinese characteristics, and delaying or even rejecting certain "super globalization" rules to achieve its own rise. Obviously, when China's economic strength was still weak, these behaviors in accordance with the rules of the Bretton Woods system were permissible, but when China's economic strength rose so rapidly that it aroused the United States' high vigilance, such conflicts in rules and systems were inevitable and unsustainable.
Faced with the new Trump administration'
