With Trump threatening to impose big taxes (tariffs) on imports from all our major trading partners, many people are desperate to find some grand scheme that would justify this seeming absurdity. Just to be clear, as economic policy, Trump’s tariffs are absurd.

There can be arguments for tariffs as part of an industrial policy that tries to foster certain industries considered strategic. This was the argument for the Biden administration’s tariffs. The goal was to build up our advanced semi-conductor industry, along with our EV industry, and the clean energy sector more generally.

We can debate whether these tariffs were good policy, but at least there is a clear argument for them. It is very hard to find much of a case for imposing large taxes on imports from Mexico and Canada, two longstanding allies whose economies are closely integrated with the U.S. by design.

These taxes will make a wide range of products more expensive in the United States. They will almost certainly dampen investment and slow growth as businesses try to sort out the impact of the tariffs. The same story applies to tariffs that Trump is likely to apply to goods imported from Europe, Latin America, and elsewhere.

While these tariffs appear to be a ridiculous self-own by Trump, there are some who see a brilliant plan buried underneath the nonsense. I’ve heard various, and often completely contradictory, descriptions of this brilliant plan. The idea is that somehow Trump’s grand tariff strategy will reposition the U.S. in the world in a way that will be far more favorable to the country, or at least some group of people within the country.

Before trying to sort out the grand plan views, let me just point out there is considerable evidence for the idea that when it comes to economics, and especially trade, Donald Trump really has no idea what he is talking about. The best single incident along these lines was when during his first term, shortly after he was inaugurated, he called his then national security adviser, Mike Flynn, at 3:00 AM to ask whether we wanted a lower dollar or a higher dollar.

Most immediately this was incredible because the national security adviser is the person who would be brought in with a threat of imminent or actual war. I assume this was Flynn’s immediate reaction to this middle of the night phone call from the president. (Flynn said he didn’t know.)

But apart from the fact that he called the wrong person at the wrong time, it was more than a bit bizarre that a president who put trade and tariffs at the center of his 2016 campaign, didn’t know whether he wanted the value of the dollar to rise or fall. That’s about as clueless as you can get. There is no reason to believe that Trump is more on top of things this time around. With that as background, let’s look at the leading conspiracy stories.

The Low Dollar Route

This story is that the United States has suffered from the dollar’s role as the world’s reserve currency. In this story, the dollar has been consistently over-valued because countries need to hold dollars to conduct their normal trade and business operations. This over-valuation makes our goods less competitive internationally, leading us to run large trade deficits and lose good-paying manufacturing jobs to the rest of the world.

Trump intends to fix this by forcing countries to raise the value of their currency against the dollar. The tariffs are a tool to get them to the negotiating table. Once there, we will arrange an accord similar to the 1987 Plaza Accord, where our major trading partners all agree to raise the value of their currency against the dollar.

There are a number of things wrong with this story starting with the concept of the role of the dollar as a reserve currency. The dollar is the world’s leading reserve currency, but it is not the only reserve currency. Countries hold a number of currencies as reserves, including euros, British pounds, Japanese yen, and even Swiss francs.

If the percentage of currency reserves held as dollars were to fall by 10-20 percentage points, it’s hard to see it having much impact on anything. If it happened overnight, it would mean a big run on the dollar and a sharp decline in its value, but if it happened over the span of 3-5 years it would likely have just a marginal impact on the value of the dollar. It’s hardly the sort of thing that would cause economic shock waves.

It is true that the dollar is used to carry on the bulk of international trade, but this is just a convenience, not some sort of international law. As it stands now trillions of dollars’ worth of trade are done in euros, yen, renminbi, or other currencies. If Saudi Arabia chooses to sell oil to China for renminbi, as it almost surely does on occasion, there is nothing that prevents this trade.

It’s true that oil is priced in dollars, but this means essentially zero in a world where computers can calculate exchange rates in a tiny fraction of a second. Here too, if the share of trade conducted in dollars were to fall by 50 percent it would be almost meaningless for the U.S. economy. The demand for dollars for international trade purposes is trivial. Trades can be completed in seconds. Even a large transaction in the hundreds of billions of dollars would mean almost nothing for the demand for dollars if neither of the parties actually wanted to hold dollars as an investment or reserve.

In this respect, it is worth looking at the example of Australia, which does not possess one of the world’s leading reserve currencies. The country ran large current account deficits every year from at least 1980 (the beginning of this data set) to 2019.

Australia did not have the “exorbitant privilege” of having the world’s leading reserve currency. Yet was able to consistently buy more than it sold internationally because people wanted to invest in the country. That is really the underlying story of the U.S. trade deficit. Is the Trump goal really to make it so that foreigners don’t want to invest in the United States?

There are a couple of other points to add on this alleged low dollar strategy. If Trump’s goal is to have a Plaza-type deal, why not go there directly? If we want to reduce our trade deficits by having a lower-valued dollar it seems easiest to just go directly to our major trading partners, most of whom are (or were) close allies, and put the question directly on the table. It’s not easy to see how we buy points by arbitrarily imposing taxes on our imports from them.

This doesn’t even make sense from the standpoint of a negotiating tactic. We’re demanding they reduce their trade surpluses with us, and we are going to unilaterally take steps to reduce their trade surpluses, unless they agree to raise the value of their currency, in order to reduce their trade surplus. There is something missing in the nature of this threat, sort of like we will break your arm unless you agree to let us break your arm.

The last point is that Trump seems to have an implicit golden age where trade was closer to balanced trade, and we had good paying jobs for working people (those without college degrees). There is something to this story, as jobs in manufacturing used to pay a substantial wage premium relative to other jobs in the economy.

The problem is that those days are long gone. The manufacturing wage premium was due to the fact that manufacturing jobs were far more likely to be union jobs than jobs in other sectors of the economy. In 1980, 32.3 percent of the jobs in manufacturing were unionized, as opposed to just 15.0 percent in the rest of the private sector. The current unionization rate in manufacturing is just 7.9 percent, compared to 5.9 percent in the rest of the private sector. As a result, the wage premium for manufacturing jobs has largely or completely disappeared.

This means that sharply reducing the trade deficit will do very little, if anything, to improve the lives of ordinary workers. This is not a way to get back to a golden age.

The High Dollar Route

The alternative perspective is that Trump wants to use tariffs to maintain and even enhance the dollar’s role as the world’s pre-eminent reserve currency. In this story, Trump understands and appreciates the fact that a higher dollar means we can get cheaper imports, and he thinks this is good. Supporting this view was a threat Trump made shortly before his inauguration where he said that he would impose huge tariffs on the BRICS countries if they established an alternative reserve currency.

Almost nothing in that particular story makes sense. The BRICS countries (Brazil, Russia, India, China, and South Africa – Trump also somehow had Spain in this group) are nowhere close to establishing a common currency, even though it has been the topic of some casual conversations. Furthermore, tariff threats against these countries, especially India and Russia, would have little meaning since they are not especially dependent on the U.S. market.

The one thing that does fit a little bit with this story is tariffs, other things equal, should make the dollar rise against other currencies. The story is that it will reduce our imports and therefore reduce the supply of dollars on international currency markets, thereby raising its value.

However, this effect can be swamped by investment demand for dollars. With tariffs and other Trump policies having substantially raised the risk of recession, the investment demand for dollars has fallen sharply. The dollar is now lower against the euro and other major currencies than before Trump was elected. If the strategy was to use tariffs to raise the value of the dollar and thereby make imported goods cheaper for people in the United States (and give us more for our exports), we’re going the wrong way.

When It Comes to Tariffs, Donald Trump Doesn’t Just Look Confused

Even Trump’s political opponents may be reluctant to believe that the president is completely clueless on an issue that he has put at the center of his political campaign and now his presidency. But the evidence here is pretty overwhelming. When he talks about tariffs, he seems to really believe that other countries just send us checks, rather than ordinary working people pay taxes on the goods we import.

There is no evidence of some grand strategy here. There is just ego and bluster. The adults in the room who were able to restrain Trump in his first term are all gone now. He is surrounded by yes-people who tell him whatever he wants to hear. That’s not a happy story for us or the world, but it is the reality, and we should recognize it.