Trade Balance: America Will Cease to Be Great

By Sheng Hong (盛洪)

President Donald Trump has launched a tariff war against virtually the entire world, and the haggling bravado peculiar to his career in real estate is on full display. Yet his insistence that tariffs should be “reciprocal” is, in principle, not misguided. In the aftermath of the Second World War, the United States shouldered an international obligation to revive the global economy; Europe came first, followed by Japan, the four Asian tigers, and, eventually, China and the other BRICS nations. Their economic resurgence has made them no less competitive—sometimes more so—than the United States. Washington therefore has little reason to go on “indulging” those partners at the border.

In practice, however, Trump’s idea of “reciprocal tariffs” means something else entirely. His formula calculates the tariff to be imposed on any given country from America’s bilateral trade gap with that country. Beyond a universal ten‑percent levy, he proposes to add a surcharge equal to half the proportion that the U.S. deficit bears to that partner’s exports to the United States—provided the result exceeds ten percent (Wei Shangjin 魏尚进, 2025). This logic strays far from any meaningful notion of reciprocity; even the crudest economics text would refuse to link the size of a deficit with the spread in tariff rates. In a commonsense view, reciprocity requires only that the two sides face the same weighted‑average tariff. Trump’s real goal, as the scheme reveals, is to drive America’s trade with its partners toward balance. From that balance he imagines a flood of factories returning home, the resurrection of American manufacturing, and—why not?—the United States restored to industrial pre‑eminence.

That ambition is impossible to achieve, or, if by some miracle realized, would diminish rather than enhance American greatness. Why? Because the shrewd businessman is now dealing with a system far more intricate than any he has ever confronted. He fixes on the immediate effect of a single measure yet misses the cumulative consequences that ripple through the larger mechanism, the outcomes that lie several causal chains away.

I have pointed out before that if one treats the U.S. dollar itself as an export, America runs no deficit at all. The dollar is an extraordinarily profitable commodity. Printing a hundred‑dollar bill costs roughly four cents, yielding a 99.96‑percent margin; electronic transfers cost almost nothing. Even after we factor in the institutional expense of maintaining the currency’s value, the margin rarely exceeds twenty percent. Roughly speaking, for every dollar issued through a trade deficit, the United States pockets eighty cents of seigniorage. On the 2024 deficit of $1.2 trillion, that works out to some $960 billion in profit.

Where, then, is this $960 billion of seigniorage to be found? First, consider how dollars come into being. The Federal Reserve, America’s central bank, creates base money by purchasing U.S. Treasury securities in the open market and by discounting loans to commercial banks, which in turn lend to businesses and households. Broadly construed, the Fed is making loans to government, to the banking sector, and—indirectly—to firms and families. Lending and selling are equivalent: one conveys permanent title for a lump sum, the other conveys temporary use for interest. Borrowers pay interest to the banks, the banks pay interest to the Fed, and the government pays interest to the Fed as well. Because borrowing and repayment never stop, the Federal Reserve enjoys a steady stream of interest income.

That stream, however, is modest—on the order of a few hundred billion dollars a year—and fails to capture the magnitude of seigniorage. The reason is that the Fed issues only base money. Through the alchemy of deposit creation, the banking system multiplies that base several times over, expanding the money supply proper.

The federal government, for its part, issues dollars through fiscal expenditures: salaries for soldiers, civil servants, and construction crews; purchases of goods from contractors, including military hardware and gold; and the acquisition of private assets for public needs.

America’s money stock thus depends chiefly on the Fed’s creation of base money and on the banking system’s “creation” of additional money. The result is more credit for firms and households, enabling them to survive, expand, and create wealth. Outside the Fed’s discount rate, the scale of supply is governed by ordinary banking prudence: commercial banks cease lending to borrowers unable to service their debts, lest the banks themselves collapse. Firms and families, to remain solvent, search constantly for cheaper inputs—raw materials, intermediate goods, labor.

Under free trade, comparative advantage lets domestic agents buy those cheaper inputs abroad. Enterprises and households that could not achieve positive cash flow on domestic prices alone can borrow, operate, and prosper when foreign goods lower their costs. Consumers enjoy higher surplus on cheaper imports; producers reap greater surplus on cheaper inputs; new enterprises arise on bank credit; and jobs proliferate. That dynamic is one reason America became rich and powerful.

Because free trade enlarges bank lending, banks in turn borrow more from the Fed, expanding the national money supply. Much of that new money is paid to foreign suppliers—dollars that promptly leave the country. In effect, U.S. monetary policy incorporates the need to pay for foreign goods and services; exporting dollars is how America issues its currency to the world.

At that moment seigniorage seems to vanish. Yet it has already been realized in the very act of buying foreign goods with a currency that costs almost nothing to produce. The foreign seller has, in effect, paid the seigniorage; its value is captured by the trade deficit itself. What does the U.S. government gain? Beyond interest on relending and bond holdings, the state taxes the additional wealth that dollar issuance confers on Americans, recovering part of the seigniorage in revenue.

America’s institutional and technological edge, coupled with cheaper foreign inputs, has fostered prosperity. According to Paul Krugman (克鲁格曼) and his new trade theory, when other things are equal, a nation that industrialized earlier or possesses a larger economy will enjoy higher equilibrium wages under free trade with restricted immigration (Krugman, 2001, p. 22). The United States, early to industrialize and vast in scale, pays wages far above most countries: per‑capita income in 2024 was roughly $86,000—six and a half times China’s. High wages both fuel demand for imports and inflate the cost of U.S. exports, making a deficit likely.

Because nations occupy different stages of development, most require fewer American goods and services than they sell to America. The resulting surplus dollars become reserves. Unlike any other commodity, the dollar is instantly redeemable purchasing power and a claim on U.S. assets. But large, persistent surpluses cannot remain idle: they would stoke inflation and erode returns at home. As John Maynard Keynes (凯恩斯) warned, “[the] effort to increase the surplus will after a point defeat itself” (Keynes, 1993, p. 286). Dollars must seek better investment abroad.

The premier asset is U.S. debt, especially Treasury bonds. Thanks to American strength, prosperity, constitutional stability, and protected property rights, Treasuries have long been the world’s safest investment. Foreign investors hold roughly a quarter of outstanding U.S. debt—about $8.82 trillion as of February 2025. Their annual purchases of American assets broadly match the annual U.S. trade deficit. Over many years, the current‑account gap and the capital‑account surplus have nearly mirrored each other (see Figure 1); only Trump’s first‑term trade war and the post‑2020 rounds of quantitative easing disturbed the symmetry. Dollars issued via trade deficits return through financial channels, chiefly as purchases of Treasuries. Because the yield on those bonds often falls below the Fed’s discount rate—and because the dollars originated at the Fed—the inflow amounts to quasi‑fiscal revenue. It is a second harvest of seigniorage.

Figure 1 United States Current‑ and Capital‑Account Balances (1999‑2024), in millions of dollars

Source: U.S. Bureau of Economic Analysis.

Dollars that come home through the deficit become a windfall for the federal budget. They fund expenditures outside the ordinary ledger—namely, defense. America’s military spending is singular. By my calculation, per‑capita defense outlays in the United States are 8.4 times the world average, the excess constituting what I have called the “imperial cost” (Sheng Hong, 2002). The link to dollar credibility is intimate: a currency’s standing rests on national power, and military power is an essential component. Returned deficit dollars strengthen the armed forces; military strength underwrites the dollar. In 2023, the Pentagon’s budget was $820.3 billion in constant dollars (USAFacts, 2024); the current‑account deficit that year was $905.4 billion and the capital‑account surplus $906.3 billion—figures broadly in line.

America, then, is no ordinary trading nation but a special pivot of the international system. Early industrialization, a colossal domestic market, and widespread affluence make it the hub of global demand. That demand produces deficits that export dollars; the security and credit of the United States lure those dollars back; the inflow finances exceptional military power that, in turn, buttresses the currency. The loop is stable and benign. This American model took decades to mature; until the 1970s, the United States ran balanced trade. Before America, Britain performed the role (Sheng Hong, 2018).

We can now see what Trump has attempted. Edward Gibbon once noted that empires sow the seeds of their decline at the height of their power. Post‑Cold‑War America stands at such a height, and Trump, emboldened by that strength, has chosen to misuse it. Should he succeed in forcing every partner into balance, the dollar deficits would vanish, along with the seigniorage they generate, the wealth they inject into American society, and the revenue they recycle into defense. To sustain military spending at the old level would mean swelling the fiscal deficit and national debt until insolvency looms. The America we know would disappear, and greatness with it.

This outcome is not obvious to the lay observer, but markets sense it keenly. When Trump announced “reciprocal tariffs,” bond prices plunged. Investors understood: fewer deficits mean fewer dollars for Treasuries, higher yields, lower prices. The sensible course is a stable, slowly rising deficit. If Trump heeds the market and settles for genuine reciprocity with similarly competitive nations—rather than chasing balance—he may yet avert collapse of the American model.

Given the retaliation already mounted against Trump’s tariffs, we doubt he will reach his goal. Even without countermeasures, tariffs alone cannot bring manufacturing back. They are but one component of cost, and they do not repair an unfavorable business climate. American labor is expensive; anti‑immigration policies prevent newcomers from easing wage pressure; a high‑tariff America may protect its home market but will remain uncompetitive abroad.

Our point is simple: even if Trump achieved his aims flawlessly, the result would be perverse. The United States would face not a “short‑term pain” but the onset of chronic decline. Inflation, recession, and a loss of credit standing would follow. A President who pursues “trade balance” to the end will be remembered not as the man who made America great again, but as the one who made America cease to be great.

References

USAFacts, “How Much Does the U.S. Spend on the Military?” USAFacts, August 1, 2024.
John Maynard Keynes (凯恩斯), The General Theory of Employment, Interest and Money (《就业利息和货币通论》), Commercial Press, 1993.
Paul Krugman (克鲁格曼), New Trade Theory (《克鲁格曼国际贸易新理论》), China Social Sciences Press, 2001.
Sheng Hong (盛洪), “From ‘Made in China’ to ‘Market in China,’” FTChinese.com and CRN (China Review News), simultaneous release, August 10, 2018.
Sheng Hong (盛洪), “New Imperialism, Strategic Terrorism, or Tianxia‑ism,” International Economic Review, no. 4 (2002).
Wei Shangjin (魏尚进), “The Dual Fallacy of ‘Reciprocal Tariffs’: An Absurd Drama of Trade Policy,” Fudan Financial Review, April 8, 2025.
April 25, 2025, at Wumu Study.

This article was first published April 28, 2025, in FTChinese.com. This translation is an independent yet well-intentioned effort by the China Thought Express editorial team to bridge ideas between the Chinese and English-speaking worlds. Kindly attribute the translation if referenced.