Trump's 'crazy' trade war: The theory behind the fury
The scene of U.S. President Donald Trump proudly holding up his new tariff board on Thursday, April 3, may mark a watershed moment in modern history.
It draws a striking resemblance to the image of British economist John Maynard Keynes and U.S. Treasury official Harry Dexter White reshaping the global economy at Bretton Woods after World War II.
Similarly, it evokes British Prime Minister Margaret Thatcher's declaration that “there is no such thing as public money”(*)—a moment that marked the ideological departure from Keynesianism and ushered in a new era of market fundamentalism.
To understand how we arrived at this moment, we must examine the rationale the current U.S. administration invokes as it takes aim at one of the bedrock principles of economic liberalism: free trade.
This analysis avoids the simplistic narrative that we’re just dealing with a reckless president—the clichéd 'madman in the elevator' trope. Rather, it recognizes that a ruling elite is defending its interests in a world undergoing seismic shifts from the vision held by 1990s-era economists.
A glimpse into the adviser's mind
Trump may appear somewhat cartoonish holding up a placard to announce tariffs on all imported goods, joking to his audience that he wanted a larger board but the wind was too strong—as if fearing the oversized sign might topple and flatten the crowd like a slapstick gag.
But beneath the comedic veneer lies something far more deliberate. The policies Trump dubbed “Liberation Day” are backed by fierce debates among some of the sharpest minds in American economics.
When we shift the lens from Trump to his circle of advisers,people like economist Stephen Miran, this “liberation” starts to take on a very different weight.
Miran, a Harvard-educated economist and now chair of Trump’s Council of Economic Advisers, is the intellectual architect of this trade war, and seems steadfast in the face of criticism.
When grilled on Bloomberg about the risk of triggering recession and inflation, Miran coolly replied that import tariffs would have limited impact, since imports comprise just 14% of the U.S. economy.
Shortly after Trump’s re-election last November, Miran published a policy paper outlining the rationale for imposing tariffs. He laid out a two-pronged rationale for tariffs: stimulating domestic job growth and addressing national security threats from China and Russia.
The ghost of Triffin
To grasp Miran’s arguments, we must revisit a 1960 U.S. congressional hearing where economist Robert Triffin warned of an ominous future for the U.S. economy—a concern later dubbed "Triffin's dilemma."
In the two decades following World War II, the U.S. dollar had emerged as the world’s primary reserve currency. Britain’s pound sterling, once dominant, had lost its footing following World War I, leaving global markets in disarray.
Triffin argued that to provide the world with dollars, the U.S. had to run persistent deficits, as foreign central banks purchased U.S. bonds. This system forced the U.S. to import goods to match the outflows, risking a loss of global confidence in the dollar.
To supply the world with dollars, the United States must run persistent deficits—that is, it must borrow heavily. Smaller economies purchase U.S. Treasury bonds and bills to store in their central banks as a way of holding dollar reserves. In turn, the U.S. uses this influx of capital to buy imports from those same countries.
However, the complete opposite happened. The U.S. trade deficit continued to widen, and the world did not abandon the dollar. In fact, this strange arrangement where the world’s largest economy depends excessively on imports became the very foundation of the global economic order starting in the 1990s.
After the fall of the Soviet Union and the decline of economic dependency theories, developing countries fully embraced globalization. The United States, in turn, grew increasingly reliant on China to manufacture its goods or supply components, drawn by China’s low-cost labor.
By the 2000s, China had become the third-largest exporter to the U.S. and the second-largest holder of U.S. financial assets.
As this system entrenched itself, Triffin's dilemma faded from discourse, with some even suggesting that today’s global conditions had disproven the theory altogether—until Miran resurrected it.
The dollar as a national security threat
So, how did Miran put Triffin's concerns back at the center of American economic policy? He argues that the U.S. share of global GDP has declined from 40 percent in the 1960s to 21 percent today. While this does not guarantee Triffin's prophecy, Miran says, it exposes the U.S. to mounting pressure.
He points to the loss of 600,000 to 1 million manufacturing jobs since the U.S. deepened trade ties with China in the early 2000s. More alarming, he warns that dependence on Chinese imports could allow Beijing to weaponize supply chains, posing a national security risk.
In Miran's view, the inflated value of the dollar exacerbates this problem. High global demand for the greenback—as central banks hoard reserves—keeps it artificially strong, undermining U.S. exports and deepening reliance on imports.
He does not seek to dethrone the dollar as the world’s reserve currency. Instead, he advocates for limited protectionism to weaken the dollar slightly, attract industrial investment, and rejuvenate American exports.
In this context, we can understand why, upon taking office, Trump swiftly announced tariffs on the United States’ largest trading partners—China, Mexico, and Canada—before expanding his trade war to include the European Union and a minimum tariff on all imported goods.
Return of mercantilism
While Miran's reasoning may seem rigorous, it has sparked fierce opposition among U.S. policymakers. Federal Reserve Chair Jerome Powell warned that new tariffs could stoke inflation and slow economic growth.
This is a serious concern given the world has waited two years for the Fed to cut interest rates, which is vital for heavily indebted developing economies like Egypt.
Liberal economists, notably Nobel laureate Paul Krugman, were quick to denounce Trump’s measures. Krugman initially called the move "full-on-crazy," later explaining in a calmer tone that it shatters the post-1947 global trade order and may prompt other nations to retaliate.
We can understand Paul Krugman’s alarm at what’s unfolding. The United States’ turn toward trade protectionism—what’s known as mercantilism—is a deep blow to the heart of liberal economic philosophy.
For generations, belief in free trade was taken as a given, dating back to the foundational work of economists like Adam Smith and David Ricardo, who helped shape modern economic thought as we know it today. (**)
Amid speculation leading up to Trump's April 2 announcement, markets braced for impact. Krugman lamented that economic fate seemed to rest solely in the president's hands.
Other economists challenge Miran's assertion that protectionism can boost industrial employment. Harvard's Jason Furman noted the irony in taxing all imports—even goods like bananas and avocados the U.S. doesn't produce. He also questioned whether America could realistically compete with countries like Vietnam in labor-intensive industries.
Even more stark is the forecast from Mark Zandi, chief economist at Moody’s Analytics. He believes the tariffs could plunge the U.S. into recession, driving unemployment from 4.1 percent to 7.5 percent, casting a long shadow over Miran’s confident projections.
What it means for Egypt
If Trump holds firm on trade protectionism, we could be witnessing the dawn of a new era—one that echoes the isolationism of the 1930s. That scenario becomes more likely if the U.S.'s trade partners retaliate with tariffs of their own, prompting Trump to counter with even more tariffs, plunging the world into a spiral of escalating trade wars.
But should Egypt be worried?
In Egypt, opinion is divided. Some downplay the impact, given the 10 percent tariff rate on Egyptian exports. Others are optimistic that a realignment of global trade might elevate Egypt's position.
However, events over the past few days suggest Egypt's economy is dangerously fragile. and that any optimism must be tempered with caution. For example, Thursday and Friday’s crash in U.S. stock markets caused the Egyptian pound to lose ground against the dollar, triggered by the flight of hot money. One can only imagine how much worse the situation would be if a full-blown global recession were to follow.
This fragility reflects deeper issues within Egypt’s domestic economy. As the global order realigns, countries like Egypt must prioritize serious development strategies and build greater economic resilience to navigate the turbulence ahead.
(*) John Maynard Keynes and Harry Dexter White played key roles in designing the post-WWII Bretton Woods system, which laid the foundation for the International Monetary Fund and the World Bank. The Bretton Woods framework emphasized restricting capital flows and empowering governments to plan their economies. (**) Adam Smith and David Ricardo were two of the most influential economic thinkers of the 18th and 19th centuries. Smith established the foundations of classical economics in "The Wealth of Nations", while Ricardo advanced the theory of comparative advantage in trade—both shaping how we understand global economics today.
A version of this article first appeared in Arabic on April 8, 2025