When the US supreme court voted 6-3 last Friday to strike down Donald Trump’s tariffs, he was incandescent. Two judges he had elevated – Neil Gorsuch and Amy Coney Barrett – were suddenly recast as traitors to the cause. Both were, he insinuated, under the sway of foreign interests. The court ruled that the tariffs overstepped the powers the US Congress granted under the 1977 International Emergency Economic Powers Act. Mr Trump responded by reaching for a 1974 trade law, invoking “international payments problems” to slap on a 10% tariff for 150 days.
Mr Trump was moulded by the 1970s. His political DNA was formed in that era’s crises and he governs as if America were still in the Nixon era of shock politics. In some ways there are parallels. The political mobilisation around economic insecurity echoes that period, as does distrust in elite authority. This explains why many populist politicians on the right reach for the 1970s, which fits the mood of decline and rivalry and offers a narrative of “restoring strength”. Internationally, Mr Trump also sees the world through the 1970s lens of industrial rivalry and trade grievance. But the world today is in a far more financialised and interdependent state.
That is why Mr Trump cannot treat today’s US trade deficits as 1970s-style balance-of-payments crises. The old Bretton Woods system ended in 1971. Today, America is not running out of gold to pay its creditors. It is losing ground in highly complex manufacturing to emerging rivals, especially China. It’s not just Mr Trump. The question isn’t whether western governments need industrial policies. It’s whether they can afford not to have them.
Many G7 powers fear slipping down the economic ladder. That is understandable. The lower rungs are filled with unhappy nations suffering hard external constraints such as Sri Lanka. It borrows in dollars, imports essentials priced in dollars and must earn or attract dollars to survive. If exports falter or capital flees, the currency drops, making it harder to import goods. Once a country cannot find enough dollars to pay its debts, the International Monetary Fund comes knocking.
Sri Lanka’s current debt crisis has forced the country to agree to the 17th IMF intervention since 1965 with one of the most aggressive austerity programmes in the country’s history. To be clear, the US faces no hard financing constraint. It does not need exports to pay its debts. It issues the currency in which those debts are written. But if it surrenders command of advanced manufacturing and crucial tech supply chains, it risks something else: slower productivity, weaker global leverage and domestic decay. That is not a payments crisis. It is a crisis of power.
History suggests that the risks are real. Britain lost industrial leadership by 1918, yet sterling endured into the 1930s. It fell not to one shock but to many: war debts, shrinking economic weight, imperial overstretch and self-inflicted deflation. Ultimately, there was dwindling confidence in Britain’s future capacity to outpace its competitors. Capital increasingly gravitated towards the rising American economy, and pricing and settlement followed. Today, the US is the pre-eminent power, having replaced Britain. The dollar survives on confidence in American institutions and innovation. Mr Trump corrodes both. If technological leadership migrates, western – and then US – leadership will follow.
