Trump’s approach to geoeconomics carries dark echoes, writes Maurice Obstfeld
Choosing guns over butter in trading relationships will make America both poorer and less safe
THE WORLDWIDE stockmarket turmoil that Donald Trump unleashed with “Liberation Day” reflects more than the destructive inefficiencies of tariffs. It also flows from the realisation that Mr Trump is willing to inflict harsh economic pain and break apart global alliances as he seeks to shake up the global economy. The president has admitted that his policies may cause short-term economic loss, but insists that longer-term gains will more than compensate—and bring about “the golden age of America”.
In keeping with his zero-sum mindset, Mr Trump’s American golden age is not so good for the rest of the world. It restricts American reliance on international trade and rejects the economic and security co-operation that largely prevailed until 2024—even during his eventful first term—in favour of a transactional approach that exerts economic pressure to bend other countries to America’s will.
After fleeing Nazi Europe for America in 1941, Albert Hirschman published “National Power and the Structure of Foreign Trade”, inspired by Germany’s use of trading relationships to dominate eastern neighbours. Hirschman’s book fell into obscurity soon after its publication in 1945 as America and its allies, drawing the right lessons from negative interwar experience, devised a world order based on multilateral co-operation. With that system now under attack by its erstwhile leading sponsor, people are pulling Hirschman’s tome from the top shelf and dusting it off.
While imperfect in many ways, the main elements of the post-war settlement—including the Marshall Plan, the IMF and the General Agreement on Tariffs and Trade (later the World Trade Organisation)—helped produce more than half a century of growing trade and prosperity, decolonisation and development, the spread of democracy and a generally peaceful world. In many cases global institutions showed they could evolve, as when the IMF accommodated itself to flexible exchange rates. The conscious goal of economic planners was to give countries space for domestic policy sovereignty while international rules or norms constrained the worst beggar-thy-neighbour impulses, of the sort seen between the two world wars.
Rapid structural transformation—due to globalisation, but even more to new technologies, demographic shifts and “financialisation” (the growth of finance relative to other economic sectors)—increased inequality. This called for farsighted and creative domestic policies, including big investments in improving workplace skills and adaptability. Democratic governments struggled to keep up. The cost of this was growing political polarisation and populism.
After Ronald Reagan’s conservative “trickle-down” revolution, American inequality rose sharply. Some regions were hollowed out and their workers left behind. Mr Trump blames America’s trade agreements, not domestic policy failings, for this. His approach is to gut the “administrative state” far beyond what even Reaganites dreamed of, to blame trade practices for America’s economic ills and to sharply reduce the country’s reliance on imports.
At times Mr Trump’s rhetoric has verged on calling for a form of autarky—witness his demands that foreign producers who wish to sell in America build plants there and hire American workers. He also—unlike Reagan—wants to scale down American foreign-security and soft-power engagement. Countries that previously nestled under America’s security umbrella should do more to defend themselves, he insists, while America disengages from global trade and aid.
America’s close entwinement with global finance—to which it is much more open than it is to trade—is unlikely to survive this transformation. This realisation is yet to sink in, and it does not augur well for encouraging a torrent of inward investment. America’s trade partners will seek to limit their exposure to its policy caprice. They will rely more on currencies other than the dollar for reserve holdings, trade invoicing, foreign-exchange intermediation and corporate borrowing.
In Mr Trump’s vision, America’s future trading relationships will look more like what Hirschman described in 1945. Some in the president’s orbit have been candid. In an interview a few months before he became treasury secretary, Scott Bessent proposed that tariffs should favour “like-minded” members of a “security zone” with “shared values, shared economy, shared defence, shared currency goals”.
On exchange rates, Mr Bessent has said that he wants foreign currencies to be stronger—thereby promoting American exports—but with the dollar remaining strong too. One interpretation of this is that he is ruling out unilateral weakening of the dollar through pressure on the Federal Reserve, which would be inflationary. But it is fantasy to think trade partners will voluntarily join a “Mar-a-Lago accord” or “new Bretton Woods agreement” in which they adjust their currencies higher and also agree to bankroll unbridled American deficits through purchases of ultra-long-maturity Treasuries at low interest rates. The multi-trillion-dollar question is whether American measures, going even beyond tariffs, could push other large economies in this direction, and if so how far—or whether the attempted coercion would motivate them to loosen economic links with America.
In a textbook from 1948 that set the terms for much of post-war thinking about economic policy, Paul Samuelson, a Nobel laureate, used the choice between producing guns and butter to illustrate how economies must weigh up alternatives when allocating scarce resources. A much darker picture of the trade-off was drawn by Hermann Göring, a German commander, in 1936: “Guns will make us powerful; butter will only make us fat.” Influential supporters of Mr Trump’s approach to trade likewise believe that Americans’ eagerness to consume has left their country weak.
Mr Trump won the 2024 election by convincing voters that his policies, tariffs included, would produce butter: lower prices, growth and manufacturing jobs, all without economic pain. The reality that “Liberation Day” revealed is different. The president has launched a costly, all-fronts assault to restructure the global trading system. It has already caused the odds of recession to jump.
Post-war economic planners believed that international co-operation could underpin a positive-sum world in which prosperity and security reinforced each other—something that is still possible with the right domestic policies. Instead, America now looks set to be both poorer and less secure.
Maurice Obstfeld is a senior fellow at the Peterson Institute for International Economics and a former chief economist at the IMF.