Tanvi Ratna is basically echoing what Yanis Varoufakis argued above. It's not her idea, and it is the right take.
Trump is trying to reset the global trading order. This will crush the markets (in the short-term, at the minimum) because the markets were built on assumptions of trade stability. Panic across many industries will be the default for several months.
The gamble is that they can transform the US into a manufacturing economy through exploiting demand & security leverage. Most of the world - particularly East Asia - does not consume nearly as much as the US, and many of them (especially Europe) rely on the US for security, so they'll be forced into a dilemma:
- They can reduce trade & security treaties with the US and consume more themselves; this means less dollars exchanged and less dollars spent on defense, allowing the US to depreciate the dollar (or appreciate those countries' currencies), either way US products are more competitive.
- They can sign a deal with Trump, where they agree to buying more US products and paying more for security (e.g. balance the deficit), achieving effectively the same thing through subsidization of US manufacturing; in this scenario, which Trump prefers, the dollar can still stay relatively strong as those countries will essentially be forced to swap their currencies for the dollar to pay US exporters.
- They can, of course, also just eat the tariffs and subsidize their manufacturers, but that's the same as (2) except they get nothing in return.
Seems like a great strategy until you realize two things:
- Many of the "partners" targeted are already facing crises; e.g. South Korea, Taiwan, much of Europe, run export-based economies, and they just don't have enough demand themselves to support their industries, so they can't do (1), nor can they simply switch to selling to China, since the Chinese market is tapped out by domestic producers.
- If they appreciate their currencies, as the US demands, they accelerate their deindustrialization. This is basically Plaza Accords 2.0 and will lead to lost decades especially when these economies are already struggling with demographics and Chinese competition.
- If they subsidize the tariffs or buy more US products, they have to take on more debt. They can address the debt by printing more money, but that leads to inflation. This creates a race to the bottom effect that lowers living standards, encourages capital flight, and discourages economic activity (since why work if your labor is worth less every day?)
The end result for most countries will be (2) or (3). Either you participate in your own deindustrialization or you accept run away inflation. Wait, you say, doesn't this mean the US wins? Well, no, because a country can only contribute to the US what it has. If the US's "partners" end up ruined, then so will the US's plan to exploit them for its transition.
And that is, effectively, what China has to ensure. It has to ensure that the US's "partners" have no life line by which they can both appease the US and keep their economies strong. It's no wonder, to this end, that the US mainstream media is using reverse psychology to try and bait China into filling in for the US as the global demand engine, right now. It's because that's the only way Trump's plan actually works and doesn't result in a global depression.
