The new Trumponomics by Ernst Lohoff, 5/5/2025

Through his widely criticized tariff policy, Donald Trump is attempting to pass on the costs of the crisis to the trading partners of the US.

When US President Donald Trump proclaimed “Liberation Day” in early April and launched a tariff war against the rest of the world, global stock markets reacted with sharp declines. After “Black Friday” and “Panic Monday,” the US president felt compelled to announce a 90-day moratorium on most of the tariffs he had just imposed. As a result, prices recovered.

Back to square one? That is doubtful. On the one hand, postponed does not mean canceled. On the other hand, a general tariff of ten percent and some special tariffs remain in force, but above all, one country has not been given a reprieve: in the tariff war with China, Trump has gone one step further and increased tariffs to up to 145 percent. The conflict between the world’s two largest economies is inherently explosive, and there is no sign of an easing of tensions.

The White House has now exempted some Chinese-made goods, such as smartphones and memory chips, from the special tariffs until further notice, but this is not a sign of de-escalation. Like Apple, which manufactures 87 percent of its iPhones in China, most US IT companies are dependent on supplies from China. They are to be given time to free themselves from this dependency. Nor is the Chinese leadership expected to back down. It has long been prepared for confrontation with the US government.

According to MAGA ideology, the prevailing free trade system allows other global players to shamelessly exploit the US. This accusation is based on the trade deficit that the US runs up year after year, which recently stood at more than $918 billion. Ironically, the Republicans under Trump are now railing against an economic order that the US itself installed under the presidency of the staunchly conservative Republican Ronald Reagan and which has kept the global economy on a growth path for four decades, even if financial crises have repeatedly led to setbacks.

In the 1970s, the global economy was in a serious crisis. All core capitalist countries were simultaneously struggling with high inflation and low growth rates. By sharply increasing both domestic interest rates and public debt in the early 1980s, while at the same time forcing the deregulation of financial markets, the US under Reagan opened up a way out of “stagflation” for itself and the rest of the capitalist world.

The financial-industrial proliferation of “fictitious capital” (Marx) became the real engine of the global economy. The US transformed itself into the promised land for investment-seeking money capital from all over the world. Especially from the 1990s onwards, it helped finance the emerging industries of the information age. To this day, apart from Chinese competition, all the world’s major tech companies are US firms. At the same time, the global economy, driven by financial market dynamics, provided countries such as Japan and Germany, and later China, with export opportunities in traditional industries.

The unleashing of the creation of fictitious capital, based on the transnationalization of goods and money capital flows, initially worked wonders. In the US, the inflation rate fell from 14 percent in 1980 to below two percent in 1987, while economic growth rose to an average of four percent in the 1980s. However, the economic order that emerged at that time has a few flaws. On the one hand, the value of share capital and the global credit volume must grow much faster than real economic growth in order for the financial industry to take on the role of growth engine. On the other hand, the functioning of this order is linked to the global division of labor already mentioned.

The strongest capitalist country, which also provides the world’s currency in the form of the dollar, plays a key role in this. In order for the capitalist system to continue functioning, the US must export financial securities and allow others to gain the upper hand in traditional industries. In the first decade of the 21st century alone, the US share of global industrial production shrank from 28 to 18 percent. Currently, it is around 15 percent.

This process of deindustrialization has decisively changed the social structure of the US. The process of social polarization has taken on extreme proportions there. While the rich part of society benefited from the dynamics of fictitious capital creation, many of the well-paid industrial jobs disappeared and wage earners were pushed en masse into McJobs.

The rise of Trumpism must be understood against this backdrop. By declaring the deindustrialization of the US to be the work of ruthless capitalist partner countries, Trump is able to unite the winners and losers of the status quo behind him. The plan to shift the financing of the state from income taxes to tariffs serves as a common denominator between the tax and state hostility of the hardcore neoliberal ruling classes and the nostalgic longing of the declining white middle class for a return to the good old days when they still shared in the American dream of prosperity and upward mobility.

Advocates of free global trade argue that tariff wars ultimately only produce losers and that the US population will suffer the most. Trump’s tariff policy will fuel inflation because the tariffs will be passed on to US consumers and US companies will not be able to fill the gap. Furthermore, Trump’s policy will lead to a flight from the US financial markets and ruin the dollar. It therefore runs counter to the interests of the country. From this prognosis, horrified economists conclude that the new administration’s approach is deeply irrational and unnecessarily destroys the proven international division of labor.

The forecast is correct, but the diagnosis is fundamentally flawed in two respects. First, Trump’s economic policy does have its own internal logic, albeit primarily one based on identity politics. By announcing during his election campaign that “punitive tariffs” were the most beautiful words in the dictionary, Trump succeeded in bringing fire and water together and creating a mass base for the neoliberal program of dismantling the state among its future victims. On the other hand, Trump is attacking an economic order that has long been in deep crisis; Trump’s policy aims to saddle partner countries with the catastrophic follow-up costs of this dissolution.

The development of Chinese economic policy clearly shows where the global trend is heading. When the US real estate bubble burst in 2008, the flight of private investors from the US stock markets threatened to trigger a global economic downward spiral. Well aware of how dependent its own growth model is on the dynamics of the US financial markets, the Chinese leadership acted, in a sense, like a global idealistic capitalist. It ordered Chinese state banks to invest in US financial markets and buy up US government bonds on a large scale.

At the peak of China’s involvement, 14 percent of US government bonds were ultimately owned by China. However, the major financial and economic crisis also marked the beginning of a turnaround. China began to increase the internal creation of fictitious capital, and the real estate boom in its own country replaced industrial goods exports as the main driver of growth. At the same time, US bonds were gradually sold off. Today, Chinese creditors hold just under three percent of the total stock.

Trumponomics represents something of an attempt by the leading capitalist power to find an emergency exit from the order it created itself, based on the free movement of goods and capital. The fact that the dollar will probably lose its previous function as a safe haven for private money capital seeking investment is not only accepted by many Trump advisors, but also desired. They consider a falling dollar exchange rate to be a prerequisite for their dubious reindustrialization program.

Accordingly, think tanks close to Trump are discussing ways of decoupling further US government debt from private return expectations. One idea is to rewrite US government bonds to a term of 100 years, with no interest payable in the first few decades. Because no voluntary buyers would naturally be found for such an “investment,” the following substitute has been considered: the US nuclear shield would be declared a “public good,” and countries wishing to come under its protection would be required to finance the US budget deficit by obliging their central banks to purchase these junk bonds. In the fever dreams of Trumpists, the European Central Bank and the Bank of Japan, among others, are assigned the role of US bad banks.