Trump's crazy plan to replace sanctions with tariffs

It would be a highly expensive mess. And that's _before_ you add the crypto madness.

[image of my and Abe’s new book, solely because the UK paperback arrived yesterday, and I am so happy to have my name on the front cover of a book with the Penguin logo that you wouldn’t credit it. Penguin paperbacks, along with those old Gollancz yellow hardcovers, are what I grew up thinking was The Good Stuff]

I’ve a piece with Abe Newman in the Financial Times today.* The argument is quite straightforward. Trump has been talking up a wild plan to replace financial sanctions with tariffs.

This is not in itself unusual: Trump’s general approach to policy proposals is like Henry Ford’s color options for the Model T: you can have any policy you want, so long as it’s tariffs. But it does have particular consequences for economic coercion, especially when you look at how it reinforces his ambitions for cryptocurrency.

To quote Trump at length, as we didn’t have room to do in the FT:

The problem with what we have with sanctions – and I was a user of sanctions, but I put them on and take them off as quickly as possible because, ultimately, it kills your dollar and it kills everything the dollar represents, and we have to continue to have that be the world currency. I think it’s important. I think it would be losing a war. If we lost – if we lost the dollar as the world currency, I think that would be the equivalent of losing a war.

That would make us a third-world country, and we can’t let it happen. So I use sanctions very powerfully against countries that deserve it, and then I take them off. Because look, you’re losing Iran, you’re losing Russia, China is out there trying to get their currency to be the dominant currency, as you know better than anybody. All of these things are happening.

You’re losing so many countries because there’s so much conflict with all of these countries that you’re going to lose that, and we can’t lose that. So I want to use sanctions as little as possible. One of the things that we have with tariffs is that I’ll say to them, you don’t honor the dollar as your world currency. Is that right?

You’re not going to do it? No, we’re not. I said, that’s okay. I’m going to put tariffs all over your product, and they’re going to say, sir, we’d love to honor the dollar as the world currency.

You know, tariffs, in addition to monetary and the money that we’ll take in, which will be bigger than you’ve ever seen in this country before, gives you tremendous political power for something like that, as an example. I stopped wars with the threat of tariffs. I stopped wars with two countries that mattered a lot. A lot of people would have been killed.

And so on - he’s also been riffing on different versions of this notion in some of his speeches. Trump has said elsewhere that countries that looked to leave the dollar (it’s not clear exactly what Trump means by this) would face “100% tariffs.” J.D. Vance has suggested to the Financial Times that NATO members would face tariffs if they didn’t spend enough on their militaries.

Trump, of course, is lying copiously about his track record, but the bigger problem with his comments is that the proposed switchover is obviously a terrible idea. The US is indeed addicted to sanctions, and there is some long term reason to worry that this may make the dollar less central to global financial exchange. But tariffs are much worse and liable to do bad things to U.S. power very quickly. Trump is proposing the equivalent of helping someone kick their unfortunate cocaine habit by taking up fentanyl-heroin speedballs instead.

As we say in the article, this plan doesn’t even make sense in Trump’s own terms. The reason that Trump and Vance are fixated on NATO military spending is that Trump thinks that the US taxpayer is subsidizing the security of allies. The actually nice thing about sanctions, from America’s point of view, is that it is just the opposite. When the US imposes extensive financial sanctions on Iran, so that foreign banks and businesses that touch the Iranian economy risk being cut off from dollar clearing, it isn’t the US taxpayer that is paying most of the costs. It is the foreign banks, businesses and Iran itself. Tariffs, in contrast, are direct trade restriction measures, which means that they hurt both the country being targeted and the country imposing the restrictions. And there is a US rival that is mostly obliged to use trade restriction measures to get its way. That rival is China. As we argue:

the dollar, if used carefully, allows America to conduct coercion on the cheap. China isn’t nearly so lucky. It has to pay to punish others. The Chinese government doesn’t control global finance, and has instead weaponised access to China’s markets to inflict economic pain on other countries. Cutting off market access hurts China as well as its targets, undermining its trade and weakening its prosperity. Chinese businesses and consumers lose their access to foreign goods, or have to pay more for them. For example, when China wanted to punish Australia, it manipulated regulations to stop imports of Australian coal. That didn’t work very well. Limiting market access reportedly cost China $2bn a week while encouraging Australia to find lucrative markets elsewhere. 

That is the approach that Trump wants to copy, using huge tariffs to cut off market access, instead of regulations. To borrow the language of his opponent, Kamala Harris, Trump wants to replace America’s economic key security weapon with a vastly inefficient “sales tax” on American consumers and businesses. Instead of taking advantage of China’s vulnerabilities, he wants to emulate them.

If the U.S. replaces financial sanctions with tariffs, it will be adopting a Trump-branded knock-off of Chinese financial coercion.

And it gets even worse. There are plausible reasons why Trump wants to do this: we mention his desire to relieve pressure on Russia by removing financial sanctions, and his love affair with crypto.

There is absolutely no way to be certain of this without inside information, but I would take a flyer on the proposition that crypto is a more important motivating force than Russia (Trump doesn’t need to get rid of the entire system of financial sanctions to rip up the measures imposed against Russia). We know that crypto is on Trump’s mind - he and his family have just launched a new crypto product. And if you have been paying attention to the policy debates, you will know that there is a big battle brewing between the Crypto Extended Universe and the U.S. Department of Treasury. I am guessing that by proposing to get rid of financial sanctions, Trump is making clear which side of that conflict he would take as president.

Two Wall Street Journal articles provide background. One of these is a recent excellent piece on the Tether stablecoin (which my colleague, Sam Chambers wrote up this morning), and which I would have dearly loved to have shoehorned into our FT piece if there had been any room at all. It explains how Tether has provided a variety of ways of working around the US dollar. The other … I am in no position to comment on its quality, but it does set out the other side of the story. It explains how U.S. authorities have been trying to tame crypto, and suggests that if they succeed the crypto universe will lose most of its remaining rationale for existence.

As the first article explains, Tether is the most important ‘stablecoin’ in the crypto universe. It is somewhat surprising that Tether still exists: it nearly capsized in the crypto market crisis), and is an incredibly sketchy operation. As Zeke Faux put it in his enormously entertaining and informative book, Number Go Up, Tether might as well be quilted out of red flags. But it not only has survived but grown huge! And it is, according to the Journal article, chock full of money laundering and sanctions evasion.

Tether has $120 billion in assets, mostly risk-free U.S. Treasury bills, along with positions in bitcoin and gold. Last year it generated $6.2 billion in profit, outearning BlackRock, the world’s largest asset manager, by $700 million. … With sanctions, Washington can cut adversaries off from the dollar and thus much of the global trading system, since all dollar transactions involve U.S. regulated banks. Tether’s popularity subverts those powers. … A United Nations report this January said tether was “a preferred choice” for Southeast Asian money launderers. … In Venezuela, financially isolated by sanctions and economic mismanagement, Tether found a ready user base. “USDT is the digital dollar for all Venezuelans,” Goncalvez said. … It is also the go-to currency for Russia’s elite. … Two months into the war, Zhdanova relayed a request from a client to a group of large Russian crypto traders, according to chats on Telegram. The client, who she said had their own bank, wanted to buy about $10 million of tether each month, needing $300 million’s worth in total, in exchange for cash that would be handed over in the United Arab Emirates or Turkey.

There is lots more detail in the original article - but that should give some sense. If you want to work around the US dollar, Tether, and the ecosystem around it, provide the most obvious way to do it.

Unsurprisingly, the US Department of Treasury would like to do something about that. Wally Adeyemo, the current Treasury Secretary, has asked for explicit authorities to treat crypto companies as banks, so that they can be prosecuted for breaking ‘Know Your Customer’ rules, enabling sanctions evasion and so on, and to “act against foreign companies providing assets like dollar-pegged stablecoins that benefit from the U.S. financial system even when they don’t touch U.S. territory or its banks.”

That, in turn, would have big consequences for the crypto industry. The most visible attraction of stablecoins is precisely that they don’t have to comply with pesky regulations. And there are people who would like to see stablecoins play a much bigger role in the financial architecture. Those people include the designers of Trump’s new crypto project, which has announced its intention to “Make crypto and America great by driving the mass adoption of stablecoins and decentralized finance.”

I think that it is extremely likely that Trump’s newfound hostility to sanctions (he used to adore them) has something to do with his love-affair with crypto, and his and his family’s intention to make lots of money from it. This is, of course, speculation. But even if that speculation is unfounded, a second Trump administration would almost certainly favor crypto and all its works over US sanctions power. Trump’s rhetoric may shift, depending on the last person he has talked to, but his attachment to his personal interests remains constant and paramount. And now he is buying into a project whose success depends on keeping crypto unregulated.

That has broader consequences. The more crypto succeeds on these terms, the easier it will be for people to work around the U.S. dollar. So if we see a second Trump administration, it is likely to undermine U.S. economic coercion through two mutually reinforcing policies - abandoning sanctions in favor of tariffs, and fostering the growth of an alternative “defi”** financial system centered on stablecoins rather than the U.S. dollar. So for something new and different, Trump’s actual policy preferences are likely to undercut the aspirations he loudly proclaims. A second Trump term would not strengthen the power of the dollar in the global financial system, and would possibly go some distance toward undermining it.

* The Financial Times only allows op-eds to be attributed to one author. So Abe and I take turns.

** The quotes around “defi” or “decentralized finance” are deliberate. In practice, as the dominance of Tether suggests, it is anything but decentralized.