There is a way to rebalance America’s trade with the rest of the world, and it isn’t through tariffs. We should instead be laser-focused on raising our export capacity.
That means investing in techno-industrial assets, reducing the time it takes to get permits and creating the financial structure to scale up domestic production for global markets.
America’s trade deficits are not a result of cheating. They are the mirror image of our large capital surpluses, which in turn derive from the dollar’s status as the preferred parking spot for the world’s savings.
Until we learn to channel those capital surpluses into productive domestic investment, tariffs — no matter how large — will result in little improvement in trade deficits.
Since 1971, the United States has run persistent trade deficits, even as tariffs fell globally. The dollar is the world’s reserve currency, which creates constant demand for dollar-denominated assets — Treasury bonds, real estate, tech stocks. This is one reason that people refer to our position as the holder of the global reserve currency as an “exorbitant privilege.”
But there is another view of that “privilege.” Instead of those inflows financing a new generation of productive enterprises, foreign holders of dollars typically prefer to keep them in relatively stable and liquid paper assets. Meanwhile, American manufacturers have faced decades of chronic underinvestment, leading export industries to wither and die.
That is what led JD Vance as a senator in 2023 to reflect on a potential parallel between the classic “resource curse” (the idea that countries rich in fossil fuels often tend to remain poor) and the reserve currency status of the dollar.
Republicans and Democrats now recognize the need to rebuild America’s industrial base, if only for national security reasons. The United States cannot deter Beijing if we are dependent on Chinese supply chains for our military drones. But reindustrialization means more than protecting existing factories behind a tariff wall. It requires building new industries and pushing them to aggressively compete with rivals, scale up production and export their products. Countries don’t get rich by creating expensive substitutes to cheaper imports; they get rich by making things the world wants to buy.
Consider East Asia’s success stories. South Korea, Taiwan and China increased their industrial capacity not primarily by insulating companies from competition but by subjecting them to it. Through a policy known as “export discipline,” businesses received state support only if they could prove themselves in global markets. Those that failed the test of export markets lost their subsidies and died. Those that succeeded became globally competitive.
America once had its own version of this approach. The foundations for the postwar manufacturing economy were laid by public institutions like the Reconstruction Finance Corporation and the U.S. Maritime Commission. During World War II, the federal government directly or indirectly owned and funded thousands of industrial plants, including ones producing aluminum, aircraft, rubber and ships.
In exchange for subsidies, companies were often required to increase production quickly, including into new sectors. Many of these wartime investments subsequently became postwar export industries. Detroit’s auto industry, for example, expanded out of wartime investments in the General Motors diesel engine division, which developed innovations in lightweight engines for tanks, landing craft and marine vehicles.
Later in the 20th century, America began making more complex, profitable goods thanks to large federal investments in science and technology. The Apollo program not only sent astronauts to the moon but served as a catalyst for research into and development of technologies that eventually found invaluable commercial uses. Silicon Valley’s leadership in tech — from satellites and semiconductors to the internet economy — was overwhelmingly seeded by the Defense Department. In both cases, perceived competition from the Soviet Union spurred America’s builders and innovators to shoot for the stars.
The Trump administration has taken the opposite approach: slashing federal science and research-and-development programs while cocooning incumbent industries in a wet blanket. This is far more likely to accelerate the decline in America’s industrial prowess than take it to new heights, not least because the tariffs also affect vital parts used by domestic manufacturers.
The Energy Department’s Loan Programs Office is a case in point. In recent years, it has quietly financed billions in advanced manufacturing, from electric vehicle batteries to nuclear energy technologies. With over $400 billion in lending capacity, it is the closest thing the United States has to a modern industrial bank. But rather than build on this success, the Trump administration is reported to be putting it on the chopping block.
Instead of cutbacks and tariffs, what America needs is a full-spectrum industrial strategy: an Industrial Finance Corporation to invest in tradable sectors, an expansion of export credit guarantees and the creation of special economic zones to cluster suppliers and lower input costs. Tariff exemptions for exporters, not across-the-board increases, are the best way to ensure our manufacturers can compete globally.
And yes, automation will need to be part of the picture. The accelerating rate of progress in artificial intelligence and robotics means manufacturing is unlikely to be a robust source of job creation ever again — and that’s not a bad thing. If America is to become an export-oriented powerhouse, it will be because A.I. and automation make our factories vastly more productive in spite of our aging demographics and higher labor costs.
This also applies to the efficiency of our export infrastructure. Yet with President Trump’s blessing, the longshoremen’s union continues to block port automation, even as our rivals build robotic ports that hum at all hours. To compete, we must find a way to pair labor fairness with global standards of productivity.
The Trump team is about to impose steep fees on Chinese-built ships docking in our ports while mandating that 15 percent of U.S. exports travel on American-flagged and -crewed ships within seven years — something that will add hundreds of dollars per container in shipping costs. The impulse is understandable. China now builds over half the world’s commercial fleet, while the U.S. shipbuilding industry has atrophied.
But this too risks backfiring. Without efforts to significantly raise the productivity of our shipyards, American exporters, already stretched thin, will merely see their logistics costs soar.
Whatever the Trump administration does for industrial support, above all it must back innovative firms with export potential and not coddle unsuccessful but politically connected ones.
The alternative is an export-disoriented America that tries to plug its deficits by taxing consumption and mistaking isolation for strength.
Samuel Hammond is the chief economist at the Foundation for American Innovation and a fellow at the Niskanen Center.
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