Mar-a-Lago Mercantilism

Why the Strait of Hormuz is the Final Nail in the Coffin of the Washington Consensus

While this blog has maintained the the US does in fact benefit from reduced global oil flows given the United States’ position as a leading exporter, the US conflict with Iran is growing increasingly politically costly for the Trump administration and the US midterm elections are soon to rear their turgid faces.

In this context, Trump would benefit from an appropriate resolution to the conflict, but cannot afford embarrassment. His on-again, off-again strikes and “carrot and stick” negotiating style is increasingly emboldening the Iranian regime, while the pattern of TACO’ing on his worst threats (Trump Always Chickens Out) is growing increasingly costly with his base, who “want him to do something big”.

While the initial strikes came from a clear sense of asymmetric upside around decapitating, denuclearizing and de-militarizing (at least formally) the Iranian regime, the possibility of troops on the ground to “finish the job” would never have been politically feasible. Much as the regime is now emboldened and the country has experienced a “rally around the flag”, the US establishment can in fact achieve a game-breaking resolution out of this conflict: namely, if it is now legitimate for Iran to tax export through the Strait of Hormuz as a matter of compensation (or however it is rationalized), why should the United States not also engage in its own maritime entreaties across key passages, when it does in fact control the world’s most powerful Navy and has maintained a “world safe for commerce” for the past 80 years?

In this context of rationalizing what is ultimately the might makes right era of the mid-21st century, the United States has an opportunity to extract even more tax receipts from global commerce. With no foreseeable change to entitlement programs - at least until Baby Boomers have all moved on from Earth, which can still take another 20 or 30 years given modern medical technology - there is no feasible path forward for the US Federal System except to find receipts elsewhere.

Trump already attempted to furnish new receipts through direct and secondary tariffs, at one point expecting nearly $300 billion additionally per year. Despite legal setbacks and existing encumbering trade agreements, new assessments show that the US Federal Government can expect a net benefit of $1.2 trillion due to tariffs over the next decade, while the existing trade balanced has remained essentially unchanged, which would on one level imply that the market could absorb far more if there were otherwise more lenient legal circumstances - either from the courts or Congress.

This lends to a further nuance in the interaction between US global and domestic political priorities. Globally, the United States remains the center of the economic, political and financial system. US companies remain the largest and most powerful, drawing significant overseas investment, while limited market confidence has been conferred to China despite its consistent growth. Its currency is far less trustworthy than USD or Euro (saying something here) and it would never accept a strong currency to begin with because under no circumstances can it transition from an export-led growth model without fundamentally de-centering the CCP domestically.

This implied circumstance means that the US must continue to find revenues or monetizing debt, but monetizing debt has led to under-development domestically, inequality and political turmoil. Revenues can be found through taxes or state-capitalist investments (also an avenue of the US Sovereign Wealth Fund, where the government now holds stakes in more than 30 companies, though this roughly amounts to holdings under $20 billion). While in this circumstances, monetizing debt to facilitate trade deficits that lead to dollars which are ultimately recycled in US markets could make the US government quite rich on paper, it does not provide a solution to the underlying political tensions at home.

Cut to increasing revenues: what can the US actually due? Most Americans already perceive their tax burdens as quite too high. Most tax increases on the most affluent usually lead to more evasion and don’t necessarily drive increased revenues, as well as further discouraging domestic private investment (a set of problems that were addressed by the Kennedy Tax Cuts of the 1960s). Trump has left a mark of his style on the Republican Party for at least a generation, possibly two, but if Democrats were to take power, they would not only face a receipts problem, but they would arguably be under more pressure from “bond vigilantes” who can more often abide disorganized wars than they can the largesse of new social spending. While local socialists like Mamdani have implemented largely symbolic “pied-a-terre” taxes in order to undermine the position of the wealthy, they are hardly seeking to drive them out completely - they too are well aware of where America’s bread is buttered.

What follows is simple: Republicans are in need of revenues, and Democrats will be even more in need of revenues should they come to power. While most Americans believe tariffs have increased the cost of goods, it is not the primary source of Trump’s unpopularity. While inflation persists at a relatively modest hum, the impact of those tariffs have been mostly absorbed without much additional commentary. China must continue to supply its consumers, while a relatively strong domestic growth outlook means that wages can at least keep pace with the cost-of-living, which was not the case in the late stages of the Biden administration.

Any alteration to the current political mix achieved by the Trump administration would likely be a step backward for the US economy, while the US cannot credibly maintain increased foreign trade integration since the actions of Trump have essentially poisoned the well, undermining any possibility that the US will return in its adherence to the Washington Consensus. While left-economists have advocated increasing centralization of green investment and industrial policy as a means to maintain global growth, their lackluster history of picking winners and losers does not abide the simple fact that states must seek out security before they can seek prosperity. In this case, autarky in critical goods and industries is necessary before trade can be opened - much as the British Empire achieved a relatively advanced stage of industrial development before repealing Corn Laws in the mid-19th century, at which time is could press said manufacturing advantage on the world.

Essentially, the United States has created value for the world by maintaining global trade, but the populace does not feel that it extracts a concomitant amount of the value it has created. In this context, the US must reintroduce taxes on trade an order of magnitude larger than anything it has achieved from Trump’s initial tariffs, but it can only do so by finding rationale elsewhere in the international system.

Whether Trump realizes it or not, Iran has done that for him with the Strait of Hormuz. Where the United States can impose tariffs, export taxes and trade taxes - firstly on global seagoing passages in the Western Hemisphere, secondly increased tariffs on critical durable and industrial goods where it wants to maintain an advantage, and finally export taxes on energy and raw materials to Europe and Asia - could conceivably generate anywhere from $1 to $3 trillion in additional annual revenue depending on how aggressively global reaction plays out. One could imagine a couple hundred billion from energy, particularly as volumes stay high (Europe has committed to $250b in energy imports per year from the United States) and a few hundred billion between exports and trade passages (US has $2.1T in goods exports annually and 30% of nearly $14T in global trade crosses the North Atlantic Corridor alone, notwithstanding continued preference for the US in Southeast Asia ex. China) - and while export taxes would offer the most immediate reaction against growth, they are also the easiest tax to enforce (hence could be in smaller), and would go a long way to reducing prices domestically.

And while Trump may not take actions here, or may face too much resistance to pursue this entire set of actions, future administrations - of either party - will be forced to, because the overriding political constraints are simply too meaningful for any other policy choices to take precedence. This is, in fact, the easy way out - as painful as it may sound at first.

Over the long term, the new revenue generated will eventually decline - what you tax is ultimately what you discourage - but under this trade regime, the United States will also meaningful commit to its own reindustrialization and domestic redevelopment. Domestic receipts will rise in concert with increased economic growth, and much like when the US was the center of global exports, “Twin Deficits” can transition to some form of “Twin Surpluses”, which would have been conceivably possible in the 1960s save for the various instances of government largesse (Vietnam, Great Society, Landing on the Moon) at the time, mostly tied to maintaining the Global Empire which - in the modern day - both parties in Washington are mostly being forced to dismantle. In the truest of long-term states from there, some other version of a wage-price spiral could take this out, as was the case in the 1970s, but even as surpluses are realized (and a strong dollar remains relatively obvious), Washington will almost certainly find something else to spend all that money on.