Insight Focus | Foreigners will pay

“To see economic policy as a problem of choice between rival ideologies is the greatest error of our time.” - JK Galbraith, 1975.

History is littered with examples of seemingly unconquerable countries losing their global dominance – and it is often economic forces that topple them. The collapse of the British Empire following World War II is a good example. The UK had become heavily overindebted, largely because of military expenditure, but also due to broader economic mismanagement and geographic overreach. Eventually, despite being on the winning side of WWII, the British Pound lost its status as the world’s reserve currency and global dominance migrated elsewhere: the US took the mantle from the UK which had in turn taken over from the Netherlands, itself a victim of economic and military overextension. An example from ancient history - the collapse of the Roman empire, burdened by years of military and public welfare expenditure - bears many of the same hallmarks.

He may be unconventional, but Donald Trump should perhaps be applauded for recognising that the US is now exhibiting some of the same symptoms. Dependence on foreigners to produce goods and finance consumption has risen precipitously, resulting in a debt pile equivalent to more than 100% of GDP to which budget deficits add a couple of trillion dollars every year. In fact, the US now finds itself in the unenviable position of running one of the largest fiscal deficits (7% of GDP) in the world, along with a very large current account imbalance (4%). Sustained twin deficits on this scale are possible only thanks to the sheer size of the US economy and by the fact that the US Dollar is the world’s de facto reserve currency. Those characteristics have underpinned global demand for US dollar assets, in turn allowing the US to borrow relatively cheaply and to take on levels of debt that would be dangerously destabilising for others.

Trump’s initial approach to remedying this unsustainable situation was to mandate DOGE to slash government expenditure. Few believed this would make any meaningful progress. And indeed, Trump has now implicitly acknowledged this and switched to a fiscal stimulus strategy instead, aiming to accelerate economic growth with his “big, beautiful bill”, currently being scrutinised by the Senate. He hopes this will solve the US debt problem over time, even though it will add to it in the near-term (he even advocates scrapping the US’s debt ceiling).

He also intends to force foreigners to contribute, headlined by his aggressive use of tariffs as tools to wield alongside the US’s enormous economic power to bully allies and rivals alike to the negotiating table and to make concessions intended to finance the fiscal stimulus, and promote US industry.

Tariffs are not new and can be helpful where used judiciously. They can be traced back to ancient civilisations, including Rome where they were used to generate revenues and to regulate trade. More recently, the EU imposed incremental 8-35% tariffs on electric vehicle imports from China in an attempt to neutralise the perceived unfair advantages conferred on Chinese manufacturers by state subsidies and lower production costs. Unsurprisingly, the Chinese retaliated, applying additional duties to EU brandy imports, thereby demonstrating the risk of reciprocation which can end up damaging both sides.

Apparently undeterred by the EU’s experience, Trump opted for a shock and awe approach which took the US perilously close to a much more comprehensive and damaging trade war with China, and possibly even with the EU itself. Fortunately, bilateral deals are being struck with China and others, providing hope that the most extreme tariffs will be discarded. Legal challenges from within the US add to this expectation. Nonetheless tariffs look likely to remain at multi-decade highs because Trump sees them as a much-needed source of revenue. For example, despite many misleading headlines, the recent UK-US deal covers only a small fraction of economic activity, while leaving the baseline 10% tariff on all goods in place. And this despite the fact that the US runs a trade surplus with the UK, making it what Trump calls one of the “good guys”.

Trump sees tariffs as a way of helping to address US economic imbalances at the expense of others, one part of what some now call a “foreigners will pay” approach that also includes a variety of other tactics. Consider, for example, the proposal to sell Green Cards to foreigners wealthy enough to stump up the $5m price tag. More perniciously, there has been discussion of a withholding tax on foreign holdings of US assets, and most recently a tax on overseas remittances by non-US nationals which could end up depriving some of the poorest countries of billions of dollars. And the proposed “most favoured nation” framework intended to peg US pharmaceutical prices to the lowest price paid in any other developed country will, if introduced, almost certainly mean drug costs outside the US rise as pharmaceutical companies act to defend pricing in what is invariably their most important market. Most egregiously, shutting down USAID at a moment’s notice immediately deprived the world’s poorest of some of the most basic necessities of life. Foreigners will pay, indeed.

The truth is, though, that this approach will not be pain-free for the US. Consumers will immediately pay more for imported goods, and even once US manufacturers have had a chance to spool up capacity (which may take several years), it is likely that domestically produced goods will cost more than imports. That is, after all, one of the fundamental reasons why the US trade deficit has become so enormous in the first place. Some of the US’s most successful and valuable companies are global and may now have to deal with new frictional costs in their cross-border activities. Indeed, all US exporters will be directly exposed to any slowdown in global economic growth and to reciprocal tariffs. And the US may find its cost of borrowing is now permanently higher because those directing global capital flows, including multinational corporates and institutional investors, may reconsider their view of the US as an unquestionably reliable partner: recall that Trump is not above threatening to seize foreigners’ US assets, as he did in January with Columbia for not playing ball on the repatriation of illegal immigrants. This may lead overseas investors to diversify away from the US (potentially to the benefit of Europe and Asia). Kicking out overseas students from prestigious universities will reduce the implicit cross-subsidy they bring to poorer US students on discounted fees. Cheaper pharmaceuticals sound great but present a double-edged sword: US patients may find access to the latest and greatest drugs becomes more constrained, and cuts to R&D budgets may mean next generation drugs are slower to arrive, if they arrive at all. And that would be to everybody’s detriment.

The idea that the rest of the world has been getting a free ride at US taxpayers’ expense is a simple yet powerful message that Donald Trump delivered very effectively to his voters. The notion that it’s now time for some payback and that foreigners must bear some of the cost of getting US finances back under control flows directly from this. However, this conveniently ignores the myriad economic benefits the US has received at the expense of its overseas partners: cheap and seemingly bottomless access to credit, low cost goods, the ability to attract the world’s best and brightest, and free access to global markets for its leading companies, for example. All are threatened by today’s more protectionist America First ideology. Near-term, President Trump’s fiscal stimulus plans need to be financed and US over-indebtedness will have to be addressed sooner or later. That will mean economic pain for everyone - including those who just voted for him.

This article was written on 10 June 2025.