May 17 2025 - 5:00pm
US Treasury Secretary Scott Bessent once described tariffs as the “gun […] on the table”. The gun may have gone off a tad early, but ultimately the image is correct. Yet it’s not about the gun, so much as it’s about the table. Something of a White House strategy appears to be crystallizing, in which goods tariffs will still play a role. Europeans could end up with a 10% tariff for most goods, and more for steel, cars and pharmaceuticals. But the heavy lifting in what Bessent this week called “big, beautiful” rebalancing will have to come from elsewhere.
Ending global imbalances would mean China, the EU and the US all altering their behavior. China will have to consume more, the EU will have to end its beggar-thy-neighbor strategy, and the US will have to save more. America has the hardest task here, and it is difficult to see how it will cut its budget deficit. The current Congressional budget draft does not foresee this; the idea that you can balance the budget through tariffs is absurd.
The US budget deficit was $1.8 trillion in 2024, equivalent to 6.4% of GDP. To reduce it to 3%, a target set by Bessent, would require a budget cut of approximately $900 billion. A 10% tariff would raise about $300 billion per year. Analyst Michael McNair has suggested that the US could tax capital flows — the other side of the balance of payments, which is mostly ignored by goods-obsessed media and politicians. McNair argues that the US could reintroduce a 30% withholding tax on earned income, and launch a sovereign wealth fund for investment capital outflows. The specific goal of this would be depressing the value of the dollar, and in extremis the imposition by Donald Trump of capital controls.
Stock markets have rebounded thanks to the recognition that tariffs will ultimately not incur as much damage as most initially thought. Once we are discussing withholding tax or capital controls, we are talking about something else altogether.
The EU is still a contributor to global imbalances. US pharma companies are producing in Europe using a known tax avoidance scam, a situation which is set to be ended by the Trump administration. Europe is a collection of mostly small- to medium-sized countries with built-in beggar-thy-neighbor economic models. The continent is ill-prepared for what is about to hit.
China is by far the world’s largest contributor to the global savings imbalance, and this is where most of the heavy lifting will have to take place for Bessent’s idea of a beautiful rebalancing to work. Germany went through a similar phase in the Seventies when it was persuaded by the US to raise its budget deficit to counterbalance export surpluses, while America imposed high interest rates to drive down inflation. This was during the early years of the G7, when such cooperation was still effective. Back then, however, this was not a structural adjustment; the task today is far greater.
No one can predict exactly how a Ponzi scheme will end, but we know that it will end. The same principle applies here. Global imbalances are unsustainable because they eventually clash with a conflicting political objective. Consecutive US administrations have recognized that the disappearance of the country’s industrial base has spawned a geopolitical threat which supersedes its military supremacy. If you rely on China for your military supply chains, or for pharmaceuticals, you are the weaker country. Many economists took a long time to realize this. Many others still haven’t.
This is an edited version of an article which originally appeared in the Eurointelligence newsletter.
