From Anchor to Anvil: America’s Drift Away from the System It Built

Last August, my wife and I visited the Mount Washington Hotel in Bretton Woods, New Hampshire. While the landscape is stunning, what truly drew us there—since we are both economists—was the desire to stand in the very spot where, over three weeks in July 1944, delegates from forty-four nations laid the groundwork for a new world economic order.

What emerged from Bretton Woods was a vision of international cooperation grounded in three core pillars: the integration of national economies through trade and capital flows; institutional coordination via the International Monetary Fund and other multilateral organizations; and a stable geopolitical anchor—quietly yet decisively—provided by U.S. leadership.

This architecture has endured for nearly eighty years, and its economic legacy is nothing short of extraordinary. In 1950, 61.1 percent of the global population lived on the equivalent of $7 (2024 dollars) or less per day—the threshold widely used to define extreme poverty. By 2024, that share had fallen below 13 percent, and the pace of improvement continues. Never in recorded history have so many escaped poverty so quickly.

Few nations have benefited more from this system than the United States. After living here for nearly three decades, I still find the scale of American prosperity staggering. In the last forty years, no large, advanced economy has experienced faster growth. A child born today into an upper-middle-class household in Minneapolis or Atlanta will enjoy life opportunities—educational, professional, and technological—that remain inaccessible to all but the most privileged Europeans or Asians.

This precisely explains why the current direction of U.S. policy is perplexing. At a time when the global economic order faces increasing strain, the United States—particularly under its current leadership—is actively disengaging from the very system it established, with minimal reflection on what is being lost.

The tariff announcement made by the U.S. administration on April 2, 2025, is, quite simply, incomprehensible. Under the new policy, the United States intends to impose tariffs proportional to the size of its bilateral trade deficit with each trading partner, subject to a minimum rate of 10 percent. Since no existing economic theory supports this formula (and even more shockingly, the formula was misapplied—using an incorrect figure), economists across the political spectrum have been left baffled. After several days of reflection, I can only echo the words of physicist Wolfgang Pauli: “It’s not even wrong.” The policy fails to meet even the most basic threshold of conceptual coherence.

Even if one accepts that reducing the U.S. trade deficit is a legitimate goal, there is no economic justification for doing so on a country-by-country basis. Bilateral trade balances reflect comparative advantages, global supply chains, and consumption preferences—not pathologies in need of correction. Countries with overall trade surpluses routinely run bilateral deficits with some partners. That’s the expected outcome of an open, integrated global economy.

More fundamentally, the trade balance (technically, the current account) equals national investment minus national saving. This is not a theory but an accounting identity—true by definition. If the United States experiences a trade deficit, it is because it invests more than it saves. Period.

In 2023, the U.S. current account deficit was 3.3 percent of GDP. Why did the U.S. save 3.3 percent of GDP less than it invested? There were two reasons: one good, one bad.

The good reason is that the U.S. is a prosperous, innovative economy with abundant investment opportunities. Like a promising firm borrowing to expand, the U.S. borrows from abroad to finance productive ventures. A modest current account deficit is consistent with this dynamic. But 3.3 percent may be too high; 1 percent of GDP might better reflect a sustainable balance between opportunity and risk.

The underlying reason is that the U.S. saves too little. National saving consists of two components: private saving and public saving. Public saving represents the difference between tax revenues and government spending. Herein lies the problem: in 2023, the federal budget deficit was 6.3 percent of GDP—a staggering figure for a country at peace and near full employment. To put it another way: the U.S. private sector saved 3 percent more than it invested; the remaining 3.3 percent gap had to be financed by foreign capital—that is, by running a current account deficit.

If the U.S. wants to reduce its current account deficit to a more sustainable 1 percent of GDP, the only path is to reduce the federal budget deficit. This should be done anyway—not just to improve the external balance but to safeguard long-term fiscal sustainability.

A federal deficit of around 2 percent of GDP would probably be sufficient to generate a current account surplus. Achieving this requires a mix of higher taxes and lower spending. As the Department of Government Efficiency (DOGE) has shown, while there is waste in federal spending, it is not remotely large enough to close the deficit. The four biggest budget items in the federal budget are Social Security, Medicare, interest on the debt, and national defense. Cutting any of these meaningfully is politically difficult and economically painful.

Moreover, tariffs will not generate the needed revenue. They would raise only a fraction of what’s required and introduce far greater distortions than more efficient, broad-based taxes. Worse, they risk triggering retaliation and undermining the very export sectors we should be promoting.

What happens when countries avoid this reality and turn to protectionism instead? Economic history has an answer. In the twentieth century, countries like India, Argentina, and Spain embraced autarky, erecting high trade barriers. Spain, for example, had the world’s highest average tariff in the first half of the century. Yet its current account deficits persisted. Tariffs didn’t solve the problem—they just hurt consumers, stifled productivity, and slowed growth. India, Argentina, and Spain fell behind their peers, often in dramatic ways.

Why did protectionism fail? Because the reduction in imports shifted demand to domestic goods, raising pressure on limited resources—without any increase in national saving. Real interest rates had to rise to suppress investment and boost saving. That, in turn, appreciated the currency, making exports less competitive. The result: a current account deficit largely unchanged, but a more distorted economy with higher prices and reduced variety.

This cannot be emphasized enough: trade barriers are economically costly and generate huge misallocation of real resources. Yes, the U.S. had high tariffs in the late nineteenth and early twentieth centuries and still grew rapidly. But the best economic historians agree: it would have grown even faster without them. America’s potential was so great around 1870 that not even bad policy could fully suppress it—but that is no excuse for repeating past mistakes.

Economists recognize a few limited cases where tariffs might be justified: during deep recessions to support demand or as strategic tools against countries that abuse trade rules. As grounds for the latter sort of tariff, China’s record over the past two decades—industrial subsidies, forced tech transfer, and market restrictions—fits the bill.

However, the actions of countries such as Australia, Canada, Mexico, the EU, Japan, and South Korea—let alone the uninhabited Heard and McDonald Islands, which face a 10-percent tariff—do not. While no country has a flawless trade regime—including the U.S.—there is no evidence whatsoever that these partners systematically skew the rules against the U.S.

As for Peter Navarro’s claim that Europe’s VAT system unfairly disadvantages U.S. exports, it reflects a deep misunderstanding. VAT is a destination-based tax: it applies equally to imports and domestic goods and is rebated on exports. There is no bias. In fact, the VAT was designed precisely to avoid this bias within the EU free trade zone. The persistence of this myth says more about the administration’s lack of basic economic expertise than it does about the facts.

Finally, the trade war risks undermining the dollar’s role as the world’s reserve currency and the status of U.S. Treasuries as the ultimate safe asset. While a full explanation of how this might unfold is beyond the scope here, as it involves a somewhat technical discussion—and the events of the past few days are especially alarming in this regard—it is enough to say that the welfare costs for the United States would be immense and potentially irreversible.

The U.S. does face real challenges: a large structural fiscal deficit and unacceptably high poverty in rural areas and disadvantaged urban communities. But trade restrictions won’t solve these problems—they’ll make them worse. Barriers reduce efficiency and shrink the economic pie.

It is time to put the adults back in charge of economic policy—those who rely on evidence, logic, and long-term thinking. They haven’t been in charge for some time. And the costs of that neglect are becoming painfully clear.

Note: This article borrows some material from a previous article published in ABC, a Spanish daily, on April 5, 2025.

Image by Travel mania and licensed via Adobe Stock.