The United States is exporting a contradiction, not bewilderment

THE COMPETITOR headline has the right instinct but the wrong noun. The rest of the world is not bewildered by America. It has worked out what is happening. What concerns allies, trading partners and foreign investors alike is a structural contradiction: the United States demands that the globe finance its deficits while making itself an increasingly unreliable partner to hold the resulting debt. The bewilderment is not overseas. It is in Washington, where the economics and the geopolitics are being pursued as though they were separate problems.

The contradiction has three moving parts. The first is tariffs. Since taking office, the Trump administration has built an elaborate edifice of duties on allies and adversaries alike. The second is fiscal profligacy: a deficit that the Congressional Budget Office projects at 5.8% of GDP in 2026, rising to 6.7% by 2036, with federal debt climbing to 120% of GDP over the same period. The third is the dollar's role as the anchor of the international financial system, which only works so long as the rest of the world trusts that America will not play fast and loose with the assets it holds.

Start with trade. The Supreme Court struck down the administration's use of the International Emergency Economic Powers Act to impose tariffs on February 20th 2026, in a 6-3 ruling that held the law does not authorise the president to tax imports. Chief Justice Roberts invoked the major-questions doctrine: a power of such vast economic significance requires clear congressional permission. IEEPA, the court decided, simply does not provide it. The ruling sent the effective US tariff rate falling from roughly 10% to around 7%, according to J.P. Morgan.

That was never going to be the end of the story. The administration pivoted to other statutory authorities. In June it used Section 301 of the Trade Act of 1974, which targets foreign practices deemed unfair to US commerce. On July 24th it announced new duties of 10% to 12.5% on more than 80 countries, justified under the thinnest of pretences: alleged failures to restrict goods made with forced labour. The next day it announced 50% tariffs on $20 billion of Canadian imports, set to take effect on August 19th. J.P. Morgan expects the overall tariff rate to creep back to 9%-10% as new measures accumulate, though further legal challenges are inevitable.

What is remarkable about this whiplash is not the protectionism - which is by now familiar - but the institutional chaos that surrounds it. The government has accepted $85 billion in potential IEEPA tariff refund applications. Companies are litigating over whether refunds belong to the importer of record or the downstream buyers who absorbed the cost. A trade policy that generates more courtroom activity than customs entries is not a strategy; it is a liability.

To be sure, the political incentives are clear. Tariffs are visible. They make protection look like action. They are also, in Mr Trump's hands, a negotiating tool and a source of revenue, however modest relative to the scale of the federal budget. The appeal to voters is obvious: they see duties announced, not the invoices that follow. The trouble is that tariffs rarely rebuild the industries they claim to save. They more often create a constituency for permanent inefficiency, while the costs fall on consumers and businesses that cannot easily substitute domestic for foreign inputs.

That brings the second part into focus. The US current-account deficit nearly doubled between 2019 and 2024, from 2.1% to 4% of GDP, before narrowing slightly to 3.6% in 2025, according to the Brookings Institution's analysis for the CEPR Paris Report. The deficit reflects vigorous domestic demand - itself fuelled by massive pandemic stimulus, persistently large fiscal deficits and the artificial-intelligence investment boom - met with a willingness of foreign savers to buy American assets. In the first nine months of fiscal year 2026 alone, the US borrowed $1.4 trillion, $35 billion more than at the same point in FY2025.

The system works because foreign investors hold roughly 40% of outstanding US Treasury securities. That is the plumbing of global finance: the US runs a current-account deficit, foreigners supply the savings, and the dollar flows back into safe assets. But the plumbing assumes predictability. When the same government that issues the debt also threatens the economic interests of those who hold it, the assumption begins to fray.

The irony is not lost on the countries being tariffed. Canada's economy shrank by 1.6% in the second quarter of 2025, largely on collapsing exports, and its unemployment rate climbed above 7% in August, as the Council on Foreign Relations documented. The Canadian response has been strategic rather than emotional: diversifying trade towards Europe and Asia, bolstering defence spending, and trying to reduce economic dependence on the United States. Prime Minister Mark Carney has called the rupture in transatlantic ties not a transition but a structural break.

The European Union is following a similar logic. The imperfect trade deal struck at Mr Trump's Turnberry golf resort in July did not resolve the underlying tension. Instead, Brussels is accelerating talks with Canada, Japan, South Korea and Mercosur. As the Council on Foreign Relations's analysis puts it, the deal may prove to be the beginning of Europe's strategic awakening: forced dependence on American energy and defence is setting in motion the very diversification that Washington finds inconvenient.

This is where the real story lies. The academic literature, including a recent study in the journal Research in International Business and Finance, describes the result as purposeful institutional innovation, not fragmentation. The EU is aligning its agreements with the Comprehensive and Progressive Trans-Pacific Partnership, a 12-member Pacific bloc. Middle powers, urged on by Mr Carney's Davos speech in January, are exploring ways to harmonise rules of origin and strengthen supply chains among like-minded partners. They are not building a bloc against the United States. They are building a bloc in case of the United States.

True, these efforts are incremental and their success is by no means assured. Aligning EU and CPTPP agreements across nearly 40 countries will be slow. The WTO remains paralysed. And for all their diversification, most of these economies still depend on the American market more than they would care to admit. But the direction of travel is clear. Trust, once eroded, does not reconstitute itself through press conferences and reciprocal deals struck at golf resorts.

What would a wiser American policy look like? The first step would be to stop pretending that tariffs are costless leverage. They are a tax on domestic consumers and a signal to foreign investors that American policy is volatile. The second would be to confront the fiscal trajectory. A 5.8% structural deficit in an economy with low unemployment is not a temporary post-pandemic hangover; it is a drag on global financial stability. The Congressional Budget Office projects that interest costs alone will drive further spending growth, creating a feedback loop that makes deficits self-reinforcing. Nobody in Washington is proposing a credible plan to break it.

The deeper problem is institutional. The Supreme Court's decision showed that the judiciary can still push back on executive overreach, even in the trade arena. But the administration's swift pivot to alternative legal authorities demonstrates that a determined president will find another door. The structural answer lies with Congress: clear statutory limits on tariffs, a credible fiscal framework, and a trade policy that treats allies as partners rather than hostages. None of these options is currently on the table.

The rest of the world has stopped pretending that this will sort itself out. Canada, Europe, Japan, and their Pacific partners are quietly rewiring the system. The United States, for all its leverage, is exporting not bewilderment but a contradiction that its trading partners are learning to navigate without it.

The danger is not immediate collapse. It is slower: weaker investment, higher costs and a politics of permanent subsidy at home, and a multilateral trading system that grows increasingly irrelevant abroad. Better to start fixing the one thing Washington actually controls: itself.