President Trump’s massive trade and investment deals risk creating a fiat economy.

In an August 5 interview with CNBC, President Donald Trump hailed his new trade deals with Japan, South Korea, and the European Union as “the greatest trade deals in the history of our country,” based in part on the unprecedented $1.5 trillion in foreign investment guarantees secured from three of America’s largest trade partners. 

These investment pledges look good on paper, which may well be their purpose. But these handshake deals are unlikely to create new jobs and profits for American workers and investors. At best, they blend planned investments and aspirational goals into a bribe to avoid debilitating tariffs. At worst, they represent an enormously inefficient reallocation of capital and an unprecedented step towards American state capitalism.

It is easy to understand the appeal of these investment pledges for Trump: they are easily quantifiable wins that place the president in his preferred role as “dealmaker in chief.” In fact, an entire White House website is dedicated to cataloging what it calls “the Trump Effect”—various investments the White House attributes to Trump’s “America First economic policies.”

Foreign investment is a good thing, and America’s unrivaled ability to attract it has been a major competitive advantage for decades. But the investment pledges in these trade deals are almost certainly illusory. Total foreign direct investment into the United States from 2021 to 2023 totaled just over $1 trillion. 

The idea that three trade partners—even major ones like Japan, South Korea, and the European Union—could invest an additional 150 percent on top of that over the rest of Trump’s second term is almost assuredly a fantasy. In fact, Japan’s $550 billion pledge approaches the $780 billion it has invested in the United States since reestablishing economic relations after World War II. European Union officials have understandably called the pledge more of an intention than a guarantee.

However, Trump has been explicit that the real purpose of these pledges is to increase tariff negotiation leverage, not investment. “South Korea is right now at a 25 percent Tariff, but they have an offer to buy down those Tariffs,” Trump said in a Truth Social post the day before the trade deal deadline. The price? $350 billion for a 10 percent rate cut. For the European Union and Japan, these investment pledges also help correct what Trump sees as a deeply imbalanced trade relationship that has been in place for decades.

But what if these investments actually come to fruition? A significant distortion in American markets would likely result. If there were sufficient demand for an additional $1.5 trillion in foreign investment, that capital would presumably already be here. If we instead force a massive influx of new investments into a constant supply of investment-worthy businesses, we are likely to drive valuations even higher despite price-earnings ratios already well exceeding historical averages and amid other signals, like a resurgent meme stock rally, that the market is already running hot.

This is even more likely if those investments are channeled into specific sectors with limited absorptive capacity, such as semiconductors, biotechnology, or critical minerals. The chemical, industrial, and shipbuilding sectors may be able to absorb several tens of billions of additional investment. However, the vast majority of this capital will struggle to find a suitable home.

There is also the matter of how this capital will be allocated. While the mechanics are murky, the president’s intent is not: “Yeah, well, there are no details,” he told CNBC, referencing the European deal. “The details are $600 billion to invest in anything I want. Anything. I can do anything I want…”

Neither the United States government nor the Republican Party has historically been in the business of running the economy by fiat. In fact, both have long derided this sort of behavior as the worst kind of picking winners and losers.

Americans have rightly criticized these actions in other countries—most notably China—for decades, along with practices like taking “golden shares” or other privileged equity positions in national champions, erecting tariff barriers to close off markets from global competition, and making government kickbacks a condition for granting export licenses. Trump has now embraced all of these, and in so doing has turned the United States confidently, if perhaps only temporarily, in the direction of state-led capitalism.

This is the kind of behavior one would expect to see from emerging markets that cannot attract and retain capital on their own merits, rather than from the world’s largest and most innovative economy. And the significant risk for both American consumers and companies is that, if the United States insists on acting like an emerging market, our trade partners may start treating us accordingly. This could mean fewer deals, with more onerous terms and less favorable rates—hardly any of which are priced in today.

Foreign investment is a good thing, and Trump is right to pursue more of it. But in prioritizing headlines over fundamentals, he is more likely to deliver higher prices and volatility than a lower balance of payments.