Trump’s Embargo Threat Spends the Leverage It Needs

On September 4 President Donald Trump threatened to halt U.S. trade with every country that runs a goods surplus against America unless the Federal Reserve cuts interest rates. He posted the demand after the Labor Department said nonfarm payrolls rose by 162,000 in August, with unemployment unchanged at 4.1 percent. The same week, economist Paul Krugman, preparing a talk on economic size and economic power for the European Central Bank’s research conference on September 16, used the episode to walk through weaponized interdependence, the idea that governments now treat trade cutoffs as tools of coercion.

The U.S. market is still a hub others cannot easily replace. Using it as a club against the central bank, while China already squeezes the metals American factories cannot swap overnight, is how that hub teaches the spokes to look for another route.

Trump Tied a Trade Embargo to a Rate Cut

The jobs print landed well above the 31,000 average monthly gain over the prior 12 months. Food services and drinking places added 59,000 jobs, and the labor force participation rate rose to 61.6 percent. That mix, on its face, argues against cheaper money. Trump treated it as proof America is a stronger credit and should have “the LOWEST RATE of any country in the World.”

He aimed the warning at the Fed board and at Kevin Warsh, his pick to replace Jerome Powell, telling them to “BE PATRIOTS for a change.” The trade half of the threat was broader than any tariff schedule. He said he would stop trading with countries with which the United States has a deficit, called that step better than tariffs, and said the Supreme Court’s tariff ruling had already conceded an “absolute right” to do it.

LOWER THE RATE OR I’LL STOP TRADING WITH COUNTRIES WITH WHICH WE HAVE A DEFICIT, which the U.S. Supreme Court, in its ridiculous and very costly Tariff decision, strongly acknowledged “the President” has an absolute right to do. ITS BETTER THAN TARIFFS!

Donald Trump, President of the United States, Truth Social, September 4, 2026

In the Oval Office he put the economics even more bluntly, saying that if the United States does not trade with those countries, “they don’t have any money to pay the bills,” and that cutting a bilateral deficit is as simple as not trading. He has also said an embargo could be done with “one swipe of the pen.”

The Census Bureau and the Bureau of Economic Analysis, in their September 3 release, put the July $88.6 billion goods and services deficit up $17.4 billion, or 24.4 percent, from a revised $71.2 billion in June. Exports fell $6.6 billion to $310.7 billion. Imports rose $10.8 billion to $399.3 billion. The goods gap widened to $119.6 billion; the services surplus ticked up to $31.0 billion. Year to date, the deficit is still $188.4 billion, or 29.6 percent, smaller than in the same stretch of 2025, because exports are up 12.0 percent. July moved the wrong way for anyone selling a shutdown as a cure.

The Two Ways a Hub State Squeezes

Henry Farrell of Johns Hopkins and Abraham Newman of Georgetown coined “weaponized interdependence” in 2019 in International Security. Their point was structural. Global finance, data, and some supply chains did not flatten into a web of equals. They piled up around a few nodes. A state that has legal reach over those nodes, and the domestic machinery to use it, can turn other countries’ connections into leverage.

HOW A HUB TURNS TRADE INTO PRESSURE

• The panopticon: Control of a central node lets a government watch the money, messages, or goods that have to pass through it.
• The chokepoint: The same node can be closed, cutting a rival off from payments, chips, minerals, or a market it cannot quickly replace.
• The jurisdiction test: Size alone is not enough; the hub state needs courts, regulators, and firms that will actually enforce the cutoff.

They tested the idea on SWIFT and on the internet’s cable landing points, both of which still run through U.S. legal space. Dollar clearing remains the cleanest American version of that map. Tariffs are a related tool, but they are a tax on a flow. An embargo is an attempt to kill the flow. Farrell and Newman named panopticon and chokepoint effects for network cutoffs, and they already flagged “potential overuse” and the reply strategies of the states being squeezed.

The International Monetary Fund made that problem the theme of the June 2026 issue of Finance & Development. Christopher Clayton, Matteo Maggiori, and Jesse Schreger argue that control of choke points confers power when the point is financial plumbing, a technology, or a critical commodity. Gita Bhatt, the issue’s editor, put the limit in one line: “Resilience matters, but so does restraint.” Jeffry Frieden, writing in the same issue, listed the bill as lost efficiency, slower innovation, weaker credibility, and strain at home.

China Already Runs a Tighter Choke

Trump’s list of deficit partners is long. China’s list of things the West cannot substitute is short and sharp. Rare earths are 17 metals used in small amounts in magnets, turbine coatings, electronics, and weapons. Beijing does not need to close every port to make that felt. It licenses the ounces that sit inside the machines.

THE RARE EARTH CLOCK

1. April 4, 2025: China puts export licenses on seven heavy rare earths, related compounds, and magnets, and auto plants in the United States, Europe, and Japan scramble for supply.
2. October 9, 2025: Controls widen to five more elements and to any foreign-made part with Chinese-origin rare earth content or Chinese processing technology, a rule that reaches far beyond China’s docks.
3. November 2025: After a Trump-Xi meeting in Busan, Beijing suspends the October package for a year, through November 10, 2026, while the April licenses stay in force.
4. June 22, 2026: The Ministry of Commerce tightens dual-use export rules on ten U.S. companies, a list that includes MP Materials and USA Rare Earth, and treats the move as a national security and non-proliferation step.

The International Energy Agency, in its Global Critical Minerals Outlook 2026, says a full rollout of those controls could put $6.5 trillion a year of factory output outside China at risk in autos, high-tech, defense, and energy. The United States and Europe each face more than $1.5 trillion of that exposure. Autos alone account for more than $3 trillion. In Europe, prices for dysprosium and terbium have run about five times Chinese domestic levels, a spread that is the market’s way of saying the spare supply is not there.

The Pause Runs Out in November

Diversification is moving, just not on political time. The IEA puts China’s share of rare earth refining at 85 percent last year, down from 90 percent in 2023. Public money for new mineral projects more than quadrupled between 2023 and 2025, to $65 billion. That still leaves a decade-shaped hole in magnets and in the heavy elements. CSIS researchers tracking customs flows found China shipped 17 tons of yttrium to the United States in the eight months after the April 2025 curbs, against 333 tons in the eight months before. Aerospace shops use yttrium in thermal coatings on engine blades; they have been rationing.

The pattern is not a global shutdown. Shipments to Europe, Japan, South Korea, and ASEAN recovered, and in some metals they ran above the pre-Busan range, while U.S. volumes stayed short. Global Trade Alert called that split “divide and rule.” A cutoff aimed at one customer, with a pause date that can be extended or dropped, is a more precise weapon than a promise to stop trading with everyone who sells America more than it buys.

In early September some Chinese suppliers were already declining U.S. orders rather than risk selling into a banned chain, even with Xi Jinping’s trip to Washington still on the calendar. That is what a working chokepoint looks like from the factory floor. It is quieter than an Oval Office ultimatum, and it is already on.

Neither Closed nor Open in Hormuz

Iran’s attempt to squeeze the United States by shutting the Strait of Hormuz is the messy version of the same idea. Before the war that began in late February, about 20 million barrels of oil a day moved through the strait, more than 20 percent of globally traded crude, and ship counters at Kpler put ordinary traffic near 130 vessels a day. Iranian forces declared the waterway closed on March 4. Traffic collapsed, then lurched through a June 17 memorandum between Trump and Iranian President Masoud Pezeshkian, a U.S. blockade, and a string of attacks that never quite produced a clean on/off switch.

TankerTrackers.com put flows at a daily average of 6.7 million barrels in the week through September 3, nearly 60 percent below the pre-war pace. At least 23 ships were hit in July and August. On September 5 the United States struck three Iranian oil tankers after what Washington called unprovoked attempts to attack two U.S. warships. Eugene Gholz, a political scientist at the University of Notre Dame who studies the waterway, said the strait is “neither fully closed nor fully opened.”

That stalemate is the practical limit on trade-as-a-weapon when the target can hit back and when the rest of the world still needs the lane. Oil kept moving, just not enough of it, and not on the old terms. A president who talks about cutting off Mexico or Vietnam with a pen is describing a cleaner machine than Hormuz has been since March.

Who Holds the Leverage in U.S. Trade

If the embargo threat were carried out as written, it would not land on a handful of rivals. It would land on the countries that actually fill U.S. ports. The July goods figures on a seasonally adjusted Census basis, the series the joint BEA-Census release uses in its country table, show where the deficits sit.

JULY GOODS DEFICITS, SEASONALLY ADJUSTED

On a quarterly goods-and-services basis, the second-quarter gaps were $61.2 billion with Vietnam, $53.1 billion with Taiwan, $52.7 billion with Mexico, and $32.3 billion with China. Those are allies, neighbors, chip suppliers, and auto plants, not a sanction list. Canada’s monthly goods deficit is small, which has not stopped Ottawa from treating each new U.S. threat as a reason to buy less of its security from one customer. The loud reading of the September 4 post was that Warsh’s Fed was being dared to stay independent. The quieter reading, and the one that matches Farrell and Newman, is that partners now write contingency plans every time Washington talks about pulling the plug.

Hub power here is real because U.S. demand still sets the pace for Mexican factories and Vietnamese exporters. It is also two-sided, because those imports are how American firms get computers, parts, and consumer goods. July imports of capital goods hit a record on a Census basis, with computers up $6.9 billion and computer accessories up $6.6 billion. Shutting that off to punish the Fed would hit U.S. shelves and U.S. plants first.

A Warning That Became a Manual

Farrell later said a Trump administration official treated the 2019 paper as a playbook for going after Huawei, after the authors had written it as a caution. In the original article they asked scholars to take seriously both the use of these tools and the “potential overuse.” That sentence is doing more work in 2026 than it did when SWIFT was the case study.

A better understanding of the policy implications of the use and potential overuse of these tools, as well as the response strategies of targeted states, will recast scholarly debates on the relationship between economic globalization and state coercion.

Henry Farrell and Abraham Newman, “Weaponized Interdependence,” International Security, 2019

Christoph Trebesch and Oliver Mohr’s 2025 survey of the geoeconomics literature, the paper Krugman flagged as a guide, sits on the same fault line. The field is no longer a niche. It is still not how most policy talk describes a Truth Social post. The post does not distinguish a financial chokepoint from a goods embargo, and it does not ask what the United States imports from the same countries it would freeze. It just asserts that surplus countries would stop being “financially ELITE” if America closed the till.

Krugman also pointed to smaller, stranger uses of the same instinct, including tariff threats aimed at Canada’s cultural rules for French, and the joke that will not die about Canada as a 51st state. Those fights are not Hormuz and they are not magnets. They still train a neighbor to assume U.S. market access is a political switch.

The Cost of Spending Hub Power

Warsh’s Fed meets beginning September 15. The jobs report, the July import surge in computers, and a war that has already thinned Hormuz all pull officials toward tighter policy, not a cut. Trump has avoided the personal attacks he used on Powell, and he has not issued an order to close ports. He has still made the next rate decision a trade event, which is a different kind of pressure than a speech about credit ratings.

China’s broader rare earth pause, as written, runs to November 10. Beijing can extend it, let it lapse, or keep using the narrower company lists that never went away. The United States can keep building magnet plants. It cannot, in a few Fed meetings, replace 85 percent of refining or invent a second Mexico.

The American consumer market and the dollar clearing system are still the nodes most countries have to use. That is why an embargo threat is louder than a lecture. Each time the threat is used to settle a fight in Washington, including a fight with the central bank, the countries on that July deficit list get another lesson in how to need the node less. Farrell and Newman said the overuse would recast the debate. The recasting is the partners drawing exits while the hub still thinks it owns the switch.