Introduction

I expect the Trump Administration to overhaul the international trade and financial systems.

This essay surveys some tools available for doing so.

These can be used by an Administration for affecting:

• the terms of trade
• currency values
• the structure of international economic relations.

During his campaign, President Trump:

• proposed to raise tariffs to 60% on China and 10% or higher on the rest of the world
• intertwined national security with international trade

Many argue that tariffs are highly inflationary and can cause significant economic and market volatility.

But that need not be the case.

The following passed with little discernible macroeconomic consequence:

• the 2018-2019 tariffs
• a material increase in effective rates

The dollar rose by almost the same amount as the effective tariff rate.

• This nullified much of the macroeconomic impact, but resulted in significant revenue.

Chinese consumers’ purchasing power declined with their weakening currency.

• This is why China effectively paid for the tariff revenue.

President Trump has also discussed adopting substantial changes to dollar policy.

Sweeping tariffs and a shift away from strong dollar policy can have some of the broadest ramifications of any policies in decades, fundamentally reshaping the global trade and financial systems.

There is a path by which these policies can be implemented without material adverse consequences, but it is narrow, and will require currency offset for tariffs and either gradualism or coordination with allies or the Federal Reserve on the dollar.

Potential for unwelcome economic and market volatility is substantial, but there are steps the Administration can take to minimize it.

From a trade perspective, the dollar is persistently overvalued, in large part because dollar assets function as the world’s reserve currency.

This overvaluation has weighed heavily on the American manufacturing sector while benefiting financialized sectors of the economy in manners that benefit wealthy Americans.

And yet, President Trump has praised the reserve status of the dollar and threatened to punish countries that stop using the dollar for reserve purposes.

I expect these tensions will be resolved by a suite of policies designed to increase burden sharing among trading and security partners: rather than attempting to end the use of the dollar as the global reserve currency, the Trump Administration can attempt to find ways to capture back some of the benefits other nations receive from our reserve provision.

Reallocation of aggregate demand from other countries to America, an increase in revenue to the U.S. Treasury, or a combination thereof, can help America bear the increasing cost of providing reserve assets for a growing global economy.

The Trump Administration is likely to intertwine trade policy with security policy, viewing the provision of reserve assets and a security umbrella as linked and approaching burden sharing for them together.

The remainder of this essay is structured as follows: first, I review the underlying economic causes of our economic imbalances.

Second, I explore tariff driven approaches to redressing these grievances. Third, I review currency-driven approaches, both multilateral and unilateral. Finally, I discuss market consequences.

This essay is not policy advocacy.

I attempt to diagnose the economic disequilibrium in the terms of trade that underlies the nationalists’ critique of the current system, describe a catalogue of tools that can be used to address it, and analyze these tools’ relative advantages or disadvantages and potential consequences.