Executive Summary
Table of Contents
For decades, President Trump has wanted to:
- reform the global trading system
- put American industry on fairer ground vis-à-vis the rest of the world
The root of the economic imbalances lies in persistent dollar overvaluation.
- This prevents the balancing of international trade.
This overvaluation is driven by inelastic demand for reserve assets.
As global GDP grows, it becomes increasingly burdensome for the US to finance:
- the provision of reserve assets and
- the defense umbrella
This is because the manufacturing and tradeable sectors bear the brunt of the costs.
Here I list:
- the available tools for reshaping these systems
- their tradeoffs
- the policy options for minimizing side effects.
This is not policy advocacy. This is an attempt to understand the financial market consequences of potential significant changes in trade or financial policy.
Tariffs provide revenue.
If offset by currency adjustments, they present minimal inflationary and adverse side effects, consistent with the experience in 2018-2019.
Currency offset can inhibit adjustments to trade flows.
Tariffs are ultimately financed by the tariffed nation, whose real purchasing power and wealth decline.
The revenue raised improves burden sharing for reserve asset provision.
Tariffs will likely be deeply intertwined with national security concerns.
I also discuss optimal tariff rates in the context of the rest of the U.S. taxation system.
Currency policy aimed at correcting the undervaluation of other nations’ currencies brings an entirely different set of tradeoffs and potential implications.
Historically, the US has pursued multilateral approaches to currency adjustments.
Many analysts believe there are no tools to unilaterally address currency misvaluation.
- But this is not true.
I describe some:
- potential avenues for both multilateral and unilateral currency adjustment strategies
- means of mitigating unwanted side effects.
Finally, I discuss a variety of financial market consequences of these policy tools, and possible sequencing.
Author
Stephen Miran, Former Hudson Bay Senior Strategist, a Senior Strategist at Hudson Bay Capital, currently Chairman of the Council of Economic Advisers.