During the first quarter of 2025, the Dow Jones Industrial Average declined 1.3%, the Standard and Poor’s 500 Index fell 4.6% and the Nasdaq Composite dropped 10.4%. It was a weak quarter that followed two very strong years of +20% annual gains. Then, a couple days after the close of the first quarter, all hell broke out. The Trump administration, after the close of trading on Wednesday, announced new far-reaching tariffs on nearly every U.S. trading partner, including a 10% baseline tariff on imports. While the markets anticipated some level of tariffs, the scale of President Trump’s announcement shocked observers. On Thursday and Friday, global markets plunged, including a 10.5% decline of the S&P 500. The S&P decline was the fifth largest 2-day decline since the 1950s, only eclipsed by two crashes in 1987 (-24.6% and -16.2%, respectively), one in 2020 at the outset of Covid-19 (-13.9%), and one in 2008 during the Great Financial Crisis (-12.4%). Wall Street’s fear gauge, the VIX volatility index, surged to over 50, which is in the top 1% of historical readings. The volatility has cut both ways in the last few weeks: the DJIA surged 8% on the day that the Trump administration instituted a 90-day hiatus on “reciprocal” tariffs on all trading partners but China. Equity markets are unsettled, domestic fixed income markets have seen interest rates increase and the US Dollar index has been very weak. As we write on April 20th, the DJIA, the S&P 500 and the Nasdaq Composite are down for the year by 8.0%, 10.2% and 15.7%, respectively.
To understand the possible implications of a tariff war, we need to understand what the Trump administration is trying to accomplish, and, more cryptically, what President Trump really believes about tariffs and free trade. The main goals, it seems to us, are both apparent and ambitious: re-order world trade to better reflect evolving economic realities; maintain the U.S. dollar as the world’s reserve currency; and re-define America’s military/security role as the defacto global policeman. These types of international realignments happen only rarely, perhaps a few times every century. For instance, the Bretton Woods agreement in 1944 established the U.S. dollar as the reserve currency, opened U.S. markets to exports and cemented America’s role as the provider of economic and military security to the world. At that time, the U.S. dominated world GDP and was a creditor nation, while most of the world was recovering from economic collapse following WW2. Additionally, the U.S. held 65% of the world’s gold reserves. After President Nixon ended dollar to gold convertibility in 1971, the Bretton Woods system went into slow collapse. By then, the U.S. only held 20% of global reserves.
From 1980 to 1985, the U.S. dollar appreciated by about 50% against the currencies of the next four largest economies (UK, Germany, France and Japan). The U.S. wanted to reduce its trade deficit by making its exports competitive by way of a currency devaluation. The Plaza Accord of 1985 brought together America’s largest trading partners, who agreed to foreign exchange market interventions to allow the dollar to depreciate in an orderly fashion. The U.S. offered its trading partners low tariffs, free capital movements, flexible foreign exchange rates and U.S. military security. After a few years of adjustment, American trade deficits declined.
The Plaza Accords and the Bretton Woods system were both negotiated by the U.S. from positions of relative strength, and abandoned when circumstances changed. American economic and military power were fundamental levers over our trading partners’ negotiating position. If global GDP grows at a rate that is in excess of U.S. GDP, then America’s relative economic importance declines over time, as does its ability to negotiate favorable trade deals. Also, historically having world reserve currency status conveyed two important benefits to the issuer of the reserve currency: 1) the ability to issue debt at lower interest rates than otherwise would have been available because of increased demand for the reserve currency; and 2) the ability to consume and borrow beyond its means, by way of issuing paper in return for imported goods and services. Today, what French Finance Minister Valery Giscard d’Estaing called America’s “Exorbitant Privilege” of issuing dollars, looks less attractive. American borrowing costs are above most of its trading partners, and trade deficits due to an overvalued dollar are hollowing out America’s industrial base. If the Trump administration believes those things, it would make sense for President Trump to try to re-order world trade now. It is similar to the response of a Soviet economic minister when asked to elaborate on his assertion that the economy would be “average” in the current year: “Yes, average economic conditions. Worse than last year, but better than next year.”
Outside of the administration’s spoken or unspoken objectives, a thornier question is understanding what President Trump really believes about tariffs and free trade. Much commentary has been made about the president’s declaration that “tariffs [are] the most beautiful word in the dictionary…maybe with the exception of ‘love’.” Others point to his assertion that a new ‘External Revenue Service’, which collects tariffs from foreign trade, will replace the Internal Revenue Service, which collects income taxes. If he believes that, he is delusional. If he just wants foreign trade officials to believe that he thinks that, it might be a valuable negotiating position. Most people now are taking his public comments at face value. However, an episode from his first term might offer some insight into his thinking. In 2018, at a G7 Summit (U.S., UK, Germany, Japan, France, Canada and Italy), then-President Trump called for a tariff-free Group of Seven. The other countries rejected the proposal out-of-hand. Following the rejection, he had this exchange with a reporter at his closing press conference:
Reporter:Mr. President, you said that this was a positive meeting, but from the outside, it seemed quite contentious. Did you get any indication from your interlocutors that they were going to make any concessions to you? And I believe that you raised the idea of a tariff-free G7. Is that …
Trump: I did. Oh, I did. That’s the way it should be. No tariffs, no barriers. That’s the way it should be. And no subsidies. I even said no tariffs… We don’t want to pay anything. Why should we pay? We have to, ultimately, that’s what you want. You want a tariff-free [G7], you want no barriers, and you want no subsidies, because you have some cases where countries are subsidizing industries, and that’s not fair. So, you go tariff-free, you go barrier-free, you go subsidy-free. That’s the way you learned at the Wharton School of Finance. I mean, that would be the ultimate thing. Now, whether or not that works — but I did suggest it, and people were — I guess, they’ve got to go back to the drawing [boards] and check it out, right?...It’s got to change. It’s going to change. I mean, it’s not a question of “I hope it changes.” It’s going to change, a hundred percent. And tariffs are going to come way down, because people cannot continue to do that.
So, if President Trump still believes the theory that he espoused in 2018, that is not a nuanced variation of his current public position, but rather a 180-degree shift from what most people still expect. To test this theory, we went back to some of the white-papers written by the people who currently advise him. We thought the most elucidating was a paper written last November by Stephen Miran, who was later appointed to the administration as Chairman of Council of Economic Advisers. What follows is a summary of Miran’s 41-page paper. We have posted the entire paper on our website. Even our summary is pretty long and dry, so feel free to skim it. Or skip it. Or read the whole thing on the website.
Stephen Miran’s “A User’s Guide to Restructuring the Global Trading System” presents an analysis of the challenges facing the global trade and financial systems, with a particular focus on the United States’ role as the provider of the world’s reserve currency, the dollar. The paper is not so much a policy prescription but, rather, an analytical exploration of the economic imbalances driving discontent with globalization, especially in the U.S. Miran argues that the persistent overvaluation of the dollar, rooted in its status as the global reserve currency, has disadvantaged American manufacturing and fueled trade deficits, contributing to economic and social malaise. The document aims to diagnose these issues, catalog potential policy tools to address them, and evaluate their trade-offs, offering insights into how a restructuring of global trade might unfold.
The introduction highlights the erosion of public support for the international trading system in the U.S. Miran notes that over the past decade, Americans have grown skeptical of globalization’s benefits, perceiving it as favoring foreign competitors at the expense of domestic industries. This sentiment, he argues, is not merely populist rhetoric but reflects a structural economic issue: the dollar’s overvaluation. As the world’s reserve currency, the dollar faces inelastic demand from global actors seeking safe assets, which keeps its value artificially high. This overvaluation makes U.S. exports less competitive and imports cheaper, hollowing out manufacturing and tradeable sectors. Miran cites the decline in manufacturing employment and the opioid crisis in deindustrialized regions as symptoms of this imbalance. He suggests that President Trump’s reelection in 2024, with a mandate to reform trade, signals a potential overhaul of the global system, making it critical to understand the tools and consequences of such changes.
Miran’s theoretical framework, detailed in the second chapter, revolves around the “Triffin Dilemma,” a concept describing the tension faced by a reserve currency issuer. The U.S. must supply enough dollars to meet global demand for reserve assets, which fuels trade deficits and undermines domestic industries. During economic downturns, the dollar’s “safe-haven” status causes it to appreciate, exacerbating the competitiveness gap for U.S. exporters. Miran argues that this dynamic has led to persistent current account deficits, with the U.S. trade balance deteriorating since the 1970s. He contrasts the U.S. experience with countries like Germany and Japan, which maintain trade surpluses partly because their currencies do not face the same reserve-driven appreciation. The paper uses historical data, such as the U.S. current account deficit reaching -6% of GDP in the 2000s, to illustrate the scale of the imbalance. Miran contends that the dollar’s overvaluation is not a natural market outcome of trade, but a structural feature of the global financial system, necessitating intervention to restore equilibrium.
The third chapter delves into the policy tools available to address dollar overvaluation and restructure global trade. Miran begins with tariffs, which he views as a blunt but effective instrument. Drawing on the 2018-2019 U.S.-China trade war, he argues that tariffs raised significant revenue ($79 billion annually) without triggering widespread inflation, as the Chinese yuan depreciated to offset the tariff’s impact. He estimates that a 10% universal tariff could generate $250 billion in revenue, equivalent to 1% of GDP, while a targeted 60% tariff on Chinese goods could yield $150 billion. He notes that tariffs risk retaliatory trade wars and higher consumer prices, though Miran suggests currency adjustments by trading partners could mitigate these effects. He also explores capital controls, such as a tax on foreign purchases of U.S. Treasuries, to reduce dollar demand. This “user fee” could discourage speculative inflows, weakening the dollar, but risks disrupting Treasury markets and raising borrowing costs. Miran acknowledges the complexity of implementing such measures, given the U.S.’s reliance on foreign investment to finance deficits.
Another tool Miran proposes is a multilateral currency agreement, dubbed a “Mar-a-Lago Accord,” reminiscent of the 1985 Plaza Accord. Such an agreement would involve coordinated interventions by trading partners to depreciate the dollar against their currencies to boost U.S. export competitiveness. He envisions offering tariff exemptions to countries that comply, creating incentives for cooperation. However, he warns of challenges, including resistance from allies like the Eurozone, which may prioritize their own economic interests, and the risk of undermining the dollar’s reserve status if pushed too far. Miran also considers fiscal measures, such as tax incentives for re-shoring manufacturing, to complement trade policies. These could encourage domestic production but would require significant public investment, potentially straining budgets. He contrasts these proactive measures with passive approaches, like waiting for market-driven dollar depreciation, which he deems unreliable given the dollar’s entrenched role.
The paper’s fourth chapter examines the financial market implications of these policies. Tariffs could strengthen the dollar initially by signaling U.S. economic assertiveness, but currency interventions or capital controls might counteract this effect. Miran predicts volatility in equity markets, particularly for import-dependent sectors, though export-oriented industries could benefit from a weaker dollar. Bond markets face risks from reduced foreign demand for Treasuries, potentially raising yields and borrowing costs. He cites historical analogs, like the 1971 Nixon Shock, which devalued the dollar and disrupted markets but ultimately stabilized trade. Miran emphasizes the importance of policy sequencing to minimize disruptions—starting with tariffs to signal intent, followed by currency negotiations to lock in gains, and supported by domestic incentives to rebuild industry. Poor coordination, he warns, could lead to stagflation or global recession, echoing the 1970s experience after Bretton Woods collapsed.
Miran’s analysis then extends to the geopolitical landscape, linking trade policy to security commitments. He argues that the U.S.’s role as a global security provider, underpinned by dollar dominance, imposes costs that trade imbalances exacerbate. By restructuring trade, the U.S. could demand greater “burden-sharing” from allies, tying tariff relief to defense contributions. This approach aligns with President Trump’s skepticism of multilateral alliances, seeking to recalibrate relationships with countries like Canada and Japan. Miran acknowledges the risk of alienating allies, which could embolden adversaries like China, but sees potential for a rebalanced global order if executed carefully. He cites the 2018-2019 tariff episode, where Canada and Mexico renegotiated trade terms under pressure, as evidence of leverage gained through assertive policies.
The paper addresses criticisms of trade restructuring, particularly from economists who argue that tariffs are inflationary and trade deficits benign. Miran counters that inflation fears are overstated, as currency adjustments and competitive pressures can offset price hikes. He challenges the view that trade deficits reflect consumer choice, arguing they stem from systemic distortions like dollar overvaluation. Drawing on economic literature, he notes that manufacturing job losses correlate with trade shocks, such as China’s WTO entry in 2001, which displaced 2 million U.S. jobs. While acknowledging globalization’s benefits, such as lower consumer prices, Miran argues that the costs (including deindustrialization, wage stagnation, and social decay) justify reform. He critiques the complacency of policymakers who assume the dollar’s reserve status is immutable, warning that unchecked imbalances could erode confidence in U.S. financial leadership.
Miran’s discussion of historical precedents provides context for his proposals. The 1985 Plaza Accord, which weakened the dollar by 50% against major currencies, boosted U.S. exports and narrowed trade deficits temporarily. However, it also triggered Japan’s asset bubble, illustrating the risks of currency manipulation. The 1971 Nixon Shock, which ended dollar convertibility to gold, reset global trade but caused inflation and market turmoil. Miran uses these cases to highlight the need for careful calibration, suggesting that modern tools, like targeted tariffs and digital currency coordination, offer more precision than past interventions. He also references the 2018-2019 tariffs, which raised the effective tariff rate on Chinese goods by 17.9%, generating revenue and pressuring China without collapsing trade flows.
The paper concludes by emphasizing the urgency of addressing trade imbalances to restore economic fairness and political stability. Miran argues that the U.S. cannot sustain its dual role as reserve currency issuer and security guarantor without reforms to protect its industrial base. He envisions a restructured system where the dollar remains dominant but is less overvalued, enabling balanced trade and robust manufacturing. The proposed tools (including tariffs, capital controls, currency accords, and fiscal incentives) form a menu of options, each with trade-offs. Miran stresses that success depends on execution, requiring coordination between fiscal, monetary, and trade authorities. He warns of risks, including market volatility and geopolitical friction, but sees opportunity in a system that better aligns global trade with American interests.
In its final section, the paper underscores the broader stakes of trade reform. Miran links economic discontent to social outcomes, citing the opioid epidemic and declining life expectancy in manufacturing regions as evidence of globalization’s toll. He argues that restructuring trade is not just about economics but about restoring opportunity and dignity to communities left behind.
Dr. Miran’s white-paper gives us a view as to what policies and tools are available to President Trump in order to re-orient world trade. It also gives us a rough blueprint: 1) high (10%) tariffs, with threats of even higher tariffs, lead to 2) bilateral trade agreements resulting in 3) the formation of larger trade blocs with low or no tariffs and significant free market access to U.S. markets in return for burden-sharing and currency normalization. The Trump administration’s main negotiating token is access to the U.S. consumer. Countries will be treated as either allies, neutrals or enemies. China is targeted as an enemy at the outset, and will likely remain so. By essentially closing U.S. trade to China as it negotiates bilateral tariff and trade agreements with other countries, China is forced to find alternative markets for $400-$600 billion of trade goods while those potential markets are simultaneously negotiating trade deals with the U.S. If U.S. trade deals start to go south, expect Republicans to abandon support for the administration. We should have a view toward success or failure within 4-6 months. In the meantime, expect drama and volatility. And some good potential investment opportunities.
There is no reason that a global trade reordering had to take place this year, but there is no reason that it should not either. As a reserve currency issuer, an untenable future is foreseeable in 10 or 15 years where the U.S. has $70 trillion of debt, foreigners own +40% of our assets and the world finds a viable alternative to the U.S. dollar. That would be a disaster for future generations. As Warren Buffett once observed, “Our country has been behaving like an extraordinarily rich family that possesses an immense farm…We have, day by day, been both selling pieces of the farm and increasing the mortgage on what we still own.”