Foreign Exchange Commentary

Global Tariffs Desired Impact and Analysis

In recent months, there has been substantial discussion about the impact of tariffs on the U.S. economy and those of trading partners. Here I attempt to present you with a summary of the framework developed by Stephen Miran, who has recently joined the Trump administration as Chair of Economic Advisors.

This framework is helpful for understanding the administration's desire to use tariffs as an economic and national security tool, and I hope you find it helpful to navigate the uncertainty created by recent tariff announcements. However, I would strongly suggest you read Mr. Miran’s paper called “A User’s Guide to Restructuring the Global Trading System” to get many important details.

The prevailing rationale, supported by Mr. Miran and Treasury Secretary Bessent, is that the U.S. dollar's reserve currency status has caused a structural imbalance in the form of large trade deficits and persistent dollar overvaluation. This imbalance has ultimately harmed the U.S. manufacturing sector, producing economic decay in some regions of the United States.

From Mr. Miran’s point of view, The United States, as the country issuing the global reserve currency, must supply the world with liquidity in the form of money and debt, which leads to persistent current account deficits. Reserve demand, especially from central banks causes the U.S. to export debt (U.S. Treasuries) and import goods and services, creating structural trade deficits in the United States. As global GDP grows relative to U.S. GDP, the size of deficits needed to support the system becomes increasingly unsustainable.

Put simply, the Trump administration believes that while the U.S. gains geopolitical leverage from its reserve currency status, it pays for this advantage through weakened industrial competitiveness.

With this background in mind, the President's economic team advocates for the use of tariffs and currency adjustments to restore trade and economic balance while preserving the geopolitical advantages provided by the dollar's reserve role.

Specifically, the administration argues that tariffs (or the threat of them) could help them:

• Raise revenue without hurting consumers or fueling inflation, if they offset by currency depreciation.
• Reconfigure trade flows and enforce discipline among trading partners.
• Strengthen the U.S. industrial complex.

Moreover, Mr. Miran argues that when paired with deregulation and tax reforms, tariffs can be disinflationary, pro-growth, geopolitically advantageous.

The primary problem with using tariffs is that they do not directly address the dollar's overvaluation. If, as expected, the currency market reacts to offset tariffs, this could lead to further dollar appreciation—a challenge the government would need to address through one of two primary methods:

1. Multilateral Accords

• Traditionally, the U.S. has relied on multilateral coordination (e.g., IMF, G7) to address currency misalignments.
• However, such efforts are typically slow, politically constrained, and largely ineffective in the current geopolitical climate.

2. Unilateral Actions

• The International Emergency Economic Powers Act (IEEPA) allows the President to: Restrict financial flows and Target currency manipulators
• Reserve accumulation strategies—buying foreign currencies to push the dollar down—mirror tactics successfully used by many surplus nations.

Potential Risks

Currency actions could potentially correct dollar overvaluation to improve export competitiveness and trade balances, but it has several risks: Inflation, higher interest rates, financial market volatility, potential legal challenges and diplomatic retaliation.

Looking forward

On April 2nd we should expect tariffs to be implemented, while their elimination or reduction will be used as a bargaining chip to get concessions from allies and trading partners, but there is a high risk of retaliation. To address this risk, most likely the administration will start entering negotiations with trading partners offering to eliminate tariffs in exchange for concessions.

The administration will also pay close attention to the value of the dollar, but it’s unlikely to take actions aimed at the currency until 2026, when President Trump will have the opportunity to name a new Fed chair more willing to coordinate Fed actions with the Treasury Department to target exchange rates.