“The president is here to protect American workers. He’s here to protect American industry. We’re going to stop that nonsense.” ~Howard Lutnick, U.S. Commerce Secretary

President Trump shocked the world on April 2, 2025 with announcement of the reciprocal tariff policy. The stated purpose is to reduce both America’s trade deficits and financial deficits, but the latent logic goes deeper. Stephan Miran, the chairman of Council of Economic Advisors and former Hudson Bay senior strategist, wrote a report in November 2024 to outline his strategic thinking in global economic overhaul with tariff walls. In the report, Mr. Miran argued that the root cause of America’s chronic economic malaise is overvaluation of the dollar, which makes it a mission impossible to finance dollar reserve assets. To address the problem, Mr. Miran called for a “generational change in the international trade and financial systems.” Let’s read the report and look into his rationale.

In the beginning, Mr. Miran introduced Belgian economist Robert Triffin’s theory. The theory focuses on global reserve assets, whose demand is determined by international trade and saving, not by domestic trade balance. In this “Triffin world”, the reserve nation provides reserve assets and inevitably runs current account deficits as the inevitable price. The reserve nation ultimately faces the “Triffin dilemma” of choosing between losing reserve status with currency devaluation, or uncontrolled current account deficits without currency devaluation. To solve this dilemma, Mr. Miran proposed policy tools in tariffs and currency, both of which help maintain America’s competitive advantages in high-value-added manufacturing, check the trend in offshoring, and raise America’s bargaining power in bilateral trade negotiations.

Tariffs can be used to raise revenue, finance reserve assets, and address national security concerns. Modest tariffs first enhance welfare as demand for imported goods decreases. The maximum welfare is reached with an optimal tariff rate that balances costs and benefits. Tariffs can also be used to correct trade-distorting policies from other nations, particularly China, who distorts international trade with export subsidies, industrial espionage, and intellectual property theft. On the other hand, tariffs pose the threat of retaliation, which the U.S. can easily withstand as the world’s largest market in capital and consumer goods. Besides, the U.S. can use national security as a trump card to deter retaliation from allies and partners.

Currency policy acts as an alternative form of tariff in correcting trade imbalance. Relevant policy tools include currency intervention, multilateral currency accords, and unilateral approaches. Currency intervention might send confusing signals to investors, thus depressing their intention in holding dollar-denominated fixed income assets. Multilateral currency accords have been historically effective in readjusting the dollar value. However, Europe and China, two major currency areas, are rather reluctant to reach such an accord. An alternative option is the “Mar-a-Lago Accord”, in which dollar reserve assets are either reduced or replaced with ultra-long-term securities.

Unilateral currency approaches trigger high market volatility, but contain high policy flexibility. The U.S. could choose to invoke the International Emergency Economic Powers Act (IEEPA) of 1977, and put restraints on the cross-national transfers of credit, payments or securities. The U.S. could also strengthen foreign currencies through open market transactions in financial assets held by the Treasury or the Federal Reserve, such as the Exchange Stabilization Fund, gold reserves, and foreign reserve portfolios.  

At the same time, Mr. Miran sent warnings regarding possible consequences of all these policy tools. Friends inside the security umbrella share more burdens, while outsiders bear more economic costs. Security uncertainty associated with withdrawal of the security umbrella drives up asset risks. The currency market is expected to undergo higher volatility. Efforts to find alternative reserve assets, like gold or crypto currencies, will intensify. To mitigate all these consequences require policy coordination among the administration, the Federal Reserve, and America’s trading partners.

In his concluding remark, Mr. Miran argued that the Trump administration possesses multi-pronged tools to reshape the global trade and financial systems, multilaterally or unilaterally. However, the path to that end is narrow and paved with volatility, as the dollar might appreciate sharply before the trend is reversed. To smooth out the process demands constant efforts in planning, execution, risk mitigation, and damage control. 

President Trump’s reciprocal tariffs have so far brought mixed results and varied responses. Though the strategy appears straight-forward, the tactics seem unsophisticated. Unwelcome reactions from stock, currency and even bond markets have made the current situation more complicated. However, the full effects of remaking the post-WWII global economic system will take months, even years, to be felt. Only time will prove him right or wrong.

The article is based on Hudson Bay Capital’s “A User’s Guide to Restructuring the Global Trading System”, authored by Stephen Miran, the former senior strategist at Hudson Bay Capital and the current Chairman of the Council of Economic Advisers. Read the full report