Stephen Miran, Trump's nominee to lead the Council of Economic Advisers, has written a very important essay on the remodeling of the international trade and financial system. This economic essay highlights for the most part the Trump's Administration strategy to change US trade and financial policy with almost all of its trading partners. It's big deal!
This is the most F* important read of 2025. The realpolitik events unfolding before our eyes reached a level of complexity that requires the avid follower to adopt rational strategic thinking. Simply put, the Trump Administration wants to remodel international trade and the global financial system. I believe it implies chaos by necessity because the great majority of trade participants are stuck in a box with a status quo mindset.
The avid follower must dismiss mainstream, shocking and emotional opinions that are full of drama and misunderstandings on what's really at stake. Unfortunately, only a minority of followers can reach that "geo-macro yoga" mindset. I hope and trust that you can reach that level when you read the comments below.
Let's now look at the Economic and Trade Policy Essay written by Stephen Miran. I have copied and pasted key highlights below:
On Tariffs, inflation and currency offsets
it is reasonable to expect the Trump Administration to undertake a substantial overhaul of the international trade and financial systems. This essay surveys some tools available for doing so. In contrast to much Wall Street and academic discourse, there are powerful tools that can be used by an Administration for affecting the terms of trade, currency values, and the structure of international economic relations.
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Tariffs provide revenue, and if offset by currency adjustments, present minimal inflationary or otherwise adverse side effects, consistent with the experience in 2018-2019.
Many argue that tariffs are highly inflationary and can cause significant economic and market volatility, but that need not be the case. Indeed, the 2018-2019 tariffs, a material increase in effective rates, passed with little discernible macroeconomic consequence. The dollar rose by almost the same amount as the effective tariff rate, nullifying much of the macroeconomic impact but resulting in significant revenue. Because Chinese consumers’ purchasing power declined with their weakening currency, China effectively paid for the tariff revenue. Having just seen a major escalation in tariff rates, that experience should inform analysis of future trade conflicts.
According to the World Trade Organization, the United States effective tariff on imports is the lowest any nation in the world imposes at about 3%, while the European Union imposes about 5% and China 10%.
If the currency markets adjust, tariffs can have quite modest inflationary impacts, between 0% and 0.6% on consumer prices.
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It’s worth noting that value-added taxes are a form of tariffs because they exempt exported goods but tax imported goods, and central banks usually do not respond to them, because legislated price changes are typically thought not to be indicative of underlying supply-demand imbalances.
trade economists argue that for a large economy, imposing a positive tariff level is modestly welfare enhancing, up to a point. Classically, modest tariffs can improve welfare because reduced demand from the tariff imposing country depresses prices of the imported goods.14 While the tariff produces distortionary welfare losses due to reduced imports and more expensive home production, up to a point, those losses are dominated by the gains that result from the lower prices of imports. Once import reduction becomes sufficiently large, the benefits from lower prices of imports cease to outweigh the costs, and the tariff reduces welfare. That tariffs initially increase and then subsequently decrease welfare implies an “optimal” tariff rate, at which point the country has reaped all possible benefit from tariffs and a higher tariff rate reduces welfare.
On the US dollar
The deep unhappiness with the prevailing economic order is rooted in persistent overvaluation of the dollar and asymmetric trade conditions. Such overvaluation makes U.S. exports less competitive, U.S. imports cheaper, and handicaps American manufacturing. Manufacturing employment declines as factories close. Those local economies subside, many working families are unable to support themselves and become addicted to government handouts or opioids or move to more prosperous locations. Infrastructure declines as governments no longer service it, and housing and factories lay abandoned.
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.
On China
Many of America’s allies and partners have significantly larger trade and investment flows with China than they do with America; are we so sure we can trust them, if worse comes to worst? Such problems are compounded by aggressive Chinese espionage. The security, espionage and sabotage vulnerability of sensitive imports from China continues to grow.
The list of China’s abuses of the international trade system is long and storied, and ranges from state subsidies for export-oriented industries to outright theft of intellectual property and corporate sabotage. These distortions interfere with the discovery of comparative advantage and a free and open system of international trade.
In a second term, there’s less cause to negotiate with the Chinese up front, since they already abdicated their responsibilities under the Phase 1 agreement. When someone has already demonstrated they walk away from their commitments, why bother trying to procure more, without some form of security—like placing their UST reserves in escrow?
The U.S. can proceed to gradually implement tariffs if China does not meet these demands. It might announce a schedule, for instance, a 2% monthly increase in tariffs on China, in perpetuity, until the demands are met.
On reserve nation status
Reserve nation status comes with three major consequences: somewhat cheaper borrowing, more expensive currency, and the ability pursue security goals via the financial system.
The tradeoff is thus between export competitiveness and financial power projection. Because power projection is inextricable from the global security order America underwrites, we need to understand the question of reserve status as intertwined with national security. America provides a global defense shield to liberal democracies, and in exchange, America receives the benefits of reserve status—and, as we are grappling with today, the burdens. This connection helps explain why President Trump views other nations as taking advantage of America in both defense and trade simultaneously: the defense umbrella and our trade deficits are linked, through the currency.
On volatility
Financial market volatility from currency moves may far exceed the volatility from total passthrough of tariffs into consumer prices.
The principal risk of pursuing a fairly valued dollar is that the policy intervention makes dollar assets less attractive in the eyes of foreign investors.
These risks can be a disincentive for holding dollar-denominated fixed income securities. If an expected change in currency values leads to large-scale outflows from the Treasury market, at a time of growing fiscal deficits and still-present inflation risk, it could cause long yields to rise. Because significant portions of the economy—like housing—are tied to the belly and long end of the yield curve, such a rise could have material adverse consequences.
The disincentive for holding equities is somewhat mitigated, as earnings rise to offset some of the currency losses. A significant portion of sales made by S&P 500 companies come from abroad16, and those sales are worth more in dollar terms as the dollar depreciates. Earnings will increase as companies are able to increase selling prices. While higher yields may weigh on multiples, the increase in earnings can mitigate volatility.
On Tariff Implementation
A second Trump Administration is likely therefore take steps to ensure large structural changes to the international tax code occur in ways that are minimally disruptive to markets and the economy. There are several steps that would help mitigate any adverse consequences.
Scott Bessent, a Trump advisor floated as potential Treasury Secretary, has proposed putting countries into different groups based on their currency policies, the terms of bilateral trade agreements and security agreements, their values and more.
Such a system can embody the view that national security and trade are joined at the hip. Trade terms can be a means of procuring better security outcomes and burden sharing. In Bessent’s words, “more clearly segmenting the international economy into zones based on common security and economic systems would help … highlight the persistence of imbalances and introduce more friction points to deal with them.” Countries that want to be inside the defense umbrella must also be inside the fair trade umbrella.
With respect to other nations, if the Trump Administration merges national security and trade policy explicitly, it may provide some incentives against retaliation.
the Trump team will view tariffs as an effective means of raising taxes on foreigners to pay for retaining low tax rates on Americans. Doubtless, tariffs are a big part of the answer for extending the tax cuts; revenue must come from somewhere.
recall that President Trump views tariffs as generating negotiating leverage for making deals. It is easier to imagine that after a series of punitive tariffs, trading partners like Europe and China become more receptive to some manner of currency accord in exchange for a reduction of tariffs.
To help mitigate potential unwanted financial consequences (like higher interest rates), reserve selling can be accompanied by term-out of remaining reserve holdings. Increased demand for long-term debt by reserve managers will help keep interest rates down, even if there is overall selling of USD fixed income as a result of the currency adjustment. Reserve owners hold fewer USD reserves, pushing their currencies higher, but the reserves they do hold are longer duration, helping contain yields.
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the term-out of reserve debt shifts interest rate risk from the U.S. taxpayer to foreign taxpayers. How can the U.S. get trading and security partners to agree to such a deal? First, there is the stick of tariffs. Second, there is the carrot of the defense umbrella and the risk of losing it. Third, there are ample central bank tools available to help provide liquidity in the face of higher interest rate risk.
His conclusion:
The next Trump term presents potential for sweeping change in the international economic system and possible accompanying volatility. It is important for investors to understand the tools that might be employed for such purposes, as well as the means by which government may attempt to avoid unwelcome consequences. This essay attempts to provide a user’s guide: a survey of some tools, their economic and market consequences, and steps that can be taken to mitigate unwanted side effects.
Wall Street consensus that an Administration has no means by which to affect the foreign exchange value of the dollar, should it desire to do so, is wrong. Government has many means of doing so, both multilaterally and unilaterally. No matter what approach it takes, however, attention must be paid to steps to minimize volatility. Assistance from trading partners or the Federal Reserve can be helpful in doing so.
In any case, because President Trump has shown tariffs are a means by which he can successfully extract negotiating leverage—and revenue—from trading partners, it is quite likely that tariffs are used prior to any currency tools. Because tariffs are USD-positive, it will be important for investors to understand the sequencing of reforms to the international trading system. The dollar is likely to strengthen before it reverses, if it does so.
There is a path by which the Trump Administration can reconfigure the global trading and financial systems to America’s benefit, but it is narrow, and will require careful planning, precise execution, and attention to steps to minimize adverse consequences.
Our conclusions:
Globalization has profited China immensely but also helped lower the cost of living in Western democracies. Globalization fueled the Great Deflationary cycle which brought interest rates to their lowest levels in history - great for consumers, terrible for the manufacturing sector and most of the working class. This secular cycle is now reversing. Protectionism and tariffs will be on the rise.
Tariffs are not necessarily inflationary if a currency offset happens (like it did in 2018);
Tariffs and the defense umbrella provided by the US go hand in hand;
Tariffs are a negotiating tool to increase the foreigners share of taxes required by the US to offer the reserve currency to the world;
the reserve nation and currency status has pros and cons; the USD is overvalued yes but how much is too much? A strong dollar is also beneficial from a geo-macro strategic point of view. Tariffs are expected to support the value of the reserve currency until a new accord is reached amongst trade partners to strengthen their currency. So the USD will remain relatively strong until a new currency accord à la Plaza Accord is reached to devalue the USD. We expect this accord will happen after the upcoming Asian Supply shock.
The US will require trade partners to buy long-term bonds; Expect yield curve control of the long end of the curve at some point.
The Federal Reserve is slowly loosing its independence in this new political economy. The 2% inflation target will eventually be dropped.
The US treasury will look to monetize the US balance sheet, including its gold reserve which has not been marked to market in decades. Could we see the US sell a good portion of its gold reserve and buy foreign currencies and assets.
Crypto-assets and equities will likely benefit from this new financial system, up to a certain point. This may radically change once the Asian Supply shock hit the world.
The new US sovereign wealth fund will play an important role in this new financial system as the US accumulates foreign exchange reserves.
The US is looking to acquire strategic assets and land (Panama canal, Greenland, Gaza, Mexico?, Canada?).
Canada will have to lower taxes and devalue its currency to remain competitive.
The chart below has been added by us.
The chart below has been added by us.
Finally, read this very eye opening tweet and this very interesting article in Foreign Policy on how Europe should respond to Trump's chaotic remodeling of trade policies.
Further references:
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