The Mar-a-Lago Accord

My apologies for yet another Trump tariff post, but it really is what the entire world is talking about right now. Given the size of the US economy and military along with the power the President wields with executive orders, a single comment from Trump can move markets in material ways. And for all the uncertainty caused by last weekend's tariff dispute, the chief one remains:

What is Trump's end-game?

Yes, Trump backed down for 30 days after Mexico and Canada struck token "deals" with the US. Both agreements were pure theatrics, with Mexico doing exactly what it did in 2019 – supposedly sending 10,000 troops to the border, a nice round number that will do nothing to stop fentanyl – while Canada simply rehashed what it had already announced in December.

As for the 10% tariffs on China, the country was effectively closed for the Chinese New Year holiday period over the weekend and the deadline slipped by. China promptly retaliated.

I have no doubt that Trump will be back for more soon enough. The tariff play-book from his first term went something like this:

• Tweet a threat, people freak out.
• Governments and politicians look for ways to appease him in the least costly way possible.
• A "deal" is struck, Trump declares victory, tariffs are avoided or watered down with exemptions.

The whole process is costly, and will be costly this time as well:

But I think there's a deeper lesson in all this chaos: that we all need to learn to take Trump at his word. Essentially, he's a mercantilist through-and-through, who thinks tariffs are both a good thing for America and as a negotiating tool. Just because he has backed down for now doesn't mean he won't continue to try to actually implement tariffs.

Trump is deeply concerned with not just the overall balance of trade, but bilateral trade balances between countries. It's a fundamentally incoherent view that economists have known to be "absurd" since Adam Smith, but at the end of the day he's still the guy wielding the hammer.

Trump's incomplete understanding of trade means that tariffs will be a feature of US policy for at least the next four years, regardless of how effective they turn out to be at achieving their stated goals.

But this time might be different in the sense that Trump and his advisors have had a lot more time to think about strategy and longer-term goals than they did during his first term. The newly appointed chair of Trump's influential Council of Economic Advisers, Stephen Miran, literally wrote A User's Guide to Restructuring the Global Trading System four months ago. And it's in there that I think we might find some answers as to what Trump is going to do, when he might do it, and most importantly, what the consequences might be.

Ripping up the global trading system

Despite cautioning that these are "my own views, not those of anyone on President Trump's team", the Guide reads as if it were written to be a 41-page manual "to reform the global trading system" for a future President Trump. It argues that:

• the US has suffered from a "persistent dollar overvaluation" because of its role as a reserve asset;
• that has enabled the US government to "borrow more without pushing yields higher", creating a persistent trade deficit;
• manufacturing and tradeable sectors have suffered the most;
• the dollar as reserve asset means the US "can exert some level of control trade and financial transactions"; and
• tariffs are a good source of revenue and when combined with "a shift away from strong dollar policy" can improve "burden sharing for reserve asset provision".

Put it all together, and:

"This connection helps explain why President Trump views other nations as taking advantage of America in both defence and trade simultaneously: the defence umbrella and our trade deficits are linked, through the currency."

Miran is clearly a smart guy and he gets a lot right about trade policy (the same can't be said for his new boss!). For example, he acknowledges that tariffs will cause the US dollar to appreciate, making exports more expensive, thus thwarting the goal of reducing the trade balance.

But both his diagnosis and solutions have several logical contradictions and blind spots; throughout the whole Guide it's almost as if "he wants the dollar to be both weak and strong".

He also puts far too much weight on foreign government US dollar reserve accumulation (Triffin's dilemma) as the driver of dollar demand, when there are several equal or greater forces (e.g. private capital flows).

As for his solutions, they tend to involve assuming away the difficulties of implementation, administration, enforcement, and possible unintended consequences, taking it as a given that a US administration can walk a "narrow" path (where have I heard that before?) and financially engineer its way out of said pitfalls with "currency adjustments", "forward guidance", and graduated tariffs linked to incentives:

"[T]o help minimise uncertainty and any adverse consequences of tariffs, the Administration can use credible forward guidance, similar to what is used by the Federal Reserve across a range of policies, to guide expectations. The US Government might announce a list of demands from Chinese policy—say, opening particular markets to American companies, an end to or reparations for intellectual property theft, purchases of agricultural commodities, currency appreciation, or more. The US 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."

For allies, Miran argues that they could be grouped into "buckets" bearing different tariff rates, "and the government can lay out what actions a trade partner would need to undertake to move between the buckets":

"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 [Treasury Secretary] 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 defence umbrella must also be inside the fair trade umbrella."

Lawyers and lobbyists would salivate at just the thought of such as system!

But it gets even more problematic the further you read, because even when Miran offers a solution to a problem he correctly articulates, such as the Lerner symmetry theorem, it ends up being too clever by half.