Plenty of economists believe that Donald Trump’s trade agenda will test the U.S. economy’s resilience as global growth slows. But Trump’s pick to lead his Council of Economic Advisers, Stephen Miran, is bullish that the president’s policies will lead to a stronger dollar, which would offer a critical buffer to any immediate downside risks that new tariffs could pose to consumers and markets as the new administration moves to shake up global trade. As a top investment strategist at Hudson Bay Capital Management, Miran has been making a case in recent weeks that U.S. tariff rates remain far below “optimal” levels that would maximize both public welfare and government revenue. And despite the doom-mongering around Trump’s tariff plans — which could include universal tariffs and 60 percent levies on Chinese imports — Miran says the dollar appreciated against other currencies during the last trade war and would likely do so again, thereby offsetting any deleterious effects that rising prices might have on consumers. As the exporting country’s currency weakens, “its real wealth and purchasing power decline,” he adds. “Since the exporters’ citizens became poorer as a result of the currency move, the exporting nation ‘pays for’ or bears the burden of the tax, while the U.S. Treasury collects the revenue.” But the purpose of tariffs, at least from Miran’s perspective, isn’t to simply weaken another country’s economy while generating revenue for the U.S. Trump wants to bolster domestic manufacturing and exports as well – which would imply a weaker dollar. To that end, new tariffs (or the threat of even higher tariffs) could be used as leverage to compel other countries to agree to new trade deals to deliver on those priorities. “Because tariffs are USD-positive, it will be important for investors to understand the sequencing of reforms to the international trading system,” Miran wrote in a research note he published after Trump’s election. “The dollar is likely to strengthen before it reverses, if it does so.” Why does that matter?: Miran’s theoretical order of operations — which he described as part of a “menu of policy tools” at the new administration’s disposal — is a glimpse into why Trump’s team views tariffs as the Leatherman within that toolkit. Yes, they can generate revenue, but they can also be wielded to protect domestic industries and extract concessions from other countries on everything from exchange rates to immigration. Miran’s paper also offers a preview of the economic rationale that a second Trump administration could use to sell its protectionist policies to Wall Street investors who’ve been skittish about core elements of his agenda. A central question of Trump 2.0 will be the extent to which both financial markets and the political class will be able to stomach the tumult that would accompany any attempt to reshape global trade, particularly if the economic outcome proves to be more painful than many of Trump’s advisers contend. Even Miran notes that any attempt to impose sweeping tariffs while shifting away from other strong dollar policies will be challenging. There is a path by which these policies can be implemented “without material adverse consequences,” he writes, “but it is narrow.” But, but, but: By Miran’s telling, because the effective tariff rate is currently quite low, higher levies on imports are less likely to inflict economic pain than higher taxes. And so long as they aren’t pumped above “optimal” levels — he cites research suggesting the optimal tariff rate on imported goods could be 10 times higher than the current effective rate of about 2 percent — the commensurate surge in the dollar’s value would keep the effective prices on imported goods relatively flat. Furthermore, the new administration could discourage retaliation from other countries by declaring “that it views joint defense obligations and the American defense umbrella as less binding or reliable for nations which implement retaliatory tariffs.” (Trump’s Treasury pick, Scott Bessent, has also called for policy shifts to link U.S. security and economic concerns more closely.) Miran goes even further, noting that a similar posture could be used to set the stage for complex new multilateral currency agreements similar to the Reagan-era Plaza Accords that weakened the dollar against the Japanese yen and European currencies. A deal on that scale in the current economic climate would represent a massive reconfiguration of trade and financial markets, and would likely face tremendous headwinds both domestically and abroad. Could it happen? Miran thinks it can, but would “require a different kind of diplomacy to procure that end than the diplomacy that produced the Plaza Accord, and the mixes of sticks and carrots may be extremely challenging to get right,” he writes. “The difficulty in persuading trading partners to agree to such an approach is a good reason for currency tools to be used after tariffs, which provide additional leverage in negotiations,” he adds. “If a currency agreement is reached, removing tariffs can be a big part of the incentive.” It’s MONDAY — Welcome back! It’s a pleasure to be back in your inbox. If you’ve got news tips, suggestions or feedback, hit me up at ssutton@politico.com.
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