A User’s Guide to Restructuring the Global Trading System
November 2024
Executive Summary
The desire to reform the global trading system and put American industry on fairer ground vis-à-vis the rest of the world
has been a consistent theme for President Trump for decades. We may be on the cusp of generational change in the
international trade and financial systems.
The root of the economic imbalances lies in persistent dollar overvaluation that prevents the balancing of international
trade, and this overvaluation is driven by inelastic demand for reserve assets. As global GDP grows, it becomes
increasingly burdensome for the United States to finance the provision of reserve assets and the defense umbrella, as
the manufacturing and tradeable sectors bear the brunt of the costs.
In this essay I attempt to catalogue some of the available tools for reshaping these systems, the tradeoffs that
accompany the use of those tools, and policy options for minimizing side effects. This is not policy advocacy, but an
attempt to understand the financial market consequences of potential significant changes in trade or financial policy.
Tariffs provide revenue, and if offset by currency adjustments, present minimal inflationary or otherwise adverse side
effects, consistent with the experience in 2018-2019. While currency offset can inhibit adjustments to trade flows, it
suggests that tariffs are ultimately financed by the tariffed nation, whose real purchasing power and wealth decline,
and that the revenue raised improves burden sharing for reserve asset provision. Tariffs will likely be implemented in a
manner deeply intertwined with national security concerns, and I discuss a variety of possible implementation schemes.
I also discuss optimal tariff rates in the context of the rest of the U.S. taxation system.
Currency policy aimed at correcting the undervaluation of other nations’ currencies brings an entirely different set of
tradeoffs and potential implications. Historically, the United States has pursued multilateral approaches to currency
adjustments. While many analysts believe there are no tools available to unilaterally address currency misvaluation, that
is not true. I describe some potential avenues for both multilateral and unilateral currency adjustment strategies, as well
as means of mitigating unwanted side effects.
Finally, I discuss a variety of financial market consequences of these policy tools, and possible sequencing.
Stephen Miran, Senior Strategist
Stephen Miran is Senior Strategist at Hudson Bay Capital. Previously, Dr. Miran served as senior advisor for economic policy at the U.S.
Department of the Treasury, where he assisted with fiscal policy during the pandemic recession. Prior to Treasury, Dr. Miran worked for a
decade as an investment professional. Dr. Miran is also an economics fellow at the Manhattan Institute for Policy Research. He received a
Ph.D. in economics from Harvard University and a B.A. from Boston University.
Please direct enquiries to research@hudsonbaycapital.com
