What is the rationale for these tariffs, if any?
Trump has appointed a relatively unknown economist named Stephen Miran from a private equity firm (Hudson Bay Capital Management) to chair his Committee of Economic Advisers. Miran wrote a paper in November 2024 attempting to provide a rational economic foundation for Trump’s tariff policy, and because of his new job as a senior White House adviser, the article has been widely read and discussed by anxious Wall Streeters. This interest has reached new heights now that Trump has nominated him to the board of the Federal Reserve. In particular, his proposal to push for an agreement with the world’s leading economies to support a controlled devaluation of the US dollar, as was the case in 1985 with the “Plaza Accord”, at that time especially against the Japanese yen. Miran has called this proposal a “Mar-a-Lago Accord” (after Trump’s golf resort in Florida).
His analysis is based on the basic premise that the United States' persistent fiscal and current account deficits and rising public debt are unsustainable. Therefore, "something has to be done." The normal policy in these situations is to devalue the currency (the US dollar), but it is argued that since it serves as the main reserve currency for the rest of the world, there is a high demand for the dollar and it is therefore difficult to push through a devaluation.
Trump has chosen a relatively unknown economist, Stephen Miran, to chair his Council of Economic Advisers. He has now nominated him for a seat on the board of the Federal Reserve.Wikimedia.
It's kind of funny to read the comments from the economic and financial commentariat. We can basically divide them into two camps. The first camp believes that the US economy was doing better than ever before Trump came to power and that the deficits were under control, so there was no need to "do something" in the first place. The whole thing can therefore be dismissed as nonsense. Despite the fact that two-thirds of Americans believed that the country was "moving in the wrong direction" and that the Democratic Party had the lowest support in decades.
The second camp recognizes that the US economy has deeper problems, first and foremost with the rising public debt, but also with the persistent deficit on the current account, so something should be done. Which does not necessarily mean that they support Trump's tariff crusade, and even less his "One Big Beautiful Bill", which was approved by Congress in July. Many of these are often referred to as fiscal conservatives.
This is, of course, a crucial question. If there are no serious problems in the US economy, there is no justification whatsoever for Trump’s tariff war. So no need to look for any rationale.
Those who have followed my writings on the US economy will know that I think that there are indeed deeper problems in the US economy, and in particular that the rising debt is unsustainable in the long run. It is difficult to say how long the long run is. But it will not last forever.
Among those who agree that “something has to be done”, there are those who argue that the main problem in the US is the budget deficit. The solution is simple: cut government spending and/or raise taxes. This will likely lead to a recession and increase unemployment. The central bank will then be able to lower interest rates, which will make it less attractive to invest in the US. Hence the dollar will be devalued (as intended), US competitiveness will be restored, and the current account deficit will decrease. However, this is not so straightforward because of the way the American political system works, where it is easy enough to get through with new spending, but almost impossible to get a majority to approve spending cuts or tax increases (as we recently saw with Trump's "Big Beautiful Bill").
However, there are those who believe that this will not be possible anyway, since there are global excess savings, and these savings have to end up somewhere (as Ben Bernanke, the former chairman of the US Federal Reserve, argued in 2015). There are various explanations for this excess saving.
One of them is that central banks around the world are building up reserves of foreign currency, especially US dollars. This is, for example, what Asian countries did after the disastrous 1997-1998 financial crisis. Globally, the sum of deficits and surpluses on the current accounts should in principle be zero (save for statistical errors), so if some countries are running a surplus to build up foreign exchange reserves, other countries must run a deficit. The United States has willingly taken on that role. At least until now.
But why do countries want to build up foreign exchange and gold reserves? As I have mentioned earlier, the International Monetary Fund, the IMF, was supposed to ensure that there was no need for countries to build up large reserves, since the IMF would guarantee a financial safety net when needed. However, it doesn’t really work like that, as the Asian countries found out during the 1997-1998 Asian financial crisis. It was after this bitter experience that the otherwise irrational accumulation of reserves began, and not only in Asia. As the IMF itself has observed, its role as a financial safety net has become less and less important over the past decades and is now negligible – the countries guarantee their financial security with their own foreign exchange reserves, gold and regional swap agreements, not the IMF. The IMF, which is under US leadership, is to blame for this, as the organization has failed to live up to its purpose.
Soaring gold prices have led to a global gold rush. The picture shows the Hlanganani shaft at the Driefontein gold mine in Westrand DM, Gauteng province, South Africa. Wikimedia Commons.
The situation now is that the growth rate of global foreign exchange reserves has been declining over the past few years, and at the same time, central banks are increasing the share of gold in their reserves, so that they now hold more gold than US Treasury bonds. This trend is expected to continue. Demand for gold has pushed up the price of gold, and it is now at a record high, three times the level in 2017 and thirteen times the level in 2000. However, gold is different from dollars. Gold is a physical asset that is produced (global production is about 5,000 tons per year), and this means that a country can increase its gold reserves without another country having to run a current account deficit. As the growth in reserves slows down, and more and more of it consists of gold, the demand for dollar assets from central banks can no longer explain the US current account deficits.
Another explanation for the US current account deficits is foreign investment in the country. A flow of capital (foreign savings) into the US will by definition result in a US current account deficit. This is usually explained by the fact that US assets are seen as a “safe haven” for private equity funds and wealthy individuals around the world, even though the returns are not necessarily very attractive. Global savings are thus transferred to the US to buy government bonds, stocks and real estate, which pushes up the dollar price and inflates the value of stocks and real estate. We are likely witnessing the building up of a bubble waiting to burst.
Some believe that it is not a problem when a current account deficit is caused by capital flowing into a country, since on the one hand it means that the deficit has already been financed, and on the other hand that investors will suffer losses if it leads to a bursting bubble. This is rather naive, since a bursting bubble normally leads to much broader economic troubles, that are not limited to foreign investors.
However, if the goal is to limit the inflow of foreign capital and devalue the dollar, there are simpler ways to do it than with Trump's tariffs and the proposed "Mar-a-Lago Accord". For example, introducing a tax on capital flows to limit the movement of "hot money". This has been done before in other countries (including Brazil, Chile and Thailand).
To conclude on this part, in my opinion there are deep-seated problems in the US economy, which are reflected in the persistent deficits in public finances and the current account. However, there are different ways to deal with it. In the next article, we will look at Trump's policies and their possible effects.
