Globalization is tilted: Analyzing the theoretical support behind Trump's trade war

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Introduction and background

"User's Guide to Reconstructing the Global Trading System" is an academic report released by Stephen Miran in November 2024, before he was nominated as Chairman of the Council of Economic Advisers of the Trump Administration. The report is not a direct policy blueprint, but an analysis of the possibility of adjustments to U.S. trade and financial policies based on the author's personal views, aiming to provide decision makers and investors with a framework for understanding the reshaping of the global trade system. Miran made it clear that the report does not represent the official position of Hudson Bay Capital or the Trump team, but reflects his diagnosis of and exploration of solutions to the structural challenges of the U.S. economy. The background of the report is that Trump's victory in November 2024 and his policy direction have attracted much attention, but the American people's dissatisfaction with globalization and its economic consequences has increased significantly in the past decade. This dissatisfaction has driven a bipartisan shift in trade policy, from free trade to more protectionist measures that focus on enhancing the status of the United States.

Miran believes that Trump has long wanted to reform the global trade system to give U.S. industries a fairer position in international competition. This desire may trigger a "generational change" during his second term. The report aims to provide insights into potential economic and market consequences by analyzing the economic imbalances of the global trading system, listing available policy tools, and assessing their strengths and weaknesses. The document was released at a time when American voters' dissatisfaction with the existing international economic order reached a peak, and Trump's re-election further amplified this trend. Therefore, although the report is academic, its content is regarded as an important reference for understanding Trump's economic strategy in his second term, especially after Miran was subsequently nominated as Chairman of the Council of Economic Advisers.

Theoretical Basis - Overvalued Dollar and Economic Imbalances

The core argument of the report is based on the theory of the continued overvaluation of the US dollar, which Miran sees as the root cause of global trade imbalances. He cited the Triffin Dilemma to explain this phenomenon: as the world's reserve currency, the dollar must provide liquidity to the world, but this role leads to an overvalued exchange rate, making US exports less competitive and imports cheaper, which hurts tradable sectors such as manufacturing. This overvaluation stems from the global "inelastic demand" for the dollar as a reserve asset - countries continue to buy dollars to hold safe assets (such as US Treasury bonds), causing the dollar's value to exceed the equilibrium level determined by its economic fundamentals. Miran pointed out that this imbalance is particularly evident in recessions, because the dollar will further appreciate as a safe-haven asset, weakening the competitiveness of US exports, while other countries' currencies tend to depreciate to stimulate exports. This asymmetry causes US manufacturing employment to fall sharply during economic downturns and is difficult to recover during recovery periods.

He further analyzed that as global GDP grows, the cost to the United States of providing reserve assets and maintaining a global security umbrella (such as through defense spending) is increasing. These costs are mainly borne by the manufacturing and tradable sectors, rather than the financial or service sectors. This structural pressure not only weakens the competitiveness of the US economy, but also causes domestic social problems, such as local economic shrinkage caused by factory closures and economic difficulties of working families. Miran believes that the overvaluation of the US dollar is not only a technical economic problem, but also a political driving force behind Trump's policy tendencies. Trump and his supporters blame the decline of the manufacturing industry on unfair trade rules, and the key to solving this problem is to reduce the value of the dollar or adjust trade conditions to reduce the structural burden on the US economy. This theoretical framework has laid a solid academic foundation for the subsequent policy recommendations of the report.

The Roots of Global Trade Imbalances and U.S. Dissatisfaction

Miran delves into how global trade imbalances have fueled widespread discontent in the United States. He points to trade deficits and the decline of manufacturing, caused by an overvalued dollar, as the root of public distrust of the existing economic order. Since the 1970s, the U.S. current account has shifted from a surplus in the 1960s to a persistent deficit, reaching several percentage points of GDP by 2024. At the same time, the share of manufacturing employment has declined significantly, and these changes are closely related to the dollar's reserve currency status. While some economists believe that the decline in manufacturing employment is a natural result of global productivity gains and technological progress, Miran emphasizes that in the political sphere, this economic consequence has been amplified into a general resistance to globalization. This sentiment is particularly strong among Trump's supporters, who link factory closures and job losses to an unfair trade system.

The data provided in the report show that the US trade deficit problem has become increasingly serious over the past few decades, and the overvaluation of the US dollar has put the United States at a disadvantage in global trade. Other countries can offset the US competitive advantage through currency devaluation or export subsidies, but the United States cannot take similar measures due to the strength of the US dollar. Miran believes that this imbalance is not only an economic problem, but also has profound social impacts. For example, the shrinking local economy caused by the decline of manufacturing has made working families dependent on government assistance, and some areas have even seen social problems, such as the prevalence of opioid addiction. These phenomena have exacerbated the American people's distrust of the existing trade system and provided a public opinion basis for Trump's policies. During his campaign, he repeatedly emphasized the need to restore the "fairness" of the US economy by reshaping trade rules, and Miran's analysis shows that this goal requires a fundamental solution to the problem of overvaluation of the US dollar.

Policy Toolbox - From Tariffs to Currency Intervention

The fourth part of the report is its core content, providing a detailed "toolbox" for reshaping the global trading system. Miran lists a variety of policy options and analyzes their advantages and disadvantages one by one. First, he discussed tariffs, which he believes are the tools that the Trump administration may prioritize. Taking the 2018-2019 tariffs on China as an example, he pointed out that although these measures increased import costs, they did not trigger significant macroeconomic consequences because the adjustment of the RMB exchange rate partially offset the impact of tariffs. To enhance the effect, Miran suggested that future tariffs could take the form of "forward guidance", such as gradually increasing tariff rates every month (such as an increase of 2%) to exert continuous pressure on trading partners to force them to make concessions in negotiations.

Second, he proposed weakening the value of the dollar through monetary policy, including reaching a multilateral monetary agreement similar to the Mar-a-Lago Accord with trading partners to reduce the dollar exchange rate through collective intervention. In addition, he suggested imposing "user fees" on foreign holdings of U.S. Treasury bonds, or forcing foreign governments to extend the holding period of their Treasury bonds to reduce short-term demand for the dollar. These measures are aimed at reducing the value of the dollar while trying to preserve its reserve currency status. He also mentioned other auxiliary tools, such as tax cuts to stimulate domestic investment, or taking advantage of the United States as the world's largest consumer market to gain the upper hand in the trade war. However, Miran also admitted that these tools have risks: tariffs may trigger retaliatory measures and lead to disruptions in global supply chains; weakening the dollar may push up U.S. borrowing costs and affect fiscal stability. He stressed that the design of the policy mix needs to balance the goal of trade rebalancing with the potential negative impact on the US economy.

Financial Market Impact and Policy Implementation Challenges

Part V of the report explores the potential impact of these policies on financial markets and the challenges in implementation. Miran predicts that tariffs and dollar depreciation policies may trigger short-term market volatility, especially in foreign exchange and bond markets. If the dollar depreciates significantly, foreign investors' demand for dollar assets may decrease, leading to higher US Treasury yields and, in turn, higher borrowing costs. However, he believes that this effect can be mitigated through currency agreements or capital controls. In the stock market, the share prices of manufacturing-related companies may rise due to tariff protection, but companies that rely on imports may be under pressure. If the trade war escalates, global supply chain disruptions may trigger inflationary pressures, although Miran believes that exchange rate adjustments can partially offset this effect.

At the implementation level, he pointed out that policies need to be carefully sequenced and coordinated. For example, tariffs should take precedence over currency intervention to avoid premature weakening of the dollar and capital outflows. He also mentioned that the Trump administration may use emergency powers (such as the International Emergency Economic Powers Act) to enforce these measures, but this may cause legal disputes and international tensions. Miran particularly emphasized that the United States' position as a major global demand country gives it more endurance in the trade game, but if other countries turn to the euro or the renminbi as alternative reserve currencies, the dominance of the dollar may be threatened. This uncertainty makes the success of the policy highly dependent on external reactions and internal execution capabilities.

Viewpoints and Reality Verification

On April 7, 2025, Trump announced a 25% tariff on Canadian and Mexican imports to put pressure on the two countries on drug trafficking and illegal immigration. This move is highly consistent with Miran's tariff strategy. Media reports pointed out that according to data from the Anderson Economic Group, this move could increase the price of American cars using Mexican and Canadian parts by $4,000 to $10,000, reflecting Miran's idea of ​​using tariffs to shift economic burdens and encourage domestic production. However, Ken Rogoff, former chief economist of the International Monetary Fund, estimated that this would increase the probability of a recession in the United States to 50%, echoing Miran's concerns about financial market volatility, such as a weaker dollar that could push up borrowing costs.

Summary and Outlook

The User's Guide to Reshaping the Global Trading System provides an ambitious and controversial framework that attempts to address the structural challenges facing the United States in the global economy through trade and monetary policy. Starting from the theory of dollar overvaluation, Miran diagnoses the root causes of trade imbalances and proposes innovative tools from tariffs to multilateral currency agreements, aimed at enhancing the competitiveness of American industries while retaining the dollar's reserve status. He acknowledges the potential risks of these policies, such as retaliatory tariffs, inflationary pressures, and financial market turmoil, but believes that careful design and coordination can mitigate the negative impact. Trump's tariff policy on Canada and Mexico in 2025 shows that some of Miran's ideas are being transformed into reality, and its subsequent impact will further test the feasibility of this framework.

Finally, the implementation of these proposals also faces multiple tests: domestic political support, willingness for international cooperation, and market reactions will determine their success or failure. Although the report provides theoretical basis and policy options, it is still questionable whether unilateral actions are sufficient to reshape the global system in the context of globalization. For investors and decision makers, this guide is both a window to understand Trump's economic strategy in his second term and a starting point for careful assessment of risks and returns. Miran's analysis combined with Trump's actual policies indicates that the United States may usher in a profound change in the trade system, but the outcome is still full of uncertainty.