Tariff Uncertainties, Part 4: A Little Q&A (Maybe It's About China?)

Forbes

2 days ago

(Photo by GREG BAKER/AFP via Getty Images)
This Spring, economists everywhere, amateur and professional, got a new study assignment: tariffs.
An old-school, back-burner policy issue, the tariff question jumped out of the history books (the McKinley presidency, Smoot-Hawley 1930, etc.) and onto the front pages here in 2025. 'Liberation Day' created such a storm of controversy that, like so many of us, I was diverted from other plans and forced to deal with it, to learn the vocabulary, to recall the history, and to pick apart the complex uncertainties. The result for me has been three installments so far (here, here and here) with several more to come, I expect.
In writing for Forbes, my general principle is to avoid editorializing (there is certainly more than enough of that out there) but the new tariff proposals are so bewildering that inevitably many of my friends and correspondents have wanted to know 'What-I-Think'.
And so –
A couple weeks ago I got a query from a reporter, who posed a number of questions about the Trump administration's tariff gambit – which I tried in good faith to answer, based on the current and highly imperfect state of my knowledge of the subject. It occurred to me afterwards that these brief and relatively unencumbered responses might serve as a preliminary and partial statement of my conclusions about some of this.
One of the questions cited below referenced a recent and now quite widely cited paper by Stephen Miran, formerly of Hudson Bay Capital and now Trump's choice as the Chairman of the Council of Economic Advisors. Titled 'A User's Guide to Restructuring the Global Trading System,' it puts forward a provocative thesis: because the dollar is in effect the world's reserve currency, it is overvalued due to 'inelastic demand' for dollar-denominated reserve assets by foreign central banks and many others. In other words, there are many economic actors globally who need to hold dollars for various reasons unrelated to the real economic value of our currency or our economy. These buyers are willing to pay a premium to acquire dollar reserves, and the price of the dollar is bid up. This creates trade imbalances because U.S. dollar-priced exports are overvalued and become uncompetitive, whereas U.S. consumers' dollar-priced purchasing power for undervalued foreign imports is stimulated. QED, growing trade deficits.
Miran's thesis invites a much more substantive assessment than what is provided here. In a future column, I expect to address the general question of 'elastic' or, as I prefer to call it, 'price-insensitive' demand for Treasury Bonds, which is a larger subject than the trade policy perspective alone would suggest.
So what follows is the colloquial Q&A, more or less unedited, from my email exchange with that reporter. It may be in some respects clearer, and more concise, than the analyses comprising the more substantive columns mentioned above. (The reporter's questions are in bold.)
I think it is best to assume that Yes, there is a plan – rather than dismissing it all because it may look disorganized or haphazard. Trump's tactical modus operandi is to keep people guessing and off balance. This studied unpredictability may be confusing to many and annoying to some, and perhaps it is intended to confuse and annoy. It certainly overturns the traditional 'diplomacy' model of patient, dignified, long-term multi-lateral convocations of bureaucrats laboring over detailed trade agreements (e.g., the 'Uruguay round' - which involved representatives from 123 countries, working for 7½ years, to produce 26,000 pages of trade agreement documentation – or the subsequent 'Doha Round' which has been grinding away since 2001 without reaching a conclusion).
As to what that endgame is — My best guess is that Trump actually would prefer to end up with a global trade regime based on low and balanced tariffs. At the G7 summit in Canada in 2018, he shocked the other world leaders by calling for the elimination of all tariffs and trade barriers – 'No tariffs, no barriers. That's the way it should be' — I think he wants to equalize or 'reciprocalize' the trade landscape among major trading partners. (China may be an exception.) In any case, I think the era where the U.S. runs a kind of parallel Marshall plan by allowing highly asymmetric trade arrangements to continue is coming to an end, one way or another.
I think the principal long-term financial impact will be on the value of the dollar. Traditional trade theory would say that as the U.S. tariffs are imposed the dollar should appreciate and exporting countries' currencies should depreciate. This is what happened with the first round of Trump tariffs in 2018. The dollar gained strength and the Chinese Yuan (for example) devalued.
However, the initial currency movements now are in the opposite direction — a somewhat weaker dollar and some appreciation of currencies like the Korean Won and the Taiwanese dollar (which has been the most severely undervalued currency in the world). This would suggest that a strategic re-alignment of exchange rates may be underway, which would address the issues raised in the Stephen Miran paper (see below, Question 4).
Some have said that the dollar's reserve currency status may be affected, perhaps diminished somewhat – which would have many ramifications, including a rise in the cost to the U.S. for financing its deficits. I'm not sure about that.
Capital outflows from China are the thing to watch most closely. Unlike the other major currencies, the Chinese currency has not appreciated significantly since Liberation Day and is at or near its lowest point since 2007. Initially it dropped in value, and has recovered only a little, apparently with massive help from Beijing.
Gain in value of major currencies vs the USDollar, April 1 to May 23 2025
The struggling economy in China, the effects of tariffs imposed by the U.S., the EU, Canada, and just about every other country in the world restricting Chinese exports, along with other domestic constraints will put pressure on the Yuan — and as it depreciates, capital flight risk will intensify. It is difficult to measure, especially given China's steady elimination of statistical measures related to the economy, but by most accounts capital has been draining from the country since 2020, and the pace is accelerating. This is the most serious risk for the Chinese regime right now, I believe. It is also probably the most important long-term effect of the tariff war.
Capital Flight from China accelerating
Miran's is a very important paper, with many interesting observations. I would simplify the basic argument as follows: just as the massive purchases of Treasury bonds by the Federal Reserve in course of the various rounds of quantitative easing drove up the price of Treasury bonds (duh!), the massive accumulation of dollars (and Treasurys) by foreign govts and others will have the same effect. Both sources of demand are price-insensitive – the purchasers have other reasons to want or need to hold dollars or Treasurys and don't care about the price per se. From this insight — which is so obvious once it is stated that I am chagrinned not to have made the connection myself! – many other interesting corollary observations flow.
Short answer is No.
Smoot-Hawley happened almost a century ago, in a very different economy, both in the U.S. and globally, and has no real bearing on tariff policy today. [Much more to say on that, for a future column perhaps – but the conclusion is solid.]
This may well be the end of the WTO as we know it. The WTO was created to put order in the global trading economy. It was born out of the General Agreement on Tariffs and Trade (GATT) system, which was itself born out of the post-war 'Marshall Plan for trade' regime alluded to above [and described in detail in my first Tariff column]. The WTO is a manifestation of geopolitical idealism. But it has failed to create or manage a fair trade regime, despite its high aspirations. The proliferation of non-tariff trade barriers in particular has raged on, with the level of complaints surging from many countries (not just the U.S.), and mostly aimed at China. The Chinese have made it clear that they are going to follow a protectionist path (a self-sufficiency model, they might call it) ever since the unveiling (in 2015) of the 'China 2025' plan.
The WTO should be revamped, or replaced, by a new regime with real enforcement powers, and the will to exercise them against bad actors.
Well, we should begin any answer to that question by defining our terms.
If globalization refers to the current highly asymmetric international trade regime, rife with not just tariff imbalances but massive currency manipulation and even more significant levels of government subsidy for 'national champions' to provide competitive advantages… well, yes, I think that form of globalization is on the way out. And to the extent that globalization focuses on manufacturing, that too is going to change. One thing that is under-commented generally is the role of services in global trade. As manufacturing (in the West) follows the path of agriculture downward in terms of employment and GDP share, due to inexorable technological progress, and we become even more committed to a service economy, the nature of 'globalization' will surely evolve. 'Fairness' will have different manifestations. And 'global trade as fair trade' — that high ideal is gestating, and it is hard to say exactly how it might emerge as a concrete reality.
A truck passes by China Shipping containers at the Port of Los Angeles, after new tariffs on Chinese ... More imports was imposed by President Trump, in Long Beach, California on September 1, 2019. - Washington moved ahead Sunday with new tariffs on Chinese imports as it stepped up a high-pressure campaign aimed at coercing Beijing to sign a new trade deal even amid fears of a further slowing of US and world growth. (Photo by Mark RALSTON / AFP) (Photo credit should read MARK RALSTON/AFP via Getty Images)
China is going to be the center stage of the next phase of global trade policy. Behind all the sound and fury attending Trump and his Liberation Day antics, there is a sober consensus cohering in the West (and Japan, Korea, India, even SE Asia) that China is the real problem for global trade. Tariffs against Chinese imports are going into place all over the world. The country's massive export subsidies, over-production, gross dumping policies, currency manipulation, and numerous forms of bad economic misbehavior are eliciting protectionist responses almost everywhere, which will crimp China's ability to stimulate its flagging economy through its accustomed export-driven channels. A weakening Yuan and accelerating capital flight will push them to the edge. China is in the weakest position to survive a trade war without serious consequences.