Trump’s tariffs and the "USExit"
The Trump administration announced yesterday the largest increase in import tariffs in its history. This measure is directly linked to the ideas of economist Stephen Miran, recently appointed to preside over the Council of Economic Advisers of the current administration. A detailed explanation of his vision, which underlies the ongoing policies, is in the document A User’s Guide to Restructuring the Global Trading System, published in November 2024. In it, Miran presents the theoretical foundation for a possible radical reconfiguration of the global trading system—ideas that now seem to guide American trade policy.
Miran’s vision for a new trading system
For Miran, the central problem of the American economy is the persistent overvaluation of the dollar, which harms the manufacturing industry by making exports less competitive and imports artificially cheap.
"The dollar is persistently overvalued, largely because dollar assets serve as the world’s reserve currency," argues Miran, resorting to the "Triffin dilemma"—the tension between the dollar's role as a global currency and the need for balance in the US's external accounts.
The strong demand for dollars, driven by its role as a global reserve, would imply an overvalued exchange rate that weakens conditions for domestic producers and exporters, resulting in a decline in production and employment in the US. According to him, import tariffs would be a way to offset this "distortion."
Miran also states that the inflationary impact of tariffs would be limited, thanks to what he calls "exchange rate compensation"—that is, countries that face tariffs tend to see their currency depreciate in a similar proportion, neutralizing the impact on prices.
Citing the US-China trade war of 2018-2019, he notes that although the effective tariff on Chinese products increased by 17.9 percentage points, the yuan depreciated by 13.7%, resulting in only a 4.1% increase in import prices in dollars.
"With complete exchange rate compensation, tariffs can have quite modest inflationary impacts, ranging from 0% to 0.6% on consumer prices," writes Miran. He estimates that a 10% tariff on all imports would have a limited impact on inflation.
Miran further proposes a system of "graduated scales," in which different countries would face varying tariff levels based on criteria such as security agreements with the US, trade practices, and exchange rate policies—thus, access to the American consumer market would be used as a lever for negotiation.
Criticism of the "Pain-Free Tariff" Theory
There are serious doubts about the central premises of Miran's thesis, especially his optimistic view of the inflationary impacts of tariffs.
Detailed microeconomic studies, such as those by Alberto Cavallo (Harvard), Gita Gopinath (IMF and Harvard), Pablo Fajgelbaum (Princeton), and David Weinstein (Columbia), directly contradict this thesis. They show that, in practice, the tariffs of 2018-2019 were almost entirely passed on to import prices, with American consumers bearing most of the costs—contrary to the hypothesis of exchange rate compensation.
Moreover, Miran's focus on the Triffin dilemma overlooks more recent analyses. Nobel Laureate Ben Bernanke, for example, attributes American trade deficits to the so-called "Global Saving Glut" rather than necessarily to the dollar's role as an international reserve. American securities are seen as risk-free assets, attracting huge global savings demand. This indeed strengthens the dollar and adversely affects the trade balance. However, in net terms, it appears to be much more of a blessing than a curse: the US can finance its debt at extremely low interest rates.
Beyond these criticisms, I see four other relevant points that Miran insufficiently considers:
Other countries should react by raising tariffs;
He ignores the complexity of global value chains: many American companies rely on imported inputs to maintain their competitiveness. Higher tariffs could harm their global operations;
There is a risk of productivity loss in the medium and long term due to reduced competition and increased allocative inefficiency;
Global trade is a two-way street: protecting the domestic market could mean losing access to foreign markets for exporters.
What is at stake
A few years ago, the United Kingdom left the European Union—the Brexit. The outcome has been disastrous. Studies show that both the British and European economies have evolved worse than they would have in a counterfactual scenario where the United Kingdom remained in the bloc.
What the Trump administration is now doing is something similar, but on a global scale: a USExit, in which the American economy detaches from the rest of the world.
My expectation is for a consistently worse economic dynamic over the next few years—for both the United States and the rest of the world. The disruptions in global chains, loss of efficiency, and weakening of innovation will undoubtedly lead to more stagnant economies and greater difficulty in dealing with inflationary pressures.
Other countries have already tried policies similar to those prescribed by Miran. Brazil, for example, with its import substitution policy. The justification here is similar: although we do not have a global reserve currency nor are we a safe haven for international savings, it is claimed that the real is overvalued because of the "Dutch disease," in which the export of primary goods appreciates the exchange rate and harms the domestic industry.
Regardless of the theory used to justify this type of policy, the goal is always the same: to protect the domestic industry. I see no reason to believe that, in the US, the outcome will be different from what happened in Brazil: a decline in productivity and development level. The difference is that, in the American case, the rest of the world may end up coming along.
*Article originally published in O Estado de São Paulo on April 3, 2025.
