A User’s Guide to Restructuring the Global Trading System

1. Overview

The restructuring of the global trade system has been a long-standing objective of former President Donald Trump. His primary focus is to enhance the competitiveness of American industries within international trade and financial systems.

A major issue in this imbalance is the persistent overvaluation of the U.S. dollar. As the world’s reserve currency, the dollar is in high demand globally, which results in structural trade deficits for the U.S.. This weakens American manufacturing while benefiting financial sectors and wealthier elites.

This report analyzes policy tools for restructuring the trade system, their potential consequences, and ways to mitigate negative side effects.

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2. Causes of Global Trade Imbalances

Triffin Dilemma and Dollar Overvaluation

• The Triffin Dilemma explains how the global demand for U.S. dollar assets forces America to run persistent trade deficits.
• This system benefits foreign economies while harming U.S. manufacturing, as the overvalued dollar makes American exports expensive and imports cheap.
• As the global economy grows, the burden on the U.S. to provide reserve assets increases, worsening the imbalance.

Trade with China and Its Economic Impact

• Since 2000, the “China Shock” has contributed to the loss of over 2 million American manufacturing jobs.
• China has deliberately undervalued its currency, maintaining an unfair trade advantage and creating a perpetual trade surplus with the U.S.
• China has also engaged in intellectual property theft, forced technology transfers, and economic espionage, which have negatively impacted U.S. economic competitiveness.

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3. Tariff Policies and Currency Adjustments

Tariff Policy and Its Effects

• Proposed Tariffs:
  • 60% tariffs on Chinese imports
  • 10% tariffs on imports from the rest of the world
• Historical Evidence (2018-2019 U.S.-China Trade War):
  • When the U.S. imposed tariffs on China, the Chinese yuan depreciated, offsetting much of the tariff impact.
  • This meant that Chinese consumers bore most of the cost, while the U.S. Treasury collected significant revenue.
  • The impact on U.S. inflation was minimal, contradicting mainstream economic fears.

Currency Adjustment Policies

• Some economists argue that the U.S. can take unilateral action to counteract foreign currency manipulation.
• The traditional multilateral approach through international institutions has been slow and ineffective.
• The Trump administration might explore direct interventions to push undervalued currencies higher and reduce trade imbalances.

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4. Market Impact and Policy Implementation

Effects on Financial Markets

• If tariffs are implemented without currency adjustments, inflation could rise due to higher import costs.
• If currency offsets occur, inflationary effects will be minimal, and foreign nations will bear most of the burden.
• The 2018-2019 tariffs demonstrated that currency adjustments helped stabilize inflation, proving that well-designed trade policies can avoid economic turmoil.

Implementation Strategy

• Gradual Implementation of Tariffs
  • Instead of imposing 60% tariffs suddenly, the U.S. government could increase tariffs by 2% per month until policy goals are met.
  • This reduces market uncertainty and gives businesses time to adjust supply chains.
• Tiered Tariff System for Countries
  • Different countries could face different tariff rates based on:
    • Their currency policies (whether they manipulate exchange rates).
    • Their trade relationship with the U.S. (whether they impose unfair tariffs on American goods).
    • Their geopolitical alignment (whether they align with U.S. security interests).
  • For example, NATO allies that meet defense spending commitments might receive lower tariffs, while China and other adversarial nations could face higher tariffs.

Linking Trade to National Security

• The Trump administration sees trade policy and national security as interconnected.
• Trade agreements could be used to pressure allies into stronger security cooperation.
• Countries that support China or Russia in geopolitical conflicts could face higher tariffs as a consequence.

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5. Conclusion: The Future of U.S. Trade Policy

• The U.S. is expected to shift the burden of trade imbalances onto foreign nations through:
  • Higher tariffs
  • Targeted currency policies
  • Trade agreements linked to security cooperation
• If implemented correctly, these policies could revive American manufacturing, reduce trade deficits, and increase revenue for the U.S. Treasury.
• However, mismanagement could lead to financial instability and geopolitical tensions.
• A gradual, well-planned approach will be crucial in avoiding excessive market disruptions while achieving America’s economic and security goals.

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This summary highlights the key arguments, policy recommendations, and potential consequences of restructuring the global trade system. While tariffs and currency policies can help correct economic imbalances, their implementation must be carefully managed to minimize risks.

*Source

https://www.hudsonbaycapital.com/documents/FG/hudsonbay/research/638199_A_Users_Guide_to_Restructuring_the_Global_Trading_System.pdf