Policy Insights
Policy Insight 142: Tariffs, the dollar and the US economy
This Policy Insight examines a set of proposals gaining traction among economists and policymakers aligned with the new US administration, who seek to overhaul the global trading and financial system to better serve US economic interests. Departing from traditional protectionism, this emerging approach embraces tariffs as tools for revenue generation and burden sharing, while framing persistent trade deficits as symptoms of broader macroeconomic imbalances - particularly a chronically overvalued dollar driven by global capital inflows. These inflows, the authors argue, result from both domestic distortions in surplus economies like China and the dollar’s role as the world’s dominant reserve currency. The proposed remedies include unconventional measures, such as penalising foreign reserve accumulation in dollars, accepting a reduced international role for the currency as a necessary trade-off for revitalising US industry and correcting current account imbalances. Drawing primarily on recent work by Miran (2024) and Pettis and Hogan (2024), the Insight explores the technical underpinnings of the ‘new arrangement’ and assesses its implications for the long-term health of the US economy.
