It's potentially the biggest economic policy shift in generations. The "Mar-a-Lago Accord." A proposal to reengineer the global financial, military, and economic system as we know it.

The two-phase plan is to 1) levy broad tariffs globally and 2) devalue the U.S. dollar in order to revive U.S. manufacturing, national security and attain other goals.

"President Trump is dead serious about rearranging our trade and tariff regime internationally" according to Vice President JD Vance.

The tariffs phase is already underway with more coming on April 2 (so called "Liberation Day"). The second currency phase is much more risky and unclear if and how Trump will even proceed with dollar devaluation strategy.

What we know is Trump's current chairman of the Council of Economic Advisers, Stephen Miran, wrote a paper outlining the whole plan titled A User's Guide to Restructuring the Global Trading System.

Treasury Secretary Scott Bessent said the U.S. economy needs a “detox” before long-term benefits of Trump’s plan are realized. Short term pain for long term gain?

So let's dive into what it is and what the potential implications for U.S. individuals, companies and the global economy.

The Issue

The underlying problem doesn't sound like a problem: a strong dollar. Especially in an administration that inherently values strength. But a strong dollar makes the manufacturing industry less competitive in the global market. This along with other policies and geopolitical events has decimated certain jobs and communities.

The Plan

The Mar-a-Lago accord is protectionist trade policy and currency policy. It outlines ways to restructure the global trade system by 1) raising tariffs and 2) devaluing the dollar while still maintaining reserve currency status. There are several paths to devaluing the currency including having other partner countries appreciate their currency in exchange for security under a U.S. defense umbrella. This is a risky plan to restructure the global economic and geopolitical system.

Why is the Dollar so Strong?

The dollar is strong due to being the reserve currency of the world. The USD is a safe haven currency used to conduct global transactions (including ones not involving the U.S.) and a store of value and unit of account for central banks globally. This inflates the demand for dollars above what would be the normal demand level for trade. It also artificially overvalues the dollar which would otherwise float to a more reasonable level.

Why is the USD the Reserve Currency?

Basically the size, strength, and trustworthy of U.S. relative to other countries. The U.S. economy is 26% of global GDP, consistently innovative and a fast growing large economy for a long time. It has the most solid and reliable financial markets in the world, historically strong economic policy and rule of law.

The global financial system is a dollar-based one.
What are the Advantages to Reserve Currency Status and a Strong Dollar?

A strong dollar is seen as a symbol of American economic strength. It has been called an "exorbitant privilege" by French presidents. Let's cover the benefits before we get into the downsides.

• Reserve currency status allows the U.S. is able to borrow more cheaply than other nations. Borrowing does not push up rates like in most countries.
• A strong dollar makes imported goods less expensive decreasing the overall cost of living. This helps keep inflation down and enhances our purchasing power.
• Geopolitical Influence. Reserve currency status also allows the U.S. government to levy corrective sanctions sanctions against nations using finances instead of soldiers.
• A strong dollar makes our financial services sector more profitable.
• A strong dollar attracts foreign investment.

The Downsides of Reserve Currency Status and a Strong Dollar

Hurts the manufacturing industry and manufacturing jobs

The main problem is that reserve currency status overvalues the USD which hurts the U.S. manufacturing sector. U.S. exports became more expensive abroad because it takes more foreign currency to buy a strong dollar. Furthermore, it makes imports from abroad cheaper. Both factors put U.S. producers at a disadvantage.

As jobs disappear from major manufacturers over the last few decades, American communities in the rust belt and other locales got hollowed out. There were significant consequences to people's health and dignity.

It should be noted that manufacturing output is actually at a near all-time high in America. However, manufacturing jobs peaked in 1979. Automation is increasing output with less labor.

Less industrial strength for national security

The decline of the U.S. manufacturing sector has follow-on effects. The lack of industrial strength undermines national security. It's not good to outsource a lot of manufacturing to a potential enemy. It's not ideal to build a military without strong domestic manufacturing capacity.

President Trump has said, “if you don’t have steel, you don’t have a country.”

According to a recent JD Vance speech, "One of Beijing's state-owned firms built more commercial ships just last year than all of America has produced since the end of World War II"

Conversely, industrial strength in foreign nations, like China, enhances areas such as innovation, jobs and national security.

Could limit innovation

Furthermore, the lack of manufacturing could eventually reduce our ability to design and engineer great products. Being geographically separated from the factories that make your items means less collaboration and less innovation. At the same time, a Chinese factory working through the ins and outs of making a product and dealing with the intellectual property could conceivably, without even setting out to do so, discover a way to disrupt it.

It also leads to a trade imbalance, meaning countries sell more to the U.S. than it sells to them. Its debatable that this is a negative.

Phase 1: Tariffs

The first phase of the plan is raising tariffs on certain countries and sectors. Tariffs are essentially taxes on goods being imported from other countries. U.S. firms (and individuals) importing these goods pay them when the product crosses the border.

For a long time the U.S. has had some of the lowest tariff rates in the world, around 4% on average . For example, the U.S. levies only 2.5% tariffs on EU automobiles but they levy 10% tariffs on U.S. cars. That said, the U.S. levies 25% on trucks which is why almost all trucks are U.S. made.

The reason the U.S. pays much higher tariffs harkens back to a history of helping countries rebuild after wars and military interventions. But many of these tariffs were never renegotiated.

Some economists cited by Miran say the optimal tariff rate should be 20%. Still other economists believe in as low tariffs as possible.

Trump levied some limited tariffs in his first term, mostly on China, which had limited effects, both positive and negative. Biden extended them and added some more, mostly around green tech.

Trump is levying way more tariffs in his second term. Trump is looking to impose wide-ranging tariffs on many countries and some sectors such as steel and automobiles. With reciprocal tariffs, essentially every country that tariffs the U.S. could be hit with a similar tariff.

Tariffs are being imposed against allies and long term trading partners including ones the U.S. has free trade agreements with like Canada and Mexico. A former U.S. Trade Representative called the tariffs on allies like Canada and Mexico "a challenging policy to understand."

The Benefits of Tariffs

Make U.S. Manufacturers More Competitive

Tariffs would raise the price of imported goods which makes equivalent American-made products (if available) relatively less expensive. This helps protect jobs and industries from foreign competitors.

A big caveat is that the U.S. doesn't have much idle manufacturing capacity and that doesn't change overnight. Ideally, policies in place to reshore are put in place in countries with idle manufacturing capacity, which is not the case in America. The U.S. basically has to start from scratch with a lot of these industrial projects.

Revenue

Tariffs will raise revenue for the U.S. government. This revenue would likely be used to either reduce the debt and/or fund tax cuts.

The idea is that the government will be funded more by tariff revenue than income tax revenue. Since the late 1800's, the U.S. government funding mechanism has transitioned from mostly tariffs to income tax revenue. The Trump administration plans to reverse this. According to Commerce Secretary Howard Lutnick, “We’re going to make the External Revenue Service replace the Internal Revenue Service.”

Negotiating Tool

Tariffs also provide a point of leverage to negotiate with. Trump could agree to reduce tariffs to influence some desirable geopolitical outcome. For example, Trump has floated the idea of reducing Chinese tariffs for a deal to run TikTok U.S. operations.

Incent Production to Move to America

Another potential benefit is tariffs add an incentive for companies (both U.S. and foreign) to move production from abroad to the U.S. in order to avoid tariffs. Although, moving production to another country is a complex project that takes several years at least in most cases. This would increase American jobs, a very important goal of the administration.

It's important to keep in mind that unemployment is low and close to full employment. Also, the crackdown on illegal immigrants means less workers. So one question is will these policies be a net increase in jobs or just people moving from other industries (say, driving an Uber to working in a factory)? Also, would there be enough workers to meet the labor demand if the reshoring renaissance happens?

Make Tariffed Nation Weaker

It is theorized that the negatively effects of tariffs are borne by the side that is the least flexible in terms of options. For example, if Americans have equivalent products to buy and can easily shift from Chinese products to non-tariffed ones, they will not be very affected. But say the China producer, on the other hand, is less flexible since they have no other major markets to replace the U.S., their biggest market. In this case, the tariffs will be partially "eaten" by China from a combination of exchange rate and price adjustments. The result would be a reduction in the purchasing power and wealth of China, the tariffed nation, with little negative effects for the U.S. We'll see how it plays out.
 

The Downsides of Tariffs

Tariffs Effect on Inflation and Prices

While the administrations argues against this, it's likely that prices of goods imported into America will rise.

And that is basically the point. When import prices rise, U.S. prices become more competitive so they sell more and those sales fuel job openings. Said another way, if import prices don't rise, then prices of American products would be no more competitive versus foreign equivalents and the trade imbalance would persist. So either prices rise or American manufacturing is boosted but not both.

According to the Commerce Department, only 52% of the goods and services purchased in the U.S. can be categorized as "made in America." Many product categories don't have viable American-made equivalents.

Also, American-made products could become more expensive since inputs such as raw materials that are imported used U.S. manufacturers would also be tariffed. Think a U.S.-made car with some parts made in Canada and Mexico. Furthermore, American companies might be able to get away with raising prices in an environment with less foreign competition.

Yet according to Bessent, “With China tariffs, I am highly confident that the Chinese manufacturers will eat the tariffs and prices won’t go up.”

It's worth noting that prices may not have risen significantly in the first wave of tariffs. Tariffs were set at 17% and the dollar appreciated 15.5% to almost completely offset tariffs. There are conflicting conclusions outlined in the Miran paper but the author seems to favor the view that prices of imported Chinese products didn't rise significantly because their currency weakened.

Some studies found that the 2018 tariffs increased costs by $51 billion annually (Lee and Varas, 2022) and were borne primarily by U.S. consumers and companies (Amiti et al., 2020).

Either way, the size of the tariffs are much bigger this time around and conditions that led to the first offset, are different.

Higher prices could be tempered by other administration policy. Bessent notes the deflationary forces of deregulation and cheap energy, all things equal, will drive prices down. Regulations suppress growth and are like a burdensome tax .

The Fed sees higher prices. “We now have inflation coming in from an exogenous source [tariffs]", said Jerome Powell.

Will American consumers accept higher prices due to less cheap goods from China and elsewhere? Retailers such as Costco and Walmart are reportedly pressuring Chinese suppliers to reduce costs so they don't have to find it.

Retaliatory Tariffs and a Trade War

One of big concerns raised in the Miran paper is that tariffs are beneficial when other countries "passively accept" them but "Retaliatory tariffs by other nations can nullify the welfare benefits of tariffs for the U.S"

Unfortunately, the U.S. has already seen retaliatory tariffs from Canada and the EU and more will certainly come after reciprocal tariffs go into effect. There is no telling how a trade war will play out. But passive acceptance is not happening.

Political Implications

The protectionist policies is turning some geopolitical allies into enemies. This unprovoked America-first trade escalation is angering many long-term allies. Even though America has more power and more strength to outlast in a trade war, these countries could build new alliances with China and other countries. There are many potential bad consequences of squandering America's goodwill across the globe.

Stronger Dollar

Yes, tariffs make the USD even stronger, all else equal. So this actually exacerbates the initial main issue raised since a strong dollar hurts American industry. This is a major contradiction.

This is why the second, and much riskier, phase of The Mar-a-Lago accord, currency policy, is necessary.

Phase II: Currency Policy

The goal of currency policy, in this case, is to weaken the overvalued U.S. dollar without losing reserve currency status and the benefits it confers.

So what are ways to navigate this without economic disaster?

Accord

One way is to work with other countries with significant currencies to strengthen their currencies, which will devalue the dollar, since currencies are relative. The Euro and the Yen are the two most important currencies for this to work. The problem is most countries don't want a stronger currency for the same reasons the U.S. doesn't.

President Reagan in the 1980's did successfully coordinate The Plaza Accord with several European nations and Japan to do just this. However, it may have contributed to Japan's asset price bubble. The world is much different now. Most reserve currency is held in Asia and the Middle east, not Europe. China will almost certainly not agree to an accord.

The current administration's party line seems to be Trump wants a strong dollar and thus no devaluation. According to Miran "I don't get the sense at the moment that President Trump and his advisors really want to weaken the dollar."

Treasury Secretary Scott Bessent stated “This administration and President Trump are committed to the policies that will lead to a strong dollar.”

However, it may just be on the back burner until the dust from tariffs settle.

Defense Umbrella

The Miran paper discusses ways to incent countries into a dollar devaluation accord. Trade, currency, and military protection are intertwined and viewed holistically. In order to get countries on board, the U.S. could offer military protection in the form of a "defense umbrella." In exchange for helping the U.S. devalue our currency, they get security guarantees.

The U.S. is essentially the global police. It's burdensome and it's not cheap. The bill falls on the U.S. taxpayers. As the global GPD grows, funding the burden with the dollar becomes much tougher.

Trump administration may divide countries up into 3 groups: friends, foes, and other, with different tariff and security packages for each.

Countries very well might just not be interested in appreciating their currency for the same downsides the U.S. is seeing from a strong currently.

Countries like Canada are already fighting back against tariffs even though a trade war favors bigger countries over smaller ones.

If some countries do buy in, it makes it very clear which countries are aligned with Team America.

This defense umbrella proposal could be a reason why Trump seems to be against NATO. The umbrella could eliminate this existing security pact that is not beneficial to the U.S. (since EU doesn't pay their full share) so create a new one that at least helps our currency policy.

Some say the U.S. is not using its power to the fullest, both financial and military, and Trump is changing that.

While not directly tied to the Mar-a-Lago accord, EU defense spending is up recently due to the Ukraine situation which helps reduces the burden of America to protect the world.

So how could other countries help us devalue our currency?

Term out

The most discussed tactic is for foreign nations to swap their existing obligations like Treasurys, gold and dollars for ultra long duration bonds, like a 100-year century bond, with some liquidity guarantees from the U.S. This is a big ask. Countries going from short-term, liquid instruments to super long term, less liquid ones. Some look at this plan as a sort of restructuring of the U.S. debt which could rile markets. In return, they would receive security guarantees, as discussed above.

Fee on US Treasurys

One things the U.S. could do to devalue the dollar is to limit the demand of U.S. Treasurys. One way to do this is to charge fees (like a tax) on foreigners buying Treasurys.

Buy Foreign Currency with USD

Thirdly, the U.S. could use dollars to buy foreign currency which would have the effect of appreciating the foreign currency. This could be done through a Sovereign Wealth Fund.

Timing of the two phases

Its important that tariffs are enacted first before currency policy. Tariffs are a much more understood phenomenon especially since they were enacted in Trump's first term. Currency policy is much riskier so it would help to see where the tariffs settle before beginning that phase.

If the U.S. dollar is devalued by any of these methods, it would make U.S. manufacturers more competitive and help potentially revive American industrials.

This would also benefit multinational U.S. companies. A weaker dollar boosts the international sales of a multinational U.S. companies with a lot of international presence.

The downsides are mostly the reserve of the benefits like higher borrowing costs, more expensive goods, and less foreign investment.

This is a really big shake up to the global economic system so economic and market volatility are expected. Often unintended consequences in currency manipulation.

Implications on Markets and the Economy

All of this uncertainty and geopolitical tension could lead to massive capital outflows which may destabilize markets. This would drive up yields also making borrowing more expensive across the economy.

If the dollar becomes less attractive, dollar alternatives such as cryptocurrency and gold could go up.

Many forecasters like Goldman Sachs are lowering their outlook for GDP and year-end forecasts for the S&P 500.

The rollout of tariffs has been very confusing, leading to a lot of uncertainty, which is reflecting a recent stock market downturn.

Is their a Trump put - will Trump be able to withstand a recession or stock market crash without reversing the plan? He is adaptable and goes back on decisions. He also has historically been very cognizant of stock market performance and equates it with success. So while he might let things ride out poorly for some period of time, there is a backstop eventually where the plan would be reconsidered if it goes very poorly. But I think the pain threshold is higher than in the first term.

Some say Trump is engineering a recession to foster in lower interest rates which would help devalue the dollar and make servicing and refinancing the debt cheaper? I don't believe a recession would be intentionally orchestrated. Avoiding a recession was one of the first things Trump requested Bessent avoid.

The dollar has been weakening as seen in the DXY this year which is not normally the case with  higher tariffs. The turmoil and uncertainty is generally causing some to flee the dollar. A worsening U.S. financial situation devalues the dollar naturally.

It could make countries slowing turn away from America. Some "short term pain, long term gain" of their own. And in economics, just a few percentage points in the wrong direction matters.

Given this, the currency reserve status is likely not to be in jeopardy, simply because no other currencies are in a place where they could take over as the currency reserve.

Fed Chairman Jerome Powell called this a “highly uncertain environment.” It's hard to imagine this won't lead to major disruptions. Thankfully, the U.S. economy and consumers have been very resilient.

The Narrow Path

It's important to note this plan is described as a "narrow path" by the paper's author, Stephen Miran. A narrow path implies, to me at least, it's not very likely to work.

Part of successfully navigating the narrow path is no retaliatory tariffs, which we know is not going to happen as Canada and EU have already retaliated, and more retaliation is surely on the way.

It will be hard to pull off without any significant negative economic consequences. If it does work and American reindustrializes, the rust belt is revived, a solid global defense umbrella is enacted, good jobs are created, factories reshore, and national security is built up, that could be considered a golden age.

If it fails, there could be ruinous consequences for the U.S.

The bottom line is this is a very complex world with every move having both positive and negative effects that all have tradeoffs and unintended consequences. We'll have to wait until the dust settles, to understand the full implications.