The One Way Trump's Tariffs Might Make Sense

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On Wednesday, U.S. President Donald Trump announced a wave of massive tariffs as part of what he called "Liberation Day," wreaking havoc across the global economy. Trump's objectives with these tariffs aren't entirely clear. In his speech, he cited several motivations, including rejuvenating American manufacturing, reducing America's trade deficit, and paying off the national debt. However, none of these explanations seem entirely satisfactory, especially since the primary consequence of the tariffs appears to be a recession.

Some commentators suggest that this move could be part of a larger plan to negotiate both a devaluation of the dollar and an unprecedented restructuring of America's massive debt pile. This theory might sound far-fetched, but it aligns closely with the ideas presented by Steven Moran, the chair of Trump's Council of Economic Advisers. In his recent paper, A User’s Guide to Restructuring the Global Trading System, Moran argues that Trump should pursue such a strategy. In this video, we will examine Moran's ambitious plan, often nicknamed the "Mar-a-Lago Accord," and discuss whether it could realistically happen.

America's Debt Problem
To understand Moran's plan, one must first grasp the severity of America's debt crisis. The U.S. national debt-to-GDP ratio currently stands at 123%. In 2024, the U.S. ran a deficit equivalent to 6.4% of GDP—the highest among OECD nations apart from Israel and more than triple the 2% average for other advanced economies. This has pushed the U.S. dangerously close to a "debt spiral," where rising interest costs lead to more debt, which in turn results in even higher servicing costs.

The situation is expected to worsen. The current Republican House budget would further expand the deficit, and the latest Treasury Department report indicates that the U.S. has borrowed more money in the past five months than ever before. This problem will become even more severe if Trump attempts to devalue the dollar—a move that Moran suggests might be necessary to fix America’s trade deficit. Moran estimates that a devaluation of up to 15% might be required.

Trump himself has echoed these concerns, telling Bloomberg in July that the dollar's strength is "a big currency problem." The belief among Trump and his advisers is that a strong dollar is responsible for America's deindustrialization because it makes American exports less competitive and increases the affordability of foreign-made goods. However, a dollar devaluation would exacerbate the debt problem in two ways: it would trigger a sell-off in U.S. government bonds (Treasuries) and could erode the dollar’s status as the world's reserve currency.

Currently, the U.S. dollar is the preferred currency for central banks and major financial institutions worldwide. This status ensures stability and creates strong demand for U.S. Treasuries, enabling the U.S. to borrow more easily. However, a rapid devaluation could undermine confidence in the dollar and potentially lead to the loss of its global reserve currency status, which would in turn weaken Treasuries' standing as the world’s reserve debt instrument.

The Mar-a-Lago Accord
Moran's solution to this problem is a multilateral currency agreement in which America's major trading partners agree to strengthen their own currencies, effectively devaluing the dollar. His proposal is inspired by the Plaza Accord of 1985, where then-President Ronald Reagan convinced key trading partners, including Europe and Japan, to strengthen their currencies, thereby boosting demand for American goods. The Plaza Accord was named after the hotel where negotiations took place, and this new proposed deal has been nicknamed the "Mar-a-Lago Accord."

To avoid a debt crisis, Moran suggests that America's allies not only continue to hold and buy U.S. Treasuries but also agree to a "rescheduling" of their current holdings. Typically, Treasuries have a set maturity date, after which they pay out their full face value. Moran's plan involves extending these maturity dates significantly. His paper suggests issuing century bonds (which mature in 100 years) or even perpetual bonds (which never fully mature). This approach would drastically ease America's debt burden, though it would be an unfavorable deal for U.S. trading partners.

To persuade them, Moran presents three key strategies:

1. The "stick" of tariffs, using trade penalties as leverage.

2. The "carrot" of the U.S. security umbrella, implying that military protection might be contingent on cooperation.

3. Central bank interventions to incentivize compliance.

Some observers believe that Trump's recent actions, including imposing tariffs on major trading partners and threatening to reduce the U.S. military presence in NATO and other alliances, align closely with Moran’s strategy. Furthermore, senior members of Trump’s team have echoed these ideas. For instance, last year, Treasury Secretary Scott Bessant argued that NATO states failing to meet defense spending targets should be required to buy 50-year military bonds from the U.S.

Will It Work?
We remain skeptical. The Plaza Accord succeeded because America's key trading partners at the time were also its close allies. Today, the situation is different. China is now one of America’s biggest trading partners and a major holder of U.S. Treasuries, and it is unlikely that Xi Jinping would agree to such a deal. Even European nations may be reluctant, especially given the recent tensions in U.S.-EU relations.

Additionally, the appeal of the U.S. security umbrella has diminished. Trump's willingness to withdraw military support has made America's allies more hesitant to rely on U.S. guarantees. Even if Trump were able to negotiate a rescheduling of Treasury holdings with international partners, domestic holders—who own 75% of all Treasuries—would still be affected by a sharp devaluation.

Ultimately, while there is a theoretical framework supporting Trump’s economic moves, it appears that his trade policies are being driven more by impulse than by a grand strategic vision. The idea that this is a calculated effort to fundamentally reshape the global trading system seems unlikely.