Unpacking the Dollar's Global Dominance: What We're Still Getting Wrong
On May 20, 2025, the Association of Foreign Correspondents in the United States (AFPC-USA) sat with Hinrich Foundation Senior Research Fellow Stewart Paterson on our Foreign Press Podcast to discuss his latest research analyzing the sustained overvaluation of the U.S. dollar and its role in driving trade imbalances, especially under the Trump administration.
Paterson contends that although tariffs were introduced to shield domestic industries, they fail to tackle the fundamental problem of currency misalignment, which continues to distort trade flows and undermine long-term competitiveness.
In conversation with Stephanie Ochoa, a White House correspondent for Entravision, Paterson dove into how the Trump administration’s perspective that China has devalued their exchange rates over time has inflamed the ongoing global trade war between both countries. Though the Trump administration has undoubtedly caused worldwide shock with its approach to tariffs, Paterson argues that achieving Washington’s goal of self-sufficiency in key manufacturing sectors will require more than tariffs alone. He emphasizes the need for comprehensive supply-side reforms and increased domestic investment to strengthen the U.S. industrial base and reduce reliance on foreign supply chains.
This episode of the Foreign Press Podcast was produced in partnership with the Hinrich Foundation. AFPC-USA is solely responsible for the content of this episode.
Stephanie Ochoa: Hello and welcome to the Foreign Press Podcast. This podcast is an educational program produced in partnership with the Hinrich Foundation. The Association of Foreign Press Correspondents in the US is solely responsible for the content of this episode.
My name is Stephanie Ochoa. I'm a Mexican journalist and I've been based in Washington since 2020. I am currently a White House correspondent for Entravision and on today's podcast we're going to speak to Stewart Paterson, a Senior Research Fellow at the Hinrich Foundation. He has spent 25 years in capital markets as an equity researcher, strategist, and fund manager. He has worked in London, Mumbai, Hong Kong, and Singapore in senior roles with Credit Suisse, Credit Suisse First Boston, CLSA, and more recently, as a Partner and Portfolio Manager of Tiburon Partners LLP. He’s the author of the research paper "Trump, the US dollar, and American trade policy,” in which this conversation will be grounded.
Thank you, Stewart, for joining us today.
Stewart Paterson: Well, thank you, Stephanie, for having me on the show.
SO: Thank you. Well, the research paper examines the persistent overvaluation of the US dollar and its impact on trade imbalances, particularly in the context of the Trump administration's policies. It argues that while tariffs were implemented to protect domestic industries, they do not address the core issue of currency misalignment. Am I right?
SP: Yeah, that's right, Stephanie.
I mean, I think through the prism of the Trump administration's eyes, America's perennial current account deficits are a problem, and the problem arises from the fact that ultimately this excess of imports over exports has to be paid for and obviously it's been financed by attracting increasing amounts of foreign capital into the United States, but much of the rest of the world, and in particular, China have through their eyes, gamed the system by undervaluing their exchange rates. That was the decision, really, the Chinese took in 1994 with that big devaluation. And ever since then, obviously the US trade deficits have been mirrored by these gargantuan trade surpluses from China. China's not the only country that's been running huge trade surpluses, but it's clearly the largest one at the moment. And so the tariffs have been the preferred way of starting to address that problem.
Tariffs, of course, are a tax on consumption, the consumption of foreign goods, and of course the current account deficit also reflects the excess of consumption, the lack of savings relative to investment in the United States. And so that is the approach that the Trump administration has taken. It's not new in the sense that Trump won, obviously introduced tariffs too, and many of those were kept in place by the Biden administration. And what the paper argues is that recently the implementation of these tariffs has been accompanied by dollar strength and that the US dollar is eye-wateringly overvalued and that it's a depreciation of the dollar. As Paul Krugman showed us in the 1980s: to address these current account imbalances, a real depreciation of the US dollar is required and there are policy measures that could have brought that about: lower interest rates, tighter fiscal policy, which would've probably addressed a lot of these problems or the problems in relation to a lot of countries without the use of tariffs. Obviously, there are countries out there who will resist tooth and nail any appreciation in their own currencies relative to the US dollar, and that of course is much more problematic and that will be something that I think the administration will have to deal with going forward.
SO: Yeah, Stewart, this is a very deep analysis and I want to take a couple of steps back just to understand, because from the perspective of a normal person, we need to understand each of the concepts that you use in this paper, which are very interesting. I want to start by understanding the meaning of the dollar overvaluation. Can you explain what it means to us?
SP: Yeah, I mean, simply put, I think a lot of your listeners will have heard of the Big Mac Index, which compares the price of a McDonald's across different countries. The principle being that in a world in which goods and services can flow across countries, and in fact obviously not all goods are tradable, but the fact is that trade as a percentage of GDP (gross domestic product) is at a new high, and therefore the world is more tradable if you like now than it ever has been before. Somewhat surprisingly, perhaps in terms of the breakdown of some trade relationships, prices should equalize and exchange rates should move in a way that means that that arbitrage opportunity disappears. There is no incentive to take a product from one country to another country because that price differential, that arbitrage opportunity has disappeared. And what this analysis shows, and there's a chart in the paper which I would encourage the listeners to look at and read, shows that far from price levels converging as a result of globalization, the overvaluation of the dollar or the undervaluation of other currencies relative to the dollar in aggregate has never actually been larger.
Stewart Paterson
So one of the ways to think of this is that world GDP can be thought of: that all the output of all the countries in the world can be measured at prevailing market exchange rates. So I take the output of China, all those cars and steel and what have you, the prices are obviously denominated in RMB [renminbi], and I convert those into US dollars at the prevailing exchange rate, or I can convert them at the purchasing power parity (PPP) exchange rate. So the prevailing exchange rate is around seven and a bit. The PPP exchange rate is below four, 3.6 or so. In fact, China's economy would be twice as large as it is in monetary terms if it was measured at purchasing power parity. So if we think about what that actually means for foreigners, and I'm defining foreigners here, including myself and you as non-Americans or people not earning US dollars, it means that our ability to buy US goods and services is severely hampered because the currency that we earn, that we get paid in is in aggregate across the world, trading at half the value that it should be to equalize the price levels across the world.
And so when you look at the gap between world GDP in nominal exchange rates that prevail in markets and the gap relative to what it would be at PPP, you come up with a gap of about US$77 trillion. That is how much potential purchasing power is missing from the rest of the world. Now, you and I and the rest of the world who don't live in the United States, you are living there now perhaps, but our propensity to buy from America is about 3%. So we spend about 3% of our incomes buying stuff out of America services and goods. Now, if we were US$77 trillion better off, we could buy a lot more American goods. And so in many ways, the current account deficit reflects this overvaluation, this misalignment of exchange rates. Now, in some cases, this is a deliberate policy from governments. So some countries peg their exchange rates to the US dollar explicitly irrespective of what their domestic price level is.
Other countries do not, and they allow their exchange rates to fluctuate. The Eurozone would be a good example of that, UK and Australia, likewise, and some are more sophisticated in the way they manage their exchange rates like China. But for a long period it was pegged, then it moved to sort of a peg against a basket and sort of a managed exchange rate. But for a lot of the world, and particularly the countries who were the biggest contributors to this undervaluation, which is sort of GDP-weighted if you like, it is a deliberate policy choice. And of course when a country as large as China, and of course China's a huge exporter, the largest exporter in the world fixed their exchange rate at a discount to purchasing power parity, everyone else is incentivized to do the same thing. They need to stay competitive against China.
So this sort of feeds on itself. So what the paper demonstrates is that actually you don't need to go to purchasing power parity. And in fact, economists would argue purchasing power parity is a wonderful first tool, but it's not a concept. But very few economists would expect exchange rates to trade at PPP or even necessarily very close to it. The point that the paper is making is that the US dollar has been perennially overvalued and that overvaluation is now greater than it has ever been despite the fact that globalization means that a greater percentage of the world's output is crossing national borders now. And therefore theory would suggest that that gap should be narrower and the trend should be towards purchasing power parity.
SO: I think you have already given me a little bit of the response of my next question, but why does the overvaluation of the US dollar matter so much for trade, for global trade and who gains and loses from it?
SP: So who benefits? Well, US consumers benefit because the dollar in their pocket has huge purchasing power, and that is reflected in some ways in US consumers' appetite for foreign goods, which obviously are highly affordable because their exchange is overvalued and it's reflected in their large propensity to consume because they're earning significant amounts at the other end of the scale. If you look at a country like China where the currency is 50% undervalued on a PPP basis, their consumers consume very little and even less from America. So they are in many ways, and it's not just China, penalized. The other end of the spectrum: you look at it from the point of view of producers. So you have consumer interests and you have producer interests. Now clearly the producer interests in the United States are disadvantaged by an overvalued currency.
Of course, their purchasing power in terms of inputs or capital goods made overseas is enhanced. But assuming that they are adding value through the process that they are carrying out, their ability to sell into the rest of the world is handicapped, conversely producers overseas such as Chinese manufacturers, they benefit from this undervaluation of the RMB and the overvaluation of the US dollar because they're in a position to compete on price significantly. So you have producer interests and consumer interests, and the American consumer is a big beneficiary, whereas the overseas consumer is a loser. Conversely, the overseas producer is a beneficiary. The American producer in aggregate is a loser.
SO: And at the same time, to what extent has a strong dollar contributed to America's persistent trade deficit?
SP: Well, significantly, because there are two ways to look at the trade deficit, or I would rather use the expression “current account deficit” because all trade in goods and services, because one of the things I highlight in this report is that the Trump administration seems very focused on trade in goods, but actually what America excels at is trade in services, and America is very successful at selling its services overseas. So yeah, it's been a key driver. There are two ways to look at it. As I've just highlighted, American goods are expensive, foreign goods are cheap, so that's a massive contributor. But also when you have an overvalued currency, your household sector is incentivized to consume. And the other way to look at the current account deficit is a gap between savings and investment. And because the American consumer is encouraged to consume with the mighty dollar, they are discouraged from saving, which is the antithesis of consumption as it were.
So yes, it's a key variable, and theoretically it is impossible to restore balance without a change in the relative prices. And the change in those relative prices could come about through a period of deflation in the United States and inflation elsewhere, which would be extremely painful probably for everyone involved, or we're blessed with the nominal exchange rate, which can move all prices very quickly and very easily. And therefore a dollar devaluation is the easiest way to restore equilibrium.
SO: And to that point about the consumption, I think in the Trump administration, he has faced many obstacles, especially by the Federal Reserve, by not lowering the interest rates and [at a] certain point just consumers avoiding to spend more, right?
SP: Yeah, tariffs are consumption tags, so they should dampen consumption insofar as the tariffs are levied on consumer goods. But of course, some of the tariffs are also levied on capital goods and intermediate goods, which perversely might make some American-made goods less competitive in international markets. However, when you look at the breakdown of America's savings investment gap, the excess of consumption – what's interesting is of course that the US government sector is running a deficit of about 6% of GDP, expenditure over income. The household and corporate sectors in aggregate are in financial surplus. They have been de-leveraging, they have been running an excess of savings over investment. And so the problem is really in the government sector. And so in fact, America's current account deficit, you could argue, is remarkably small given that government fiscal imbalance. So tackling that fiscal imbalance is going to be key to reducing the current account deficit as well.
SO: How likely do you think the administration will achieve the goals that they expect from imposing the tariffs? We're talking about protecting domestic industries, protecting jobs, raising government revenue, reducing [the] trade deficit, and [gaining] leverage in trade negotiations. How can you see from your point of view [that] this is working actually to reach or finally get to the point?
SP: Well, some of the goals are mutually exclusive. Okay, so if your objective of putting tariffs on is to stop the imports coming in, then you're not going to get the tariff revenue, right? You only get the tariff revenue if the goods continue to come in. And obviously there's a halfway house where the tariffs act as a disincentive to import, but some imports come in and that raises some tariff revenue. But I think what's more important about the tariffs and the objectives is really to sort of shake countries up and make them realize that the current global imbalances are unsustainable and that the administration is determined to tackle those and to find out who is on board with America's attempt to restore some equilibrium and do away these imbalances, and who is not. Unfortunately, I think the way that the administration has gone about it might well prove somewhat counterproductive because the negative publicity, the blowback against them around the world has probably diminished the propensity of the rest of the world to buy American goods up to a point at least, which means the adjustment process will have to be even greater.
And the other issue here, I think, is that there are many countries around the world, the United Kingdom being one, Australia really being another, New Zealand, likewise, whose exchange rates float. Canada would fall into this category as well. Their exchange rates float. They do not engage in heavy subsidies of export-orientated industries. In other words, they play by the rules. They have been pretty exemplary members of a global trading system. And yet these countries have been targeted in some cases more harshly than countries that are quite blatantly flouting the spirit of the rules, if not the latter. The Eurozone, of course, is a slightly different and more difficult case, and I use the Eurozone, not the EU, because the Eurozone has had a distorting effect in my view on trade because it has led to an undervaluation of North European exchange rates vis-à-vis the rest of the world because the euro as a whole, its exchange rate has been kept down by the participation of southern European countries in that exchange rate.
But to a large degree, I think that the most pernicious element of that exchange rate, it's not really manipulation that the side effect of euro membership has sort of passed. However, there is something to be said for the fact that Germany in particular, and Japan and China, have been extremely mercantilist economies. And by that I mean that they have failed to boost domestic demand to meet their domestic supply. They have been dependent on running net foreign surpluses, goods surpluses in order to grow their economies. And clearly that is unsustainable in the long run. Everyone who grows their economy through net exports, someone has to shrink theirs through net imports. Not everyone can run a trade surplus. Someone has to be on the other side of it. And that is the fallacy in the logic behind that sort of mercantilist approach. So I think the Trump administration has a point that we do need to move to a world trading order where exchange rates move flexibly because otherwise the system is going to break down. And a lot of what we're seeing in terms of the breaking down of the trade system, is simply a symptom of the failure to address these global imbalances that have been around and getting bigger for several decades now.
SO: So just to confirm that I'm right, the relationship between trade policy and exchange rates is completely close to each other. They are intertwined, inevitable.
SP: Yeah. I mean, in my view they are. Because if you manipulate your exchange rate to your advantage, by which I mean your producer's advantage in terms of exports, it's not necessarily a national advantage because you're penalizing your consumers, but you are having a distorting effect on everyone else's economy at the same time through trade.
Stephanie Ochoa
SO: How does an exchange rate shape the competitiveness of American exports, and why hasn't this been more central in the US trade policy?
SP: So the US does not really target exchange rates. It believes in market mechanisms for finding the value of the dollar. And the Federal Reserve which sets interest rates has a mandate which is linked to inflation, not the competitiveness of trade or through the value of the US dollar. So insofar far as the US dollars, strength or weakness might impact inflation, and that is a concern for the Federal Reserve. But the Federal Reserve has not been tasked with ensuring that the US economy is in equilibrium with regard to its external account. And so it's not within their remit to do so. In a way, you are right, it is perhaps odd that the exchange rate is not really a policy tool when the trade deficit has been such a concern for the United States, but the whole structure of a market economy tends to be based around the assumption that the market economy is trading with other market economies.
And in those circumstances, the market adjustment mechanism would probably work substantially. I mean, there'd be periods when capital flows might drive an exchange rate to a level of overvaluation or vice versa, but the market would be relatively good at clearing that imbalance. And although it's not an ideal comparison, because bilateral trade relationships are not a great measure of anything really, but when you look at trade between countries that do not manipulate their exchange rates or do not target their exchange rates, the trade between them, their exchange rates between them, their bilateral exchange rates do tend to oscillate in a mean reverting fashion against each other, move by terms of trade shifts and the usual things that move bilateral exchange rates. The big spanner in the works is when the largest trading nation in the world is a non-market economy with a fixed or managed exchange rate. And that has been the big issue.
SO: You already talked about this in a few comments before, but the paper highlights the US$78 trillion gap between nominal and PPP adjusted global GDP. What does that reveal about the international economic imbalances? And maybe if you can explain [to] us one more time, the differences between the world growth of domestic products and the purchasing power parity could be great.
SP: Yeah, so world GDP, gross domestic product, can be measured in different ways because what you are really looking at here is a raft of goods, thousands of different products made in different countries, and they're measured in the output of those. The value of those products is measured in local currency terms. So you can't add apples to oranges, so you need to put it in a common currency. So when you put everything into a common currency, the question is how do I translate from RMB or Japanese yen into US dollars? The common currency that we're going to use, one exchange rate they could use is the market exchange rate or the exchange rate that's prevailing. It might not be market-driven in the sense that we think of a market price, but it's the exchange rate prevailing today at which I could go and buy and sell that currency.
So that's the at-market prices. The other way is you could say, well, I'm going to translate the value of these goods at purchasing power parity. That is the exchange rate which equalizes the price of these goods across countries. And so that's the two methods that you can use. The gap, which is huge as you say, US$78 trillion or so – and in fact, that's sort of a 100% of world GDP excluding the United States, which by definition is a one on a purchasing power parity base. So that gap reflects the fact that on average, the rest of the world's exchange rates are trading at half the level that they should be trading at.
SO: Well, only China alone accounts for over 20% of that gap. How should the US be thinking about trading currency alignment with China moving forward?
SP: Yeah, so I mean clearly this isn't new to Trump nor even Trump 1.0. The United States has consistently argued that the Chinese exchange rate is misaligned, and there are a number of issues with this that the Chinese would retort that they do not manipulate their exchange rate. And what they would point to there is the lack of foreign exchange reserve growth in China, which would stand as a sort of proxy for central bank PBOC, People's Bank of China intervention, direct intervention in the market to keep the value of the RMB down. They'd say, well, that's absent. So there's no evidence of that. But of course, in reality, because of capital controls, because of the existence of state organizations that facilitate the outflow of capital from China, the state through these various agencies control who can and cannot take capital out of China, and therefore there's no sort of compulsion for any exchange rate manipulation, if you like, to show up in the PBOC balance sheet. It could show up in the China Development Bank's balance sheet or the commercial bank's balance sheets or in the balance sheets of state aid enterprises who are taking money out of China, keep recycling the dollars out of China into the Belt and Road Initiative, and other things like that. So what is clear is that the RMB is highly undervalued because it's evident in the trade position.
But this is not new. This has been around for a long time, and the US historically has been very soft on China in bringing pressure to bear for it to abandon that exchange rate regime and the Chinese authorities, because of a mercantilist mindset in which they favor producer interests over consumers and where they see the current account surplus or trade surplus as almost being a sort of virility test for the economy where it will be very unlikely to abandon this kind of exchange rate regime. The sad thing of course for the Chinese people, is of course their spending power; their ability to buy stuff from the rest of the world would be massively enhanced if the exchange rate were to trade much closer to purchasing power parity. But here we go into another set of reasons as to why it wouldn't get there. And that is that if you were to allow people to actually take their money out of China, many of them would do so and actually probably drive the exchange rate even weaker.
And the reason for that is, of course, that they would like to avoid the financial repression that takes place in China, the low returns that you get on assets in China that also like to diversify their portfolios, which they've been unable to do largely speaking, and take advantage of the opportunity set that exists outside China rather than just the property market and the stock market and rather poor-yielding bank deposits, which is all that's really been available to many people in China. So the exchange rate regime in capital controls goes right to the heart of Communist Party control over the commanding heights of the Chinese economy and Chinese society. And that's why you are pushing on a locked door by negotiating some kind of currency realignment, I believe, with China, which is, of course, [that] the administration knows that, which is why they've gone in with the tariffs in such a heavy-handed way. And of course backtracked somewhat recently for the very reason that was predictable, that by leaving it so long to challenge this, America, like everyone else in the world has become highly dependent on Chinese supply chains in critical pinch points. And so China has put itself in a position whereby it can push back against foreign efforts to make it modify its behavior, change its behavior in the international economy through the weaponization of these trade dependencies. In this case, critical minerals seem to have been the trigger that has pulled the Americans back somewhat.
SO: Well, so we're talking about the biggest opponent of the US, especially in this trade war, which is completely understandable, but we have the rest of the world who are also trying to figure out what they're going to do. And as a Mexican journalist, I would like to get your thoughts about the North American region because Mexico is the first commercial partner of the US and vice versa, the situation of Mexico is completely in another position. They don't have leverage at all. And we have Canada too, who had sent retaliatory tariffs as well. But in the case of Mexico, that's not the same situation. They cannot come back with tariffs because they don't have anything to protect themselves even though they are trying to diversify their markets and industries with some of the Chinese businesses coming into the country. But what is it left for the rest of the world?
SP: So I think there are a number of trends that will become more apparent. I mean, the US market is obviously a crucial market for many countries, but particularly for Mexico because of its geographical situation. And fortunately, I think the message that the Trump administration has put out there is that deals struck with it are not necessarily worth very much because they can be overturned very, very quickly. But my sense is, and I'm happy, I know this is debatable, but I think my sense is that one of the key issues that the agenda issues that the administration is pushing is this idea of Chinese content getting into the United States and the trade dependencies on China being disguised, if you like, through the use of third countries. And this is why, I believe, the likes of Cambodia and Vietnam, which export significantly to the United States but a lot of that content is coming from China.
And to some extent Mexico falls into that same category. I would very much hope that there is a deal to be done here because clearly the economic consequences for the United States of tariff and trade barriers between it and Mexico are very significant—not as significant as they are in Mexico. That's the nature of the asymmetry in the trade relationship. But America is not going to, should not be even aiming to or thinking about taking on board the sort of lower value-added manufacturing that has been going on in Mexico and smoothing the path for Mexico to move up the value chain. I think is an important part of stability in North America, economic, political, social stability in North America. And so it is really not in America's interests to cripple the Mexican economy in any way, shape, or form. And so I think this is more about signaling and getting cooperation on other issues. And I would hope that the trade side of things settles down relatively quickly and obviously the quicker the better because businesses need certainty to plan and over geographical location of supply chains.
SO: What might a more sustainable or balanced US trade policy look like, especially for emerging economies trying to compete at the same time?
SP: Well, I mean, I would say that the previous, the laissez-faire approach in which a large part of the world manipulates its exchange rate, subsidizes its industry and America stands back and takes it, that wasn't sustainable either, right? That wasn't sustainable. So this is a move from, in my view, an unsustainable situation through a hiatus which is chaotic and detrimental to economic welfare to something that is sustainable. And to my mind, that revolves around flexible exchange rates and clear doctrine around economic security in a national security perspective and welfare maximizing free trade on the other hand, and getting that policy mix right between allowing profit-maximizing private sector agents to exchange goods and services across borders in an unhindered fashion, but without a country putting in itself in a situation where it becomes vulnerable to disruptions to that supply chain in a way that can impact its national security.
And I think that's the sort of holy grail that we are looking for in the trading system that evolves post the current system, if you see what I mean. And whether this administration or the next has the ability to bring that together, I'm not sure, but I think the incentives to get it right are very high. My question really is whether this administration's approach has perhaps done too much to damage trust in American leadership to allow America to be the sort of prime mover in putting that next system back together. I mean, that's an open-ended question. It's not an assertion, but it's just a fear.
SO: Do you think that coordinated currency policy or multilateral [relations] perform, play a role in resolving these tensions, or is it politically out of reach?
SP: See, I don't think that what's driven the US dollar higher to its overvaluation is in part market failure, but it is market failure that in many ways has been facilitated by the exchange rate policies of major actors in the rest of the world. So, the market will drive the correction in the dollar. The dollar has benefited from the fact that the Eurozone has not been an attractive place to invest. It's been stagnant growth-wise. It doesn't have deep capital markets. Japan, likewise, is not attractive. So the dollar has kind of benefited from being the least ugly option available. And one would hope that policies in the Eurozone, in Japan, and in other surplus countries to stimulate domestic demand at home will lead to their currency strengthening, which weakens the dollar and helps correct those global imbalances. China has been talking about stimulating domestic demand in its own economy for at least the last 20 years and has singularly failed to, in a meaningful fashion, reduce the savings rate and increase the consumption rate. And that's because I don't think it really wants to because it's not within the construct of its political economy to do so.
And so I think when push comes to shove and people have to choose in terms of which economy, which major economy in the world they're going to pin their flag to in terms of their own growth and development prospects going forward, I think they will come back to the United States simply because that is the compelling, the more compelling option. I mean, there has been talk in the press that the Trump administration's behavior towards the EU would drive the EU back towards China. I just don't really see that happening because China is sadly an unattractive prospect economically for the European Union. China has been systematic in its approach to intellectual property theft from German companies and EU companies. The trade balance between the two has moved dramatically in China's favor.
A lot of the import substitution policies that have been implemented in China have been targeting the very goods that Germany has historically exported to China. It's just a really hard sell to see how closer economic ties between the EU and China are going to do anything other than benefit China. And I would add to that, that while the EU has been a harsh critic of Trump's tariffs, if the Chinese trade diversion leads to a supply side shock in the EU, it wouldn't surprise me to see the EU adopting very similar policies. I do think that from an economic perspective, the economic reality is that countries that are serious about their economic development will be drawn back into the US orbit once this hiatus has died down. I think that the Trump administration now makes diplomacy around that harder than it otherwise needs to be.
SO: And Stewart, this is my last question, and it's coming from a field that I cover in [Washington,] D.C. and that probably I understand more than the economy, right? I mean, you're the expert. So I want you to tell me how policymakers and voters, how can they rethink the goals of trade policy in today's global economy?
SP: So I think there are two goals and there is a tension between them. The first is to maximize economic welfare, and clearly the fewer barriers there are to trade, the greater the prospects of maximizing that economic welfare are within the context of a level playing field and a system that is not manipulated by large players, which means flexible exchange rates and free capital, free flow of capital. And China has neither of those flexible exchange rates or the free flow of capital. And the second is more the national security perspective. And I would draw quite a wide circle around the field of national security because obviously it touches on things like critical national infrastructure, which is energy policy, telecoms policy, etc. And in a world of great power competition, I think a key aspect of trade policy is to design doctrines that ensure that national security is prioritized. And so there is a clear tension between the desire to maximize economic welfare and the desire to maximize security. And that I think is really going to be the preoccupation of policymakers really for the next 10 years or so. We have lived through a very unusual moment in world geopolitics where the global hegemonic power was unchallenged and businesses and commercial policy really paid no attention whatsoever to national security considerations. It was all about efficiency, and I think those days have passed.
SO: Thank you, Stewart. This has been an amazing conversation and you help us to understand a bit more in a deeper way what are the implications of the tariffs from the US and the reaction around the world with the biggest economies. So thank you so much, Stewart Paterson. He is a Senior Research Fellow at the Hinrich Foundation. And just to remember everybody, that this podcast is an educational program produced in partnership with the Hinrich Foundation. The Association of Foreign Press Correspondents in the US is solely responsible for the content of this episode. Thank you so much, Stewart.
SP: Thanks. Thanks, Stephanie.
