JD Vance on the Economy

Tariffs, Dollar Hegemony, and Psychology

To discuss Trump’s VP pick, ChinaTalk chatted with Employ America’s Arnab Datta and economist Matt Klein, who writes the excellent Overshoot newsletter. 

We get into…

• Vance’s beliefs about the economy - from dollar hegemony to tariffs and industrial policy,

• Psychological dynamics at play within the Trump-Vance ticket,

• The case for weakening the US dollar, and how the executive could make that happen.

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The Death of Dollar Hegemony?

Jordan Schneider: Matt, kick us off – what can we expect from JD Vance economically? I hear he’s read your book, Trade Wars Are Class Wars: How Rising Inequality Distorts the Global Economy and Threatens International Peace.

Matt Klein: You can see this in the questions he asked Federal Reserve Chair Jerome Powell — “Why should the dollar be the reserve currency? Why would we want it to be the reserve currency? Is it a problem that foreigners like using the dollar?”

This indicates that he and his team have read and absorbed some points from the book I wrote with Michael Pettis. We argued that while the US economy is large globally, the use of the dollar vastly exceeds the size of the US economy.

Concretely, our economy is between 20-25% of the world, but our currency and financial system meet the needs of 80% of the world. That leads to big mismatches between what makes sense for global savers and investors versus Americans.

There’s an argument to break that link — to have the dollar used mostly by Americans — and have the US financial system focus on what makes sense for Americans, not on creating assets for foreigners. This is an argument from our book which Vance seems interested in.

Jordan Schneider: If a president wants to devalue the dollar and ensure the US is not the global reserve, how would they go about realizing that practically?

Matt Klein: If your goal is to make US assets less accessible and attractive to foreigners, legislation would help. Without it, you could arbitrarily enforce the rule of law, use sanctions, or confiscate wealth. Many countries have trouble attracting foreign investment by doing this unintentionally.

Bipartisan legislation was proposed five or six years ago to give the Federal Reserve authority to impose a tax on any foreign purchase of US assets. The Fed could adjust the tax based on their judgment of foreign demand for US assets to balance financial inflows and outflows.

Another option, used by many countries to lower exchange rates, is to have the central bank buy foreign assets. You create dollars and buy something else. The Swiss National Bank has bought dollars and euros, including stocks, to manage exchange rates. Singapore’s Monetary Authority targets the exchange rate instead of setting interest rates.

There’s no inherent reason why the Fed couldn’t do this, but legislation would help.

To change the wording — the dollar is not strong, it’s expensive. It’s overpriced.

Jordan Schneider: What would that do to the global and American economy?

Matt Klein: For the US economy, if you make the dollar less expensive relative to other currencies, Americans should find US-made goods relatively cheaper than foreign-made goods. People outside the US should find US-made goods more affordable. This should increase buying of US-made products and decrease American buying of non-US products.

Second-order effects could include increased profits, investment, and hiring in export industries, while import-dependent businesses might do less well. Globally, companies competing with US firms might lose out.

This could create an inflationary impulse, which sometimes is welcome. The Bank of Japan, Swiss National Bank, and Swedish Central Bank have intervened in currency markets to generate inflation when it was too low.

The actual impact could be more complex. Some countries, like China, use sterilization techniques to offset some effects of currency interventions.

Jordan Schneider: What are the first and second-order global effects?

Matt Klein: It partly depends on the magnitude. A 10-20% move isn’t unusual over a multi-year span. For larger moves, there’s debate among economists. Some argue a stronger dollar is bad for emerging markets because it tightens financial conditions. Others say a weaker dollar hurts exports from these countries.

The net impact is unclear and context-dependent. Some argue it doesn’t matter because international trade is invoiced in dollars anyway, but this ignores the eventual conversion to local currencies for profits.

A massive move could lead to asset sales and potentially higher US interest rates. Usually, significant currency moves are responses to other factors, like the dollar’s appreciation during the financial crisis due to widespread dollar-denominated debt.

Jordan Schneider: Let’s talk tariffs. Matt, did Vance learn anything from your book in this department?

Matt Klein: We actually wrote that many arguments for tariffs don’t make sense in a world of floating exchange rates. The textbook argument is that tariffs penalize exporters because imports remain constant while the exchange rate appreciates, making exports less competitive.

If tariffs act as tax increases and tighten the government budget, it could reduce American spending and the trade deficit, but by making Americans poorer. Some in the Trump administration have suggested using tariff revenue to offset tax cuts elsewhere, complicating the net effect.

Jordan Schneider: All right, let’s talk industrial policy.

Arnab Datta: I’ve worked with Vance’s office on some initiatives. He’s thoughtful and diverges from Republican orthodoxy, particularly on spending. He’s willing to invest in strategic sectors. The question is how much he’ll define that conversation in a future Trump administration.

Even in areas with bipartisan consensus, like next-gen geothermal energy, many Republican senators support the industry but don’t want to spend money. I’m curious how a future Vice President Vance might influence thinking on these issues.

Jordan Schneider: He has said he supports the CHIPS Act, framing it in an isolationist context about reducing dependence on Taiwan. He has a bias toward treating manufacturing as the only “real” part of the economy.

Matt Klein: He didn’t come from Silicon Valley. He came from Ohio.

Arnab Datta: I’m always curious about what Vance actually thinks because he tends to look for the most partisan aspect of an issue. The semiconductor example you used about not wanting to protect Taiwan is one version. Another is his argument about immigrants driving up housing prices, which has no evidence. I’m never quite sure how to evaluate these things.

Jordan Schneider: He’s been playing that game really aggressively for the past eight years

The Psychology of a Trump Apprentice

Jordan Schneider: We’ve done a lot of Shakespeare emergency episodes over the past few months, which explore the question of how well politicians can really “know themselves.”

Vance is clearly very smart and thoughtful. But he has also been able to put on the clothes of some guy who does great on Tucker Carlson, and he’s been completely inhabiting that role for a number of years now. Does that end now? Is it in his marrow at this point?

Matt Klein: It’s not Shakespeare, but there’s a relevant line in “A Man for All Seasons.” The line is: “But for Wales” - basically, you’re giving up all of your principles for a little bit of power.

Sir Thomas More: There is one question I would like to ask the witness. That’s a chain of office you’re wearing. May I see it? The Red Dragon. What’s this?

Judge: Sir Richard is appointed Attorney General for Wales.

Sir Thomas More: For Wales. Why Richard, it profits a man nothing to give his soul for the whole world. . . but for Wales.

Jordan Schneider: But the difference is, Vance now has a good chance of being president. Not just if Trump dies, but running in four or eight years. Your Faustian bargain here has the potential to have a pretty high payout from a power acquisition perspective.

There’s been some reporting about how all his staffers are really tall and smoke a lot. Can we get a vibe check on the broader energy of the JD Vance universe?

Arnab Datta: That is not something I have experienced. The folks that I know from his world are average height, and as far as I know they don’t smoke. But I don’t hang out with them enough to know that for sure, I guess.

Jordan Schneider: Fair enough. One interesting discovery from my aggressive googling over the past 48 hours is that his wife spent a year in China after college as a Yale China fellow, teaching at Sun Yat-sen University.

Matt Klein: I mean, Matt Pottinger spent a long time in China, too.

Arnab Datta: My big takeaway from this is Yale Law School just keeps winning, controlling the country every other way.

Jordan Schneider: Anyway, it’s reported that everyone wants to have this really tight relationship with Trump and ask him for favors all the time. In a Shakespearean way, it seems like Vance was very strategic about this. He didn’t even ask Trump to endorse him. The only thing he asked for was an endorsement of a transportation safety bill or something.

If and when Vance is sitting in the White House and thinks “This is my time to spend some political capital and push something with Trump,” I wonder if Trump will end up seeing his own mortality and feel threatened.

That mentor-protégé dynamic may get a lot more complicated as time goes on, perhaps becoming more contentious and dark.

Arnab Datta: I’m just thinking about Trump in a mentor relationship, and that sounds not great.

Is he gonna get annoyed when Vance gets some good press and try to cut him down a little bit? I don’t know.

Jordan Schneider: Well, if he starts pushing things Trump doesn’t want to be pushed, then all of a sudden he goes from surrogate son to someone who’s trying to do unpopular things that are obnoxious. Matt, can you talk about this better than I can?

Matt Klein: I’m just surprised that someone who’s gone as far as he has in talking about January 6 and so forth would bother to push Trump in a place that Trump wouldn't want to go anyway.

Jordan Schneider: Perhaps it’s more strategic for him to hide his talents and bide his time.

Matt Klein: There’s nothing to hide. He’s been very clear over the past few years about what he thinks about the Constitution and what he thinks his role as a senator is and so forth.