The 28th Annual Milken Institute Global Conference kicked off live in Beverly Hills in May of 2025. This year, we present a RealClearMarkets exclusive interview with Dr. William Lee.
Dr. William Lee is Chief Economist of the Milken Institute. Previously he was head of North America economics for Citigroup and was deputy division chief responsible for analytical chapters of the IMF’s flagship publication “The Global Financial Stability Report.” Before the IMF, Lee was senior economist and division chief of the financial markets division at the Federal Reserve Bank of New York.
I interviewed him on the sidelines of Global Conference. We discussed the President Trump's trade policies and the turmoil surrounding the markets.
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Trump Trade Policy: Overall policy package and the role of Tariffs:
Altenbach: Thank you for joining us again. We're going to talk about trade policy today, a timely subject.
Altenbach: On April 7th, 2025, you commented on President Trump's tariffs as being “part of his agenda to restructure the US economy and global supply chain.”
Could you share with my readers your assessment of Trump's planned Tariff and policy adjustments and what pain may be felt by those affected by the adjustment process?
Lee: I tried to explain what role the tariffs played in the overall package of policies President Trump was putting in place.
President Trump was elected on a policy agenda that included a massive restructuring of the U.S. economy and changing the global trade system to be more fitting for 21st century trade.
The World Trade Organization (WTO) based trading system that we've been operating under was set up by the United States after World War II, when the United States was the only healthy economy in the world. That trading system was designed to accelerate and help the recovery of countries that were completely destroyed by World War II.
Now we are in the 21st century and countries have become very healthy around the world. In fact, massive groups of countries in Europe, Eastern Europe, Latin America, Middle East, and Asia are rising into the middle class. This includes countries like Brazil, the UAE, and the famous Tigers of Singapore, Taiwan, South Korea.
These countries are itching to trade in a way that's very different from what they were doing right after World War II. They're trying to trade with each other: e.g., the North-South trade, the South-South trade; all these trading needs are not well served by the WTO system. President Trump noted the current WTO-rule-based system is not working well for the rest of the world, and it's certainly not working well for the United States because huge imbalances have developed .
Altenbach: You said huge imbalances have developed?
Lee: The overall balance of payments deficit that the United States has been experiencing is mainly because the United States spends more than it has income. There are both the trade deficit and the federal budget deficit. The federal budget deficit is rising to five to seven percent of GDP going forward.
These are huge deficits where they need to tap into US domestic savings in order for the government to spend as much as it does.
To finance these twin deficits, we also need to tap into savings from abroad. Net foreign capital inflows into a country generally lead to a balance of payments surplus in the financial account, but often also lead to deficit in the current account, which has been the case for years in the US.
That current account deficit from importing more goods and services than we export is also matched by a capital account surplus, which reflects a situation where more foreign capital flows into the United States than U.S. capital flows out. In effect, we can borrow money from the rest of the world because the rest of the world accepts payment from us in the form of dollars.
Altenbach: Is the trade deficit necessarily a bad thing? Isn't that just a natural ebb and flow of the economy, especially when you have a big economy trading with a smaller economy?
Lee: But here I'm talking about the overall balance of payments of the United States and the rest of the world.
However, such a balance of payments deficit is not sustainable because it is getting so large that we're borrowing at a pace that people might NOT want to keep lending us money.
Tariffs are not designed to fix the overall balance of payments problem. Instead, they are intended to reshape the global trading system and to change the composition of countries from which we import goods and services. I believe President Trump wants to reduce the size of the enormous bilateral deficit with China, and shift some of those imports to other countries, in part to diversify our supply chains for important materials such as basic pharmaceutical inputs into more advanced medicines. The job of reducing the overall balance of payments has to rest with boosting income so that we do not consume so much more than we make.
I’ve been using a medical metaphor to explain Trump’s Tariff policy: When a cardiologist analyzes or diagnoses someone with atrial fibrillation, one of the first things he prescribes in a package of therapies is Coumadin. It’s rat poison. It’s a blood thinner that causes rats to bleed out. Doctors will give you something that could be potentially very harmful, but will adjust the dosages in a way that, as part of a therapy package, to make you much healthier.
Just like Coumadin, tariffs can be very harmful if they are too high or used inappropriately to support failing industries. But a little bit can be an incentive for accelerating discussions to revise the global trading system in a way that secures supply lines, reduces reliance on just single-supply sources, and allows countries to renegotiate trade pacts in a way that is more appropriate for their current needs.
Bilateral vs. Multilateral Trading Systems:
Altenbach: And the bilateral Imbalances?
Lee: And, are there bilateral imbalances that are also unhealthy? There you are right to say there are times when you trade with big versus small economies and you have an imbalance because they tend to export more to us than we buy from them, because they don't offer that much in the way of goods and services that the American citizens want to buy.
The largest bilateral imbalance is with China, and China is the second-largest economy in the world. These two large economies are trading with each other, and there is an enormous imbalance between the United States and China. And that's one of the symptoms that the system isn't working to correct itself. The tariff policy is a way for President Trump to accelerate discussion and renegotiation of what the global trading system has to look like. It can no longer be this multilateral system that was put together after World War II.
“President Trump is trying to incentivize bilateral and regional discussions, such as that we have had with Mexico and Canada, with the UK, and with Singapore.”
It's much easier for countries to make bilateral and smaller agreements because as every political scientist knows, there's the tyranny of the minority. When you have a large group of nations get together to renegotiate a treaty, there's always one country that'll hold out to get its own way and prevent any kind of agreement and then the group as a whole is forced to throw out very important issues for many countries just to get to a common core they can agree with. The tyranny of the minority has driven WTO to a point where it's become dysfunctional.
And I think the tariff policy has been designed to incentivize more countries to trade with the United States, because we are the largest and most robust marketplace in the world. So the issue is whether can we negotiate a bilateral or regional agreement that will be to the betterment of all. This is opposed to the old dysfunctional system that prevents American goods and services from being sold at a comparable level to what we are buying from those countries.
Tariffs and Non-Tariff Barriers:
Lee continued and noted:
“As for the European Union, a lot of those imbalances are occurring not because of tariffs, because as everyone knows, the many rounds or tariff reductions under WTO has done a good job of reducing tariffs around the world over time.
But what has come in place of tariffs have been non-tariff barriers, legal restrictions, quality standards, health codes, and other legal hurdles that American companies have to jump over in order to sell in foreign marketplaces. And it's not just the EU, but some of our “friends” such as Japan too. E.g., we can't sell rice in Japan and agricultural goods in Japan because of similar quality standards. Around the world, more and more non-tariff barriers have arisen. The discussion is going to be, get rid of the restraints on trade that produce these bilateral imbalances that are unhealthy and unreasonable.
Altenbach: Will Trump be successful when the dust settles?
Lee: We have to revise the trading rules and create a new trading system for the 21st century. The WTO system just isn't adequate to meet current and future trading needs. And the evidence as to why the current system’s not adequate are these huge bilateral imbalances, not just between the United States and many countries, but also within the emerging market economies and among the larger industrial economies around the world. Each country faces similar kinds of difficulties and that's why it's so important to renegotiate everything.
Volatility goes beyond Tariffs: Uncertainty of Execution of Trump’s MAGA policies:
Altenbach: Approaching and immediately after Trump’s “Liberation Day” on April 2, 2025, we’ve had substantial volatility in equities and bonds, the dollar fell, and the 10-year Credit Default Swap (CDS) rate spiked. Gold rose to over 3500. There were many discombobulations in global markets.
However, you were one of the few economists who stated the tariff concerns are exaggerated.
On April 15, 2025, you commented:
“The source of stock market volatility has not been tariffs but growing fears that Trump’s MAGA policies may not be enacted and that the recent sell-off in the dollar and US bond market reflects highly-leveraged investors selling the most liquid asset first to meet margin calls.” You added that China is the focus of Trump’s efforts to diversify global supply chains.
Can you expand on this unusual observation? So, the volatility goes beyond just the mere tariff tensions, and the tariff adjustment issue was just the catalyst that sparked and magnified the uncertainty?
Lee: Tariff policies are designed in a way to try to revise the global trading system. But the other part of the Make America Great (MAGA) agenda that he got elected on was to restructure the US economy. To do that, President Trump promised that he would:
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Shrink the size of government to free up resources for the private sector.
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Lower tax rates to reduce disincentives for work and production.
3. Put in place fewer regulations, not only by getting rid of all current unnecessary regulations, but by requiring before any new regulation is put in place, 10 need to be eliminated.
Those are the main items of the restructuring effort for the US economy to make it more productive, more attractive to all investors, and less dependent on foreign supply chains. With so much discussion in the last few months on tariffs themselves, I was/am concerned that these most important elements of the Trump agenda will not get passed because he's using up so much of his political capital defending why his tariffs are in place the way they are.
Remember, tariffs are in place to incentivize immediate and rapid discussions with other countries. The restructuring of the US economy will also help to attract foreign investors to the US. During President Trump’s first speech in January to the World Economic Forum in Davos, he announced the US hopes for global investors to come partner with the US by producing more stuff in the US. Tariffs are just one piece of the policy package designed to do just that.
Lee: Enticing foreign investors to come into the US economy is a critical part of the restructuring of supply chains that Trump wants to put in place.
However, what investor will come to the United States when there's so much uncertainty as to what the tax rates are, and whether the size of the government interfering with the private sector will stay in place?
Recession fears?
Lee noted:
‘Remember, the US is a relatively closed economy. Imports are only 14% of GDP. Exports are only 11% of GDP. Those are very small levers to worry about shoving us into a recession.
The uncertainty is due to challenges that may delay or prevent the policies that fed the optimism that markets had from the day President Trump was elected in November to the day that he came into office. That rise in the stock price valuations and that rise in the value of the dollar was based upon expectations of smaller government, lower taxes, and fewer regulations. And we have yet to see most of that get in place still.
The fear of not implementing the main pieces of the MAGA agenda has been a more important source of volatility in the marketplace than the tariffs themselves.
Altenbach: As the weeks went on, the Trump Administration’s initiatives stalled. Were the markets already skittish when we had this tariff tension, and just went berserk?
The US Dollar is still very strong:
Lee: Well, regarding the Treasury-Dollar stock market nexus, Treasury Secretary Bessent had the clearest explanation, which is that global investors, including Japanese insurance companies, held massively leveraged positions in US dollar assets in the forward markets relative to the cash markets. The volatility disturbed that trading strategy, and as such, they had to meet margin calls. They sold the most liquid assets: US treasuries and other US dollar-based assets such as stocks. There were about three days of relatively large volatility compared to the days before in the FX market, the dollar market, and the Treasury market. But that calmed down very quickly.
Lee expanded on movement of the US Dollar:
Lee: To give your readers some perspective, consider the FRED Nominal Broad US Dollar Index, which takes into account all the countries we trade with. Look at where the dollar is today. It is well above its level in 2024.
Go back 10 years to where the dollar has been, it was around the level of about a hundred back around 2016 and 2017.
As of April 22nd, 2025 it's at 122. So it's actually much higher than it was during the first Trump administration. It is also much higher than we were at pre-COVID.
Lee: So, we still have a very strong dollar. When President Trump got elected, the dollar shot up to extraordinarily over-valued levels in late January and early February, as high as 130. That was a way overvalued dollar. 130 from 120-something in three months, is way too fast for such a rise. In my judgment, the drop from January of 130 down to where we are now is a normalization of where the dollar should be. As of January 15th, it was 129. On Tuesday, April 22, it was at 122. So it’s dropped about 6%.
Keep in mind that there is a big difference between the dollar's value and its role in the international financial system as a reserve currency. The dollar fluctuates depending on economic conditions in the US compared with the rest of the world. However, I believe its role as a reserve currency and a medium of exchange in international trade is still secure.
While there is frequent talk about finding another reserve currency, most alternatives fall short. Certain currencies are always used in specialty ways for regional trade or between one or two countries, like China and Saudi Arabia, where it may make sense to use the renminbi instead of the dollar to trade oil and Chinese-manufactured goods. But these are exceptions rather than the rule for most countries.
Altenbach: People want to know, are the tariffs inflationary?
Lee: Inflation is a continuous rise in the price level.
A rise in inflation means prices rise at a faster pace. In other words, going from 2% to 3% inflation means prices rise faster.
Tariffs alone don’t produce inflation. They don’t cause prices to rise faster or continuously. You’ve raised the price of imports, that means the price of imports will go up. But what do people do? For example, “they say, “Oh my God, this imported avocado is now more costly than before.” Do I really need avocados or can I buy them from California growers?” And they’ll find substitutes or do without the more costly imported good.
Economic theory is very clear: You don’t have continuing inflation or even higher inflation unless you get a jolt of extra spending power money. This can be due to printing more money, giving people rebates such as the Covid stimulus that we got under Biden.
US Dollar's Reserve Currency Status:
Altenbach: Getting back to the issue you raised a minute ago, some commentators have questioned whether the US Dollar might lose its Global Reserve Currency status. China's Renminbi has been touted as a replacement.
However, with the Renminbi, you have currency controls. And the language of China is not the language of international trade – English is. The rule of law is not respected like it is in the West. China does not have deep international and domestic markets for their sovereign debt, and they have had capital controls in place.
Those were other issues I had with the argument that the Chinese are ready to replace the dollar with the Renminbi. That said, economically and militarily, they are on par with us.
What are your views on the dollar's reserve currency status and how might BRICS factor into this situation in the future?:
Lee: I think the most important thing about reserve currency status is that it reflects the power and global linkages of the country which issues that currency. People choose to hold dollar-based assets because this is the country that produces the highest rates of return.
Professor Robert Mundell, the Nobel Prize winner In Economics, was on my PhD orals committee at Columbia University. He would ask the question: “why would anybody want to trade in dollars?”
Mundell’s favorite answer was “It allows countries to lower the cost of transactions.”
He would also note that if another currency were able to effect the transaction at lower cost, then that alternative would become the new transaction medium. Moreover, if another currency became more attractive to hold as an asset, that currency would become a reserve currency. So far, the dollar is THE favorite transaction AND reserve currency.
Altenbach: What about Saudi Arabia? Saudi Arabia was going to sell some oil to other countries using local currency. China was one of them, e.g., Oil for Renminbi.
Lee: China is going out of its way to say, "Hey, I want to be able to pay you in renminbi.” Saudi Arabia has agreed to that because Saudi Arabia buys a lot of stuff from China. So that's a bilateral deal that works to the advantage of both. They don't have to go through the dollar. They can transact directly with renminbi . But that's only if Saudi Arabia buys enough from China to be able to recycle the renminbi that it's holding once it sells oil to them.
Now, if they don't buy enough goods, what are they going to do with the renminbi they are holding? It isn't worth anything in and of itself; indeed you can’t even use the surplus to invest in China because of capital controls..
The issue is, if you're running a balance of payments surplus with China and you're collecting all these renminbi in your reserve holdings, what are you going to do with them? The renminbi is not internationally convertible. You can't convert renminbi to anything else other than Chinese goods and services. So that's why there's a limited use of the renminbi around the world because it's not internationally convertible.
That reduces the attractiveness of the renminbi as a reserve asset. The United States, you want to buy US companies? Do as much as you want. You want to cash out on US companies? You can cash out on US companies. Completely liquid, and there's no restrictions on capital flows going in and out of the United States. That's another element of what makes the US dollar such an attractive reserve asset.
Altenbach: It sounds to me like you don't think that the renminbi or any other currency is going to replace the US dollar anytime soon as a reserve currency?
Lee: I would think much longer than decades. So long as the US remains the center of technological innovation, investors will want to invest in US assets to attain the highest returns and the highest profits. As long as the US remains THE innovation center for technology, the dollar will continue to remain the most attractive reserve asset to hold.
Altenbach: Okay. And also, the rule of law in the West is respected, whereas other countries may have high growth rates, like China, but they have dubious property rights. And they don't have the deep international and domestic markets for their sovereign debt, in addition to capital control. Those are all other factors?
Lee: . Absolutely. And those are the elements of ‘non convertibility’ and the lack of free flow of capital in and out of a country that restricts the attractiveness of that country's currency. The attractiveness of the US as a place for investment adds to the attractiveness of the US Dollar as a reserve currency.
Altenbach: Okay. Do you have anything else to add?
Lee: The views I expressed in this interview are my own and do not necessarily reflect those of the Milken Institute.
I'm trying to be an honest analyst of where I think policies are going and what they're supposed to be doing. My responses reflect the fact that the Milken Institute is nonpartisan. Unfortunately, many of my economist peers are pro-Democratic and anti-Trump Republicans. I think that their analytic judgments about tariffs have been clouded by personal dislike for Trump.
I would summarize things by saying that the doom and gloom of the United States and the demise of US exceptionalism are certainly overstated and premature. And as much as I sound like a dollar bull, I'm really a US bull. I really believe that the United States, if it is able to restructure its economy in the way that President Trump was elected to do, really holds hope for rebalancing things in a way that will make not just the United States better off, but the rest of the world better off.
Altenbach: Well, we covered a lot. Thank you for joining us. It’s been a pleasure.
Lee: Thank you again for inviting me to speak to you. Take care, Jim.
Altenbach: You too.
