As policymakers around the world struggle to keep up with US President Donald Trump’s tariff announcements, they seem to struggle more with determining the appropriate policy response. So far, they have leaned towards imposing trade restrictions of their own. This is an own-goal approach that reduces growth, raises inflation and places an unnecessary burden on domestic households and businesses.
Trump is often credited with thinking outside the box. It is time policymakers elsewhere did the same. An alternative to imposing tit-for-tat tariffs is to match US tariffs with a similarly scaled reduction in central bank holdings of US Treasuries.
For example, if the US announces 25 per cent tariffs on Mexico and Canada, they can announce their intention to sell 25 per cent of their US Treasuries held as official foreign exchange reserves. Funds can then be redeployed into other highly rated sovereign or supranational bonds, or they buy…
