I participated in Bridgewater's competition and lost. Barely.

Earlier this year, one of my newsletter subscribers suggested I participate in Forecasting the Future: A Modern Economics Challenge. Organized by the hedge fund Bridgewater Associates and the NGO Global Citizen, the competition involved submitting forecasts about the future of global trade, statism, and industrial policy. Winners would receive $25,000 and the chance to interview for a position at Bridgewater.

As someone who writes about these types of topics — which I often think of as conversations related to deglobalization, de-dollarization, and the re-assertion of sovereign primacy over corporations – it made sense to throw my hat in the ring. It ended up being a rewarding experience because it allowed me to delve into a topic that I’m passionate about and bring my thoughts together on this broad set of issues in a focused way.

Sadly for me, when Bridgewater announced the winners at the 2025 Global Citizen Festival in Central Park this weekend, I wasn’t among them. Yet the signs had been encouraging: in August and early September I was informed that my submission had made it through the first few rounds of cuts. And with only ten days to until unveiling the winners, I received further good news: from among the 1000+ submissions from 100+ countries, I’d made it to the final round. Some of the signaling I received suggested to me that it was a small pool of applicants.

Despite some mild disappointment at not having won, I always knew it was a long shot and am still glad that my paper went quite the distance as it is. Most importantly, I take it as confirmation that these ideas are worth developing further and sharing, which is exactly what I am going to do.

Tariffs as a modified, synthetic real exchange rate shock

The idea that I developed about modern mercantilism revolves around tariffs: modeling the tariff shock (not just level but, more importantly, change), why the U.S. is implementing them (internal fracture, external challenge), whether they have staying power (yes), and how they are likely to work. This last piece formed the crux of my forecasts, which expressed a view of the current account balances in 2026 for 171 countries.

Models of real exchange rate shocks help inform how tariff shocks can affect the current account balance, although there are of course differences between these two types of shocks. The point is that — from the U.S. perspective — tariffs resemble a real currency depreciation in that the imported goods become more expensive for the importer. From the perspective of a country that is subject to U.S. tariffs on their exported goods, it is akin to a real exchange rate appreciation, because their goods become more expensive for the importer abroad.

There is a strong, negative relationship between real exchange rates and current account balances. This is due to price and volume effects. Take, for example, a real currency depreciation. Since the prices of imported goods are now higher, there is a negative effect on the trade balance (i.e. ceteris paribus the “M” in “X - M” increases) and, by extension, the current account.

Yet there is also a volume effect, whereby the volume of imports decreases due to the higher relative prices of imports and the volume of exports increases because now the country’s exports are priced more competitively. In response to a real exchange rate shock, the combined import and export volume effect is larger than the price effect alone, and works in the opposite direction. In our depreciation example, then, the decline in the current account from the price effect (which, remember, increases “M”) is offset by the volume effect, which increases the current account through lower import volumes (i.e. decreases “M”) and higher export volumes (increases “X).

On their own, exchange rate volume effects are smaller than the price effect because imports and exports respond to real currency shocks inelastically, i.e. elasticity is less than one. Yet the summed import and export volume effect almost always overrides the price effect, which is why a country can increase its current account balance by depreciating its currency.

So real exchange rate shocks give us a useful framework from which to analyze the price and volume impacts of tariffs, although it is important to note that the tariff impact differs in some ways. From the U.S. perspective, it’s clear that the dynamics on the import side are similar: pass-through inflation is real, as is the volume effect via importer choices or exporters in China willing to re-route their exports to non-U.S. markets.

The volume effect on the export side is less clear: U.S. exports aren’t more competitive from the introduction of tariffs on imports and as they would be in the case of a currency depreciation. Yet with so much of the world facing U.S. tariffs, U.S. exports do have the benefit of facing little in the way of retaliatory tariffs. In any case, it could easily take 3-5 years for U.S. exports to rise (if they rise at all) in response to the new protections, as that is the type of minimum time frame to bring new manufacturing capacity online.

As of July 2025, the U.S. trade deficit appears to be widening, which would be consistent with the tariff price and volume effects via the import side only starting to feed through to a bigger trade deficit. This also suggests that volume effect for U.S. exports is zero — for now. But it’s still too early to read too much into these data, especially without accounting for domestic and foreign cyclical effects and also considering the freakishly large trade deficit in Q1 as U.S. importers front-ran tariffs.

So, that’s the essential gist of my thinking when it comes to the impact of tariffs on current accounts. Of course, for countries facing tariffs from the U.S., the logic is somewhat reversed, though there are some nuances. I also consider the effect of retaliation, factoring that into an overall net tariff shock. For instance, in 2025 the U.S. raised its effective tariff rate on China by 31.7 percentage points, while China’s ETR on the U.S. rose by 11.5 points. The net tariff shock on China is thus 20.2 points, as a synthetic appreciation. In modeling the current account impact I adjusted for trade exposures as a share of GDP and bilaterally to account for the direction of tariff exposure.

All in all, it was a rewarding exercise that I hope to present in more detail and develop further. Stay tuned for more.

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