What Tariffs, Trade Deficits, and the Dollar Actually Do to Commercial Real Estate: Michael Klein on RFP 109

Most commercial real estate underwriting treats macroeconomics as weather. It happens, you note it, you move on. Professor Michael W. Klein argues the weather is closer to plumbing, and that the pipes run through construction budgets, cap rates, and tenant demand. Klein is the William L. Clayton Professor of International Economic Affairs at The Fletcher School at Tufts University, the former Chief Economist in the Office of International Affairs at the U.S. Treasury, and the founder of EconoFact, the nonpartisan site that translates economic research into plain English memos. On episode 109 of The Real Finds Podcast, he walked through the machinery.

The Single Most Important Price in an Economy

Klein opens with a line from Milton Friedman: the exchange rate is the single most important price in an economy. One number converts everything a country sells abroad out of its own currency, and everything it buys from abroad into that currency. For an economy the size of the United States, trade is a smaller share of activity than in France or Japan, so the effect is muted. It is not absent.

For a developer, the transmission is short. Steel, lumber, and finish materials cross borders before reaching a site. When the dollar moves, input prices move, and a project that penciled in January stops penciling in June. No single direction helps everyone. Exporters want a weaker dollar because it makes American goods cheaper abroad. Importers want a stronger one. Klein described a case study built on two newspaper quotes from the same day, one treating a weakening dollar as a crisis and one as a gift, because each spoke for a different constituency.

Trade Deficits Are Not Corporate Losses

The most persistent misconception Klein encounters is the corporate metaphor: a company running a deficit is in trouble, so a country running one must be too. He dismantles this on two levels.

Bilateral deficits are, at best, noisy. When an iPhone arrived from China, it counted as roughly a three hundred dollar import. The value China actually added was about five dollars. Components came from South Korea, Vietnam, and the United States itself, and China assembled them. The measured deficit with China was wildly overstated, and by arithmetic, deficits elsewhere were understated. His homelier version: he runs a bilateral deficit with his grocery store, his students run one with him, and nobody files a grievance.

The aggregate deficit is real but means something different. It reflects a country spending more than it earns, which means borrowing. Klein’s test is what the borrowing buys. A student loan that funds skills pays for itself. The same loan spent on a Ferrari that eventually gets wrecked leaves the borrower with debt and nothing productive. He points to the Asian economies of the 1990s, where the joke was that the national bird of Thailand was the construction crane, and much of the borrowed money went into housing and office space that never found a use.

Where Tariffs Land

Klein notes that when the Chicago Booth panel of leading economists was asked whether broad based tariffs benefit a country, the answer was close to unanimous across the ideological spectrum, which almost never happens in that survey. His explanation of why is the part worth internalizing.

A tariff is a tax on imports, but its price effect is wider than its tax base. When import prices rise, domestic competitors raise prices too, and no revenue is collected on those increases. The consumer pays either way. Research by Kadee Russ and Lydia Cox, published through EconoFact, made the point in employment terms: there are vastly more jobs in industries that use steel than in industries that make it. Klein put the working ratio at roughly eighty to one. Protecting a mill in Pennsylvania raises input costs for plants making washing machines, cars, and dishwashers. One EconoFact contributor visited a Pennsylvania furniture factory expecting enthusiasm about tariffs and found the opposite, because the plant imports most of its wood from Canada.

Klein does carve out a narrower category. Semiconductors concentrated in Taiwan and South Korea, aluminum dependent on Canadian hydropower, and rare earths processed largely in China and Indonesia raise genuine security questions. He argues these belong in their own bucket, addressed through stockpiling, alternative sourcing, or substitution, rather than folded into a general argument about trade balances. Onshoring advanced fabrication is not a policy switch, and rare earth processing carries lead times no tariff schedule shortens. For Midwest industrial owners tracking reshoring demand, the distinction matters, a theme that also ran through our conversation with Chad Griffiths on industrial opportunity.

Dollar Dominance and the Number That Sets Your Mortgage

Asked whether dollar dominance is eroding, Klein separates two ideas. The Bretton Woods advantage, where the United States effectively set monetary policy for everyone, ended in 1973. What remains is the dollar’s role as the vehicle currency for global trade, including transactions involving no American party.

The larger advantage, in his view, is not the dollar at all. It is the Treasury market, the deepest and most liquid in the world, which holds yields on ten year Treasuries below comparable sovereign debt elsewhere. That yield is the benchmark under mortgage rates and car loans, which makes it the number sitting under every capitalization rate in the country. Klein and a colleague examined periods when global uncertainty spiked. Historically the dollar strengthened as capital fled into Treasuries. In two four month windows, at the start of each Trump term, it weakened instead. His read is that talk of charging central banks to hold Treasuries, or of repaying obligations on a flexible schedule, is playing with the one advantage that is genuinely hard to replace.

Fed Independence, Affordability, and the Supply Problem

Klein asks his students which branch of government the Federal Reserve belongs to. The answer is none, by design, for the same reason courts are insulated from politics. Absent a firewall, the incentive is to juice the economy before an election and absorb the crash after. He cites research by Thomas Drechsel finding that the frequency of meetings between administration and Fed officials predicts higher inflation on its own.

The framing lands on live news. Kevin Warsh was sworn in as chair on May 22, 2026, and at his first meeting the committee held the benchmark rate at 3.50 to 3.75 percent with a dramatically shortened statement. Klein reads the hold as reassuring and the surrounding pressure as unresolved, with inflation rising three months running.

On affordability, he is blunt that housing is a supply story. Restricted supply began as a coastal issue and has spread inland, driven substantially by zoning and neighborhood opposition. His fix is more multifamily and greater density, the same policy fight we covered in our look at the FIMBY movement and in our conversation with Jon Siegel on workforce housing. Drought conditions in the West, he adds, are about to show up in food prices on top of tariff effects.

The Conversion Question and the Private Credit Unknown

Klein consulted his sister, who spent her career in commercial property management, before the interview. His conclusion on converting surplus office to housing is skeptical: absent a teardown, the building types are too different. Practitioners who have run the numbers often land nearby, which is why selection criteria matter more than the concept, a subject we treated in finding the right building for conversion and in our episode on the largest completed conversion in American history. He also flags the Boston biotech overbuild as a familiar cycle and names private credit as the opacity risk nobody has fully mapped, drawing a parallel to 2008 mortgage instruments without claiming the outcome will rhyme.

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Van Vlissingen and Co. has been the Midwest’s oldest commercial real estate brokerage, development, and management firm since 1879, and today is independently ranked the #1 commercial real estate agency in Chicagoland, home to the #1 independently ranked agent, Gordon Lamphere, and the region’s #1 ranked commercial property management team. If you own, manage, or invest in energy-adjacent, mixed-use, or transit-oriented property across Lake County, the North Shore, the Northwest and O’Hare corridors, DuPage and the I-88 corridor, Will County, or southern Wisconsin’s Pleasant Prairie, Kenosha, and Racine markets, contact Van Vlissingen and Co. at 📞 847-634-2300 or 🌐 vvco.com. For a market-wide view of where these dynamics sit today, see our State of the Chicagoland Commercial Real Estate Market for Q2 2026.