The Tariff War and the Future of the Dollar
The chaotic decisions of the Trump administration, the unpredictable tariff measures that are likely to affect even the most important economic partners of the US – Canada, Mexico, China and the EU – as well as the equally disorderly reconsideration of American geopolitical interests in relations with Russia, Ukraine and Europe have triggered a new series of debates on an old issue: the role of the dollar in the world.
The conclusion that emerges from the current, very heated discussions is that, in the near future at least, there are no viable alternatives to the role of the dollar as the main international currency. In the long term, the actions of the US government may affect the economic and geopolitical foundations of this function.
The main factors determining the current dominant position of the dollar in the world economy are: the solidity of the economic and political foundations of the US currency; the world’s trust in the US as a credible commercial and geostrategic partner; the avoidance so far of excessive use or abuse of financial sanctions by the US government. The US economy accounts for 26% of global GDP, and US financial markets are the largest, most liquid, and most open in the world. The US government’s macroeconomic policy has been relatively sound throughout the post-war period, and the rule of law and US institutions have proven strong throughout this time. The use of the dollar in the defining functions of a currency (means of account, means of payment, and reserve currency) is universal, which creates a high demand for dollars and gives value to the US national currency, recognized and accepted worldwide.
The Trump administration’s measures undermine these foundations of the dollar’s international role. The US budget situation is unsustainable, but the US president has announced his intention to reduce taxes and fees. Despite his fanciful statements that tax cuts, fees, and public spending will lead to a balanced federal budget, the budget deficit and public debt, already very high, continue to grow. Trump has hinted at the possibility of taxing foreign capital invested in the US, namely the taxation of foreign exchange operations carried out by people trying to avoid the dollar, decisions that economic analysts warn will lead, among other things, to a reduction in foreign investment in the US economy and to tax retaliation measures against American investments abroad. The ability of the US central bank (Fed) to design and implement monetary policy seems to be questioned in recent days, and the Trump administration uses at least capricious and bizarre instruments in numerous government programs, which fuels inflation and the depreciation of the dollar.
After World War II, US hegemony constituted the protective shield that facilitated global and transatlantic prosperity and gave the dollar the role of the world’s main currency. This hegemony was achieved by the US through the aid it provided at the beginning of the Cold War for the reconstruction and development of war-torn European economies (the Marshall Plan), by supporting the creation of international institutions (NATO, the International Monetary Fund, the World Bank, the OECD and the European Union), by promoting free trade, democracy and territorial integrity. All these achievements are now in danger. President Trump is clearly supporting Russia against Ukraine, which seemed unthinkable a few months ago. Relying on the American shield, Europe has shied away from its defense responsibilities – and it is very good that it is now taking a step towards reasserting these obligations – but it openly wonders whether the US will abandon NATO and was offended by Trump’s statement that “the EU was created to screw the US”.
The American president is threatening tariffs and imposing such barriers not only on trade with China but also with long-standing economic and geostrategic partners such as Canada, Mexico and the EU. The chaotic and mercantile way in which tariffs and sanctions threats are being implemented, withdrawn and then re-imposed has created confusion among US and foreign companies and undermined confidence and investment – both domestic and foreign – in the US economy. The US government is also trying to eliminate American development assistance, especially humanitarian and medical aid, which has stopped the loss of life and famine across Africa. The dismantling of the “Agency for International Development” (USAID) weakens the US image as a “soft power”, ceding economic and political ground not only to Russia – in Africa, but also to China – in Latin America. A well-known international organization (Stop TB Partnership) estimates that over 14,000 people have died from tuberculosis since the US government cut funding for TB efforts. Each of these deaths is a human tragedy and a moral outrage, but also a self-inflicted blow to the US position in the world.
The main consequence of these irresponsible actions of the US government is that the world is losing confidence in the US as a geostrategic partner – as an enthusiastic supporter of transatlantic relations and future German Chancellor, F. Merz, eloquently stated.
It is too early to know how the Trump administration will use the weapon of tariffs and other announced sanctions in the medium and long term. It can be said, however, that if the US administration’s trade policy causes the rest of the world to move away from the US or even stop treating the dollar as the world’s global reserve currency, American power will be severely affected, and the effect would be entirely self-inflicted, created not by an external shock but by the decisions of the US government itself. It is a bizarre way of “making America great again”.
The US has had narrow and selfish policies in the past, and each time they ended in catastrophe. History does not repeat itself: the same mistakes do not always have the same consequences. But with a president as unstable as Trump, the consequences of recent decisions are very difficult to predict. Anyway, acting alone is not a way to achieve any kind of greatness.
Punitive measures, applied to all countries and to achieve US geostrategic objectives, will probably create more uncertainty about the international role of the dollar than the imposition of bilateral sanctions. However, economic history is full of telling examples that show that trade war is an inadequate and less effective solution than diplomacy. On the other hand, given the long-standing economic and political ties between the US and Europe, it is possible that the escalation of the trade war between the two sides of the Atlantic will not be triggered. After all, both sides may soon be in a position to agree on the continuation of sanctions against Russia. And, in fact, the American president announced on Wednesday, April 9, a 90-day pause in the application of the “reciprocal taxes” with which he shook the world markets. The exception to this “permissiveness” is China, on which the US is increasing taxes to 125%.
In conclusion, it is expected that the dollar will maintain its role as the world’s main currency for a while. In the near future, there are no viable alternatives to this formula, although a more competitive European economy with a larger volume of safe and diversified euro-financial assets could lead to a strengthening of the global position of the European currency. Also, given the growing distrust in the way the US government manages the economic and geopolitical foundations of the international role of the dollar, investors could try to find some alternatives to the US currency (cryptocurrencies; currency created by the BRICS countries; Special Drawing Rights; etc.). All these processes will undoubtedly amplify the instability of the world economy and the volatility of international financial markets.
Undermining the economic and geostrategic foundations of the international position of the dollar is harmful first of all for the US, and secondly, for the world economy.
