US President Donald Trump’s term inauguration was launched in a whirlwind of changes in Washington, DC’s current state and relations with the United States.
There is no rapid pace of eviction from the norm, from targeting Canada, the most immovable ally in the United States, with greater tariffs than China, to the Gaza occupational Canada, to the threat to the Greenlandan annex and the decision to reach out to Russian President Vladimir Putin to end the war in Ukraine.
Trump’s tariffs may not be the most shocking foreign policy overture of his second administration, but they may be the most consequential in the long run.
Like the foreign policy moves that generate his headlines, his tariff plans are also part of his excessive game plan to rebuild the US economy. He says he will trade with Europe, China and the US to bring manufacturing home and impose tariffs on “make America great again.”
But in this example, Trump’s audacity rarely brings him closer to his long-term goals due to the careless impact these tariffs have on the US dollar.
The US manufacturing costs are much higher than Europe, let alone Asia, and therefore the immediate impact of his tariffs and tariff threats is inevitably raising inflation expectations, as well as launching a new cycle of strength in the US dollar with other major currencies. You may think that a stronger dollar will add additional costs to trade, tariffs and its threats, but this potential profit can be minimized. Additionally, the US Federal Reserve is pushing for cuts as other top central banks, such as the Bank of England and the European Central Bank, have been replaced by the need to stimulate growth in the face of trade threats.
However, the structure of the international monetary system, which is already dominated by the US dollar, means that expectations of higher yields on US assets only further strengthen the dollar.
For a long time, global demand for US currency means that its major exports are currency and associated financial instruments. This unique “exorbitant privilege” is what allowed Washington to implement both trade and fiscal deficits without much resistance to the economy.
Trump is increasingly aware of the importance of protecting this system, threatening 100% tariffs and other actions on countries that try to ignore and accept Russian-China-backed “BRICS” organizations.
Trump today believes his challenge is not only rearrange the fiscal policies that support domestic manufacturing in the United States, but also establishing new rules for the international financial order. Simply put, the President wants to allow the US dollar to trade at a weaker value compared to other currencies without compromising currency centrality, particularly US government securities, in the international currency system.
This led to debate about whether the Trump administration was aiming to reach new dollar stabilization transactions with other governments and their central banks, similar to the Reagan administration known as the Plaza Accord and the Louvre Accord. Certainly, the Trump administration’s attempt to reach a so-called “Marua Lago” agreement has been frequently talked about among economists.
But such a move will be extremely difficult. Because today such agreements must focus on China, as opposed to the Reagan era’s dollar stabilization agreement, the focus was on Japan. At the time, the US acted to rectify the perceived weakness of the Japanese yen as a threat to its profits. This was not a major challenge as it was our close ally, as Tokyo does. But China is not like that. There is not much interest in such negotiations, and the legacy of transactions in Japan in the 1980s, often cited by Beijing as a reason to strengthen the currency against the dollar, as the strengthening of the yen as a result of those agreements is often not seen as a core factor in the subsequent “lost decades.”
Trump is willing to weaponize the system to secure concessions and achieve its long-term goals, even if it has nothing to do with trade. Even the most immovable US allies must prepare for a threat that goes far beyond tariffs. This is a late January threat of “treasury, banks and financial sanctions” against Colombia, where if they fail to accept military aircraft delivering Deporties, they are usually reserved for fraudulent conditions in North Korea, Iran, Russia and others.
Such a threat has resulted in far more economic destruction than tariffs due to the centrality of the US dollar, its government securities, and the broader financial system to the global economy.
However, the Trump administration’s willingness to use such a threat to its allies means it has little desire to support its negotiations with its allies economically. Beijing and other supporters who erode the dollar system will try to exploit these weaknesses. For example, for Putin, this is an even more important goal than weakening NATO. He has mentioned the dollar system so often that he has mentioned military alliances since the full-scale invasion of Ukraine.
Trump is trying to sort the international monetary system into US interests, but so far his actions show that his understanding of it is at best a sophomore. This was by no means clearer than when asked about NATO spending levels in Spain shortly after his appointment, but he mistook the country as a member of the BRICS block.
The US dollar system has not been a completely American system to date. Most were born in Europe. There, in the 1950s, banks began issuing loans in dollars to meet local funding needs and demand. Thus, by making foreign policy unity between the US and Europe “make America great again,” Trump may inadvertently overturn the dollar system that has been responsible for much of America’s power and greatness for decades.
The main difference between countries that are members of the BRICS BLOC and those of European states like Spain is that BRICS members are large-scale producers of international trade surplus, exporting more than imports, but almost always maintaining important capital controls.
Meanwhile, European trade strength is not sufficient to maintain levels of government spending in the European Union or most of the UK. Nor is Japan where debt-to-gDP figures are far beyond other major economies. Similarly, after the US, these historic allies are the major borrowers of international capital markets, and capital in surplus income countries like many BRICS members are those who are trying to invest in them. This is why China is the number one owner of the US Treasury Department despite the geopolitical competition in Washington.
Trump’s moves, including tariffs and annexation threats directed towards allies, tend to undermine this system. His geopolitical threat, which aims to rearrange the monetary system, may target Beijing, but his approach risks not only breaking political alignment with the US and its historic allies, but also breaking their economic alliance.
If Trump succeeded in his approach, it would likely have some advantages to US manufacturing. The current growth of US GDP at 10.2% in manufacturing would certainly appeal to his base. But the risk is that he blows up the US dollar system with the aim of doing so. And it’s devastating for the US economy, perhaps causing not only major inflation but also dramatic recession.
The views expressed in this article are the authors themselves and do not necessarily reflect Al Jazeera’s editorial stance.