Trump's Tariff Threat: A War Call to Save the Dollar

The possible loss of the dollar as the main international reserve or trade currency causes additional anxiety in the heart of the US government, administration, companies, and the global world order.

Listen to what former US President and Republican presidential contender Donald Trump recently said about the matter; do not rely only on my word for it. Emphasizing the need of strategically implementing and eliminating sanctions quickly to prevent negative effects on the dollar and its symbolic relevance, he underlined their negative impact on the value of the money. Trump underlined the vital need of keeping the dollar as the world currency and compared the possible loss of this position to a major loss equivalent to declaring a third world country.

The Republican presidential contender also revealed at a recent meeting his plan to levy a significant 100% tariff on goods coming from nations that stray from using the US dollar in foreign trade. Although at first look the justification for this choice seems unclear, a closer look explains why the United States cannot negotiate maintaining the dollar's worldwide currency position.

In a quick historical perspective, the Bretton Woods agreement following World War II helped the dollar move to its position as world currency. The dollar was backed by a physical good - gold until 1971. But in 1971, President Richard Nixon broke off the dollar from the gold standard and converted it to a fiat money. The international reserve money then started depending just on faith in the US economy's capacity to fulfill its debt.

Lack of a physical asset supporting the dollar, together with its consistent devaluation and growing national debt, have caused anxiety within the world financial community. Concerns about the viability of US policy of continuous money creation and the approaching debt ceiling of unlimited nature have surfaced.
Over the past five years, attempts to substitute the dollar as the main world currency have run against many challenges. Initiatives including BRICS (Brazil, Russia, India, China, South Africa) have battled to agree on a shared monetary policy and currency. Based on IMF data, the US dollar still commands 59% of official foreign exchanges despite a slow decrease in its supremacy; the euro trails at around 20%.

For Donald Trump, maintaining the dollar's primacy is still a top priority, particularly in view of recent conversations with big nations such China, India, Brazil, Russia, and South Africa looking at substitutes for dollar reliance. Dollarization, this expanding trend, marks a deliberate attempt by nations to lessen their dependence on the US dollar in worldwide trade.

The dominance of the US financial system may be threatened by the development of Central Bank Digital Currencies (CBDCs). By using CBDCs to get beyond conventional financial institutions, nations could reduce the value of the dollar in next transactions. Further complicating the dollar's supremacy are geopolitical events such China's and Russia's attempts to circumvent the US-owned SWIFT system as well as America's strict sanctions on non-compliant countries.
Globally, foreign exchange reserves show the US dollar's dominance dropped from 85% in the 1970s to 58% in 2022. Countries are diversifying their reserves by looking to substitutes like gold more and more. Notable instances are India, China, Russia, and Turkey building significant gold reserves. Furthermore becoming popular as good substitutes for the dollar are currencies including the Australian dollar, Swiss franc, British pound, and euro.

The dynamics of oil trade have added another layer to the scene of currencies. As main oil consumers, China and India have enlarged their blocs to facilitate trade of their own currencies. This changes their reliance on the dollar-centric trading system. To enable transactions in their own currencies, China has been proactive in this regard by signing currency exchange arrangements with important allies including Russia and Saudi Arabia.

The fight for dollarization is essentially a calculated attempt by the United States to protect the dollar's current value and, hence, America's position in world order and global finance. This complex interaction of economic factors emphasizes the need of keeping the dollar's dominance among changing geopolitical environments. .

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