United States President Donald Trump’s second term in office has begun with a flurry of changes to the status quo in Washington, DC, and to the country’s global relations.
The pace of these shifts—from imposing higher tariffs on Canada, the US’s closest ally, than on China, to floating the idea of a US occupation of Gaza, threatening to annex Greenland, and reaching out to Russian President Vladimir Putin to attempt to end the war in Ukraine—has been overwhelming and deliberately so.
While Trump’s tariffs may not be the most shocking foreign policy move of his second administration, they could end up being the most consequential in the long term. Like his other headline-grabbing foreign policy actions, his tariff strategy is part of a broader plan to reshape the US economy. Trump has proposed imposing tariffs on Europe, China, and all other trading partners to bring manufacturing back to the US and to "Make America Great Again."
However, this boldness is unlikely to help him achieve his long-term goals due to the unintended consequences these tariffs could have on the US dollar. Manufacturing costs in the US are significantly higher than in Europe, let alone Asia, meaning that the immediate effect of tariffs and tariff threats would likely raise inflation expectations and strengthen the US dollar against other major currencies. While a stronger dollar might seem to curb inflation, tariffs add trade costs, minimizing this potential benefit. Additionally, the US Federal Reserve has paused its rate-cutting cycle, even as other central banks, such as the Bank of England and the European Central Bank, continue cutting rates to stimulate growth amid trade threats.
The dominance of the US dollar in the international monetary system means that higher yield expectations for US assets will only further strengthen the dollar. For decades, global demand for the US dollar has allowed the US to export its currency and related financial products, enabling Washington to run significant trade and fiscal deficits without major economic consequences. This unique "exorbitant privilege" is something Trump is increasingly aware of, as he has threatened 100% tariffs and other measures against countries seeking to de-dollarise or embrace the Russia- and China-backed BRICS organization.
Trump now sees his mission not only as reordering US fiscal policy to support domestic manufacturing but also as establishing new rules for the international monetary order. Simply put, he aims to weaken the US dollar relative to other currencies while maintaining its central role in global finance. This has sparked discussions about whether the Trump administration is seeking to negotiate new dollar stabilization deals with other governments and central banks, similar to the Plaza and Louvre Accords of the 1980s. Some economists have even speculated about a potential "Mar-a-Lago Accord."
However, such a move would be far more challenging today. In the 1980s, US efforts focused on Japan, a close ally, to address the perceived weakness of the yen. Today, any similar agreement would need to involve China, which is far less interested in such negotiations. Beijing often points to Japan’s experience in the 1980s—where the yen’s strengthening is seen as a key factor in Japan’s "lost decades"—as a cautionary tale about the risks of a stronger currency.
Trump’s willingness to weaponize the dollar system to secure concessions and achieve his long-term goals extends beyond trade. Even US allies must prepare for threats that go beyond tariffs. For example, in late January, Trump threatened Colombia with "treasury, banking, and financial sanctions" if it refused to accept military aircraft delivering deportees—a tactic typically reserved for rogue states like North Korea, Iran, and Russia. These threats carry far greater economic devastation than tariffs, given the centrality of the US dollar, its government securities, and the broader financial system to the global economy.
Yet, Trump’s willingness to use such threats against allies undermines his ability to negotiate with China. Beijing and other proponents of weakening the dollar system will likely exploit these divisions. For Russian President Vladimir Putin, undermining the dollar system is an even greater priority than weakening NATO—he has mentioned it nearly 1.5 times as often as NATO since his full-scale invasion of Ukraine.
Trump is attempting to reorder the international monetary system to benefit the US, but his actions suggest a limited understanding of its complexities. For instance, shortly after his inauguration, he mistakenly labeled Spain as a member of the BRICS bloc when discussing NATO spending levels.
The US dollar system has never been entirely American. It was largely born in Europe during the 1950s, when banks began issuing dollar-denominated loans to meet regional financing needs. By disrupting US-European foreign policy unity in the name of "Making America Great Again," Trump risks inadvertently destabilizing the dollar system that has underpinned much of America’s power for decades.
One key difference between BRICS members and European countries like Spain is that BRICS nations are major earners of international trade surpluses, exporting more than they import, while also maintaining significant capital controls. In contrast, Europe’s trade strength is insufficient to sustain government spending levels in most EU countries or the UK, nor in Japan, which has one of the highest debt-to-GDP ratios among leading economies. After the US, these historic allies are the main borrowers in international capital markets, while surplus-earning nations, including many BRICS members, are the ones investing in them. This is why China remains the largest holder of US treasuries despite geopolitical tensions with Washington.
Trump’s actions—such as tariffs and threats against allies—tend to weaken this system. While his geopolitical threats aimed at reordering the monetary system may target Beijing, his approach risks not only breaking the political alignment between the US and its allies but also their economic alliance.
If Trump succeeds in his approach, it could benefit US manufacturing, with growth from its current 10.2% share of GDP likely appealing to his base. However, the risk is that in attempting to achieve this, he could destabilize the US dollar system. Such an outcome would be catastrophic for the US economy, potentially triggering both significant inflation and a severe recession.
The views expressed in this article are the author’s own and do not necessarily reflect Al Jazeera’s editorial stance.
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