Trump’s New Policy Towards Dollar Hegemony

The Trump administration’s controversial reshoring efforts through “reciprocal tariffs” don’t need much introduction, to say the least. Rhetorically, the administration has been positioning them as a way to undo existing global spatial division of labor and bring manufacturing jobs back home. But the drastically cheaper costs of production in the underdeveloped world means that this is unlikely to be undone even by a combination of steep tariffs, incentives, and subsidies. The Trump administration, of course, has only offered tariffs. Even if it did offer all three, the necessary commitment of private capital, the physical realities of labor, and the construction of completely new local supply chains would make such a transition take years. The potential economic fallout has led various commentators in the media to sound alarm bells. Of course, this will cause hardship for everyday Americans and for those whose economies’ depend on American consumption. But some have even declared that this will be the beginning of the end of the U.S. dollar’s hegemony as the global reserve currency and medium of transaction.

For better or for worse, I argue that this is not the case. I begin by historicizing the present shift with the construction of dollar hegemony in the first place: a Postwar U.S. project based on American military protection and the coerced development of export-oriented economies in the underdeveloped world. In conversation with this history, I argue that the aggregate of macroeconomic arguments don’t seem to point to an end of dollar hegemony. They just amount to a change in American policy towards that hegemony: away from manufacturing consent for such a system and towards actively extracting rent from it. This is economically unviable. Only time will tell what that will entail.

Historicizing Dollar Hegemony

Though a shift towards the dollar as a global reserve currency and medium of exchange had started earlier, the international structures on which dollar hegemony was built were largely a Postwar phenomenon.

Coming out of World War II, many nations suffered large scale destruction of capital and needed aid for reconstruction. This allowed the United States to emerge as hegemonic global power. This position let it structure the protection regimeⁿ¹ towards the end of American financial stability. In the first instance, it leveraged this power to insist on a dollar-centered global economic system at Bretton Woods.

For some, Bretton Woods was meant to be an attempt to create a system that ensured price stability in all countries and economic interdependence between all countries. The memory of what happened in Germany leading up to the war was, of course, a driving one. So the U.K. adopted John Maynard Keynes’ proposal of a supranational currency, which would be the medium for all international trade. Instead, all currencies were pegged to the dollar, which was pegged to gold, meaning that all countries’ central banks needed to hold reserves in dollars.

This artificially supported the price stability of the U.S. dollar, allowing the government to run persistent deficits without suffering from currency devaluation or capital flight. Through unprecedented mechanisms, the American governments’ preeminent Postwar geopolitical power allowed it to structure the global economy towards its financial gain.^c1

While much of the world demilitarized in the name of peace, the United States managed to manufacture consent for such a system with its increasing military capacity. In the Japanese case, it intervened financially in electoral politics, turned Japan away from defense spending by providing an American security umbrella, and provided Japan with low-interest loans, and promoted Japanese imports.^c2 Of course, this wasn’t just about currency hegemony. In a Cold War ideological frame, having a wealthy, capitalist Japan across the sea from Communist China was a major foreign policy victory.

This kind of policy persisted even past the era of gold convertibility. The U.S.’ position as the hegemonic military power meant that it was the only state able to offer oil-extracting Gulf States like Saudi Arabia a security umbrella. This geopolitical protection was (and is) contingent on those states structuring their economic activities in U.S. interests. As a result, the energy that all global production depends on is traded in dollars. The oil-producing states that receive those dollars are given favorable terms in the acquisition of the U.S. Treasury securities. The U.S. structures Gulf dictatorships’ economies to the end of dollar hegemony: it manufactures consent for this by enriching them and providing them with military protection.

The shift in the global spatial division of labor towards manufacturing in the underdeveloped world has also been structured towards American interests. All of the previous examples have allowed the U.S. to emerge as the single largest domestic market in the world. This means that there is a huge opportunity for capital accumulation for multinational corporations that operate in the undeveloped world where labor is cheap and then export their products to the United States.. International multilateral agencies often pressure states to pursue a mode of development through multinational corporate capital. But because of the opportunities for accumulation that come with doing so, many do it regardless. For statesmen in the underdeveloped world, alignment with export-oriented multinational capital is a way to access wealth they can use to sustain their power. Of course, this arranges their interests in ways that have little to do with the needs of their people.^c3

This has created a world where central banks own dollar-denominated assets in incoherently high proportions from a risk management perspective, but they do it anyway.^{c4, c5} Some combination of their desire to facilitate domestic capital’sⁿ² access to American markets and dependence on the American security umbrella puts many states in this position. The rest still find themselves in a world where the U.S. has a network of economic client states, multilateral organizations, and military power it can use to make dissenting practices unattractive, to say the least.

Outside of its status as a reserve currency, the aggregate of these facts and the importance of U.S. financial infrastructure (e.g. SWIFT networks) in global exchange means dollar hegemony extends to interactions ostensibly unrelated to American markets. 54% of all trade invoices are dollar denominated,^c6 but U.S. imports account for only 10.1% of global trade.^{c7, c8}

These are structural realities that the Trump administration is rhetorically sensitive to, and uses to justify the tariffs. At a White House briefing, Stephen Miran, chair of the Council of Economic Advisers, said:

[W]hen private agents in two separate foreign countries trade with each other, it’s typically denominated in dollars because of America’s status as the reserve provider…As a result of all this, Americans have been paying for peace and prosperity not just for themselves, but for non-Americans too. President Trump has made it clear that he will no longer stand for other nations free-riding on our blood, sweat, and tears, whether in national security or trade….While it is true that demand for dollars has kept our borrowing rates low, it has also kept currency markets distorted. This process has placed undue burdens on our firms and workers, making their products and labor uncompetitive on the global stage.^c9

Miran presents the status quo as a parasitism on the part of foreign countries, rather than a protection regime his predecessors actively tried to create to the ends of capital accumulation in America. Regardless of how misleading this is, the question is: how will his administration’s tariffs affect that hegemony?

II. The Macroeconomic Tendencies

A headline in macroeconomic tendencies has been the alleged beginnings of a shift away from the dollar as a “flight-to-safety” currency.^c10 Generally, economic turmoil has led investors to hold dollar-denominated assets, particularly U.S. Treasury bonds, as these are perceived as a very low risk asset. While 10-year treasury yields have increased by 0.2% and recession seems on the horizon, the U.S. dollar has fallen by over 9% against a basket of major currencies.^c11 Demand for the dollar is weak despite indicators that would usually make it strong. But this doesn’t seem to constitute such a seismic shift. Everyone knows that inflationary tariffs are coming. A nominal increase in interest rates doesn’t translate into real return on investment if the inflation is high. If dollar-denominated assets’ perceived real return on investment decreases, it makes sense that demand for them will decrease. There is historical precedent for this. High supply-side inflation through the 1970s meant that, while nominal rates on 10-year Treasury securities started at 7.83% on the New Year in 1978 and ended at 10.33% on December 31, the major currencies U.S. Dollar Index decreased in the same time period.^{c12, ,c13} On macroeconomic grounds alone, this doesn’t seem to constitute a threat to dollar hegemony.

The possible macroeconomic threats

Private foreign ownership of U.S. Treasury securities is at an unprecedented high, accounting for around half of foreign ownership. Foreign ownership as a whole accounts for half of ownership of U.S. debt.^{c14, c15} This effectively means that a quarter of debt is owned by private actors over which the U.S. government wields no direct power. States may be unwilling to risk switching to other assets for fear of the geoeconomic and geopolitical harm the U.S. is capable of inflicting on them. But private actors aren’t directly bound in this way. This is the case while the budget deficit is at an unprecedented high of 7% of GDP. With plans to extend tax cuts from Trump’s first term, this is set to increase.^c16 As a result, the trend is towards investors favoring long-term debt over short-termb debt.^c17 If this persists, the Treasury will find itself having to recycle debt at more regular increments while open to the whims of the decision-making of private investors abroad. If their demand cools down, the Federal Reserve will be caught between two bad options: worsening tariff-induced inflation by directly funding that debt (i.e. printing money to purchase securities itself) or increasing interest rates.

Either possibility does not bode well for capital accumulation in the United States, which is increasingly leveraged in recent years. It is highly contingent on borrowing from private credit markets that issue credit to companies considered too risky by traditional banking institutions. The formal banking sector itself is more exposed to non-bank entities than it was just before 2008.^c18 The sustained growth which that mode of accumulation hinges on would be offset by either of the scenarios above.

The aggregate of these arguments is that the Federal Reserve may find itself in a place of historically distinct precarity when it comes to its debt. At the same time, tariff-induced inflation seems inevitable and the domestic economy is prone to recession even if growth slows slightly. While these are dark predictions for the domestic state of affairs, they don’t constitute a threat to dollar hegemony in themselves.

An absolute decrease in American consumption would have to be paired with a relative increase in consumption elsewhere to reorient foreign export-based capital and the states that protect it away from American markets. For states dependent on the U.S. security umbrella, this is not possible. This includes the Gulf States. The world will be dependent on those states (and therefore dollars) for its energy needs for a long time. Other states still need to consider American geoeconomic power: when the possibility of creating a BRICS currency as an alternative pole to the dollar was floated, Trump threatened participating states with 100% tariffs.^c19 Transitioning away from the dollar and U.S. markets can’t just be an economic diversification. The Trump administration is ensuring that it is a zero-sum choice. In the coming years, a scenario in which dollar hegemony ends because enough states make that choice seems unlikely.

The economic result might strengthen dollar hegemony. In countries very dependent on the U.S. market, the tariffs’ impact will have a stronger impact on their currencies than on the dollar. In response, foreign central banks will have to reduce their interest rates, encouraging investment in their economies and depreciating their currencies so that their exports are competitive again.^c20 This would incentivize export-dependent nations to purchase dollar reserves, which would strengthen the position of the U.S. dollar.

So it seems like dollar hegemony is here to stay. But all this represents a significant mutation in U.S. policy towards that hegemony. The U.S. is no longer interested in manufacturing consent for dollar hegemony through military protection. It is no longer interested in turning the underdeveloped world towards (dollar-denominated) export-oriented development through multilateral organizations. For a long time, this served it well. The U.S. government benefited at home by:

1. Improving the quality of life of the American people by providing them with cheap consumer goods,

2. Facilitating capital accumulation and popular home ownership by keeping interest rates low,

3. Facilitating capital accumulation through financialization by centralizing immense foreign surpluses in American banks

But now things are changing. To reword Stephen Miran’s rhetoric into the reality it implies, the U.S. is looking to unilaterally extract rent out of that hegemony in the form of tariffs. The aggregate of arguments in the press don’t seem to point to a short-term end of that hegemony. They just point to the fact that this restructuring of the government’s relationship with it is economically unviable. Dollar hegemony is predicated on some states needing American military protection, and on America’s ability to make exiting from the dollar system very costly for the rest. Until states can carve out an exit option from that, it will be durable. Trump’s policy won’t end dollar hegemony, but it will make people suffer from it in new ways — both at home and abroad.