The overriding objective of President Donald Trump’s ‘liberation day’ tariffs — most of which remain suspended until July while the White House renegotiates trade deals with dozens of countries running trade surpluses with America — is to re-industrialise America and bring blue-collar jobs back by rebuilding its manufacturing base.
But that will not be possible for him without severely impairing — even if not completely knocking down — the very foundations that have for decades underpinned the US’s global economic dominance: the hegemony of the dollar in the international monetary system.
Herein lies the US’s Triffin dilemma, which explains the burdens of being a reserve currency issuer. It means that the US must run trade and fiscal deficits to supply global liquidity, which hollows out its manufacturing sector. If the US cuts deficits, global trade suffers due to a lack of dollar liquidity as the US is buying less from abroad, thereby impacting world growth.
In other words, countries must use the US dollar as a settlement and reserve currency to conduct international trade. And because there is demand for the dollar, countries have to stock the US currency earned through exports.
The US must run trade and fiscal deficits to supply global liquidity, which hallows out its manufacturing sector, but if the deficits decrease, global trade suffers due to a lack of dollar liquidity
On the other hand, as the US supplies dollars, if it wants to safeguard its position as the world’s dominant currency, it will have to export dollars by running a trade deficit. For so long, its currency and related financial products have remained the primary US export. This has enabled Washington to run both trade and fiscal deficits without any major drag on the economy.
In theory, the dominance of the US currency hinges on the stability of the dollar, requiring America to maintain a balance of payments surplus. However, these two objectives of domestic stability and global monetary supremacy as the world’s reserve are structurally contradictory and paradoxical, as explained by the Triffin dilemma.
Hence, Trump’s tariff plans — which aim at pushing ‘re-industrialisation’ of the US not just to narrow its international trade deficit but also to achieve a balanced trade or a trade surplus — inadvertently but inherently run the risk of being hugely consequential for global dollar dominance in the longer run. The current push for re-industrialisation underscores a seismic shift in US economic policy as Washington seemingly quits the cause of globalisation.
Even though no other country wants the structural burdens of replacing the dollar, as it requires chronic deficits, the narrative that the dollar’s reserve currency status is being eroded has gained momentum lately.
A JP Morgan report from October points out that, “Some signs of de-dollarisation are evident in the commodities space, where energy transactions are increasingly priced in non-USD currencies. For example, Russian oil products exported eastward and southward are being sold in the local currencies of buyers or in currencies of countries that Russia perceives as friendly. Elsewhere, India, China and Turkey are all either using or seeking alternatives to the greenback.”
Natasha Kaneva, head of global commodities strategy at JP Morgan, further explained in the same report, “Most of the world’s oil still sells for dollars. But with Russia, the world’s second largest exporter of oil, selling its petroleum exports in the local currencies of its customers, other producers might find themselves following suit.”
In addition, central banks, especially those in emerging markets, are increasing their gold holdings in a bid to diversify away from a USD-centric financial system. According to JP Morgan, central banks collectively bought a net 1,136 tonnes of gold in 2022, the highest annual demand on record, and another 1,037 tonnes in 2023.
“This reduces their need for precautionary reserves of US dollars and US Treasuries, which in turn frees up capital to be deployed in growth-boosting domestic projects,” it said. Globally, new payment systems are also evolving rapidly and facilitating cross-border transactions without the involvement of US banks.
For instance, Project mBridge is a multi-central bank digital currency platform that connects central and commercial banks across China, Hong Kong, Thailand, the United Arab Emirates and Saudi Arabia without relying on the dollar.
Similarly, the US dollar’s share of foreign exchange reserves, the most commonly analysed barometer of dollar dominance, has decreased, notably in emerging markets. Central bank reserves are typically held in dollars, but they are now being supplanted by other currencies.
“All in all, while global trade and foreign exchange reserves have flatlined, the dollar still retains its influence in this space, especially when taking into account other factors including dollar-denominated bank deposits, foreign exchange volumes and trade invoicing,” the report said.
Though these developments underline the diminishing influence of the US in the international monetary system, the dollar hegemony remains intact for now. None of this means the dollar will disappear overnight. It remains deeply embedded in global finance, though its gravitational pull is weakening.
Nonetheless, the dollar dominance in the international monetary system will be undermined if Trump’s re-industrialisation project effectively impedes the export of its currency to provide liquidity to meet growing global demand.
As pointed out recently by Han Heyuan, Senior Research Fellow and Vice-Chairman of Guangdong Association of Productivity Science, in an article, “The US has to choose between implementing its re-industrialisation strategy and safeguarding the dollar hegemony: if the US picks the former, this implies that dollar hegemony will crumble — the country will no longer be able to export dollars via international trade deficits and current account deficits. If the US chooses the latter, it must accept the fact that its manufacturing sector will continue to weaken, because that is how the dollar can be exported.”
That said, Trump’s re-industrialisation plans would also likely meet other impediments. “Manufacturing does not occur in a vacuum. It requires infrastructure, capital – and above all, labour. And herein lies the first, glaring inconsistency in America’s re-industrial dreamscape. The country simply does not have the workforce it needs to realise this vision,” points out an op-ed published by The Brussels Morning Newspaper.
The possibility of the dollar’s retreat affords an opportunity for diversification of reserve currencies should other economic powers like the European Union and China seize it. This would potentially free the Global South from the deep economic impacts of the volatility of the American currency.
Published in Dawn, The Business and Finance Weekly, May 19th, 2025
