[Economy Insight] Trump’s tariffs could cost the US dollar its dominance

US President Donald Trump boards Air Force One at Joint Base Andrews in Maryland on April 11, 2025. (Reuters/Yonhap)

The tariff policy adopted by the Trump administration in the US is dangerous. While Trump preaches that trade deficits are evil and that tariffs are the most effective way to eliminate them, countries around the world envy the US for its ability to wield a hegemony despite running up a trade deficit.

But the US’ trade deficit is neither inherently good nor evil.  It is simply a natural phenomenon within the international economic order, much like how the Earth revolves around the sun. The problem lies in the fact that Trump not only fails to understand that principle but is in fact trying to shatter it.
 
The US and other countries in the world should be capable of standing on their own two feet. Having most of one’s supply chain be overly reliant on outside resources can be devastating to economic security. However, absolute autarky is not the answer. No country in the world would be able to pull that off. Defining the extent to which a country should be self-reliant is also a tricky matter.   
 
Politicians love to insist that this pipe dream of “complete self-reliance” is somehow within reach. But it’s an inherently contradictory concept. Trump behaves as if it is possible to completely revamp the world order with a snap of his fingers, but he has forgotten that everything comes at a price. The US may reap some benefits through these tariffs, but at the same time, it may lose something far more precious. The age of a great US will come to a close the moment that it falls for the notion that its hegemony is only manageable through sheer force and bullying. 

The nature of the US deficit

Let’s focus on the data. Looking at the goods sector, we see that the US buys much more from other countries than other countries buy from the US. That difference is the trade deficit.

The US has had a deficit nearly every year since the 1970s. Surprisingly enough, those deficits have tended to shrink during recessions. That suggests that the US deficit is heavily influenced by consumer expenditures. 

In other words, the outcomes of consumption on the part of Americans are manifested in the trade deficit. (Consumption is still possible amid an ongoing trade deficit. Indeed, this is the source of the US’ strength. More on this later.)

The problem arises when a trade deficit is the result of declining exports, since that could mean that supply chain self-sufficiency is breaking down. In reality, US exports have been increasing substantially. Of course, the rise in imports has outpaced exports, so that the overall trend is an increasing trade deficit.

The US exports a lot of goods. In 2024, its exports exceeded US$2 trillion. The amount has grown more or less every year. By any definition, the US is a major export power.

What about the service sector? The situation there is a surplus: the US exports more than it imports in the sectors of financial services, tourism, education, and technology services. In 2023, it recorded a surplus of around US$278 billion with exports of over US$1.25 trillion in services. The size of that surplus is likely to have been even higher in 2024.

From the US’ standpoint, one might emphasize the point that the trade deficit persists even when goods and services are combined. That doesn’t change the fact that the US is a major exporter — one that dominates in services rather than goods.

This is a case of the classical concept of comparative advantage. The US’ strengths lie in the service sector, not goods. US companies and workers are adept at making software, films, music, TV shows, and the like, and the world needs those things — and is willing to pay for them.

Two sides of the same coin

There is one other thing that shouldn’t be forgotten: the US’ purchasing power is rooted in the strength of the dollar. Without the dollar’s status as the world’s primary reserve currency, US consumption would be unsustainable. The trade deficit would be a catastrophe.

Indeed, quite a lot of countries would love to be like the US. With stores of dollars in the shed, there would be no need to worry about a mounting trade deficit. Those countries would be able to enjoy a good deal of abundance if they could print the money out like the US does.

This is the point that Trump overlooks. The US is the country that issues dollars — a currency that has become the world’s, whether that is due to the US’ own strength or the world’s acceptance of it. It’s something only the US can produce.

With the dollar, the US can achieve most of what it wants. While other countries need to toil away to amass dollars to survive, the US can print them more or less for nothing.

Most sovereign states issue their own currencies, but not all currencies have equivalent value. This is another natural law. Just as apples vary widely in price depending on the producer and place of origin, all currencies have different prices.

Among those currencies, there are certain ones that predominate. These are the ones we refer to as “global reserve currencies” or “key currencies.”

The US dollar has held that title since 1944. Central banks around the world stock dollars as reserves, and most international transactions take place in dollars. 

The world needs lots of dollars, and the US has to supply them. That is the fate and duty of a key currency country. It’s the only way to keep the global economy turning. This is another order that the US has shaped.

The global economy is sustained through dollar supplies. The more dollars the US exports, the more abundant the world becomes. As demand for dollars grows, the dollar gets stronger, and the costs of imports to the US go down.

Conversely, the situation becomes more difficult for US exports. A large supply of dollars means that the scale of the trade deficit is growing. 

Here, the US may feel threatened. It may feel some anxiety to see its self-sufficiency network collapsing. But the essence of things does not change. A trade deficit is the price paid by the country that issues a global reserve currency.

If the US starts generating a surplus through supply chain self-sufficiency the way Trump intends, the rest of the world will be starved for dollars. Demand for dollars will escalate, and the value of the dollar will rise rapidly. A sharp rise in the dollar’s value will diminish the competitiveness of US exports. 

As this situation persists, the rest of the world will go looking for a new reserve currency. At that point, demand for the dollar plummets, taking its value with it. Trump’s people cannot be unaware of that fact.

Ultimately, the US will seek to use its military strength as another means to stop the dollar-based system from breaking down. But how long can that exodus be held off amid an absolute shortage of dollar supplies? It can’t be.

The contradiction that faces countries that issue key currencies is known as the Triffin dilemma. The US imports goods and exports an equivalent amount of dollars. Dollars are the US’ biggest export, but they turn the US into an eternal debtor.

The other major exporters will end up building excessive reserves. As time goes by, the imbalance grows. From the US’ standpoint, the imbalance may be a sore point. But one thing is clear: issuing a key currency is most definitely a privilege.

The US needs to inject suitable amounts of dollars into the global system. It needs to register a deficit. If it refuses to do so, it has to give up its key currency status. This is not a matter of policy — it’s math.

For a key currency issuer, trade is not a zero-sum game. For other countries, trade balances are of vital importance. If they are unable to generate enough of a surplus, the shortage of dollars may leave them suffering a severe devaluation of their currency due to a shortage of dollars — or even a foreign exchange crisis or dollar crisis.

Why comparative advantage cannot be ignored

The theory of comparative advantage articulated in the 19th century by the British economist David Ricardo is still relevant. All countries stand to profit from trade based on producing and exporting the things they are competitive with and importing the things they are not good at making on their own.

To be sure, the theory carries its share of flaws and pitfalls. A given country may not be capable of establishing any real competitive advantage over others. It may have strengths but lack the political or diplomatic capabilities to make use of them, and it may have its trade restricted through oppression by a more powerful country.

But from an objective standpoint, that is another natural outcome. Survival of the fittest is an unavoidable law of nature.

Even if the US comes out on top in negotiations on Trump’s tariffs, the consequences could be detrimental. (Reuters/Yonhap)

As the 2008 Nobel in economic sciences laureate Paul Krugman put it, we cannot turn New York back into the apparel industry city it was in the 1950s as a way of creating more jobs. Countries like Vietnam and Bangladesh are much more productive when it comes to making garments.

Is it a “bad” thing that the apparel industry moved over to emerging economies? It is absurd to argue that the lives of American workers would be richer than they are now if the apparel industry returned to New York. For workers in Bangladesh and Vietnam, these are jobs that can offer upward mobility; for American workers, this is the kind of sweatshop labor that only people in prison do. 

So what should America make? “A free trade purist would answer, whatever the market decides; let private firms figure out what’s profitable to make in America,” Krugman writes. “And even if you aren’t a free trade purist, you have to admit that governments don’t have a great record of picking winners.”

But that doesn’t mean that the government should be completely hands-off on industrial policy. Krugman argues that the US should be using subsidies and, to a limited extent, other mechanisms to foster industries of the future — particularly those related to advanced technologies. The argument is that there’s a need to stop the firms working in these sectors in other countries, buoyed by enormous subsidies, from unfettered expansion. 

More importantly, Krugman emphasizes, the US must ensure that technology like semiconductors that are crucial to its national security isn’t threatened by the ever more precarious geopolitical situation. He argues that it would be foolish for the US to be entirely reliant on advanced chips made in Taiwan.  

But Trump’s tariff policy is sweeping in its breadth. He believes that tariffs will “liberate” the US. Just how exactly and to what extent the US is being exploited overseas is unclear to say the least, but this remains his conviction.

Will such a belief really be able to “save” America? Even if the Trump administration gets what it wants out of the tariff policies, the fallout could be disastrous. The problem is that there are no clean victories in a situation like this. Wars, trade or otherwise, always leave destruction in their wake, no matter who wins. 

Perhaps the US will get what it wants when it comes to the exchange of goods, but it’ll need to prepare itself for the hit to its services that this will entail. Moreover, the more that trade partners around the world harbor doubts about the US, the greater the risk for the future of the US dollar. We can only wait and watch to see what path the US takes. 

By Yoon Seok-cheon, economics commentator

Please direct questions or comments to [english@hani.co.kr]

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