LATEST NEWS:

The dominance of the dollar means that tariffs are not the only choice

The dominance of the dollar means that tariffs are not the only choice
Illustration: Efi Chalikopoulou / FT

Source: The Financial Times
Translation: Telegrafi.com

Another week and another wave of outlandish threats from US President-elect Donald Trump. On Tuesday, he promised to "impose very high tariffs on Denmark" if the latter does not agree to sell Greenland to the US.

Then on Wednesday, reports indicated he was considering declaring a national economic emergency to impose trade sanctions on some countries.


No doubt another round of threats will soon follow. Welcome to a world of angry mercantilism, where the politics of force prevail.

However, there is some irony here. In his speeches, Trump usually focuses on threats of tariffs related to traded goods. But this is not necessarily the main source of his influence.

After all, as a new report from Global Capital Allocation Project (GCAP – a joint research center between Stanford, Chicago and Columbia universities), China is the one that actually has hegemonic power over global manufacturing, through its dominance over many supply chains.

Meanwhile, America has hegemonic power in finance, through the dollar-based system. Or, as GCAP puts it: “Since the US-led coalition controls a dominant share of global financial services, often exceeding 80 or 90 percent in many countries, this near-total control of the global financial system enables the coalition to USA to use finance as a means of coercion".

Therefore, the question global investors must ask now is: Will the Trump team use these "coercive" tools to punish rivals or make deals? In other words, fees are not the only – or even the main – choice.

Of course, this problem is not entirely new: the US government has used its currency as a weapon, increasingly in recent years, trying to exclude perceived enemies – such as Iran and Russia – from the fiat-based financial system. dollar. It has also imposed sanctions on financial institutions that challenge this approach. Marco Rubio, the candidate for secretary of state, has pushed the US index company, MSCI, to exclude Chinese groups.

The Trump team will almost certainly intensify this approach. In addition, he has threatened retaliation against countries – such as Brazil, Russia, India, China and South Africa – that might try to reduce their dependence on the dollar by launching a common currency.

At Mar-a-Lago, other even more surprising ideas are floating around. Scott Bessent, nominee for Treasury secretary, suggested last year that the world was moving towards reorganization under the "Bretton Woods System".

This implies that he may aim to revalue currencies, mainly to weaken the dollar and help US exporters. This could include an attempt to repeat the Plaza Accord of 1985, when America forced others to accept such a revaluation – a significant parallel, given that the dollar is now near 1985 trading weight levels after strengthening against the yen and the renminbi.

Bessent has also suggested that countries that benefit from America's military protection should be forced to buy more dollar debt as a kind of reciprocal arrangement. "Could some kind of diplomacy be used where you go to [these countries] and say we have these 40- or 50-year military bonds [to buy]?" - he said, mentioning Japan, NATO members and Saudi Arabia.

These may be empty threats. In Trump's first term, his rhetoric was often tougher than his actions. However, if his team decides to use these "coercive tools", they may backfire.

For example, it is unclear how Washington can achieve a new Plaza Agreement if China is determined to launch competitive devaluations. Moreover, the more Trump tries to use the dollar as a weapon, the more it may push other countries to look for alternatives.

In fact, as an IMF blog recently noted, there are already signs that many central banks outside the US are slowly diversifying their reserves away from the dollar – albeit at very slow and modest rates, starting from a base of high, and mostly shifting to smaller coins.

Most intriguingly, GCAP notes that between 2015 and 2022, the share of Russia's financial services imports controlled by the US and allies fell from 94 percent to 84 percent—meaning that “the financial power of the American coalition on Russia was halved, contributing to the fading effect of the financial sanctions imposed".

This reveals another key point: with hegemonic power, small declines can have large effects. Or, as GCAP puts it: "Moving the part from 95 percent to 85 percent can dissipate a lot of power, sometimes as much as moving from 85 to 50 percent."

In theory, this should lead Trump's team to be wary of radical moves, especially given that America's "excessive privilege"—that is, the dollar's status as a reserve currency—is what has enabled the country to run deficits. so big so far. However, in practice this can make them even more aggressive to protect their own power.

In any case, investors should prepare for (at best) currency volatility before deals are struck – and (at worst) a bigger financial shock. Extreme risks in markets are rising – not just because of fees. /Telegraph/