If Donald Trump is re-elected to the US presidency it could accelerate global dedollarisation. Though Trump’s desire to address the twin deficits may be justified, his approach could be risky for the dollar. His isolationist foreign policy might empower the Brics bloc, for instance, while his tariff plan could reduce the US dollar’s purchasing power. Additional tax cuts would increase the budget deficit, with a further negative effect on the currency.
The US presidential election is shaping up to be a very tight race, with a few thousands votes in a handful of swing states potentially determining the outcome. While both candidates have made tax reform proposals that call US fiscal credibility into question, Trump’s mix of tax cuts, tariffs and isolationism could see the dollar lose its pre-eminent position in global trade.
Democratic candidate Kamala Harris has proposed tax cuts for families and small business, but she has also called for increased taxes for wealthy individuals and large corporations. Trump, on the other hand, hopes to cover his proposed tax cuts by raising tariffs on imported goods. According to some, both candidates’ tax plans will increase the debt burden on the government by trillions of dollars.
If Trump’s tariffs lead to increased domestic production, that might theoretically spur growth. However, estimates from the non-partisan Tax Foundation suggest his tax plan will increase the deficit substantially without generating a commensurate increase in economic output. The US has already been downgraded by ratings agencies due to unsustainable debt levels, and further increases to the national debt will concern investors.
While both candidates threaten to undermine the status of the dollar with loose fiscal policies, Trump’s tariffs come with additional inflationary risks. Tariffs make imports more costly, which would hurt the US economy — especially consumers.
Trump’s tariff plans also risk alienating some of America’s biggest trade partners, many of which already use, or are making plans to use, alternatives to the dollar. Brics bloc countries supply about 20% of US imports, so any attempt at reducing imports via tariffs risks accelerating dedollarisation.
Trump’s tariffs
Trump has said that if elected he will implement a 20% tariff on all imports entering the US, along with a 60% tariff on goods from China. He has suggested imposing a 100% tariff on imports from countries that use alternatives to the dollar. Trump even suggested during one of his rallies that tariffs of 200% could be applied to cars imported from Mexico.
The Republican candidate clearly views tariffs as the perfect means by which to address the twin deficits, because they raise tax revenue while making imports more expensive. This could help lower the US’s large trade and budget deficits. That said, tariffs may prove more costly than the former president realises.
Considering countries that conduct trade in other currencies include US allies such as Japan and the EU, Trump’s proposals are not realistic. The inflationary effect such as steep tariffs would have on the US economy also makes such a policy prohibitively expensive. Major trade partners can also be expected to retaliate with export restrictions and tariffs of their own.
China could prohibit the export of key materials to the US if Trump escalates the trade war further. It has already blocked exports of antimony to the US, a metalloid with defence industry applications. This follows restrictions on exports of gallium, graphite and germanium.
Applying steep tariffs to Chinese exports would also motivate Beijing to abandon the dollar. A strong dollar has benefited China because it has boosted its exports to the US. However, with reduced access to the US market China will be less motivated to trade in dollars. Its central bank has already sold hundreds of billions in US treasuries in recent years, a trend that can be expected to accelerate if Trump is re-elected and implements his tariff plan.
Diplomacy
If Trump avoided further tax cuts, applies modest tariffs and achieves peace through diplomacy, this would address some of the structural problems plaguing the US economy. This policy mix could help the US achieve smaller deficits while keeping global inflation down. Smaller deficits would also support the dollar, offsetting the inflationary effects of the tariffs.
Instead, the former president has promised more tax cuts if re-elected, offsetting the revenue that tariffs are forecast to raise. As such, Trump’s policies are likely to be inflationary, depreciating the purchasing power of the dollar and increasing debt servicing costs for the US government. Higher wage expectations resulting from inflation, combined with anti-immigration policies, would also hurt efforts to reshore US manufacturing.
Trump may be well intentioned in his desire to address America’s deficits, but his policies are riddled with contradictions. He wants to increase domestic manufacturing but doesn’t want to make use of cheap migrant labour, wants to reduce inflation while applying inflationary tariffs and wants to lower the budget deficit while cutting taxes. This is economically unrealistic.
One area where Trump has been more coherent is on foreign policy, with the former president advocating for peace through diplomacy. Resolving global conflicts in places such as Ukraine and Israel would save the US government money on military aid and reduce the inflationary risk of these conflicts escalating further and disrupting the global oil trade.
However, Trump’s isolationist foreign policy positions could also see the US divest from the UN and other international bodies, as we saw during his first term in office. Combined with the fact that US investments in Africa have already fallen behind those of China, Saudi Arabia and the United Arab Emirates, this could see more fast-growing emerging markets developing closer financial relationships with the Brics bloc, which has made it a goal to reduce the world’s dependence on the dollar.
Trump’s policies may be an honest attempt at addressing structural issues in the US economy, though many analysts remain sceptical his policy proposals will achieve their stated objectives. A more measured approach to tariffs without cutting taxes may be the better option, especially if Trump succeeds as a peacemaker and is willing to continue trading with the rest of the world.
• Shubitz is an independent Brics analyst.
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