The greatest threat to dollar primacy is not foreign rivals but domestic populists, fighting the wrong battle with the wrong weapons
The dollar’s dominance as a reserve currency magnifies financial power, but it does so by shifting the balance of the economy away from production toward paper. As America’s productive base gradually and unevenly hollows out, its national cohesion and material prowess, two central pillars of power, begin to erode.
Over time, the corrosive forces seep into politics, rising from the grassroots to the national stage. In the end, the greatest danger to the dollar-based global order may be the American voters who must live with its consequences.
The political costs of hollowed-out power
American communities built around tradable industries experience the dollar-based reserve-currency system less as stability than as a source of permanent headwinds: lost contracts, shuttered factories, and a relentless struggle against a structurally elevated dollar they never chose to face.
The gains of dollar dominance accrue quietly in the rarefied citadels of high finance, technical in character and largely invisible to the general public. Its costs, by contrast, are dispersed across the local economy, plainly visible to all and deeply personal to those who must bear them. It is within this widening chasm between lofty monetary privilege and ordinary economic experience that populist rebellion begins to take shape.
Real estate tycoon and reality-TV showman Donald Trump spearheaded an anti-elite revolt despite being a quintessential product of the very elite he railed against. He built a formidable electoral movement on the unsubstantiated assertion that America’s economic decline stemmed from foreign cheating, and on the promise that tariffs could reverse the damage. Once in office, the insurgent-turned-president translated that premise and pledge into policy, launching sweeping trade wars marketed as industrial renewal.
Ultimately, Trump, the mercantilist in chief, trades in demiurgic illusion, resorting to a classic maneuver from the populist playbook. Populism consists in exploiting complex structural tensions through misleading simplicity in the contest of narratives, arguably the very essence of politics: easy remedies based on false diagnoses and misplaced attributions.
In practice, populism reduces real grievances to seductive, prefabricated tales of archetypal villains and ritual scapegoats, of egregious betrayal and sabotage, and of alluring promises of effortless restoration.
What began as a captivating electoral narrative advanced by an iconoclastic maverick – that foreign rivals were exploiting America – evolved into a perilous policy. It transformed a structural economic imbalance into a political weapon of mass destruction, economically counterproductive and ultimately self-defeating.
However much Trump touts tariffs as a panacea and deploys them as his preferred policy weapon, they cannot override the structural realities of a reserve currency and cannot resolve the systemic tensions produced by global dollar dominance. Behind America’s trade gaps lies not foreign malfeasance and predation but the structural logic embedded in issuing the world’s reserve currency.
Tariffs cannot neutralize a systemically overvalued dollar. They cannot restore competitiveness in a system that casts the US as the world’s absorber of last resort for excess global savings. Least of all can they succeed when expansive monetary policy continues to amplify the underlying predicament.
At best, tariffs function as a blunt and costly substitute for market-driven exchange-rate adjustment, shifting who bears the burden of the economic system rather than altering the structural forces that actually drive the trade imbalance.
Tariffs mainly reconfigure trade flows, redirecting resources toward politically protected industries while imposing deadweight losses – value that disappears altogether – on the broader economy. In effect taxing the many to subsidize the few, they offer temporary relief to inefficient upstream firms by raising import prices, at the cost of disrupting supply chains, burdening downstream industries through higher input costs, raising prices for consumers, and provoking retaliation abroad.
Fundamentally, Trump’s tariffs target the wrong problem, treating the symptom – alleged unfair trade – rather than the underlying macroeconomic cause – a structural monetary condition – and deepening the very distortions they claim to correct.
Mainstream macroeconomic theory holds that a country’s trade balance is determined primarily by the gap between national saving and investment, not by the tariffs it levies. A nation that invests more than it saves must borrow the difference from abroad, and that borrowing shows up as a trade deficit regardless of trade barriers.
Standard open-economy models predict that tariffs will drive up the real exchange rate, eroding competitiveness and, in the long run, leaving the overall trade balance largely unchanged. This dynamic may even exacerbate the imbalance they seek to correct.
This happens when tariffs lift domestic prices, attracting additional capital and pushing the dollar still higher, thereby offsetting any protective or competitive gains and reinforcing the very pressure they were meant to relieve. In a reserve-currency economy, those underlying forces are further amplified. The U.S. is a textbook case.
Persistent foreign demand for dollar assets channels capital into U.S. markets, sustaining a structurally strong currency and financing the gap between domestic saving and investment. These inflows exert persistent downward pressure on the trade balance and frequently outweigh the intended effects of protectionism. As long as the world continues to channel its savings into US markets, the dollar will remain structurally overvalued, and deficits will persist regardless of tariff policy.
Populists often rightly give voice to genuine grievances but then offer simplistic remedies that fail to address the root causes and frequently worsen the problem.
When competitiveness problems stem from macroeconomic imbalances, trade barriers can at best serve as a tourniquet and a palliative, but they are not a cure. They may slow the bleeding and ease the pain in certain industries, but they do not treat the underlying condition that keeps producing it: a global system in which the U.S. ostensibly exports safety, absorbs the world’s capital, and contends with a chronically strong currency.
Used strategically, surgically, and sparingly – and strictly for economic purposes – tariffs may create temporary breathing space, shield sectors vital to national security, and counteract genuinely unfair trading practices.
Yet used as a grand solution, they mostly reshuffle the manifestations of the imbalance – and its winners and losers – while leaving the root causes untouched and deepening the underlying trade-offs.
Against this backdrop, the U.S. president’s promise that tariffs would somehow miraculously restore industrial strength is political in appeal rather than economic in substance and therefore destined to disappoint, a classic case of limitless ambition running up against structural constraints.
The deleterious economic effects are further compounded by political repercussions when tariffs are deployed for non-economic ends, such as coercing foreign powers, a tactic to which Trump has shown a marked inclination.
The paradox of dollar dominance
America’s monetary privilege still rests on formidable foundations: deep capital markets, unmatched financial liquidity, and strong legal and institutional integrity, with no credible rival yet in sight. But reserve-currency status is not self-perpetuating. In the end, it must be anchored in a productive economy and a durable political consensus at home.
The paradox of dollar dominance is that the global system magnifies American power abroad while quietly eroding its foundations at home. As long as the benefits accrue to global finance while the costs fall on tradable industries and local communities, political backlash will only intensify.
Ultimately, the greatest threat to dollar supremacy does not rise from an external challenger but from mounting political revolt at home. Empires rarely lose their currency first; before that, they lose the domestic consensus that sustains them – and makes their currencies credible.
[Part 7 of a series on the global dollar. To be continued. Previous columns in the series:
