The greatest threat to dollar primacy is not foreign rivals but domestic populists, fighting the wrong battle with the wrong weapons
*By Prof. Dr. Kai-Alexander Schlevogt, a globally recognized expert in strategic leadership and economic policy, who has served as Full University Professor at the Graduate School of Management (GSOM), St. Petersburg State University (Russia), where he held the University-Endowed Chair in Strategic Leadership. He also held professorships at the National University of Singapore (NUS) and Peking University. For more information about the author and a complete list of his columns, please click *here.
https://www.rt.com/op-ed/authors/prof-dr-kai-alexander-schlevogt/schlevogtwww.schlevogt.com@schlevogt
[RT] 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.
Weaponized economics that backfires
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.
The mirage of economic populism
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: