Trump’s Re-Election Could Accelerate Dedollarisation

Donald Trump’s re-election could accelerate global de-dollarisation. Although Trump’s desire to address the twin deficits may be justified, risks remain for the dollar. Trump’s isolationist foreign policy could empower BRICS, while his tariff plan could reduce the US dollar’s purchasing power. Additional tax cuts would increase the budget deficit, negatively impacting the currency further.

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 of the race. While both candidates have made tax reform proposals which 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.

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 estimates, 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 that Trump’s 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 whom already use, or are making plans to use, alternatives to the dollar. The BRICS supply about 20% of US imports so any attempt at reducing imports via tariffs risks accelerating de-dollarisation.

Trump’s Tremendous Tariffs

Trump has said that if elected, he will implement a 20% tariff on all foreign imports entering the US, along with a 60% tariff on goods from China. He has also suggested imposing a 100% tariff on imports from countries that use alternatives to the US dollar. Trump even suggested tariffs of 200% could be applied to cars imported from Mexico during one of his rallies.   

The Republican 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 United States’ large trade and budget deficits. That said, tariffs may prove more costly than the former president realises.

Considering countries who conduct trade in other currencies include US allies such as Japan and the European Union, Trump’s proposals are not realistic. The inflationary effect such steep tariffs would have on the US economy also makes such a policy prohibitively expensive. Major trade partners may also 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 and has already blocked the export 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 US dollar has benefitted China because it boosted Chinese exports to the US. However, with reduced access to the US market, China will be less motivated to trade in dollars. China’s 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. 

Better Options

If Trump avoids further tax cuts, applies modest tariffs, and achieves peace through diplomacy, this will address some of the structural problems plaguing the US economy. This policy mix can 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 called for more tax cuts if re-elected, offsetting the revenue 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 like Ukraine and Israel would save the US government money on military aid and reduce the inflationary risk that these conflicts escalate further and disrupt 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 China, Saudi Arabia, and the UAE, this could see fast growing emerging markets develop closer financial relationships with the BRICS, who have made it their goal to reduce the world’s dependence on the US 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.