A local undergraduate who hopes to work at Goldman Sachs one day recently asked what sounded like a simple question:
“America is the world’s largest economy, with a USD27 trillion GDP. So why would Trump disrupt the global order? We’ve studied your tariff columns and tested your model across 15 countries – the logic is sharp, even politically brutal, but it holds. What’s unclear is this: you never really explained why the US insists on tariffs. I understand the trade deficit argument and the need to defend the dollar’s reserve status – but don’t those goals contradict? All lecturers think one comes at the expense of the other. Are they right?”
Thank you for reading the columns and for seriously engaging with what many still view as a contrarian stance.
Economic arguments exist on both sides.
The apparent contradiction depends on what one considers the prime mover – the starting variable that sets off the chain reaction. Based on where one begins the analysis, the cause-and-effect narrative shifts.
In reality, both views contain elements of truth.
My argument is this: the US has run persistent trade deficits, with imported goods displacing domestic production. Jobs were lost – not just to competition, but because the US dollar has remained structurally overvalued.
This overvaluation is not incidental.
It arises because the dollar is the world’s reserve currency.
An overvalued currency makes US exports less competitive and imports cheaper. The demand for dollars – to settle global trade, to be held as reserves, to backstop sovereign wealth funds and institutional portfolios – is inelastic.
This “exorbitant privilege” has allowed Americans to consume beyond their means.
In standard trade models like Ricardian or Heckscher-Ohlin (make sure you master those), currency values adjust over time.
A country running a trade surplus accumulates foreign currency, which it then exchanges for local currency – pushing up the local currency and making imports more attractive, thus rebalancing trade.
But when a country’s currency serves as the world’s reserve asset, this mechanism breaks.
Dollar demand is no longer governed solely by trade balances.
It is a function of global liquidity needs.
The dollar becomes a component of the world’s money supply – linked not just to US trade, but to global savings and investment flows.
As the global economy expands, so does the demand for US dollars and Treasuries.
To meet this demand, the US issues Treasuries (UST) and receives foreign currency in return – which it then spends on imports, further widening the current account deficit.
Trump and his allies would frame it this way: the US runs deficits not because Americans demand foreign goods, but because the world demands dollar assets. In this view, Americans aren’t freeloaders – they’re patrons of global growth.
They absorb the world’s exports and fund its investments.
And now, they want to be repaid.
So, you asked, why now?
Why disrupt an order that isn’t visibly broken?
Because this reserve currency privilege has a tipping point.
According to World Bank data, the US share of global GDP has declined from 40 per cent in 1960 to just 26 per cent in 2023.
Though the US economy is still growing, it is expanding at a slower pace relative to the rest of the world. To support the scale of international trade and global savings pools, the US must run ever-larger current account and fiscal deficits as a share of its domestic economy.
That’s the reserve currency trap – the so-called “twin deficits”.
Over time, it leads to unsustainable debt accumulation, rising credit risk, and pressure on the dollar’s reserve status.
Servicing interest on both public and foreign debt becomes increasingly difficult.
Tariffs, then, are not just about jobs or trade imbalances.
They’re a tool to recalibrate – to signal that the old system, where America underwrites global growth with little reciprocity, is no longer viable.
Losing the hegemony of the US dollar – combined with a shrinking share of global GDP – would spell the end of America’s dominance in the current world order.
Its control over international trade and financial systems exists solely because the US dollar functions as the global reserve currency. Ultimately, everything hinges on this privilege.
American anxiety has been amplified by a deluge of literature and commentary predicting the rise of the East -especially China – and the emergence of alternative reserve assets such as a proposed BRICS currency.
That concern intensified after Washington began weaponising the dollar. While that tipping point may still be years away – largely because no credible alternative to the dollar exists today – it’s clear that preemptively striking at trade is viewed as A NECESSARY STEP.
Improving the US trade balance, reallocating global demand toward the US, and increasing America’s share of world trade and GDP are seen as critical to maintaining dollar dominance.
In Washington’s narrative, this isn’t about economic aggression.
It’s about preserving global prosperity – because the world, they argue, needs the US to provide the very reserve currency that fuels it. And the blunt tool for achieving this realignment is tariff.
If you examine my model closely, its deployment rests on three structural determinants:
Elasticity of foreign export supply – If exporters remain responsive even as prices shift, the US can extract greater surplus with minimal disruption.
Elasticity of US import demand – The more inelastic domestic demand is, the lower the consumer surplus loss, making tariffs more defensible.
Relative trade weight – Only countries with sufficient scale can influence world prices through unilateral tariffs. The US can. Most others can’t.
These levers form the foundation of Trump’s strategic calculus in the trade war, which he frames across five distinct battlegrounds.
A key expectation from his administration is that the US dollar will appreciate to absorb part – or all – of the tariff impact.
In this scenario, the post-tariff import price in US dollar terms remains unchanged, leading to no or minimal domestic inflation.
For a detailed breakdown of this mechanism, see ‘The great capitalist experiment’ (Feb 12, 2025). In a perfect currency offset, where the exporting country’s currency depreciates by the same percentage as the US tariff, American consumers see no change in price.
In this case, exporting countries bear the full cost – their populations become poorer in real terms due to the currency depreciation, while the US government collects all the tariff revenue. If there is no currency offset, US consumers pay higher prices.
But even then, the tariffs shift competitiveness toward domestic producers. The higher cost of imports encourages onshoring, supply chain diversification, and gradual trade rebalancing in America’s favour. Over time, exporters may also divert their goods elsewhere.
Even without a perfect offset, tariff revenue flows into US coffers.
That consumption tax – paid by consumers – can be recycled via corporate tax cuts, spurring investment, productivity, and job creation. Lower personal income tax can help counteract higher consumer prices.
It’s a classic playbook. Capitalism 101. But there’s a caveat: tariffs lead to either higher prices or currency appreciation.
Again, a stronger dollar makes imports cheaper – paradoxically worsening the trade deficit.
Long term, it’s not in America’s interest to have an overvalued currency. Yet as long as the dollar serves as the reserve currency, it will remain overvalued.
The US dollar isn’t just used to settle trade.
It backs global investments, anchors financial systems, and fills the reserves of central banks.
The quantity of US dollars in global circulation grows with the expansion of the global economy – irrespective of America’s own trade needs. This brings us to the second part of his question: How can the US dollar be driven down to a more sustainable level?
One strategy I routinely execute – admittedly a risky one, as it runs counter to mainstream practice – is encouraging central banks to gradually unwind their US dollar reserves.
Personally, I find it immensely satisfying.
In doing so, they would buy back their own currencies – driving them up – making US exports more competitive and narrowing their trade surplus with the US.
Alternatively, foreign central banks could shift into perpetual US Treasury securities (USTs) – effectively “terming out” America’s debt.
In accounting terms, perpetual debt is classified not as debt, but as equity. This transfers some of the US macroeconomic risk to foreign holders.
Or, as US Treasury Secretary Scott Bessent put it: “Shared interest ultimately strengthens the international system.”
The deeper mechanics were explained to the student separately, given both space constraints and the sensitivity of the topic.
Medecci Lineil leads a specialised quant team within Goldman Sachs’ investment banking division. He’s also a founding board member of consultancy firms in Kuala Lumpur and Singapore. Reach him at med.akilis@gmail.com.
