Trump’s Tariffs: The Tipping Point for Dollar Dominance
Over the past few decades, the basic mechanism of the dollar cycle has operated as follows: Leveraging its formidable economic and military strength, the United States has consolidated the dollar’s global dominance, encouraging other countries to use the dollar as the primary settlement currency in international trade. Through persistent trade deficits, the U.S. exports dollars to the world; meanwhile, other countries accumulate vast dollar reserves by exporting goods and services to the U.S.
These countries then invest their dollar reserves in U.S. Treasury bonds and other assets, resulting in capital reflux that supports America’s low interest rate environment and high consumption model. By adjusting its monetary policy—such as raising or lowering interest rates—the U.S. influences the liquidity and value of the dollar, thereby regulating global capital flows and economic cycles. This process is commonly referred to as the “Global Dollar Cycle.”
In the 21st century, emerging markets like China joined international organizations such as the WTO and quickly became integral parts of global supply chains. Through export expansion and enhancement of manufacturing capacity, these countries provided tangible backing for the dollar cycle and, at the same time, helped bolster the dollar’s credibility, mitigating the spillover effects of dollar-denominated debt.
However, in recent years, trends of de-globalization and supply chain restructuring have had a significant impact on the dollar cycle. As China and other countries optimize their industrial capacity and open up their financial sectors, their reliance on the dollar has gradually diminished, leading to a marked decline in the efficiency of the dollar cycle. Meanwhile, supply chain crises triggered by events such as the COVID-19 pandemic have further weakened the liquidity and value stability of the dollar—manifested in persistently high domestic inflation and the rapid expansion of U.S. national debt since 2022.
Since 2023, the net supply of U.S. Treasury debt has consistently remained at nearly $200 billion per month, with more than 80% being short-term Treasury bills (T-bills) with maturities of less than one year. At the same time, the auction yield of 10-year Treasury bonds has climbed steadily, rising from 0.63% at the end of 2020 to 4.63% in March 2025, displaying clear characteristics of short-termism and high-yield Ponzi-style financing.
This poses a major challenge for the Trump administration: If the US were a company, its corporate financial statement would look dire: the U.S. federal government’s cash flow situation is grave and urgently requires both increased revenue and reduced expenditure.
With his extensive experience in bankruptcy, Trump is well aware of this reality. Thus, he first implemented cost-cutting measures such as layoffs and reductions in foreign aid and funding projects. Subsequently, he sought to alleviate fiscal pressure through debt restructuring and increased revenue. As a result, his top priorities are twofold: on the one hand, to increase corporate tax contributions to the federal government; on the other hand, to lower the federal government’s refinancing costs.
The high profits of American multinational conglomerates rest on three pillars: low-interest financing for buybacks, asset-light outsourcing operations, and extremely low effective tax rates.
Under U.S. accounting standards, the shareholder equity of many American multinationals has long turned negative, making them essentially virtual companies—investors are effectively trading large bundles of securitized assets. For example, toothpaste giant Colgate has total liabilities of $15.502 billion, but ordinary shareholders’ equity is only $212 million, with tangible book value per share even at -$5.93. Of its $16 billion in total assets, less than one-third consists of equipment and plants; the rest are intangible assets, inventories, and financial instruments.
Similarly, companies such as Apple and Nike have located their production bases in economies with the lowest global labor costs and established entities in countries like Ireland for tax planning purposes. They have even fragmented and networked their supply chains. Fully virtualized internet platform companies can allocate most of their revenues to low-tax jurisdictions while keeping R&D costs in the United States, thus achieving cross-sovereign arbitrage. The popularity of this model is made possible precisely because the dollar system provides its fundamental support. Data show that in 2022, the top ten U.S.-based pharmaceutical giants generated nearly $110 billion in net profits through outsourced R&D and contract manufacturing, yet paid less than $10 billion in taxes in the U.S.
Resistance to arbitrary taxation is one of the most important founding narratives of the United States. Raising domestic taxes, especially direct personal taxes, is often seen as a return to tyranny. One reason Kamala Harris lost the election was that the Democratic Party proposed a plan to withhold future capital gains taxes, a policy that greatly angered the wealthy class. Since this path proved unfeasible, tariff revenue became the most convenient alternative: after all, tariffs are not the same as taxes. In addition, imposing tariffs has the hidden benefit of targeting the tax avoidance and arbitrage practices of American multinationals through global outsourcing.
As early as the Biden administration, Janet Yellen had proposed a “global minimum tax” scheme, attempting to bring back the tax base of some American companies that had shifted overseas. However, this plan was extremely difficult to implement and ultimately came to nothing. While Trump’s move to impose tariffs on “Penguin Island” may seem absurd, in reality it is forward-thinking: as long as this loophole is left open, Apple’s global revenue center may well be registered there next. Likewise, from a national perspective, after the US-Japan trade war of the 1980s and 1990s, Japanese industries quickly relocated to other parts of Asia, so overall, the United States did not effectively reduce its trade deficit.
Moreover, tariffs can circumvent a practical problem: the United States’ enormous surplus in service exports. Frankly speaking, America’s impressive GDP figures rely heavily on consulting, legal, compliance, patents, copyrights, and other fields. The world’s largest “free” English e-book website, Z-Library, has been repeatedly shut down by the FBI, and its Russian founders have even been placed on global wanted lists. Behind these actions lies a logic aimed at maintaining the dominant position of the U.S. in service trade.
Trump Is Cutting Off the Dollar Cycle
However, tariffs also face a problem of “who ultimately bears the cost.” Microeconomics has long studied the impact of tax costs on supply and demand. If tariffs are borne by American consumers, the price is slower economic growth and weaker consumption; if they are borne by major U.S. corporations, the result will be reduced corporate profits, less capital allocation (such as R&D, capital expenditure, or share buybacks), and a decline in stock values; if the costs are shifted to other countries, it means sacrificing the income of foreign manufacturers or workers, and may even affect exchange rates. Judging from current financial market performance, what investors worry about is that tariffs may ultimately end up hurting the growth of the U.S. domestic economy.
Recently, Stephen Milan, chairman of the White House Council of Economic Advisers, gave a speech in which he spoke at length about the heavy price the United States pays for providing “global public goods” and criticized the behavior of various “free riders.” He clearly understands that it is America’s “position of strength” that is the foundation of the dollar system.
The reason free trade under the dollar cycle can exist is because U.S. military power ensures America’s financial stability and the credit of the dollar. Now, however, both the country’s military and financial dominance appear, in the eyes of the Trump administration, to be in jeopardy and must be defended at all costs. Of course, that cost needs to be shared by everyone present.
His original words were roughly: “If other countries wish to benefit from America’s geopolitical and financial umbrella, then they need to fulfill their responsibilities and pay their fair share. These costs cannot fall solely on ordinary Americans, who are already paying a lot.”
As for the five “cost-sharing” models Milan listed, I assume everyone has seen them, so I won’t repeat them here.
In my view, the most interesting are two: attracting foreign investment and “protection payments.” Isn’t this, in essence, a kind of “debt-to-equity swap”? Milan also suggested that collecting tariffs is not just about “raising revenue” but also about cutting spending—reducing the fiscal deficit can lower U.S. Treasury yields and, in turn, the interest rate level of the entire American economy.
This brings us back to the second objective mentioned earlier: to change the Ponzi-style financing status of the U.S. federal government and lower its refinancing costs. In the short term, however, investors are not convinced; the rapid rise in U.S. Treasury yields and heavy market sell-offs are clear evidence. Now, Trump’s “tariff shock therapy” faces its biggest problem: it may strangle the dollar cycle with its own hands.
As we know, the dollar interest rate system under the leadership of the Federal Reserve is an inflation-targeting regime. Although energy and housing are the largest components of U.S. goods and services prices—and these can be suppressed in nominal terms by creating a recessionary environment—trying to achieve everything through drastic and volatile short-term measures is at best a double-edged sword, and at worst, could be catastrophic.
The reason why everyone is willing to hold their noses, endure tariffs and endless, complicated compliance requirements, put up with extraterritorial jurisdiction and policy flip-flops, and still sell goods to the U.S. ultimately comes down to making dollars. The U.S. dollar can be used in international markets to buy other things at the lowest cost and with the greatest convenience, and it also provides the most stable capital returns.
However, if the next step—just as people like Navarro have proposed—is to impose a holding tax on foreign holders of dollar assets, or even refuse dollar settlements and actively withdraw from the dollar-denominated system, then the scale of dollar credit, dollar equity financing, and dollar debt worldwide will all contract.
We have already seen a sustained withdrawal of dollar investment funds from China’s capital markets. Can the U.S. domestic financial and services markets withstand the shock of $50 to $60 trillion in offshore dollar repatriation? The inflation shocks of 2022–2024 are only the beginning.
It is precisely America’s massive trade deficit that supports the “U.S. exceptionalism” narrative in financial markets. If the U.S. begins to proactively deleverage, the most likely outcome of this process will be “shrinking with low interest rates”—a large amount of derivative leverage will be wiped out once the underlying support is withdrawn.
If trade financing can no longer use dollar debt or dollar equity assets as collateral, then seeking alternatives or even “barter settlements” would be more attractive than assets that might be slashed at any moment. Countries around the world will begin to de-dollarize their reserve assets and cross-border financing. No matter how powerful the Federal Reserve is, can it really absorb all of this?
“Make the U.S. Military Great Again”
Ultimately, whether it’s about maintaining the dollar order and global hegemony or closing the doors to isolate and extract “protection fees,” it all fundamentally relies on the military power of the U.S. as the ultimate guarantee. Therefore, the goal of reshoring American manufacturing is, at its core, about bringing back the high-profit segments of the value chain—especially the capability to manufacture military equipment.
Just how exorbitant are U.S. manufacturing costs today? For example, under Biden’s administration, the first batch of infrastructure projects has gradually come online. Toyota built a battery plant in North Carolina, which broke ground in 2021 and has recently started mass production, costing $14 billion. For the same capacity, CATL’s project in Sichuan cost just 6 billion yuan and took only a year to build and launch. That’s a 16-fold cost difference. TSMC’s experience in Arizona is another example.
TSMC Arizona
This is also a motive for launching a tariff war: without tariff barriers and various “market access” protections, the U.S.’s high-cost manufacturing would be economically unviable.
However, in this de-dollarizing environment, the capital expenditures required for the U.S. to restart its military manufacturing industry will far exceed current expectations, further prolonging the time needed to see fiscal returns—possibly not even within Trump’s term. In other words, the harder they push for reshoring equipment manufacturing through a tariff war, the further they move from actually achieving that goal.
From another perspective, I have a bold idea: Suppose a sovereign wealth fund approaches Trump and says, “I want to convert my $1 trillion in U.S. Treasury holdings entirely into a U.S. Industrial Revitalization Fund, all to be invested domestically in building factories and critical equipment manufacturing. I’m even willing to provide experts and skilled workers to help out, just like the Soviet Union assisted China in the past. After completion, I’ll only take a 25% stake, with the rest given to the U.S. Treasury or a designated entity. These factories will all IPO in the U.S. Would you dare to accept this, Mr. Trump?”
Editor: huyueyue
