Self-afflicting tariff tempest

The US dollar fell against major currencies on April 10, hitting a ten-year low against the safe-haven Swiss franc, as markets digested President Donald Trump’s dramatic reversal on tariffs. The US Dollar dropped 2 per cent to 144.795 Yen and 3.6 per cent to 0.82635 Swiss franc. The benchmark S&P 500 (SPX), Dow (DJI), and Nasdaq (IXIC) share indexes fell sharply. The global trade war saw the ICE US Dollar Index, which measures the US dollar against a basket of international currencies, fall sharply, dropping under the 100 level. A US-based financial analyst compared this trend as “worse than when former President Nixon took the USA off the gold standard in August 1971”. According to him, “The biggest damage right now is to the US brand”, reports Forbes.

Financial analysts warn that the US financial system is undergoing major turbulence and emphasise that precious metals and cryptocurrencies could play a critical role in navigating the crisis. Though the Bretton Woods International Monetary System was relatively stable, it was also very short-lived. From the declaration of par values by 32 countries on December 18, 1946 to the closing of the gold window on August 15, 1971, when the US President abandoned it on August 15, 19971, it lasted only for twenty-five years. Since then USA resorted to various strategic moves, including the fifty year ‘petrodollar agreement’ between the United States and Saudi Arabia which expired on Jun 9, 2024, to retain US dollar’s hegemony on the global economy. In 1974, the petrodollar agreement helped the US dollar to migrate from the ‘Gold Equivalent Standard’ to ‘Crude Equivalent Standard’—dollar got linked to the value of crude oil..

It may be recalled that President Trump, during his first term, had also taken the use of unilateral actions based on claims of ‘unfairness’ to an extreme. Nonetheless, it was not the first time the US pursued such policies. The ‘Nixon shock’ in August 1971 included a 10 per cent tariff across the board to force Japan and West Germany, which had trade surpluses with the US, to revalue their currencies. During the 1980s, the US applied unilateral measures under Section 301 of the 1974 Trade Act as a leverage in negotiating “voluntary export restraints” as a form of managed trade to reduce the US trade deficits (at that time with Japan). It authorised the US President to take all appropriate action, including tariff-based and non-tariff-based retaliation, to obtain the removal of any act, policy, or practice of a foreign government that burdened or restricted US commerce. In the 1980s, such a power-based strategy had been used in the pursuit of a narrowly defined aim of reciprocity. A narrow definition then meant bilateral reciprocity in cases of US trading partners having a trade surplus, as reminded by Steve Woolcock (2019).

Data suggests that the US dollar is losing its all-pervasive dominance in the global economy. Before the current tariff war, a report by JP Morgan (October 2024) observed that in recent years, signs of de-dollarisation have been evident (i) in the commodities space, where energy transactions are increasingly priced in non-USD currencies, (ii) globally, new payments systems are facilitating cross-border transactions without the involvement of US banks, which could undermine the dollar’s clout, and (iii) USD’s share of FX reserves — the most commonly analysed barometer of dollar dominance — has decreased, notably in emerging markets. The immediate challenge is the shift towards more ‘power-based policies’ in the United States. This is based on a view that the existing rules are ‘unfair’ on the USA. This is threatening the viability of the World Trade Organisation (WTO) — a ‘rules-based’ trading system.

Major Initiatives to Dethrone US Dollar

Since the late 1980s, three major non-US initiatives were taken to dethrone the US dollar: (i) Europe-centric initiative, (ii) climate-centric initiative, and (iii) non-petro-dollar-centric initiative.

• European Initiatives: After the reunification of East and West Germany in October 1990, the resurgent Europe formally established the European Union (EU) when the Maastricht Treaty came into force on November 1, 1993. The main architects of the EU, among others, were Helmut Kohl (served as chancellor of Germany from 1990 to 1998 and, before German reunification, as the chancellor of West Germany from 1982 to 1990), François Mitterrand (served as President of France from 1981 to 1995) and Horst Köhler (served as President of Germany from 2004 to 2010.). The euro was launched on January 1, 1999. For the first three years it was an ‘invisible’ currency, only used for accounting purposes and electronic payments. In 2002, Euro banknotes and coins replaced national currencies in 12 of the member states. Since then, the Eurozone has increased to encompass 20 countries. The Euro became the second-largest reserve currency in the world.

European leaders also wanted to establish an alternative global trading system to counter the ‘power-based policy’ of the USA and Section 301 of the US Trade Act. The EU has a vital interest in defending a rules-based trading system, which was also supported by several other developed and developing countries. Moreover, European leaders also realised that the growth of China and other emerging markets had undermined the legitimacy of the OECD club model. Hence, a new trading system was needed. To develop an alternative trading organisation, the Uruguay Round—the 8th round of multilateral trade negotiations (MTN)—was conducted, during 1986-1993, within the framework of the

General Agreement on Tariffs and Trade (GATT), embracing 123 countries as “contracting parties”. The Round led to the creation of the World Trade Organisation in 1995, with GATT remaining as an integral part of the WTO agreements.

Arthur Dunkel—a Portuguese-born economist who served as director-general of GATT between 1980 and 1993—took an active part in the Uruguay Round Negotiations and proposed a draft agreement, known as the ‘Dunkel Draft’ in December 1991. Even though the United States and India continued to bargain for changes to the Dunkel Draft, only minor amendments were made in the sphere of agriculture. The Dunkel Draft was accepted and became the foundation of the World Trade Organisation.

It may be recalled that one of the recommendations of the Bretton Woods Conference (July 1944) was the establishment of an International Trade Organisation (ITO) which, together with the “International Monetary Fund” and the “International Bank for Reconstruction and Development” would become the pillars of the new international economic order. Negotiations for the ITO culminated in the signing of the Havana Charter in March 1948. The ITO’s formation ultimately failed because the US Congress did not ratify the Havana Charter. However, during the same period, negotiations for the General Agreement on Tariffs and Trade (GATT) were underway, resulting in the signing of the GATT in 1947, which was put into provisional application in 1948. Thus, after a gap of nearly five decades USA ratified a ‘rule-based’ multilateral trading organisation in the WTO.

• Climate Centric Initiatives: The Earth Summit (1992), where the United Nations Framework Convention on Climate Change (UNFCCC) was formed, may be considered as a major move to weaken the dollar by cutting the use of fossil fuel, the major source of strength of the USD. These are crude oil export revenues denominated in US dollars. Since 1995, every year, UNFCCC organises Conference of the Parties (CoP) to address global climate change issues. In their third annual meeting (CoP3) at Kyoto, UNFCCC agreed to a Protocol on the reduction of greenhouse gas emissions. Though the USA signed the Kyoto Protocol (KP), the US President Bush withdrew from the KP in 2001, as he thought it would “severely damage the United States’ economy”! Climate change in UNFCCC usage “refers to a change of climate that is attributed directly or indirectly to human activity that alters the composition of the global atmosphere and that is in addition to natural climate variability observed over comparable periods.” In this new definition, the cause of climate change has been assumed to be linked to human activities, primarily fossil fuel use! Though the Obama administration rejoined UNFCCC, Trump again withdrew the US from the Paris deal during his first term in office. The process took years and was immediately reversed by the Biden presidency in 2021. President Donald Trump signed an executive order in January 2025, directing the United States to again withdraw from the landmark Paris climate agreement, dealing a blow to worldwide efforts to combat global warming and once again
• Non-petro-dollar centric initiative: As a first major departure from the petro-dollar arrangement, in October 2000, a UN panel approved Iraq’s plan to receive oil-export payments, under the UN “oil-for-famine” programme, in Euro instead of USD. President Saddam Hussein had to pay severely for this. The other two major oil deals being: in 2013, Saudi Arabia and China entered into a Petro-Yuan Pact, driven by China’s status as the Middle East’s top oil customer; it was designed to bypass the US restrictions. And in the aftermath of the Ukraine war, Russia and India entered into a Rubble-INR mechanism. Many such oil deals bypassing the US dollar are expected shortly.

Tariff War 2025, unlike the previous ones as mentioned above, is purely an American initiative. The US President Donald Trump’s ‘tariff war’ in the name of ‘Making America Great Again (MAGA)’ has forced countries on a path towards reduced reliance on the United States, which is likely to imply a desire for reduced reliance on the US dollar. Trump threatened countries that tried to de-dollarise with extra tariffs. Ironically, his isolationist policies may drive the de-dollarisation trend, reports Reuters. How the one hundred eleven years old US dollar, first printed in 1914, reacts to this new challenge is a million dollar question now.

Views expressed are personal