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Trump's tariffs will not eliminate the dollar's exorbitant privilege

Mint New Delhi|December 25, 2024
Exporters to the US may want to shift trade into other currencies but the dollar won't be dethroned
- VIVEK KAUL is the author of 'Bad Money'.

Idous Huxley, the English writer and philosopher, once said: "That men do not learn very much from the lessons of history is the most important of all the lessons that history has to teach." This dynamic is currently playing out in the United States. President-elect Donald Trump has been warning of imposing tariffs on countries with which the US has a trade deficit—that is, countries from which the US imports more goods and services than it exports.

There will be a few obvious effects of these tariffs. From January to October, the US ran a trade deficit of $736 billion, 12% higher than in the same period of 2023. Imposing tariffs to reduce the trade deficit would require sourcing goods and services locally, which might not be available at the same prices as imported alternatives or in sufficient quantities to meet demand. Goldman Sachs has estimated that tariffs will lead to inflation going up 1%. Further, many American and other companies that import what they sell in the US, from automobiles to household durables, may see their profits fall.

Indeed, the tariff threat may also be about nudging companies to move their sourcing and supply chains out of China. This is something that started during Trump's first term as US president and continued under Joe Biden. In fact, in January to October 2022, the US trade deficit (in goods) with China stood at $337 billion. In January to October 2023, it fell to $235 billion. This year, it was at $245 billion, implying that the US has seen some success on this front.

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