Trump’s Bombast Could Blow Up Dollar Hegemony

[IMPORTANT: Make this 4 times longer with much more detail]

Argument An expert’s point of view on a current event. Trump’s Bombast Could Blow Up Dollar Hegemony Extreme threats risk a global exit from U.S. financial power. By Patrick Chovanec , a private sector economist in New York. Donald Trump greets attendees during a campaign stop at the Smith Family Farm in Smithton, Pennsylvania, on Sept. 23, 2024. Donald Trump greets attendees during a campaign stop at the Smith Family Farm in Smithton, Pennsylvania, on Sept. 23, 2024. Win McNamee/Getty Images FP Live: How are Trump’s first moves playing out globally? FP Live brings together three seasoned observers to discuss: Ed Luce, Kishore Mahbubani, and Nathalie Tocci. Register now to join. January 30, 2025, 3:10 PM Comment icon View Comments ( 0 ) Colombia and the United States nearly went to war last weekend, but if you blinked, you might have missed it. Piqued by Colombia’s refusal to accept U.S. military flights bearing shackled detainees, U.S. President Donald Trump on Sunday posted on social media a blistering broadside of threats, including 25 percent tariffs on all Colombian exports, later upped to 50 percent after another heated exchange with Colombian President Gustavo Petro. Tucked away at the very bottom of the list, however, was an item that deserves more attention than it received. Briefly, it reads “IEEPA [International Emergency Economic Powers Act] Treasury, Banking and Financial Sanctions to be fully imposed.” Trump’s Second Term Ongoing reports and analysis The implications of these words are easily missed. Most attention focused on the tariffs on popular Colombian exports such as coffee and cut flowers, which are easy for the average person to understand. Additional threats to restrict (or revoke) visas for members of Colombia’s government, and to conduct rigorous entry shakedowns for visiting Colombian nationals, were measures that would usually be aimed at a long-standing adversary, such as China, over some deep-seated dispute—as opposed to an economic and military partner, such as Colombia, raising a limited objection. Colombia and the United States nearly went to war last weekend, but if you blinked, you might have missed it. Piqued by Colombia’s refusal to accept U.S. military flights bearing shackled detainees, U.S. President Donald Trump on Sunday posted on social media a blistering broadside of threats, including 25 percent tariffs on all Colombian exports, later upped to 50 percent after another heated exchange with Colombian President Gustavo Petro. Tucked away at the very bottom of the list, however, was an item that deserves more attention than it received. Briefly, it reads “IEEPA [International Emergency Economic Powers Act] Treasury, Banking and Financial Sanctions to be fully imposed.” Trending Articles Germany Narrowly Avoids Passage of AfD-Supported Migration Bill CDU/CSU leader Friedrich Merz broke a postwar political taboo by working with the far-right party. Powered By Advertisement Germany Narrowly Avoids Passage of AfD-Supported Migration Bill X Trump’s Second Term Ongoing reports and analysis The implications of these words are easily missed. Most attention focused on the tariffs on popular Colombian exports such as coffee and cut flowers, which are easy for the average person to understand. Additional threats to restrict (or revoke) visas for members of Colombia’s government, and to conduct rigorous entry shakedowns for visiting Colombian nationals, were measures that would usually be aimed at a long-standing adversary, such as China, over some deep-seated dispute—as opposed to an economic and military partner, such as Colombia, raising a limited objection. But the proposed banking sanctions went a giant leap further, toying with what, in economic policy, has often been called the “ nuclear option .” The details were, of course, as vague as a hastily posted threat can be. But taken at face value, the language implied all-but-wartime steps to treat Colombia as an enemy state, possibly freezing its assets (including reserve holdings of U.S. Treasurys) and cut it off from the U.S. financial system and all dollar-denominated transactions. These are the kinds of measures imposed on countries such as North Korea and Iran or fundraising networks for al Qaeda . Even after Russian President Vladimir Putin invaded Ukraine, U.S. officials hesitated to impose such draconian sanctions on Russia, worried they might be considered an act of war—though they ended up pulling the trigger. One reason U.S. officials wavered, in the case of Russia, involved the potential disruptions such a drastic cutoff could create for U.S. banks and businesses. A more profound concern, however, relates to America’s role as a trusted custodian of the world’s largest financial markets and reserve currency. The effectiveness of U.S. financial sanctions depends on the perception that they are outliers in an otherwise predictable, rules-based order. Most countries, and most investors, have to believe that it would never happen to them. Sanctions on North Korea? That could never be me. Iran? Same. China or Russia? Things get a little trickier if (like Saudi Arabia or India) you do a lot of trade or investment with them or don’t always see eye to eye with the United States. But Colombia? Canada? Denmark? That could be anyone, tomorrow, based on Trump’s latest whim. There are compelling reasons why most countries hold U.S. dollar reserves. The United States has the world’s largest and most liquid financial markets, allowing them to put their money in and out of those markets easily. It still has the world’s largest economy, ensuring that someone will always demand dollars to pay for the goods and services it produces—which mean other markets, for global commodities, are denominated in dollars, too. The United States is assumed to be good for its debts, and in moments of economic uncertainty, such as the COVID-19 pandemic, scared investors tend to abandon other assets and rush into U.S. Treasurys as a safe refuge. But what if that safe refuge turns into a knife at your throat? Previously, that threat was reserved for rogue states and as a punishment for extreme actions such as invasions of a sovereign neighbor. Now, it seems, it might be anybody, on any given day, who happens to run afoul of Trump. Dollar holders may begin to consider alternatives, even if they come with some cost and inconvenience. Like many cataclysmic changes, it might happen gradually—and then suddenly. Now, to be fair, dollar hegemony is not an unalloyed boon for the U.S. economy: The desire of so many foreign countries to hold dollars as reserves plays a key role in driving chronic U.S. trade deficits. But the “rapid unscheduled disassembly” (to use the SpaceX euphemism for “explosion”) of the dollar wouldn’t be a good thing either. It would translate into financial pain and a dramatically lower standard of living for millions of Americans. Either the dollar would fall, making everyday imports a lot more expensive, or the U.S. Federal Reserve would have to hike interest rates, pushing the economy into recession. A real dollar crisis would probably mean both. Read More This photograph taken on February 9, 2023 shows a Euro coin and US dollar banknotes in Moscow. Donald Trump and the End of the Dollar as We Know It Ahead of the U.S. election, conversation is picking up in Europe about finding alternative reserve currencies. Analysis | Caroline de Gruyter The latest standoff appears to have ended as quickly as it escalated. Trump claims that Colombia backed down, though which country actually conceded what may not become clear until flights resume. In fact, both countries had a strong incentive to fudge their differences and “agree to disagree,” if only to step away from the brink. But to the extent that Trump walks away the perceived victor, he will be strongly tempted to make such threats again. And similar disputes—with Denmark over Greenland, the European Union over social media regulation, and Canada over Trump’s bizarre insistence that it become the 51st U.S. state—lie just around the corner. If threats of “nuclear” banking sanctions become the president’s go-to ultimatum, with friend and foe alike, Washington will be playing a very dangerous game indeed. Sign up for Editors’ Picks A curated selection of FP’s must-read stories. Sign Up By submitting your email, you agree to the Privacy Policy and Terms of Use and to receive email correspondence from us. You may opt out at any time. Enter your email Sign Up ✓ Signed Up You’re on the list! More ways to stay updated on global news: FP Live Enter your email Sign Up ✓ Signed Up World Brief Enter your email Sign Up ✓ Signed Up China Brief Enter your email Sign Up ✓ Signed Up South Asia Brief Enter your email Sign Up ✓ Signed Up Situation Report Enter your email Sign Up ✓ Signed Up View All Newsletters This post is part of FP’s ongoing coverage of the Trump administration . Follow along here . My FP: Follow topics and authors to get straight to what you like. Exclusively for FP subscribers. Subscribe Now | Log In Economics United States Patrick Chovanec is a private sector economist in New York. Read More On Colombia | Donald Trump | Economics | Trade Policy & Agreements | U.S. Economic Sanctions | United States Join the Conversation Commenting on this and other recent articles is just one benefit of a Foreign Policy subscription. Already a subscriber? Log In . Subscribe Subscribe View 0 Comments Join the Conversation Join the conversation on this and other recent Foreign Policy articles when you subscribe now. Subscribe Subscribe Not your account? Log out View 0 Comments Join the Conversation Please follow our comment guidelines , stay on topic, and be civil, courteous, and respectful of others’ beliefs. You are commenting as . Change your username | Log out Change your username: Username I agree to abide by FP’s comment guidelines . (Required) Confirm CANCEL Confirm your username to get started. The default username below has been generated using the first name and last initial on your FP subscriber account. Usernames may be updated at any time and must not contain inappropriate or offensive language. Username I agree to abide by FP’s comment guidelines . (Required) Confirm