Since his inauguration, President Trump’s second term has consistently alienated the US’s allies, especially with its stances on the war in Ukraine and its hostile tariff policies. The Administration’s erratic behaviour has led to questions about the future of the US’s international standing, even more pronounced than those expressed during his first Presidency.
The decline of American hegemony does appear to be a real phenomenon, although it would be short-sighted to assign responsibility for that solely to President Trump. The second Administration may or may not be the straw that breaks the camel’s back, but - at least in hindsight - the decline of American hegemony goes back much further.
The Dollar as the Foundation of US Hegemony
One useful lens through which we can analyze US hegemony and its trends is the status of the US dollar in the world economy. The US Dollar has been the world’s undisputed leading reserve currency ever since it replaced the Pound Sterling in this capacity.
A reserve currency is a foreign currency that is held in large quantities by governments, central banks, and financial institutions, playing an important role in global trade. In the modern, interconnected world economy, a reserve currency has practically become a necessity for international trade. Just as a particular currency works as a convenient medium of exchange of goods and services within a market, a reserve currency functions as a medium between different markets of different currencies.
To a layperson, this may be familiar in how the value of different currencies, goods, and services is often expressed in terms of the reserve currency. For example, the GDP of countries is generally expressed and compared in terms of the US Dollar.
The Triffin Dilemma and the Logic of Deficits
In the 1960s, Belgian-American economist Robert Triffin theorised that a country issuing the world’s primary reserve currency faces an inherent contradiction between its foreign policy goals of maintaining the status of its currency and its domestic policy objectives. This is known as the Triffin Dilemma.
Fundamentally, for a currency to be used as a reserve currency, it must be widely available on the international market. Currently, it is estimated that about half of the US dollars circulate outside of the US. This means that the US Dollar must continually flow out of the US to other countries to meet the global demand. While some of this can occur through foreign aid, the majority happens through trade. This, in turn, means that the American market must purchase goods from the rest of the world.
In essence, the US must import more than it exports to run a trade deficit and keep dollars flowing out to the global market. Because more money is always leaving the US than coming in, it means that the US market relies on borrowing more and more money from abroad in order to finance these imports.
Exorbitant Privilege (and Its Downsides)
The situation is beneficial to the US, because it avoids currency risks, reduces transaction costs, and lowers borrowing costs. US dollars and US government bonds are considered secure, “risk free” investments, and many people are happy to hold their money in US dollars or invest it in the US market. Low interest rates make both deficit and spending much cheaper for the US, and capital more available to American firms.
In a practical sense, it also means that US consumers can maintain a higher standard of living by relying on other people’s money. This was once described as the US’s “exorbitant privilege” by Valéry Giscard d’Estaing, then-Minister of Finance in France.
On the other hand, there are also downsides. The low interest rates can cause overspending and overinvestment, as well as increased public and private debt. Furthermore, the necessary trade deficits can potentially mean the loss of jobs in the US. The US for instance may instead wish for its industries to outcompete foreign ones, to be a net exporter, and see increased profits and/or salaries from such a situation.
This is in fact exactly what we see under the current Administration’s protectionist and “economically nationalist” policies, which fundamentally disregard the expectations of foreign actors using the US dollar as a reserve currency.
De-dollarisation and Structural Erosion
In 2020, the International Monetary Fund released an opinion on the pandemic having brought about “a new Bretton Woods” moment, referring to the system under which many currencies were pegged to the US dollar, itself backed by gold, until the system fell apart in 1971. A new Bretton Woods moment would imply a similar loss of status for the US Dollar, and while it has not lost any cataclysmic amount of market share since 2020, it is clear that many countries are actively seeking “de-dollarisation” today. This includes most notably the BRICS countries, but also to an extent the EU.
While the Triffin Dilemma was formulated to address contradictions faced by a country issuing the world’s primary reserve currency, its central insight may be generalised. While the US significantly benefits from it, the maintenance of the “American Empire” is expensive, and - at least in the short term - taking advantage of that position or reducing its cost can be beneficial to the US and to its people.
If the political situation is more tense at home, US politicians may continue to prioritise domestic concerns over the maintenance of American hegemony. Of course, this inevitably erodes trust in the US and the position it holds as the central pillar of the international community.
A Question of Trust
While it may be tempting to view the erosion of American hegemony as a series of historical accidents tied to recognisable names, it is more useful to understand it in terms of its structural underpinnings. Currency is one crucial lens through which we can better understand the role of the US in the international order as well as the fragility of this role.
To understand the US’s trajectory, it is not enough to follow the headlines. The more important question is whether the administration is expending its advantageous position, sacrificing long-term structural influence and accumulated trust for short-term political gain - and it is also worth considering whether it is also running down trust that cannot be easily rebuilt. Whether or not a particular US government acts on these possibilities at any given moment, the temptation has certainly always been there. It should not have come as a surprise to Europeans that Washington would succumb to it.
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