A Global Perspective on the Dollar System and America’s Trade Deficit

The United States reported a trade deficit of $773.4 billion in 2023, a number which has been growing persistently throughout 2024. While Americans might find this figure concerning, it highlights the unique role that the U.S. plays in the global economy, particularly through the dollar system. This system has long positioned the U.S. as a central economic force, with its trade deficit being integral to the global financial structure.

After World War II, the U.S. became the world’s largest surplus and creditor nation. The dollar, established as the world’s reserve currency under the Bretton Woods system, created challenges for other countries with trade deficits as they struggled to obtain dollars. Aid programs like the Marshall Plan helped solve this by rebuilding Western economies and providing access to U.S. dollars. Today, the currency is supplied to the market through U.S. trade deficits, which happen when the country imports goods and services that exceed the quantity that it exports, benefiting both the global economy and itself.

During periods of economic uncertainty, investors often seek refuge in the dollar and U.S. Treasury securities, leading to an appreciation of the dollar. However, said appreciation provokes significant ripple effects, particularly on economies within the periphery of the U.S. IMF research from 2023 reveals that a 10% increase in the dollar’s value can reduce output in emerging economies by 1.9 percentage points within a year, while advanced economies face a smaller reduction of 0.6 percentage points. These negative impacts tend to persist for around two and a half years in emerging markets and one year in wealthier economies.  

A strong dollar increases global borrowing costs, as seen after the 2023 U.S. election when Treasury yields rose, pushing up bond yields in countries like Australia and Japan. While a Federal Reserve rate cut helped temporarily, it remains difficult for central banks to support weak domestic growth.  

Former U.S. President and now President-elect Donald Trump’s trade policies, such as 2018 tariffs on China, also affected the dollar. These tariffs often weaken the currencies of targeted countries, like the renminbi, which fell 10% to offset tariff impacts. Though the U.S. benefits from issuing the world’s reserve currency, a rising dollar shows how dependent the global economy is on it, making careful management important.  

The graphic below explains how changes in the value of the U.S. dollar affect countries in the American periphery. This is not specifically about Mexico, but as an example: when the dollar strengthens, it becomes more expensive for Mexico to repay debts in USD. This often forces Banxico to step in, either by using foreign reserves or raising interest rates, actions that can slow economic growth. On the other hand, a weaker dollar eases the debt burden and reduces pressure on Banxico. It also helps boost economic growth by controlling inflation and making financing more accessible. This shows how U.S. monetary decisions significantly influence peripheral economies like Mexico, affecting their financial systems and overall stability.

While a growing trade deficit poses a threat to the domestic U.S economy, once sworn in the Trump administration must balance U.S. economic priorities with the needs of the American periphery, as missteps in policy could accelerate global de-dollarization efforts and strengthen geopolitical rivals. To maintain the dollar’s central role and avoid unintended consequences, policies should account for both domestic economic concerns and America’s sphere of influence.

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