Global demand for dollars as the reserve currency forces the U.S. to run persistent trade deficits to supply them. This strengthens the dollar and boosts import power but hollows out the domestic industrial base. A future decline in dollar demand would create a painful economic transition.

While U.S. fiscal deficits remain high, new tariffs are reducing the trade deficit. This means fewer U.S. dollars are flowing abroad to foreign entities who would typically recycle them into buying U.S. assets like treasuries. This dynamic creates a dollar liquidity crunch, strengthening the dollar.

A weakening dollar reduces the credit risk for dollar-borrowers, which encourages more dollar-denominated lending. This credit is the lifeblood of intricate global supply chains. As a result, exports of sophisticated goods, like semiconductors, can thrive even during periods of dollar weakness.

While the US exports less to Canada by volume, its exports (electronics, pharma) have far higher margins and shareholder value multiples than Canadian exports (lumber, oil). Therefore, for every dollar of trade disrupted by tariffs, the US loses significantly more economic value, making the policy self-defeating.

U.S. Treasury Secretaries use the term "strong dollar policy" not to target a specific currency value, but as a deliberately ambiguous phrase. It signals the dollar's key role in global markets and its utility in foreign policy (e.g., sanctions), while allowing for flexibility and avoiding conflict with the principle of market-determined exchange rates.

Howard Lutnick reframes the trade deficit as a long-term transfer of national wealth. The U.S., an "inventor island," pays a "producer island" for goods, which then uses that money to buy up the inventor's assets. The key metric is the $26T net negative international investment position, not just the flow of goods.

The U.S. economy's ability to consume more than it produces is not due to superior productivity but to the dollar's role as the world's reserve currency. This allows the U.S. to export paper currency and import real goods, a privilege that is now at risk as the world diversifies away from the dollar.

The negative economic impact of tariffs was weaker than forecast because key transmission channels failed to materialize. A lack of foreign retaliation, a depreciating dollar that boosted exports, and a surprisingly strong stock market prevented the anticipated tightening of financial conditions.

Despite US tariffs, China’s trade surplus reached a record high. This is because China diversified exports to emerging markets, utilized transshipment through other countries, and key allies have not joined the US in a broad trade war.