"Trump’s tariff war… eroding the U.S. advantage of issuing the world’s reserve currency"
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Summary
- Economists said that if U.S. tariff policy leads to a rise in the dollar, the burden of debt-servicing costs could increase due to massive dollar-denominated external liabilities.
- Professor Şebnem Kalemli-Özcan said that uncertainty over tariff policy has driven a decline in the dollar, negatively affecting the standing of the U.S. dollar.
- Professor Kalemli-Özcan cited research suggesting that if the effective nominal tariff rate ends up not at 30% but around 10%, the economic impact of tariffs would be negligible.
"U.S. has massive dollar-denominated external liabilities
If tariffs lift the dollar, it could boomerang"
The main talking point among economists attending the 2026 annual meeting of the American Economic Association (AEA), which opened in Philadelphia for a three-day run, was “Trump (Donald Trump, U.S. president).” Session after session examined the president’s various policies and analyzed their potential economic impact.
The most closely watched session on the first day was “The Dollar After the Tariff War,” with Kenneth Rogoff, a professor at Harvard University, delivering the opening presentation. Professor Itskhoki is regarded as one of the most prominent researchers in international finance in recent years, having won the John Bates Clark Medal in 2022. Using a mathematical model, he argued that while conventional wisdom holds that raising tariff rates is the way to reduce the trade deficit, “in the case of the United States, excessively high tariff rates are not appropriate.”
His argument is that because the U.S. has massive dollar-denominated external liabilities (assets held across borders), a tariff-driven rise in the dollar would increase debt-servicing costs and deepen the burden. He said that maintaining high tariff rates could reduce the trade deficit, but not as a result of a revitalized manufacturing sector—rather, it would be because “the United States becomes poorer” due to a heavier debt load.
Next, Şebnem Kalemli-Özcan, a professor at Brown University, pointed out that uncertainty surrounding tariff policy is having a negative effect on the standing of the U.S. dollar. “As in the first Trump administration, if tariffs were raised again last year, the dollar should have appreciated as a result, but instead the dollar weakened,” she said, adding that “uncertainty over how tariff policy will change has driven the dollar lower.”
Linda Tesar, a professor at the University of Michigan who served as a discussant for Kalemli-Özcan, echoed the point, saying, “There is ample evidence that when tariffs are imposed, demand for domestically produced goods rises and the currency appreciates.” She added, “Moreover, in times of crisis the dollar often strengthens sharply due to a flight to safety, so we need to examine why it moved in the opposite direction.” She interpreted the move as meaning that “uncertainty was large enough to overwhelm the appreciation pressure from tariffs.”
Professor Tesar stressed that “you can’t look at tariffs alone,” noting that “the risk that the Mar-a-Lago Accord could be implemented, threats to the independence of the U.S. central bank (the Fed), taxation of foreign investors, rising public debt, and the unraveling of alliances, among other factors, have increased uncertainty.”
Economists also noted that the ‘scale’ of tariffs will be an important variable, since the Trump administration’s initially touted nominal tariff rate of around 30% is not actually being maintained. In this regard, Kalemli-Özcan said, “Smaller tariffs have smaller effects,” adding that “research finds the impact of tariffs at around 10% would be negligible.”
Philadelphia=Lee Sang-eun, correspondent selee@hankyung.com
