Trump's threatened tariffs projected to harm economies of US and the BRICS

President Donald J. Trump has said repeatedly that he would impose 100 percent tariffs on countries that seek to reduce the US dollar’s dominant role in global finance. But if he carried through with such threats, the action would result in slower growth and higher inflation than otherwise in the US and most of the targeted economies, according to our analysis.

“You leave the dollar, you’re not doing business with the United States because we’re going to put 100 percent tariff on your goods,” then-candidate Trump said at a campaign rally in September.

Soon after taking office in January, Trump took particular aim at the BRICS countries—original members Brazil, Russia, India, China, and South Africa plus newcomers including Egypt, Ethiopia, and Iran—which have discussed possible ways to conduct more international commerce in something other than the dollar.

"We are going to require a commitment from these seemingly hostile Countries that they will neither create a new BRICS Currency, nor back any other Currency to replace the mighty U.S. Dollar or, they will face 100 percent Tariffs," Trump said January 30 on his Truth Social website in a post similar to one he posted in November. He even threatened Spain with a 100 percent tariff, mistaking it for a BRICS member.

The US dollar is by far the currency most commonly held as official reserves (figure 1), accounting for most of central bank reserves. The euro is the second most held reserve currency, with other currencies accounting for small shares. Similarly, the dollar is the most widely used currency in trade invoicing, followed by China’s renminbi (RMB), reflecting China’s prominence in international trade.

Observers speculate periodically on other currencies assuming the dollar’s dominant role (for a time the Japanese yen was the candidate, later the euro, and most recently the renminbi). Still, the dollar prevails because no other country has been able to match the US for its macroeconomic stability; large and deep financial markets; absence of capital controls; open, transparent, rules-based financial system where foreign financial service providers can compete on equal terms with domestic competitors; and range of liquid and safe financial assets to promote cross-border exchange. Even if such a country were to emerge, its currency would not likely supplant the dollar, as the world economy has had periods in which multiple currencies fulfilled these roles. However, advances in financial technology may reduce the advantages of incumbency and make it easier for market participants to move between currencies, maintaining diversified portfolios.[1]

Although neither current conditions nor the BRICS discussions appear to pose an immediate danger to American interests, Trump has repeatedly threatened these countries with a 100 percent tariff.

We analyze the implications of this action using the G-Cubed model: a multi-country, multi-sector hybrid dynamic stochastic general equilibrium–computable general equilibrium model (McKibbin and Wilcoxen 1999, 2013). Our online dashboard provides a full set of macroeconomic and sectoral results for each country. We do not consider the possible effects of the target countries retaliating by imposing similar tariffs on US products. We would consider it likely, but as China has demonstrated, there are other ways to retaliate than the imposition of mirror tariffs. For this reason, the results we report will likely understate the impact, at least on the US, of initiating such a trade war.

Figure 2 shows the impact on the US and the prominent BRICS members of the US imposing a 100 percent tariff on imports from those countries. All these countries see slower GDP growth, with China hit the worst because of its exposure to the US. All the countries experience accelerated inflation except China, which instead sees inflation initially slowing as its central bank tightens monetary policy to reduce the depreciation of the Chinese currency.

For the US, by the end of the second Trump administration, GDP is $432 billion lower than it would be without the tariffs, and the overall price level is 1.6 percent higher.

Meanwhile, the BRICS pose no serious threat to the dollar’s dominance.

China is the dominant member of the BRICS group and is looking to reduce its reliance on the dollar. Beijing is encouraging greater RMB use by promoting RMB exchanges. Developing a partial Chinese alternative to the SWIFT bank messaging system could encourage even greater RMB use, as could the development of the e-CNY, a Chinese central bank digital currency. The effects of Western financial sanctions against Russia in response to its invasion of Ukraine, as well as US-China tensions over Taiwan, could also deepen Chinese and BRICS interest in monetary decoupling. Nevertheless, the US dollar remains the predominant currency in all these dimensions.

The BRICS have established the New Development Bank and a currency stabilization scheme, the BRICS Contingent Reserve Arrangement (CRA). The group is exploring establishing a common BRICS payment system as an alternative to SWIFT, a common currency, and their own common central bank digital currency. Observers debate China and Russia's motivations regarding these initiatives, but the consensus is that the idea of a BRICS currency is going nowhere.

These results and the lack of a BRICS threat suggest that the US imposing a 100 percent tariff on the BRICS would be an inappropriate and self-defeating response that would cause significant global economic damage.

Note

1. Barry Eichengreen, Arnaud Mehl, and Livia Chiţu, 2018, How Global Currencies Work: Past, Present, and Future. Princeton: Princeton University Press.