The dollar on the path to the end of its imperial era

 To get a preliminary understanding of the evolution of the American economy within the global context, we can rely on two important indicators: GDP growth and the current account balance. The GDP of the United States currently represents 26.3% of the world GDP, while China's accounts for 16.9%. In contrast, China’s GDP grew at an average annual rate of 13.27% between 2005 and 2020, while the American GDP only grew at an average rate of 3.2% during the same period. This implies that if this differential in average growth rates persists in the future, China's GDP will surpass that of the United States within five years. Based on the projected growth rates for the coming years, which are 1.7% for the U.S. and 5.2% for China, it is estimated that China will exceed the U.S. GDP around 2037, although some calculations suggest this could happen as early as 2035. It is also anticipated that once it surpasses the U.S., China will lead global GDP for the next forty years.

Even more concerning for the United States, which sheds light on its foreign policy, is the country’s current account balance, which shows an annual deficit of $800 billion, while China has a surplus of $400 billion. Before the onset of the Ukraine war, Russia had a surplus of $200 billion, and the European Union, collectively, shows a surplus of $120 billion. The substantial external deficit is the real Achilles' heel of the American economy, which Trump promises to rectify by increasing tariffs on products that America imports from China, Europe, and other regions of the world. Paul Krugman, Nobel Prize-winning economist, recently wrote that Trump is deceiving his voters, as the increase in these tariffs will be fully passed on to the prices that American consumers and businesses will pay for imported products. However, it might be the case that Krugman’s prediction does not materialize, or at least is not as intense as he suggests, if foreign companies that rely on the American market find themselves compelled to absorb at least part of the tariff increases, as Trump indicates.

It remains to be seen what Trump intends to do to boost U.S. exports, the other determinant of the balance. In the U.S., this balance has persistently shown a deficit since the early 1960s, with few years presenting surpluses. The ability to maintain this deficit over such a long period is rooted in the fact that the dollar has served as an international reserve currency since the Bretton Woods Agreements in 1944 and has managed to maintain this role even after the suspension of its convertibility into gold in August 1971 and its move to a free-floating status shortly thereafter.

During the first two decades following World War II, the United States had optimal conditions to maintain external surpluses due to high export volumes, both to a growing Europe—where the German economy was recovering from the destruction it faced during the war—and to its allies in the Pacific. This phase ended when Europe regained its export capacity, especially Germany, and the same occurred in the Pacific after significant industrialization in Japan and South Korea. Consequently, the situation reversed, and these countries, previously importers of American products, became primarily exporters to the United States, contributing, among other factors, to the decline of the American automotive industry. It was thus the allies, not the enemies, of the United States who were the initial causes of this country’s economic problems. This new context led to the accumulation of American external debt resulting from the persistent current account deficit.

The international role of the dollar has afforded the United States a unique global position, allowing it to pay its external debt—recently reaching $26 trillion —by issuing its own currency. This advantageous position of the U.S. in the international monetary system explains its hostility towards the creation of the euro, fearing that it might undermine the foundational dominance of the dollar. Although the worst fears regarding the euro have not come to pass, the future remains concerning as China contests their leadership in the global economy. The situation is further complicated by the fact that China is also the largest international holder of American public debt, which currently stands at approximately $24.5 trillion and represents about 122.3% of the country's GDP. Therefore, the United States is moving toward a point where it will struggle to continue repaying external debt with its own currency. From that point, it will be compelled to forcibly correct its current account balance, a process that will be quite painful for the American economy and is sure to generate a period of heightened geopolitical tension.

Thus, the decline of the United States is not simply the result of Trump’s election, as many Europeans believe. On the contrary, that election, grounded in the slogan "Make America Great Again" and a set of promises that are difficult to realize, is itself a symptom of this decline and the path toward the end of the dollar's imperial era.