President Biden recently raised taxes on American consumers and businesses and may have hastened the end of the dollar’s world reserve currency status. President Biden did this by increasing tariffs on Chinese imports.
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Specifically, President Biden raised tariffs on products including Chinese-produced steel and aluminum and many components imported from China for use in manufacturing electric vehicle batteries. Tariffs on Chinese-made semiconductors are rising from 25 to 50 percent while tariffs on Chinese-made electronic vehicles are rising from 25 percent to an astounding 100 percent.
Of course, the costs of these tariffs will be borne by Americans wishing to purchase electric cars and American electric car manufacturers that use material imported from China. These new tariffs thus undercut Biden’s goal of getting more Americans to drive electric cars.
The tariffs on Chinese goods give China even greater Inventive to challenge the dollar’s world reserve currency status. The same week Biden imposed these tariffs, China President Xi Jinping and Russian President Vladimir Putin announced they were strengthening their alliance in order to better challenge US military and economic hegemony. This is a reaction to US foreign policy of the post-Cold War era which has reversed the Richard Nixon-Henry Kissinger strategy of pursuing good relations with China.
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A part of the announcement recognized use of the Chinese yuan and Russian ruble for over 90 percent of the trade between the two countries. This is only the latest challenge to the dollar’s world reserve currency status. China’s share of the global economy has more than doubled in the last twenty years from 8.9 percent to 18.5 percent while the US share of the global economy has fallen from 20.1 percent to 15.5 percent. China’s rise is one reason why the US currency held by foreign central banks has dropped from over 70 percent in the early 2000s to under 60 percent today.
Last year, China and Saudi Arabia agreed to expand their use of their own currencies in trade between the two countries. This is the first time the Saudis have agreed to use a currency other than the dollar for the oil trade since Henry Kissinger negotiated a deal where the Saudis would trade exclusively in dollars in return for US support for the Saudi regime. The “petrodollar” is a major reason why the dollar retained the world reserve currency status after President Nixon severed the last link between the dollar and gold.
If the dollar loses its world reserve currency status, the US government would lose the ability to “weaponize the dollar.” Other countries would then have less incentive to abide by US demands, including related to regime changes. It would also reduce other countries’ interest in purchasing US debt instruments. This would increase pressure on the Federal Reserve to monetize the debt, creating more price inflation and leading to a major economic crisis. This will not just end the US military and financial empire abroad. It will also end the welfare state at home.
Since both major presidential candidates and most Congress members are not serious about making the changes in foreign, domestic, and monetary policy necessary to avoid the crisis, America will likely face hard times in the near future. However, the end result may be a return to limited, constitutional government and a political class that realizes that Ronald Regan was correct when he told me that no nation has ever abandoned gold and remained great.
