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The US government is pulling away from multilateralism and adopting an increasingly protectionist stance on international trade. This move is, in part, a response to two long-run economic grievances: a decline in American industrial performance and the ‘exploitation’ of US markets by overseas competitors. But as the value of the dollar continues to slide in the face of tariffs and other policy uncertainties, Washington could soon find itself in a tricky self-imposed corner: a weaker dollar, together with a refusal to allow the current account deficit to increase, will make reindustrialisation next to impossible to finance.
There are various interpretations of the recent changes in international relations, triggered by initiatives from the new US administration. One reading is that rule-based multilateralism is effectively giving way to a network of bilateral agreements based on power dynamics. Another is that we are witnessing a true retreat of the United States from multilateralism – a dynamic that, in theory, might not necessarily be negative, if other countries manage to keep global free trade alive without the overbearing presence of the White House.
Both perspectives offer important insights, but a third interpretation is possible: the United States, as the hegemonic power, is changing its approach to exercising its power in international relations. In the past Washington predominantly used its influence to create international rules and institutions – and shape them to its advantage. In other words, multilateralism was dominated by American influence and interests. Today the United States is adopting a different attitude – abandoning treaties, institutions, rules and established practices. This new approach had already emerged in various forms in recent years, but it is now openly and unreservedly promoted.
Why is multilateralism no longer serving the US?
It is useful to reconsider the reasons for Washington’s growing impatience with the multilateral method. Two are worth stressing:
The first is technology. Innovation, especially in intangible and scalable sectors, enables firms to benefit from economies of scale, favouring the rise of a few dominant companies with massive global market power. For these few firms, access to the large US market is crucial for profitability and growth. From the American perspective, other countries are strategically taking advantage of the size of its market, without offering much in return. Multilateralism, even if managed correctly, no longer seems adequate to support an industrial and trade policy primarily focused inward.
The second is security. Growing military threats, especially from Asia, have led the United States to view the outsourcing of production as a risk to its ability to support (or threaten) large-scale conflict. In this context, national security may appear better protected outside multilateral institutions, which were born in a now-outdated geopolitical context.
So, existing free trade treaties and international organisations are seen as facilitating strategic access to the US market by both friends and foes. Washington wants to break free from multilateral constraints on an industrial and national security policy essentially aimed at ‘selective reindustrialisation’.
The unbearable lightness of a strong dollar
In this process the critical issue is financial vulnerability. America’s large gross external debt may not be a problem if the dollar retains its status as the dominant currency. But as many observers have already noted, if the dollar’s status were compromised then the current level of external debt may not be sustainable without fundamental corrections.
Being the issuer of the dominant currency has well-known advantages. First, the US government can borrow at lower costs, thanks to both the ‘liquidity premium’ and the so-called ‘convenience yield’ – that is, the non-monetary benefits that drive investors to accept lower yields in exchange for holding US Treasuries. Second, as long as international demand for American debt securities remains high and grows at least as fast as interest rates, the United States can refinance its debt and pay interest by issuing new securities, without needing to generate a trade surplus. In short, a dominant currency allows a country to maintain debt levels that would otherwise be unsustainable.
What seems to irritate the Trump administration is the main side effect of this advantage. Because a dominant currency creates a strong financial incentive for debt, the country’s external position is ‘structurally in deficit’. In equilibrium, the dollar is structurally strong. This encourages imports and creates incentives for outsourcing production abroad. This side effect lies at the root of the idea that seems to guide current policy: correcting the trade imbalance to bring production back to America, from the perspective of the White House at least, requires both a weakening of the dollar and a reduction in the trade deficit.
Wishful reindustrialisation
While the idea that a weak dollar is good for reindustrialisation has already been criticised in many ways, two observations have not yet been sufficiently emphasised. First, a reindustrialisation process is better pursued with selective industrial and trade policies than by setting balance of payments targets. Ultimately, the United States wants to increase domestic investment. Since the current account deficit equals the difference between investment and savings, holding savings constant, reindustrialisation requires an increase in the current account deficit.
To be clear, an increase in the deficit could be avoided with policies targeted to raise savings (i.e., a correction in public accounts and private consumption). But the former conflicts with the government’s tax relief policies, and the latter conflicts with its full employment goals. So, an ‘immaculate’ reindustrialisation process, without a deficit increase, doesn’t seem to be ‘on the cards’.
The second observation follows from the first. In this context, abandoning the dominant currency status would dramatically increase the cost of reindustrialisation. Not only would borrowing costs rise, but US foreign debt would become more like actual debt, losing its status as an international monetary asset – whose high demand exempts the issuing power from rollover concerns.
It may seem like a naïve view, but to truly do justice to the ‘America First’ project, why not stimulate high-tech investments with appropriate policies – leveraging the dominant financial and monetary position – rather than chasing the elusive benefits of competitive devaluations, which are by nature temporary and not structural? Investments in technology could ensure lasting competitiveness in the future even with a strong dollar.
All in all, this is exactly the direction suggested by the Draghi Report. Europe lacks a dominant currency but has high savings. According to the report, reducing the disadvantage of Europe in innovation investment requires repatriating savings now placed abroad. This goal can be pursued through a ‘Saving-Investment Union’ that would facilitate the required portfolio rebalancing. In this sense, the Draghi Report is fully aligned with Trump administration’s objectives, as it implies increased investment financed by a reduction in Europe’s trade surplus.
Clearly, tech-driven development has implications for redistributive policy. In practice, high-tech investments mean robotics and artificial intelligence, as well as the employment of skilled and specialised workers (as shown by recent reshoring data). Reshoring has significantly affected value-added, but not employment – at least so far (Firooz et al., 2025). But growth can have positive effects on overall economic activity, especially if accompanied by smart redistribution policies. By contrast, a policy of competitive devaluations might help unskilled employment, but only marginally and temporarily – and at what cost?
What next?
Since the global financial crisis, there have been signs of a weakening of the dollar’s status. US public debt continues to rise, at rates that cast both economic and political doubt on the feasibility of fiscal adjustment. We could witness rebalancing via a persistent surge of inflation above target. Meanwhile, the ‘convenience yield’ on ten-year Treasuries has already zeroed – perhaps reflecting increased long-run risk in the eyes of global investors. These effects are visible in equity and long-term bond markets, but less so in short-term securities (whose markets still offer very high liquidity). If only for this reason, a dollar collapse still seems unlikely for now.
Nonetheless, there are reasons to believe that the international monetary system is at a turning point, although its direction and outcome are far from certain. It is in the United States’ interest to reshape its power by distinguishing among different fronts. By way of example, until a few days ago, there were strong concerns about the future of the International Monetary Fund (IMF), under threat from a US retreat. Recent statements from Scott Bessent suggest a different stance. To the US administration, the IMF must “go back to doing its job” of regulating global imbalances (i.e., pressuring surplus countries to adjust their policies). Ironically, the US position today echoes John Maynard Keynes’ concerns about international systems where adjustment responsibility always falls on deficit countries. The message is clear: when it suits the US government, multilateral institutions must be kept alive and steered toward its own interests.
Nothing is new under the sun.
Or is there? A key concern is that the change in the US approach to exercise hegemony can weigh on the IMF activity up to compromising its credibility and functions, and undermine its effectiveness.
Author: Giancarlo Corsetti