“Let them vote against us. We’ll save a lot. We don’t care.”
US President Donald Trump threatened to stop financial aid to all the countries rejecting his recognition of Jerusalem as Israel’s capital at a United Nations summit in December.
The extortion failed as 128 countries defied Trump. It angered US ambassador Nikki Haley who claimed the US had been “singled out”.
It may be the clearest example yet of how isolated the US has become since Trump took over from Barack Obama about a year ago.
Obama was a bridge builder. Trump excels at burning them. Allies no longer take the US President’s words as gospel.
Of course it’s the prerogative of the White House to further retreat from the world stage by stopping financial aid to other countries.
This week Trump singled out Pakistan in this respect. He’s withholding $255m in aid for not being cooperative enough.
Trump can put America first just like he promised his voters. However, a more inward-looking US could spell trouble for the dollar and by extension the US economy.
Spend money to make money
In Europe we’re taught in school how a charitable US helped the continent back on its feet after World War II.
The US effectively bankrolled Europe’s quick recovery via the Marshall Plan. Of course that’s only half the story.
The other half is that it was just good business. A Europe in tatters was no use to the US.
Only an economically strong Europe could buy the stuff the US wanted to sell. And so a lot of the money sent in the form of aid found its way back to the US.
‘You have to spend money to make money’ as a business credo goes. That’s exactly what the US did in the aftermath of the war.
It’s one of the reasons the US managed to become the world’s biggest economic power.
The dollar took over the pound’s role as global reserve currency. Some might say the greenback is the biggest US export product since 1945.
The dollar makes up 64% of all known reserves held by central banks worldwide. The dollar is always in demand. It’s a ‘safe haven’ currency while the market for US Treasury bonds is the most liquid financial market there is.
If the US being at the centre of everything is doing wonders for its economy, the opposite must be true as well.
Ever since Trump was elected president, US foreign relations have worsened considerably. Trump doesn’t seem to care about making enemies and he can’t be bothered with maintaining friendships either.
He’s pulled the US out of the Paris Climate Accord, the Trans-Pacific Partnership (TPP), and UNESCO while he’s threatened pulling out of NATO as well.
But by retreating into isolation, Trump may be underestimating the importance of geopolitical alliances – not least for the US economy.
Keep enemies close, keep friends closer
Not long after Trump’s inauguration the Economist noted that “the dollar standard is one of the most vulnerable pillars of global stability.”
Countries like China and Russia seek to end the hegemony of the US dollar. They want a global reserve currency that isn’t connected to an individual country as the dollar is now.
The reason the dollar has held on despite these calls is because the US and its allies have resisted change up until now. If the US were to lose influence, the dollar’s importance could soon diminish too.
“The greenback’s dominance has been sustained by geopolitical alliances that are now fraying badly,” writes economics professor Barry Eichengreen for Project Syndicate.
Globalisation made the dollar the de facto world currency. The US’s central role on the world stage and its diplomatic and military ties gave many countries a reason to hold dollars.
States that heavily depend on the US for their security tend to hold a lot of dollars as part of their foreign currency reserves.
If Trump continues to isolate himself and alienate the US from its allies, it’ll inevitably bring harm to the dollar and the economy.
As an example, Eichengreen mentions Japan and South Korea, US allies with foreign currency reserves that consist for 80% of dollars.
“One can imagine that the financial behaviour of these and other countries would change dramatically, with adverse implications for the dollar’s exchange rate and US borrowing costs, were America’s close military alliances with its allies to fray.”
In this sense the Trump presidency might reshape the world order.
Pulling out of TPP and perhaps even NATO or the UN will leave a vacuum. China is the most likely to take the US’s place and its currency, the renminbi, could gain in importance.
Trump is also playing a risky game by threatening allies and withholding financial aid. If countries can no longer count on the US, they won’t have a reason to keep so many dollars in reserve.
Central banks could start dumping dollars en masse. In that case the US economy will have to pay for the actions of Donnie No Mates.
“Pundits have been saying last rites for the dollar’s global dominance since the 1960s,” says Eichengreen.
“The pundits may finally be right.”