Trade has always encompassed more than the mere exchange of goods across borders – it serves as a barometer of power, policy, and national priorities. In today’s interconnected global economy, trade wars have resurfaced as a prominent instrument of geopolitical strategy, most notably in the intensifying competition between the United States and China. Although the economic fallout of such disputes is well-documented, their persistence points to deeper political and strategic drivers.
At its essence, trade aims to lower the total landed cost for consumers while preserving profit margins for producers. This landed cost includes not only the base price of a product, but also shipping, insurance, tariffs, taxes, and other logistical expenses. When these costs are minimized, trade thrives, a principle that has propelled globalization for centuries. Yet, trade does not unfold in isolation. It is continually shaped by government intervention, through market regulations, tariff structures, and subsidies designed to safeguard domestic industries and advance national interests.
History provides clear warnings about the long-term consequences of trade wars. A notable example is the ”Chicken Tax” of the 1960s. In response to France and West Germany imposing tariffs on U.S. chicken imports, the United States retaliated with a 25% tariff on imported European light trucks, among other items. Though originally a tactical move, the light truck tariff remains in effect to this day. Over time, it has suppressed competition and innovation within the U.S. automotive industry, leading to higher prices and reduced choices for American consumers. A widely recognized outcome among economists.
More recently, the United States imposed tariffs on steel and aluminum in 2018 and again in 2025. From a production standpoint, steel and aluminum are classified as intermediate goods, inputs used in the manufacturing of final products but not consumed directly. Tariffs on such goods have a compounding effect: increased costs ripple through the supply chain, raising prices at every stage of production. This makes tariffs on intermediate goods especially harmful to the broader economy. In contrast, tariffs on end-consumer products tend to have a more limited impact and are often easier to justify politically. Both the Chicken Tax and the steel and aluminum tariffs illustrate a recurring theme: while trade barriers may offer short-term protection to specific industries, they often inflict long-term harm on the economy.
The current trade war between the United States and China is about more than economics, it reflects a broader struggle for global supremacy. In 2001, the U.S. was the primary trading partner for most of the world. By 2025, China had overtaken that position, reshaping global trade flows. This shift has deeply concerned U.S. policymakers, who view China’s rise as a challenge to American hegemony.
Economists like Ray Dalio argue that we are witnessing a classic power transition: a rising power (China) challenging the incumbent (the U.S.). Historically, such transitions are accompanied by trade disputes, shifts in currency dominance, and, in some cases, military conflict. According to Dalio’s framework, industrial dominance tends to precede the emergence of a reserve currency, a pattern seen in the rise of Britain and later the United States.
The process begins when a nation becomes a net exporter of highly desired goods, driven by advancements in productivity, infrastructure, human capital, control of critical raw material and strategic state support. This trade surplus leads to an inflow of foreign currency, historically, gold. Simply put, the hegemon provides the world with cheap and valuable goods, while accumulating foreign currency reserves. The strength and reliability of the hegemon’s reserves, traditionally measured in gold, become the basis for trust in its financial system. Over time, this trust can lead to the hegemon’s currency being adopted as the world’s de facto reserve currency.
This pattern, industrial leadership followed by monetary dominance, is well-supported by historical precedent. While the United Kingdom surpassed the Netherlands as the world’s leading trading nation in the late 17th century, it wasn’t until 1784 that the Dutch guilder (also known as florin) lost its reserve currency status to the British pound. Similarly, although the U.S. emerged as an industrial superpower in the early 20th century, the British pound only fully ceded reserve status to the U.S. dollar in the 1950s.
This historical pattern helps explain why rising powers are typically needed to become major exporters first. As their industries outcompeted those of the reigning hegemon, they began attracting increasing amounts of gold. In simple terms, the richer a country gets the more influential position in the world trade it will get. Over time, this shift in wealth would gradually deplete the dominant power’s gold reserves. Although the incumbent currency enjoyed a major advantage, widespread international use, there came a tipping point. Once the hegemon’s gold reserves fell too low, it would face a crisis of confidence, triggering a run on its currency. That collapse would pave the way for the rising power’s currency to assume reserve status. This is the dynamic Ray Dalio describes in his power transition framework.
However, this model was based on a gold standard system, which the United States abandoned in 1971. At that time, U.S. gold reserves had been significantly drained, one of the main reasons for the end of the gold standard. Yet, unlike previous hegemons such as the British or the Dutch before them, the United States did not see its currency decline in status. In fact, the U.S. dollar became even more dominant in the decades that followed. Instead of collapsing, the dollar shifted from being backed by gold to being backed by trust, institutional stability, and unmatched financial market liquidity. Central banks around the world continue to hold U.S. dollars not because of trade surpluses, but because the dollar remains the most reliable and widely accepted global currency. This gives the United States a unique advantage: it can run persistent and massive trade deficits without jeopardizing the dollar’s reserve status.
Since the 1970s, the United States has faced three major economic challengers, each of them nations or regions that exported significantly more than they imported. The first was Japan in the 1980s, an export-driven powerhouse that prioritized industrial growth and innovation. Japan’s expansion was halted in the beginning of the 1990th. Then came the European Union, which, with a larger population than the U.S., surpassed American manufacturing output in 2003 and consistently maintained a trade surplus. EU lacks the full unity of its domestic market to fully challenge the dollar with the Euro (not all EU countries use the Euro). In both cases, however, the U.S. dollar retained its status as the world’s dominant reserve currency.
Today, the third and most serious challenger is China, a key driver of the current trade war. To understand why the dollar has survived these challenges so far, it’s essential to recognize a major shift in global economics: the declining importance of trade surpluses, or what used to be the accumulation of gold. Unlike in earlier centuries, the dollar’s continued dominance has not depended on the U.S. maintaining a trade surplus, but rather on other nations continuing to use the dollar as their preferred reserve asset. The real hard currency is not gold but worldwide institutional trust in the stability of US.
There are two primary reasons for this continued reliance on the dollar. This is true before the spring 2025. The first is safety, both in terms of political stability and protection from asset confiscation or currency collapse. The dollar remains one of the most stable and secure currencies in the world. The second is liquidity. Central banks can easily access dollars through institutions like the Federal Reserve, the International Monetary Fund (IMF), or the World Bank. For many countries, exporting to the United States remains the most reliable way to earn dollars, reinforcing their participation in the dollar-based global financial system.
By facilitating this access, the U.S. has given countries a strong incentive to plug into the dollar ecosystem. In turn, the dollar’s reserve status has granted the United States a powerful strategic advantage: it can sustain global military commitments even without the industrial dominance that historically underpinned such power. In effect, the U.S. has disrupted the traditional cycle outlined by Ray Dalio, in which industrial strength precedes and supports monetary supremacy. The U.S. financial system really supports its superpower status.
However, this divergence may come with long-term risks. If a major global conflict, such as a hypothetical World War III were to erupt, the U.S.’s relative lack of industrial capacity could become a critical weakness. This concern about eroding industrial strength is one of the underlying reasons the U.S. has chosen to escalate its trade war with China. It’s not just about tariffs; it’s about rebuilding strategic resilience in a world where economic and geopolitical competition is intensifying.
The outcome of the ongoing trade war between the United States and China hinges on two possibilities: either the U.S. reclaims its position as the world’s leading industrial power, or the dollar loses its status as the global reserve currency. For China to emerge victorious, it must convince the rest of the world to adopt the renminbi in place of the dollar.
However, recent U.S. actions, particularly the use of sanctions and the freezing of foreign assets have eroded trust in the dollar. The Trump administration’s preferred tool in the trade war, tariffs, has only intensified this mistrust. Unpredictability in policies and a lack of clear strategic goals have increased dollar volatility. Tariffs have also made it more difficult for many countries to export to the U.S., depriving them of a safe and reliable way to earn dollars, and weakening the foundation of the dollar-based global system.
In theory, China could capitalize on this opening and replace the dollar as the world’s reserve currency by pursuing a three-step strategy. First, it would need to build trust and predictability for foreign investors. This would involve making the People’s Bank of China fully independent, removing capital controls to allow free movement of money, and providing ironclad guarantees that foreign assets in China would not be subject to political retaliation or confiscation.
Second, China would need to make the renminbi more attractive than the dollar by opening its domestic markets to foreign competition, reducing trade barriers, and allowing its currency to float freely. It would also have to end industrial subsidies, wage suppression, and currency manipulation to build confidence in the long-term viability of the Chinese economic model.
Third, and most critically, these reforms would require significant political liberalization. China’s leadership would have to cede a degree of control to independent institutions tasked with safeguarding private and foreign capital, something it has shown little inclination to do. In fact, recent trends suggest the opposite: increased centralization and a tightening grip on capital and information flows. As a result, despite China’s economic size and global trade presence, the renminbi remains a marginal player in international finance. And so, ironically, China chooses not to make its currency the world currency. Its unwillingness to reform limits its ability to challenge the dollar, even as U.S. missteps continue to weaken trust in the American system.
But does that mean the U.S. will win?
For the U.S., victory means regaining industrial strength without compromising the dollar’s reserve status. This could be achieved through a combination of targeted tariffs, strategic industrial policy, smart immigration reforms (attract the right entrepreneurs and talent), and renewed investment in innovation and infrastructure. However, the current political environment complicates this path. Attacks on independent institutions like the Federal Reserve, populist protectionism, limitation of immigration and unpredictable trade policies threaten the very trust and credibility that uphold the dollar’s global role and at the same time makes the re-industrialization more costly and slower.
To succeed, the U.S. must pursue a more balanced strategy, one that supports domestic industry while maintaining the openness, stability, and predictability of its financial system. Short-term political wins through tariffs and rhetoric may energize voters, but they often lead to inflation, reduced efficiency, and global uncertainty. A longer-term vision, grounded in institutional strength and economic openness, is essential.
In the absence of credible leadership from either side, the world is drifting toward a multipolar economic order. Three major export blocs – the United States, China, and the EU are emerging, each dominating its own sphere of influence. China remains the largest exporter, but not dominant enough to rewrite global rules, even with full support from its fiends in BRICS. The U.S. remains the most powerful, but not powerful enough to isolate China entirely. The EU maintains strong export capacity but lacks unified geopolitical power. In this new world, no single power dictates the terms of global trade. Instead, influence is divided among regional clusters, and international rules are increasingly disputed.
Ultimately, trade wars are not anomalies; they are symptoms of deeper structural tensions. They erupt when global economic systems become too efficient, too interdependent, and too fragile. They reflect political efforts to redirect wealth, reset power balances, and shape the future of international order. As such, understanding the origins, mechanics, and consequences of trade wars is not just useful, it is vital for navigating the turbulence of 21st-century geopolitics.