The deficit that tariffs cannot close
The United States runs a persistent trade and current-account deficit because it issues the reserve currency the world wants to accumulate - the mirror image of the capital that flows in to buy Treasuries and US assets. That is an identity, not a policy failure, and it is why the tariff regime, whatever its other effects, has not closed the deficit. Tariffs have reordered the composition and geography of trade - pulling supply chains toward Mexico, Vietnam and reshored production - and raised revenue, but the aggregate external gap persists because the capital account requires it. To eliminate the trade deficit, the US would have to stop being the world's banker.
Trade as statecraft
The defining external development is the use of access to the American market and the dollar system as instruments of policy. Tariffs are levied and lifted as leverage; sanctions and the threat of exclusion from dollar clearing are deployed against adversaries; allies are pressed on defence and trade simultaneously, as Germany's auto exporters have learned. This is a genuine regime change in how the US wields its economic centrality, and it has two consequences: it raises the cost of relying on the US market and the dollar, which accelerates quiet diversification by others, and it injects policy uncertainty that itself weighs on global trade and investment.
Every time the US weaponises access to its market or its currency, it collects a short-term geopolitical win and pays a long-term premium: it gives every other country a reason to build an alternative. The dollar's dominance is not at risk in this decade, but the tariff era is planting the seeds of the diversification that could erode it in the next.
The dollar and the financing
The external deficit remains comfortably financed because the dollar is firm and demand for US assets is intact. A hawkish Fed keeps the dollar bid, the reserve role guarantees structural demand for Treasuries even at a higher term premium, and safe-haven flows return to the dollar whenever geopolitical stress rises - as they did during the Iran war. The risk to this comfortable arrangement is not cyclical but structural and slow: the same weaponisation that delivers leverage today erodes the trust that underpins the financing tomorrow. For now, the financing holds, and the external accounts are not a near-term vulnerability.
| Dimension | Reading | Trend |
|---|---|---|
| Trade deficit | Persistent | Structural |
| Tariff regime | Active | Reordering flows |
| Dollar | Firm | Fed + haven supported |
| Reserve status | Intact | Slow diversification risk |
| Allies | Strained | Trade vs security tension |
Scenarios
Our base case is continuity: a structural deficit, comfortably financed, with tariffs reordering trade and straining alliances but not threatening the dollar's role this decade. The bull case for US external stability is a de-escalation of the trade wars that restores predictability and alliance cohesion. The bear case is an acceleration of diversification - more bilateral settlement outside the dollar, faster reserve diversification by adversaries and even allies - that begins, at the margin, to raise the cost of financing the American deficit. That is a multi-year tail, not a 2026 event, but the tariff era is the thing that makes it thinkable.