How the dollar’s global dominance complicates US-China tariff truce

[WORLD] The recent Geneva breakthrough between the US and China may have lowered the temperature of a simmering trade war, but it did little to address the structural fault lines beneath the dispute. While tariffs are set to ease for 90 days, and diplomatic niceties resume, neither side appears willing—or able—to engage with the systemic forces distorting trade flows. Chief among them: the dollar’s status as the world’s reserve currency. For investors and policy analysts, this is the real axis of imbalance. Temporary tariff rollbacks may offer a tactical pause, but the larger strategic misalignment remains, leaving capital markets and global supply chains in a state of suspended uncertainty.

The Real Story Behind the Trade Pause

The Geneva deal, struck with little fanfare and limited documentation, surprised analysts largely because expectations were so low. Washington and Beijing agreed to suspend some tariffs and countermeasures imposed in recent months, resetting the tone of bilateral negotiations. Yet the agreement was striking for what it didn’t do. Core disputes—intellectual property, industrial subsidies, forced technology transfer, and fentanyl trafficking—remained unaddressed.

Most tellingly, the deal leaves intact all tariffs implemented during Donald Trump’s first term. Those measures, imposed under the guise of correcting the bilateral trade deficit, marked a dramatic departure from free-trade orthodoxy. At their peak, US tariffs affected over $370 billion in Chinese goods, prompting symmetrical retaliation. According to the Peterson Institute for International Economics, US-China trade in goods declined by over 15% from 2018 to 2020, while global supply chains scrambled to adapt.

Textbook economics suggests exchange rates ought to self-correct trade imbalances over time. Yet that logic breaks down when it meets the reality of the dollar’s outsized role in global finance. As the world’s primary reserve currency, the dollar is in constant demand—whether to settle international transactions, anchor central bank reserves, or fuel the appetite for US-denominated assets. That relentless demand keeps the dollar elevated, pricing American exports out of reach and blunting the intended impact of tariff measures. In practice, this structural distortion locks in the US trade deficit—one no provisional deal or temporary tariff reprieve can meaningfully resolve.

The Dollar as Trade Policy’s Blind Spot

While much of the political rhetoric focuses on "unfair practices" and "currency manipulation," the market reality is more structural and self-inflicted. The United States’ fiscal deficits and capital account surpluses all but guarantee continued upward pressure on the dollar. As Barry Eichengreen notes in Globalizing Capital, “The very privileges that the dollar enjoys make it harder for the US to reduce its trade deficit without triggering global dislocations.”

China, meanwhile, plays a dual game: resisting renminbi internationalization while exploiting the dollar's structural gravity. Chinese policymakers complain about American financial dominance, but their reserve accumulation strategy and managed currency regime tacitly reinforce it. The irony is that both nations benefit—albeit asymmetrically—from the system they decry.

What’s missing from most trade debates is the recognition that tariffs are, at best, a workaround. They may redistribute trade flows in the short term, but they can’t rebalance the macro forces behind capital surpluses and trade deficits. Without addressing the role of the dollar in this global loop, any "fix" remains cosmetic.

Implications for Investors and Policymakers

For global markets, the short-term de-escalation is welcome news. Risk assets rallied modestly after Geneva, with emerging markets and export-heavy equities seeing brief upticks. But the underlying fundamentals haven't changed. The dollar remains elevated. US monetary policy is still relatively tight. And capital flows continue to favor American assets over trade-balancing investments abroad.

Investors should treat the Geneva deal as a temporary détente, not a turning point. Tariffs may fall, but structural divergence remains the baseline scenario. For policymakers, the challenge is greater. As long as the US dollar remains the world’s preferred reserve, the trade deficit will be sticky—and political pressure to “do something” will resurface cyclically, potentially triggering further protectionist rounds.

Moreover, the longer underlying distortions persist, the more likely it is that third parties—such as the EU, ASEAN, or commodity-exporting nations—will suffer collateral damage. Already, we see increased hedging behavior: gold accumulation by central banks, sovereign wealth diversification, and moves toward non-dollar trade agreements. These signal early-stage erosion of trust in dollar-centric global stability.

Our Viewpoint

The Geneva trade truce is a tactical relief, but not a strategic solution. What looks like diplomatic progress is really just a timeout in a much larger economic contest—one driven not by tariffs, but by the financial gravitational pull of the dollar. Unless future deals grapple with the deeper monetary distortions shaping global trade, these ceasefires will remain little more than surface-level optics. Investors would do well to look past the choreography of tariff announcements and focus instead on the undercurrents—currency trends, liquidity shifts, and capital flight patterns. If a real decoupling is on the horizon, it won’t start at the negotiating table. It will be triggered by central banks recalibrating portfolios, and by subtle but strategic moves away from dollar-denominated dominance.