It was Apr 2, 2025 when they chose to declare a national emergency. Over a decade in, I’m still adjusting to being an immigrant. At least it wasn’t Apr 1. That would’ve been truly next level.

In this whole emergency thing, I’m trying to put some order to the chaos that are the new U.S. tariffs. Getting past the formulaic comedy is one thing. The tariffs have some math. But what’s the reasoning, I’ve spent the whole day wondering.

You want a reserve currency?

After WWII, the Bretton Woods system established the U.S. dollar as the world’s reserve currency. As the dollar took over the role of gold in the interntational financial system, the U.S. agreed to link the dollar to gold (at the rate of $35 per oz), with all other currencies pegged to the dollar. After the war most countries had transferred their gold to the U.S., which was now closest to offering the most trusted currency, also backed by gold. A key motivation for the Bretton Woods system was to avoid floating, independently-managed national currencies by isolationist regimes, while enabling lightly managed, stable currencies with free convertability and free trade.

Little did they know how this would work out.

When the system became operational in 1958, countries settled their international dues in dollars, which could be theoretically converted to gold. After WWII, as Japan and Germany recovered, their share of world production increased at the expense of the U.S. As the U.S. further extended itself with military spending and foreign aid, the world grew less confident about its ability to convert dollars to gold. As U.S. inflation rose and the risk of a gold run grew, the U.S. unilaterally ended the convertability to gold in 1971, effectively devaluing the dollar.

Devaluing the dollar is a repeating trope, you’ll soon see.

Turns out, gold-backed currencies aren’t the easiest to manage. Moreover, trust can be built through perpetuating belief systems (arguably the greatest human invention). Even without gold convertability, the dollar has remained the world’s reserve currency. But this still has its downsides.

The Downsides

There are at least two downsides that an issuer of reserve currency might bear.

One, each country typically maintains reserves of the ‘reserve currency’. These reserves can act as insurance if bad players try to manipulate the country’s domestic currency. These reserves also allow the country to manage their domestic currency exchange rates to make domestic goods more price-competitive in the international market. To maintain such reserves, countries buy dollar denominated US treasuries, which causes the dollar to appreciate. Unfortunately, a rising dollar makes U.S. goods relatively less competitive. Sadly, this is the curse of a reserve currency.

Two, high demand for treasuries encourages the U.S. government to borrow with abandon. As countries purchase U.S. debt, where does all this borrowed money go? At the risk of gross reductionism, it goes to feed the U.S. consumption beast. Broadly, U.S. consumer habits are funded by savings from developing countries that buy U.S. issued debt. Run long enough, this scheme tends to make the U.S. addicted (entitled?) to debt, making the periodic visit to the rehab almost predictable. First world problems, eh?

Devaluation

To quickly recap, holding the reserve currency gives the U.S. geopolitical power (e.g. through trade restrictions), though it also results in a perpetually appreciating dollar. This happens to enable other countries to improve their competitive strength while undermining investment and production in the U.S.

Apparently, you can’t have a competitive currency and be the reserve currency.

But what if we throw in periodic devaluation? Now, can you do both?

Specifically, can you:

1. Depreciate the dollar
2. Reduce US debt servicing costs
3. Maintain the US dollar as the reserve currency

Yes, we can. Sorry, Barack Obama!

#1 effectively delivers #2 by reducing the value and cost of servicing the current national debt.

#2 increases the chances of #3 by avoiding insolvency.

Bonus: A depreciated dollar makes U.S. production more competitive internationally, inviting capital investment. You like that?

But inflation? And tariffs? Omg, you’re killing me.

Tariffs

Generally, tariffs cause the national currency to appreciate. Specifically, U.S. tariffs would invite countries to re-baseline their currencies to make their exports attractive again. For example, during the trade war in 2018-19, a JP Morgan report recounts:

The PBOC allowed the CNY, which operates within a semi-fixed exchange rate regime, to devalue through controlled FX mechanisms. A weaker CNY partially cushioned the impact of tariffs by making Chinese exports relatively cheaper and preserving their competitiveness in the global market.

Just trade uncertainty can also lead to depreciation of national currencies. Not making this up. It’s in the same JP Morgan report. This would lead to the U.S. dollar appreciating. Wrong direction, you say?

While devaluating individual currencies can partially absorb inflation in the U.S., in the mid-to-long term these countries need to lower their domestic interest rates. This would reduce local production costs, making their exports attractive again. This would also effectively cap inflation in the U.S. Controlling inflation in the U.S. would in turn open the door to lower U.S. interest rates and lower cost of servicing the U.S. national debt. By the way, as individual national currencies depreciate, the dollar also has room to climb down from its overvalued state.

Are we back to our original series of goals or what?

Alternatively, companies from these countries can invest in building production capacity in the U.S.

The U.S. would benefit either way.

But why don’t countries just lower their domestic interest rates without all this drama? Lower interest rates (aka monetary easing) can stimulate growth, but can be risky. Among other things, it can lead to (1) foreign capital outflows, and (2) unwanted inflation, which would hurt the local population. No politician likes this part, especially if you’re a non-elected Chinese official.

When a country isn’t willing to naturally take on these risks, it can enter trade negotiations with the U.S. It’s definitely war time, and negotiations are good, right?

Dare we say that the U.S. would benefit either way?¹

Overall, I can’t defend the reciprocal tariff rate math by any means, but maybe that’s not the point. Could there still be some order behind the chaos? After all, yesterday’s executive order contains…

the modification authority, allowing President Trump to increase the tariff if trading partners retaliate or decrease the tariffs if trading partners take significant steps to remedy non-reciprocal trade arrangements and align with the United States on economic and national security matters.