Sri Lanka should stop appeasing Trump

THE Triffin dilemma, identified by economist Robert Triffin, highlights the conflict faced by a country whose currency serves as the global reserve.

- By Charith Gunawardena

To meet international demand, it must supply large amounts of its currency, often through trade deficits, which can undermine confidence in its long-term value while conflicting with domestic economic priorities.

The supply of US dollars to the global economy is primarily achieved through international trade, requiring the US to run persistent trade deficits. This structural necessity reflects the Triffin dilemma—a conflict between domestic economic goals and the global demand for the dollar as the world's reserve currency.

Trump's policy failures

President Donald Trump’s tariff-driven trade policies reflect an inconsistent and irrational response to this paradox. By attempting to reduce trade deficits through protectionism, while maintaining the dollar’s dominance, his approach fails to reconcile the fundamental contradiction at the heart of the dilemma. A strong dollar undermines US manufacturing competitiveness, while a weaker dollar risks diminishing international confidence and investment.

Manufacturing jobs have not only shifted from the US to low-wage countries in the Global South, but also to high-income nations like Europe and Japan, both of which maintain significant trade surpluses with the United States.

Since the 1980s, the dollar’s share of global foreign exchange transactions has surged from under 50% to over 85%, reinforcing its reserve status—but at a cost. US national debt has ballooned from around $ 10 trillion in 2008 to over $ 36 trillion today. This debt accumulation, partly a result of supplying global dollar liquidity, has begun to erode investor confidence. For the first time, US Treasury bonds were recently downgraded, prompting significant capital outflows from the bond market.