Trump Tariff War: Dollar, Treasuries, 2026 Reality

This post was written on April 13, 2025, just as the tariff war began. In migrating it, I updated the figures and added at the end what actually happened afterward.

U.S. stocks are on a roller coaster because of Trump’s tariffs.

Just as he had warned, President Trump went ahead and declared a tariff war on the whole world, and as a result more than USD 6 trillion in market value was wiped off U.S. stocks in two days (The Wall Street Journal, April 2025).

Many people in Korea invest in U.S. stocks too, so these losses will hardly feel like someone else’s problem. That must be why, almost every day, people vent about U.S.-driven instability on blogs, Threads, and other social media, and try to predict the future.

Background of the tariff war: a chronic trade deficit

The background of Trump’s tariff-driven trade war is America’s chronic trade deficit.

The U.S. goods and services trade deficit in 2025 was USD 901.5 billion, almost the same as in 2024 (USD 903.5 billion). Looking at goods alone, the deficit actually grew 2.1% to USD 1,240.9 billion (U.S. Census Bureau and Bureau of Economic Analysis, preliminary figures released February 19, 2026; the June 2026 annual revision raised the 2025 deficit). In other words, despite all those tariffs, the size of the deficit did not shrink much.

Put simply, if you view the U.S. as one group, the U.S. is the side that keeps spending money, and other countries keep making gains by trading with it. For a more detailed explanation of the trade balance (the gains and losses from trade), see the post below.

What is the meaning of trade balance?

The under-discussed story 1: the dollar is the reserve currency

When talking about U.S. tariffs, there is a story so important it cannot be left out, yet it gets less attention than you’d expect: the U.S. dollar is the “reserve currency.”

For a reserve currency to play its role in the international economy, the issuing country’s trade deficit has to grow. Conversely, if the issuing country runs a trade surplus, the reserve currency doesn’t circulate in the market and the international economy cannot run smoothly. This is the Triffin dilemma.

According to the Triffin dilemma, for the dollar to be used smoothly in the international economy, the U.S. must run a trade deficit so that plenty of dollars are released into the market. That is because, from the world economy’s point of view, a U.S. trade surplus means dollars purely “flowing out” to the U.S.

In other words, the “steady trade surplus” that Trump’s America First agenda calls for could mean giving up the dollar’s status as the reserve currency. Giving up reserve-currency status is the same as giving up dollar hegemony. The U.S. will never accept that.

The under-discussed story 2: U.S. Treasuries and the bond vigilantes

Another part that’s easy to miss is “U.S. Treasuries.”

The U.S. government has never defaulted since its founding, and as the reserve-currency issuer it is extremely unlikely ever to do so. That’s why U.S. Treasury securities are held up as the textbook “risk-free asset.” Of course, by the nature of bonds, there is a risk of loss when rates rise, and selling before maturity can lock in a loss.

Wall Street has an expression, “bond vigilantes.” It describes investors dumping government bonds when a government pursues irresponsible economic policy, pushing up interest rates and thereby pressuring it to change course.

True to that expression, U.S. Treasury yields jumped within days of the tariff announcement. The rise itself was not large, but the problem is the size of the U.S. federal debt. As of October 1, 2026, U.S. federal debt stands at about USD 40.26 trillion (U.S. Treasury, Debt to the Penny). Even a small rise in rates significantly increases the interest burden on the U.S. government.

The April 2025 forecast

The Trump administration reversed the large country-by-country tariffs it had announced and declared a 10% across-the-board tariff with a 90-day pause. Compared with its early hard-line stance, when it denounced the whole world, it looks like a step back in the face of market shock.

I think this is a key point for predicting where policy goes from here. Ultimately, it is reasonable to predict that the Trump administration will move within limits that preserve the reserve-currency status America will never give up, and that do not cause the bond market to collapse.

Looking back in October 2026

Here is what has been confirmed since then.

• In 2025, Korea agreed to USD 350 billion in investment in the U.S. in exchange for cutting reciprocal and auto tariffs from 25% to 15% (Yonhap timeline, Sep 23, 2026)
• On February 20, 2026, the U.S. Supreme Court struck down the reciprocal tariffs, ruling that “IEEPA does not authorize the President to impose tariffs” (6–3; opinion and SCOTUSblog)
• The administration then moved through a Section 122 global tariff and switched to Section 301 tariffs from July 24, 2026. General imports from Korea face a total of 12.5% including the base tariff, and autos remain at 15% under Section 232 (Kyunghyang Shinmun, Oct 4, 2026). Note that the 12.5% does not apply to Section 232 items such as autos, steel and semiconductors.
• The U.S. side told the Korean government it will “keep the rate at the 15% level, in whatever form” (Aju Business Daily, Oct 1, 2026)

What exporters can actually do in the tariff era continues in U.S. Tariffs, Still Unsettled After a Year: How Exporters Should Respond.