The aftershocks of tariffs have not yet subsided, Trump's next trump card: financial nuclear bomb?

As President Trump's latest round of tariffs is still drying, various sectors are on high alert the leader who is accustomed to using strong-arm tactics to force trading partners into compliance may next resort to even sharper financial weapons. As the global financial hub and issuing country of the reserve currency, the United States holds multiple financial levers from credit card settlement to dollar supply, all of which could be utilized as tools for Trump to coerce other countries. Although using these unconventional weapons will come at a high cost to the United States itself, and may even backfire, observers warn that this extreme situation should not be ruled out. Especially against the backdrop of the U.S. approaching full employment leading to severe labor shortages, if the tariff policy fails to effectively reduce the global trade deficit, the risk of a financial war would significantly rise. Barry Eichengreen, a political economy professor at the University of California, Berkeley, said: "I can completely imagine Trump... becoming frustrated and then trying to implement some bizarre ideas, even if those ideas make no logical sense." Mar-a-Lago Accord An unspoken plan of the U.S. government is to reconfigure the trade landscape by devaluing the dollar, one way to achieve this goal is to seek cooperation from foreign central banks to jointly revalue their currencies. According to a paper by Stephen Moran, chair of the economic advisory committee selected by Trump, this could happen as part of the Mar-a-Lago Accord, which draws on the 1985 Plaza Accord that restricted the dollar's appreciation, and is also related to Trump's Mar-a-Lago estate in Florida. The paper, published in November last year, points out that the U.S. would use tariff threats and the lure of U.S. security support to persuade foreign countries to appreciate their currencies against the dollar, while also having other concessions. However, economists doubt whether such an agreement would receive support in Europe or China, as the current economic and political situation is vastly different from 40 years ago. Maurice Obstfeld, a senior fellow at the Peterson Institute for International Economics, said: "I think such a scenario is highly unlikely." Obstfeld believes that tariffs have already been implemented, making them no longer a viable threat, and the U.S.'s ambiguity on the Ukraine issue has weakened its commitment to global security. He added that central bank governors of the euro area, Japan, and the UK are unlikely to agree to an agreement that would force them to raise interest rates and risk an economic downturn. Even in Japan, despite the government's repeated interventions in the currency market in recent years to support the yen, memories of the 25-year deflation that just ended may dampen enthusiasm for a significant yen appreciation. Dollar Support Measures If an agreement cannot be reached, the Trump administration may lean towards a more aggressive strategy, such as using the dollar's status as the global trade, savings, and investment currency. Obstfeld and some regulatory agencies and central bank governors suggest that the authorities may threaten to cut off currency swaps between the Federal Reserve and foreign central banks a lifeline that provides dollar liquidity to the global economy in times of crisis. Disrupting this source of funding would disrupt the dollar credit market valued at trillions of dollars outside the U.S., with particularly severe impacts on banks in the UK, euro area, and Japan. Of course, these so-called swap lines are entirely controlled by the Federal Reserve, and Trump has never indicated he wants to control this powerful monetary institution. However, his recent personnel changes, including changes in regulatory agencies, have unsettled observers. "In a larger negotiation, this could become a nuclear threat, which is no longer unimaginable," said Spyros Andreopoulos, founder of the consulting firm Thin Ice Macroeconomics. He believes that over time, this move could weaken the dollar's position as a reliable global currency. Payment System Card The U.S. also holds another trump card its payment giants, including credit card companies Visa and Mastercard. While Japan and China have developed their own electronic payment systems to varying degrees, these two U.S. companies process two-thirds of the credit card payments in the euro area of 20 countries. Mobile app payments dominated by U.S. companies such as Apple Inc. and Alphabet Inc. Class C make up nearly one-tenth of retail payments. This shift puts Europeans at a disadvantage in a massive market worth over 113 trillion euros (124.7 trillion dollars in the first half of last year). If Visa and Mastercard were pressured to stop services under pressure, like they did to Russia shortly after the conflict in Ukraine, Europeans would have to resort to cash or cumbersome bank transfers to shop. Maria Demertzis, Chief Economist for the Confederation of European Businesses, said: "America's hostile posture is a major setback." The European Central Bank warned that this places Europe at risk of "economic pressure and coercion," and a digital euro could be a solution. However, plans to launch such a digital currency are mired in discussions and may take several years to implement. European officials are considering how to respond to Trump's actions, but are wary of further escalation. They could impose tariffs themselves or take more aggressive measures, such as restricting Bank of America Corp's access to the European Union. However, the risk of retaliation against European banks operating in America and the international influence of Wall Street would make it difficult to take such drastic measures. Nevertheless, some executives at International Bancshares Corporation expressed concerns about potential retaliatory threats from Europe in the coming months.