Tariffs, sanctions, and reserve currency
Who really pays, who really has leverage
What's actually happening with tariffs
A tariff is a tax on imports paid by the US importer. When Apple imports a $100 component from China and there's a 25% tariff, Apple pays $25 to US Customs — not China. Empirical research on the 2018-2019 US tariffs on China found ~95% of the cost was passed through to US consumers and importing firms. Chinese exporters cut prices very modestly. US producers raised prices to match the new (higher) competitor prices, capturing windfall margins.
Tariffs can be useful — protecting strategic industries, retaliating against unfair trade practices, building up domestic capacity. But "China pays" is essentially never true in practice. The American consumer pays.
How sanctions actually work
Sanctions are restrictions on financial or trade dealings with specific countries, companies, or individuals. The US has the most powerful sanctions regime because of two leverage points:
SWIFT access. Most international wire transfers run through SWIFT. The US has effective veto power over which banks can use SWIFT. Cutting a country off (Iran 2012, Russia 2022) effectively excludes them from international trade.
Dollar clearing. Most international trade settles in dollars. Dollar transactions clear through US banks. Treasury's OFAC can sanction any foreign person, blocking their access to the dollar system.
The downside: sanctions hurt ordinary people in target countries far more than they hurt the regimes. Iraqi sanctions in the 1990s killed hundreds of thousands of children. Iranian sanctions have crushed the middle class while the regime continues. Sanctions are a sledgehammer where surgical tools are usually needed.
The other downside: aggressive use accelerates de-dollarization. Russia's $300B in frozen reserves (2022) sent a message to every authoritarian regime: don't keep your reserves where the US can freeze them. China, Saudi Arabia, India have all increased non-dollar reserves and trade settlement since.
The dollar as reserve currency: how, and why it's slowly eroding
About 60% of global central bank reserves are held in dollars. About 50% of international trade is invoiced in dollars. About 90% of foreign exchange transactions involve the dollar on one side. This is "exorbitant privilege": the US can run persistent trade deficits, finance them by issuing debt the world wants to hold, and use the dollar as a foreign policy lever.
Why the dollar dominates: deepest financial markets, strongest legal property rights, network effects, military dominance backstopping it. Why it's eroding: sanctions weaponization → reserve diversification; China-Russia trade settling in yuan/ruble; BRICS+ payment system experiments; petroyuan; central bank gold purchases at historic highs; US fiscal trajectory making dollar look less risk-free.
The dollar's reserve share has dropped from ~72% in 2000 to ~58% today. Slow erosion, not collapse. Network effects are powerful — the dollar will likely remain dominant for decades, but its share will keep eroding.
What you just learned
Tariffs are taxes on Americans, not on foreigners. Sanctions are powerful but blunt and accelerate the dollar's decline by overuse. Reserve currency status is a generational asset built over 80 years and being eroded over decades. None of these tools is free; each one has consequences that show up months or years after the policy is announced.