Author: Charles Joseph, Director of Sales, B.A. Economics, Michigan State University
Most manufacturers are familiar with the direct effects of tariffs, those government-imposed taxes on imported goods that can disrupt supply chains and inflate costs. But there’s a less obvious, yet equally critical, factor reshaping the economics of global sourcing: the strength of the U.S. dollar. While this might sound like a concern reserved for currency traders or financial analysts, the dollar’s value plays a critical role in how tariffs affect your bottom line, and it may be the nudge manufacturers need to reconsider offshore production altogether.
When the dollar is strong, American buyers get more for their money overseas. Imports priced in weaker foreign currencies become cheaper, even with tariffs applied. A 25 percent tariff might sound significant, but if the base cost of that imported product has dropped due to favorable exchange rates, the net impact is reduced. In contrast, a weaker dollar has the opposite effect. As the dollar declines, the cost of imports rises before tariffs even enter the equation. That same $1,000 part could now cost $1,100 or more, and with a 25 percent tariff on top, it becomes a serious hit to profitability. For companies relying on foreign-sourced components, this creates financial exposure that’s mainly out of their control.
And here’s the key concern: the U.S. dollar has been weakening. Over the past year, it has fallen against major currencies like the euro, yen, and yuan. The DXY index, which tracks the dollar against a basket of global currencies, has shown a steady downward trend. As a result, the price of imported materials and parts has risen significantly for American manufacturers, amplifying the effects of tariffs and undermining the once-clear cost advantage of offshore production. What was already a fragile global supply chain has become even riskier due to forces beyond your grasp, such as inflation, interest rate shifts, and geopolitical instability.
Another factor accelerating the dollar’s decline — and, by extension, amplifying the effects of tariffs — is the growing willingness of foreign governments to reduce their holdings of U.S. Treasury bonds. These bonds, often used as reserves by central banks, are not just financial assets but also geopolitical instruments. When countries sell off U.S. Treasuries, the increased supply can drive bond prices down and yields up. But more importantly, for manufacturers, these actions typically weaken the U.S. dollar.
Several countries hold large quantities of U.S. government debt. As of early 2025, Japan remains the largest holder with over $1.1 trillion in Treasuries, followed by China with around $760 billion. Other significant holders include the United Kingdom, Luxembourg, Canada, Switzerland, Ireland, Belgium, and Taiwan — each with hundreds of billions in holdings. Smaller countries and financial centers like the Cayman Islands, Singapore, Brazil, Saudi Arabia, Germany, and India hold sizable amounts. While these nations buy Treasuries for stability and liquidity, there has been a growing trend — especially among China and other BRICS countries — to diversify away from the U.S. dollar.
When these governments begin reducing their Treasury positions, they often convert the proceeds into their own currencies or alternative assets like euros or gold. This behavior weakens global demand for the dollar and exerts downward pressure on its value. For American manufacturers, this matters in a big way. A weaker dollar makes imports more expensive before tariffs are even applied, turning what might have been a modest cost increase into a substantial profit hit. It also means that offshore production strategies are now exposed to not just economic cycles, but also the strategic decisions of foreign central banks — a risk few companies can afford to ignore
There’s a compelling case for reshoring in light of this growing uncertainty. By bringing production back to the U.S., manufacturers gain greater control and predictability over their costs. Volatile exchange rates or shifting trade policies don’t impact domestic supply chains. Pricing is stable, protection from future tariff changes, and a more resilient operational model is especially critical in an era defined by pandemics, port delays, and international tension. And let’s not forget the marketing advantage: consumers are placing more value on American-made products, making reshoring not just a cost-management strategy but a brand-building opportunity.
Bottom line: offshore production savings rely on variables that are anything but stable. Tariffs aren’t a fixed line item but are deeply influenced by currency strength. A strong dollar softens their blow, while a weak one magnifies it. With the dollar declining, relying on offshore sourcing is a game of diminishing returns. Reshoring offers stability, strategic control, and long-term value. In today’s unpredictable landscape, domestic manufacturing isn’t just a safer option—it may be your smartest investment.