Introduction

In the eight decades that the United States (US) has led the global economy, there have been a few instances that seemed like fundamental ruptures, such as the end of the Bretton Woods arrangement and the global financial crisis of 2008.^[1] While the overarching structures have remained, certain fundamental mechanisms of the US order shifted. Today, nearly a year into Donald Trump’s second term, there has been a noticeable reconfiguration of some of the contours of American domestic and international political economy.^[2] The question is whether these changes are temporary, or they represent another rupture in the US-centric global financial and economic system.

The US is a large and rich market that consumes far beyond its means by running massive current account deficits, and its relatively safe, deep, and diverse markets absorb a large proportion of global capital, making the dollar the primary global currency.^[a],[3] Indeed, no country in the postwar era has managed to reach middle-income status without access to the US market. Under Trump, as tariffs rise erratically, this US benevolence—of providing market access to the rest of the world—is being watered down, and most low-income countries can no longer rely on exporting to the US as a ladder to middle-income status.

Moreover, decades of uncontrolled government spending are now raising serious concerns about the US’s long-term debt sustainability.^[4] Relatedly, a political rift has ensued between the executive branch and the Federal Reserve Board  regarding the primary purpose of monetary policy, which has moved beyond its dual mandate to now include keeping debt-interest payments in check.

While it might be flawed to think that the US-led order is coming to an end, there are signs that some aspects of it are changing in ways that could outlast the current presidency. After all, in the postwar era, the US assembled a global economic empire, which was as strategic as it was commercial. Its continued strategic relevance would require other countries to buy into this system.

The Survival of the Most Productive

In 2023, US imports (US$3 trillion) comprised 13.2 percent of the US$22.6-trillion value of global trade—making it the leading importer in the world.^[5] The average sixfold rise in US tariffs has not dampened consumer spending.^[6] To be sure, goods with higher price elasticities will see a reduction in imports. However, the US has no real manufacturing capacities for most of the commodities, whether final or intermediate, that its households and firms consume. Moreover, it is unlikely that those industries will be re-shored given relatively high and uncompetitive American wages.^[7]

Going forward, considering the mammoth size of the US market, coupled with the absence of a domestic manufacturing sector, the country is likely to continue importing in larger numbers for the foreseeable future. Given the scale of Trump’s tariffs, only the most productive firms will be able to export to the US, resulting in a massive reallocation effect^[b] among manufacturing firms—both within and among countries. Smaller manufacturing players could lose their production share to larger firms that have the resources to either absorb a portion of the tariff costs or undertake costly transhipment via low-tariff economies.^[8]

For instance, some of the largest manufacturing firms are Chinese-owned. As geopolitical tensions have spilled over to supply chains, in an effort to shock-proof their supply chains, some of these Chinese firms have created hub-and-spoke style satellite supply chains across Asia. These can now be scaled up or down according to geopolitical requirements. Smaller firms will not have the capacity to engage in such fundamental supply chain restructuring.^[9]

Meanwhile, the losers from this episode will be geographically concentrated around labour-intensive exporting clusters, impacting their local economies. For instance, India’s jewellery manufacturers in Gujarat or the apparel firms in Tamil Nadu that do not have waivers from Trump tariffs will experience concentrated losses. This will have real impact on local economies and people’s livelihoods in the respective industrial clusters.^[10],[11]

The US-led global economic empire provided smaller firms across the world a chance to export to the US and unlock growth and prosperity in their regions. This aspirational element was one of the core ‘liberal’ tenets of the US-led economic order, which will now get increasingly watered-down.

The Withering Away of the Development Dream

Whether it was through the General System of Preferences (GSP) or the African Growth and Opportunity Act (AGOA), the US has extended non-reciprocal market access to relatively poorer countries.^[12],[13] Today, the rise in US protectionist barriers is likely to have disastrous consequences for the poorest countries in the Global South. These countries and their mostly labour-intensive sectors will take the biggest hit, likely to experience adverse effects on export incomes, jobs, and government revenues. While redirecting exports to other markets is possible, at least in theory, there is currently no real substitute for the US market, and for smaller exporters, penetrating new ones is a costly exercise.^[14] Trump’s tariffs, coupled with a steep decline in development aid and funding, will produce some brutal outcomes for parts of the Global South.^[15]

In the postwar order, the non-reciprocal access to Western markets was a quid pro quo—it essentially amounted to developing and least developed countries buying into the US-led order. For the US, extending non-reciprocal access bought strategic compliance or, at the very least, strategic ambiguity from the Global South. In the near future, some of these economies might be compelled to rethink their developmental models—often entirely decoupled from the US economic sphere. The US risks becoming a long-term political fault line in these countries, especially at a time when it already faces an almost existential strategic competition from China across the same regions.

If the largest (mostly multinational) firms emerge as the primary winners—or more realistically, the better-off losers from the US’s tariff escalation, does it then warrant a larger inspection into how this episode might shift the underlying political economy of global trade?

Over the past two decades, the key theme in trade politics literature has been related to the effects of firm heterogeneity.^[16] There is reasonable evidence to support three conclusions. First, there is a lot of heterogeneity among firms, which is connected to their productivity levels.^[17] The most productive firms are those involved in global production networks, followed by those that actively export, only import, and neither import nor export, respectively. Second, their productivity level determines their political influence, as the most productive firms have the resources required to lobby governments.^[18] Third, the rapid proliferation of preferential trade agreements, especially between north-north and north-south countries, over the past two and a half decades essentially reflected the interests of the multinational firms running the global value chains.^[19]

At some point, trade agreements stopped being about trade policy and became more about ways to incentivise and protect foreign direct investment (FDI) and harmonise rules among the countries participating in these supply chains. Unlike the simple idea of power, structural power—a concept by the renowned political economist Susan Strange—reflects power over the underlying structure of the international system.^[20] The largest and most productive firms amassed an enormous amount of structural power that they managed to hack their own and foreign governments’ trade policy.^[21]

The rise of Trump and the larger shift toward supply chain resilience across the world have shifted some of this power back to the state and away from these big firms. This is an important shift, especially since the lifting of capital controls in the post-Bretton Woods era, which saw bargaining power change hands from organised labour to capitalists.

However, a more nuanced reading suggests a broader proliferation of state capitalism and the melding of corporate and state power. The US government charging a strategic fee from NVIDIA^[22] and AMD to allow them to sell chips to China or taking up a stake in Intel are instances of how state capitalism is penetrating even a country like the US, which for decades has been a symbol of private sector-led success.^[23] A firm like Taiwan’s TSMC is another example of how such structural power is getting tied to national security. Its status as the node of global supply chains for advanced chips is seen as an instrument of protection vis-à-vis China.^[24]

Meanwhile, in China—the mecca of state capitalism—the power enjoyed by sections of the private manufacturing sector is unmatched. It has reached the scale and efficiency levels that it now essentially has a monopoly over global production networks. This structural power is even more potent in some of the leading renewable energy sectors, such as solar, electric vehicles, and batteries.^[25]

The bottom-line is that specific firms continue to enjoy vast amounts of structural power, but they can now wield that power only as long as it adheres to the larger strategic orientation of the state. In turn, this kind of corporate power is weaponised by the state to meet strategic objectives. This does fundamentally alter the degree of commercial freedom enjoyed by firms. Its economic feasibility test will now have to pass the geopolitical yardstick, which specific company boards will have no right to determine.

The Rules-Based Order Without the U.S.

Long before Trump initiated the trade war against China in his first term, his onslaught on the global trading order began by blocking the appointment of judges to the World Trade Organization’s (WTO) Appellate Body (AB), which is essentially the supreme court of the WTO’s dispute resolution mechanism. Dispute resolution had been the cornerstone of the WTO’s existence and regulated disputes among member states. It did so without having any real enforcement powers but by leveraging inter-state policies and diplomacy.^[26] Thus, most practitioners and analysts had predicted the demise of the global trading system that managed to uphold the postwar trading order and help avoid any race-to-the-bottom tariff wars.^[27]

To the surprise of most pessimists,^[28] many countries saw the value in that older dispute resolution system, and in 2020, 47 WTO members came together to notify the creation of the Multi-Party Interim Appeal Arbitration Arrangement (MPIA).^[29] The MPIA is essentially a voluntary alternative to the WTO’s AB and now features 57 members, covering over 57 percent of global trade. In July 2025,  MPIA concluded a high-profile intellectual property dispute between China and the EU, and the verdict was accepted by both parties—underscoring a functional multilateral dispute resolution mechanism.^[30]

It is hard to miss that a new multilateral trading rules-based order is emerging without the US. With an increasing number of disputes getting settled at the WTO’s panel and MPIA stages, a new body of trade law precedents will pile up that the US will perhaps refuse to adhere to. The very architect of global trade law—in its modern avatar—will be absent from its future renditions.

Moreover, while the US is unlikely to negotiate any deep trade agreements for the foreseeable future, the rest of the world has continued to do so. Even a traditional sceptic like India has jumped on the bandwagon and negotiated a deep trade agreement with the UK—the first of its kind for New Delhi.^[31] For most of the world (barring some like India), these deals are no longer about tariff reductions, which have reduced significantly over the past three decades.^[c] Rather, they are about rule-making and harmonisation. Whether it was the erstwhile Trans-Pacific Partnership or the USMCA, the US has been a leader in the game of rule-making. However, this is unlikely to be the case in the future.

The Role of the Federal Reserve Board

As some crucial characteristics of the US global economic order gradually evolve, it is reasonable to ask if any of these are critical enough to alter US structural power and the nature of the international economic and financial order it built after the Second World War.

At face value, even this question might seem unreasonable. While the aforementioned developments are crucial, they do not comprise the core of the US financial empire. Moreover, the US economy has shown remarkable resilience since the COVID-19 pandemic—unlike any other G7 economy.^[32] While its average weighted tariffs have risen sharply over the past few months, some important waivers do exist, and the US and China have not entirely decoupled. Even if an inflationary spell sets in, it is likely that the bond markets will rein in Trump.^[33]

The role of the dollar in the global economy has arguably been the characteristic feature of the US order. As long as the Fed continues to enjoy de-facto independence—or at least the markets continue to believe it does—the status of the dollar in the global economy is unlikely to change. Indeed, there are no substantive alternatives. Notwithstanding its manufacturing prowess, China is unwilling to deregulate the Renminbi and facilitate the kind of capital, money, and other markets necessary to internationalise the currency.^[34] Thus, over time, it might dilute dollar dominance but not replace it. The Euro is more likely to play some marginal hedging role as opposed to outright substitution. Finally, cryptocurrencies like Stablecoins will perhaps extend dollar centrality more than challenge it.^[35]

Yet, the Dollar’s larger and more existential challenge comes from within. The White House onslaught on the Fed is enormous.^[36] President Trump and his ministers have consistently attacked Fed Chair Jeremy Powell and threatened to fire him if the central bank did not lower interest rates.^[37] His government tried to officially sack a member of the Federal Open Market Committee (FOMC), Lisa Cook, but its decision was blocked by the judiciary.^[38]

A factor motivating these attacks is the US government’s desire for lower interest rates, which is essential for debt sustainability. Decades of debt, piled up over the past four decades during the low-interest rate environment, are now causing a slight panic in some financial corners.^[39] Owing to a host of factors, there is a rising perception that the US economy will transition away from the era of low-interest rates, which will impact its interest payments and, subsequently, borrowing costs.^[40] Trump would like a Federal Reserve Board that provides him with those low rates.

The issue is that central bank credibility is hard-earned, but it can vanish into thin air. The Fed won this under Former Chair Paul Volcker (in the late-‘70s and early-‘80s), who hiked the prime rate to over 20 percent to reduce inflation.^[41] Since the rise of the modern avatar of the Federal Reserve Board under Volcker, the global political economy has been built around treating Fed independence as sacrosanct. The next few months will determine the long-term status of the Fed as the quintessential global central bank.

The question of Fed independence inevitably results in rising concerns about the status of US treasuries as the safest assets in the global financial system. Typically, in phases of financial and economic turbulence or crises—even when they stem from the US—global flows moved toward US treasuries.^[d] Over the past few months, this correlation seems to have broken down, suggesting that, at least temporarily, there are concerns about the status of these US assets in the global financial system.^[42] With the country’s debt unlikely to come down—without some hard political choices and bargains—and the likelihood of an emerging higher interest rate era, the question is, can the US continue to roll over its debt without paying all that much?

As of now, key international stakeholders have struggled to imagine a world where US treasuries do not enjoy paramount status and the central banking across the world is built around dollar reserves. The question is whether the US government will want to tempt its fate.

The Weak-Angry Labour

Beyond these external challenges, the domestic political economy of the US presents the most potent long-term challenge to the country’s global financial and economic system. At the end of the day, it was the large parts of de-industrialised America that argued that globalisation wracked their societies and a non-establishment candidate like Trump was necessary to retrench the US’s global role.

Macro hedge-fund Manager and Political Economist duo, Eric Lonergan and Mark Blyth, in their book ‘Angrynomics’, take a slightly longer view. They demonstrate remarkably how, across the three iterations of capitalism in the US, power has swung between workers and capital owners.^[43] Through the second half of the 19^th century and until the Great Depression in the 1930s, the capitalists had complete control over their sovereign’s monetary policy and the state was essentially absent. The Great Depression forced a reset, and through the New Deal programme, the US saw the rise of the welfare state and power tilted toward labour. The system lasted for about four decades and then broke down.

With the end of Bretton Woods in 1971 came the lifting of capital controls, wholesale deregulation, and the offshoring revolution—which shifted the power back to the capitalists. According to Lonergan and Blyth, this system had begun to break down, and the 2008 recession should have triggered another systemic reset. Instead, the system just saw some minor tweaks and eventually resulted in the rise of populism—channelling all the working-class angst.

If the recent round of US tariffs remains and results in a considerable spike in inflation, their distributional consequences will overwhelmingly affect the working classes. Questions are being asked about whether the majority of the American population are already in recession.^[44] Moreover, if a larger inflation spiral sets in, altering medium-term expectations, it will likely fuel more public anger. The median US labour market is dominated by mid-wage and gig economy jobs, and this will further worsen their balance sheet and bargaining power.

As Karl Polanyi contends, treating labour like a commodity will eventually result in a backlash against a market system.^[45] For decades, American workers have been on the losing side of both the American economic system and the global order it dominates. If they chose to, they could pressure the political class to fundamentally end that order—something that Lonergan and Blyth think should have happened after the Great Recession. However, the US marched on, which eventually resulted in a populist takeover of its politics.

Today the question is whether the US labour market of 2025 has become too fragmented and polarised to still wield meaningful influence. Parts of it might come together to elect populists, but culture wars will perhaps continue to fragment it to allow any broad-based movement necessary to demand a system reset. For now, those divisions should be cheered on by the benefactors of the global financial system.

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Srijan Shukla is Associate Fellow, Centre for Economy and Growth Programme and Forums, ORF.

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All views expressed in this publication are solely those of the author, and do not represent the Observer Research Foundation, either in its entirety or its officials and personnel.

Endnotes

^[a] The US accounts for a significant portion of global demand. Consequently, while US consumers and the government absorb a large part of global excess demand, the rest of the world funds this excess expenditure by putting their savings into the US government bonds or its financial markets.

^[b] The most productive manufacturing firms in the global value chains are typically the largest multinationals. This scale also coincides with more liquidity and profit margins, which allows them to absorb a rise in fixed costs due to higher tariffs. In turn, this results in reallocation of production from smaller to larger (more productive firms).

^[c] See Song et al., How FDI Reshapes Host Markets’ Trade Profile and Politics, for an overview on how deep trade agreements are no longer about tariff and non-tariff barriers and reflect the priorities of multinational firms, which aim to harmonise standards across the set of countries they operate in.

^[d] For more on how this dynamic might be changing, please refer to Posen’s article, “The New Economic Geography” in the Foreign Affairs.

^[1] J. Bradford DeLong, Slouching Towards Utopia: An Economic History of the Twentieth Century (New York: Basic Books, 2022).

^[2] Adam S. Posen, “The New Economic Geography,” Foreign Affairs, August 19, 2025.

^[3] Kenneth S. Rogoff, Our Dollar, Your Problem: An Insider’s View of Seven Turbulent Decades of Global Finance, and the Road Ahead (New Haven, CT: Yale University Press, 2025).

^[4] Rogoff, Our Dollar, Your Problem

^[5] US trade data from 2023 can be accessed on the website of the Observatory of Economic Complexity (OEC): https://oec.world/en/profile/country/usa.

^[6] J.P. Morgan Insights – Global Research, “US Tariffs”, https://www.jpmorgan.com/insights/global-research/current-events/us-tariffs.

^[7] Colin Grabow, “The Reality of American ‘Deindustrialization’,” Cato Institute, October 24, 2023, https://www.cato.org/publications/reality-american-deindustrialization#conclusion.

^[8] This report by William Alan Reinsch for CSIS, titled, “A Primer on Transshipment”, is a good primer on transshipment: https://www.csis.org/analysis/primer-transshipment.

^[9] Bloomberg Audio Studios: Odd Lots Podcast: This Is How Chinese Manufacturers Are Countering Trump’s Trade War,” July 28, 2025, https://www.bloomberg.com/news/audio/2025-07-28/odd-lots-how-chinese-firms-are-reacting-to-us-tariffs-podcast.

^[10] Bansari Mayur Kamdar and Rajendra Jadhav, “Trump Tariffs: Surat Diamond Traders Face Existential Crisis as Export Demand Hits 20-Year Low,” Mint, August 26, 2025, https://www.livemint.com/economy/surat-diamond-bourse-20-year-low-donald-trump-tariffs-low-export-demand-china-traders-move-business-away-india-economy-11756198466119.html.

^[11] “Trump Tariff Effect: Tamil Nadu’s Apparel Hubs Are Unravelling at the Seams,” The Hindu, September 5, 2025, https://www.thehindu.com/business/Economy/trump-tariff-effect-tamil-nadus-apparel-hubs-are-unravelling-at-the-seams/article70016800.ece.

^[12] For more on how GSP helped developing countries, see, “The Generalized System of Preferences: How Much Does It Matter for Developing Countries?” by the United Nations Conference on Trade and Development: https://unctad.org/publication/generalized-system-preferences-how-much-does-it-matter-developing-countries.

^[13] JJ Enoch, “How Africa Can Shape Its Trade Future Beyond AGOA,” World Economic Forum, August 6, 2025, https://www.weforum.org/stories/2025/08/how-africa-can-shape-its-trade-future-beyond-agoa/.

^[14] Matthew Plouffe, “Liberalization for Sale: Heterogeneous Firms and Lobbying Over FTAs,” SSRN, 2017, https://ssrn.com/abstract=2105262.

^[15] See this report by Organisation for Economic Co-operation and Development, “Cuts in Official Development Assistance: Full Report, https://www.oecd.org/en/publications/2025/06/cuts-in-official-development-assistance_e161f0c5/full-report.html.

^[16] Leonardo Baccini, “The Economics and Politics of Preferential Trade Agreements,” Annual Review of Political Science 22 (2019): 75-92, https://doi.org/10.1146/annurev-polisci-050317-070708.

^[17] Marc J. Melitz and Stephen J. Redding, “Labour Allocation,” in the Handbook of International Economics, vol. 4, ed. Gita Gopinath, Elhanan Helpman, and Kenneth Rogoff (Amsterdam: North-Holland, 2014), https://www.sciencedirect.com/science/article/abs/pii/B978044454314100001X.

^[18] Plouffe, “Liberalization for Sale”.

^[19] In Song Kim, Steven Liao, and Sayumi Miyano, “How FDI Reshapes Host Markets’ Trade Profile and Politics,” American Journal of Political Science (2025), https://doi.org/10.1111/ajps.70010.

^[20] Susan Strange, States and Markets (London: Bloomsbury Academic, 2015).

^[21] Strange, States and Markets

^[22] “Nvidia and AMD to Pay 15 % of Chinese Revenues to US Government,” BBC News, August 14, 2025, https://www.bbc.com/news/articles/cvgvvnx8y19o.

^[23] For details of the deal, refer to this press release by Intel Corporation, “Intel and Trump Administration Reach Historic Agreement to Accelerate American Technology and Manufacturing Leadership”, August 22, 2025, https://newsroom.intel.com/corporate/intel-and-trump-administration-reach-historic-agreement.

^[24] Srijan Shukla, “Revisiting Structural Power in the Global Economy: It’s Multinationals, Not States,” Journal of International Affairs, Vol. 75, No. 1, (2022), https://www.jstor.org/stable/27203129.

^[25] Rhodium Group, Was Made in China 2025 Successful?, May 5, 2025, https://rhg.com/research/was-made-in-china-2025-successful/.

^[26] M. Busch & E. Reinhardt, “Bargaining in the Shadow of the Law: Early Settlement in GATT/WTO Disputes,” Fordham International Law Journal (2002), https://ir.lawnet.fordham.edu/ilj/vol24/iss1/9/.

^[27] Srijan Shukla, “Political Underpinnings of WTO’s Partial Resilience in the Post-Trump Era,” Yale Journal of International Affairs (2022), https://www.yalejournal.org/publications/political-underpinnings-of-wtos-partial-resilience-in-the-post-trump-era.

^[28] Shukla, “Political Underpinnings of the WTO’s Partial Resilience”

^[29] Please see this press update from European Commission – Trade Policy News, “Multilateral Trading Order Strengthened as UK Joins Interim Appeals System”, June 26, 2025, https://policy.trade.ec.europa.eu/news/multilateral-trading-order-strengthened-uk-joins-interim-appeals-system-2025-06-26_en.

^[30] For more details on the EU-China dispute resolution case by MPIA, see: https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds611_e.htm.

^[31] As Amitendu Palit has described in this column in Financial Express, how the India-UK FTA is an “ivy-league” deal and India’s first venture into deep trade agreements, https://www.wto.org/english/tratop_e/dispu_e/cases_e/ds611_e.htm.

^[32] Federal Reserve Bank of Kansas City, Resilience Tested: A Cautious Outlook for the U.S. Economy, May 29, 2025, https://www.kansascityfed.org/documents/10869/2025_Kauffman_May_Economic_Outlook.pdf.

^[33] European Central Bank, The ECB Blog: Euro Area Benefits from Easing Services Trade, August 14, 2025, https://www.ecb.europa.eu/press/blog/date/2025/html/ecb.blog20250814~86d5171bf2.en.html.

^[34] European Central Bank, The International Role of the Euro, June 2023, Frankfurt: European Central Bank, https://www.ecb.europa.eu/press/other-publications/ire/focus/html/ecb.irebox202306_01~d3f9e5dbdf.en.html.

^[35] For more on how stablecoins are likely to further entrench dollar dominance, please refer to this article in Bloomberg: https://www.bloomberg.com/news/articles/2025-10-07/stablecoin-adoption-poised-to-drive-dollar-buying-jpmorgan-says.

^[36] Jessie Yin, The Fed Struggles to Balance Trump’s Demands with Economic Reality, Atlantic Council (Econographics), September 15, 2025, https://www.atlanticcouncil.org/blogs/econographics/the-fed-struggles-to-balance-trumps-demands-with-economic-reality/.

^[37] For more on President Trump’s attacks on the independence of the Federal Reserve and its Chair, Jeremy Powell, please refer to this article in the New Yorker by John Cassidy, https://www.newyorker.com/news/the-financial-page/donald-trumps-war-with-jerome-powell-and-the-fed-is-far-from-over.

^[38] Please refer to this feature by the New York Times on an overview of how the Fed has come under intense attacks by the White House, https://www.nytimes.com/2025/09/15/business/federal-reserve-trump-independence.html.

^[39] Rogoff, Our Dollar, Your Problem

^[40] Rogoff, Our Dollar, Your Problem

^[41] Alan S. Blinder, A Monetary and Fiscal History of the United States, 1961–2021 (Princeton: Princeton University Press, 2022).

^[42] Posen, “The New Economic Geography”

^[43] Eric Lonergan and Mark Blyth, Angrynomics (London: Agenda Publishing, 2020).

^[44] As Tej Parekh noted in the Financial Times in the column, “Is the US Already in a Recession?” on September 7, 2025, https://www.ft.com/content/e9be3e3f-2efe-42f7-b2d2-8ab3efea27a8.

^[45] Karl Polanyi, The Great Transformation: The Political and Economic Origins of Our Time (New York: Farrar & Rinehart, 1944).

• Economics and Finance
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