World Finance in an Era of Trade Wars

The U.S. trade deficit in 2024 rose to a record $1.2 trillion. The White House attributes this alarming imbalance to asymmetries in trade barriers between the United States and its foreign economic partners. For instance, the U.S. collects a 2.5% tariff on passenger car imports, while the EU charges 10%, India 70% and China 15%. On top of that, non-tariff barriers hinder U.S. producers’ reciprocal access to foreign markets. These include such restrictions as licensing, technical standards, sanitary and phytosanitary measures, as well as inadequate protection of intellectual property rights, currency undervaluation, low wages and value-added taxes that stimulate exports to the U.S. while suppressing domestic consumption in other countries. According to White House data, the U.S. share of consumption to GDP is 68%, compared to 39% in China, 50% in Germany and 49% in South Korea. Meanwhile, manufacturing — which is responsible for 70% of all research and development (R&D) spending — represents just 11% of U.S. GDP. The inextricable link between innovation and manufacturing is underscored by the faster growth in annual R&D expenditures by American corporations in China compared to their spending dynamics in the U.S.

To address the situation and curb the widening trade deficit, President Donald Trump signed an executive order on April 2, 2025, introducing reciprocal differential tariff rates on imports from most U.S. trading partners. In particular, China was hit with a 34% tariff on top of the 20% imposed earlier. After China levied retaliatory duties, the U.S. raised its rate to 145%. In response, Beijing hiked tariffs on American goods to 125%. As of the time of writing, 75 countries that are willing to negotiate trade deals with Washington had their reciprocal tariffs paused until July 10, 2025.

It is important to stress that global trade imbalances stem from flaws in the current international monetary system based on the U.S. currency. The U.S. must run an ongoing trade deficit to supply the world with dollar liquidity — a problem first described in the 1960s and known as the Triffin dilemma. At the same time, the oversupply of international liquidity leads to the erosion of the dollar’s purchasing power as the world reference currency. Since the 1980s, the U.S. stock market began absorbing excess money supply to prevent consumer price inflation, which gave rise to a parallel financial system, detached from the real economy. Higher returns in finance disincentivized investment in manufacturing. Global trade imbalances have driven the over-financialization of the world economy, exacerbated by the deregulation of international capital flows and global monetary creation. The U.S. stock market now draws in capital from around the world, adding to global economic asymmetries. In this way, international trade is inextricably linked with international financial flows. This article will explore how a worsening trade war could impact world finance.

International trade cannot function effectively without the financial infrastructure that services it. The current policy of the White House reflects the U.S.’s natural ambition to retain its leadership in the world economy. As more countries transition to a new technological basis, the outcome of this policy will depend on the ability of U.S. financial institutions to rebuild the international financial architecture in a way that renews other countries’ dependency on U.S.-centric institutions. As warnings of “deglobalization” and “fragmentation” dominate the global information space, U.S. banks are actively investing in the acquisition of the world’s leading blockchain platforms — a key technology for 21st-century world finance. Other countries will face a fateful geopolitical choice: either passively wait for the U.S. to pursue its new global ambitions or establish independent financial architecture that does not rely on American technologies.

The U.S. trade deficit in 2024 rose to a record $1.2 trillion. The White House attributes this alarming imbalance to asymmetries in trade barriers between the United States and its foreign economic partners. For instance, the U.S. collects a 2.5% tariff on passenger car imports, while the EU charges 10%, India 70% and China 15%. On top of that, non-tariff barriers hinder U.S. producers’ reciprocal access to foreign markets. These include such restrictions as licensing, technical standards, sanitary and phytosanitary measures, as well as inadequate protection of intellectual property rights, currency undervaluation, low wages and value-added taxes that stimulate exports to the U.S. while suppressing domestic consumption in other countries. According to White House data, the U.S. share of consumption to GDP is 68%, compared to 39% in China, 50% in Germany and 49% in South Korea. Meanwhile, manufacturing — which is responsible for 70% of all research and development (R&D) spending — represents just 11% of U.S. GDP. The inextricable link between innovation and manufacturing is underscored by the faster growth in annual R&D expenditures by American corporations in China compared to their spending dynamics in the U.S.

To address the situation and curb the widening trade deficit, President Donald Trump signed an executive order on April 2, 2025, introducing reciprocal differential tariff rates on imports from most U.S. trading partners. In particular, China was hit with a 34% tariff on top of the 20% imposed earlier. After China levied retaliatory duties, the U.S. raised its rate to 145%. In response, Beijing hiked tariffs on American goods to 125%. As of the time of writing, 75 countries that are willing to negotiate trade deals with Washington had their reciprocal tariffs paused until July 10, 2025.

It is important to stress that global trade imbalances stem from flaws in the current international monetary system based on the U.S. currency. The U.S. must run an ongoing trade deficit to supply the world with dollar liquidity — a problem first described in the 1960s and known as the Triffin dilemma. At the same time, the oversupply of international liquidity leads to the erosion of the dollar’s purchasing power as the world reference currency. Since the 1980s, the U.S. stock market began absorbing excess money supply to prevent consumer price inflation, which gave rise to a parallel financial system, detached from the real economy. Higher returns in finance disincentivized investment in manufacturing. Global trade imbalances have driven the over-financialization of the world economy, exacerbated by the deregulation of international capital flows and global monetary creation. The U.S. stock market now draws in capital from around the world, adding to global economic asymmetries. In this way, international trade is inextricably linked with international financial flows. This article will explore how a worsening trade war could impact world finance.

Foreign exchange market

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The foreign exchange market is the largest segment of world finance, with daily transactions exceeding $7.5 trillion. Traditionally, this market has been dominated by the so-called “Big Four” currencies, namely, the U.S. dollar, the euro, the Japanese yen and the pound sterling. In 2022, the Chinese yuan overtook the Australian dollar to become the fifth most traded currency in the world. A trade war with the U.S. could potentially boost demand for the yuan in the foreign exchange market. China’s management of the yuan, which is allowed to trade within a band of 2% above or below the midpoint rate against the U.S. dollar, remains an obstacle for investors. In contrast, currencies like the South African rand, Thai baht and Russian ruble have a wider ±10% band, potentially making them more attractive for transactions with the yuan. Geographically, China accounts for 1.6% of the global foreign exchange market, compared to 38.1% for the UK and 19.4% for the U.S. One reason for London’s dominance in foreign exchange trading is its position on the prime meridian, which runs through the suburb of Greenwich and serves as the reference point for time zones. This allows London to conduct foreign currency transactions with major markets in Asia, Europe and the Americas at the same time. In this context, the extension of trading hours for Beijing’s interbank foreign exchange market to 20 hours per day (closing at 3 a.m. Beijing time) starting January 2023 offers global investors greater flexibility in managing yuan exchange rate risks.

International monetary system

Trade asymmetries between the U.S. and the rest of the world are just an individual case of a persistent mismatch between the contribution of countries of the global majority to global value creation and the role their currencies play in international financial intermediation. Between 1999 and 2023, developing countries increased their share in world GDP measured at purchasing power parity from 42.6% to 59.3%; their share in global exports of goods and services rose from 22.4% to 38.2%; and their share in global foreign direct investment inflows grew from 19.3% to 65.1%. Yet only the Chinese yuan — out of the currencies of 155 developing nations — is represented in international reserves, accounting for 2.17%, compared to the U.S. dollar’s 57.39%. In international payments, six to seven currencies of the global majority countries make up only 6.24% versus 49.12% for the U.S. dollar, while in foreign exchange trading their share stands at 15%, in contrast to the dollar’s 88%. These disproportions stem from the monopolization of the global financial infrastructure by U.S.-centric institutions, which hinder the advancement of the currencies of fast-growing economies in the global financial market. The international monetary system has essentially transformed from a link that was meant to facilitate the smooth flow of financial resources among all nations into a tool of U.S. leverage over its emerging-market competitors. The White House’s duties incentivize fast-growing economies to develop regional monetary and financial systems. It is increasingly evident that Trump’s new tariff policy will prompt central banks that manage liquidity to take a more cautious stance in shaping the composition of their official international foreign exchange reserves. If trade continues to shift toward geopolitically aligned countries, it could impact the choice of contract currencies and the diversification of foreign exchange reserves.

National monetary systems

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Tariff wars also tend to lead to higher prices of imported goods, which, in turn, dampens demand. This may encourage domestic producers to expand output. Restricted access to foreign markets would compel exporters to redirect their supply to the domestic market. Meanwhile, exporters’ reliance on global price benchmarks would drive up prices for the final consumer and weaken demand for domestically produced products. As a result, tax revenues would decline, and the budget deficit would widen. To close budget gaps, governments will likely turn to increased borrowing on the domestic market. Stimulating the issuance of public debt would require a reduction in the central bank’s key interest rate. In this context, weakening consumer demand and the resulting pressure on domestic prices create favorable conditions for a more accommodative monetary policy. The reorientation toward domestic demand should stimulate wage growth so as to increase household disposable income. Higher incomes can be achieved by reallocating financial resources from export-oriented industries to those focused on meeting domestic consumer needs.

Global debt market

The bond and bank loan markets are two core segments of the global credit market. In the fixed-income debt securities market, three major players — the U.S., the EU and China — accounted for 82.4% of all outstanding debt instruments in 2024. This market is clearly set to continue growing as debt securities remain a preferred means of preserving liquidity during crises. However, the share of international debt securities is expected to decline given that regional and national markets gain priority due to rising costs of global operations. The development of the international bank loan market will continue to shift away from traditional centers in the UK and the U.S. to emerging hubs in Europe and Asia as these regions embrace strategic autonomy aimed at reducing reliance on traditional financing through international financial centers of London and New York.

International settlement and payment relations

The escalation of the tariff war may give fresh momentum to the development of alternative payment systems. In response to global U.S. ambitions, emerging market economies have launched their own financial messaging services and card payment systems, including SPFS and Mir in Russia, CIPS and UnionPay in China, UPI in India, Pix in Brazil and SEPAM in Iran. In early 2024, the Buna payment system was launched, operated by the Arab Regional Payments Clearing and Settlement Organization. It is supported by Arab central banks and fully owned by the Arab Monetary Fund. Buna allows financial institutions and central banks in the region and beyond to send and receive payments in four Arab currencies, as well as in U.S. dollars and euros. While transaction volumes are still modest, interest among banks in using the system grows steadily.

In addition, China, Thailand, Vietnam, Cambodia and Laos are developing a payment system based on a standardized QR code format (KHQR Code). India, Singapore, Japan, Malaysia and South Korea are planning to join this cross-border payment system. The Central Bank of Nigeria is beginning to accept incoming transfers in its digital currency, eNaira, through an international money transfer operator.

BRICS countries, especially China and Russia, are already actively working to build an international financial architecture independent of the U.S. dollar, U.S.-oriented institutions such as the IMF and World Bank, or the SWIFT payment system, which is heavily influenced by G7 nations. A key component of this vision appears to be the development of interoperable central bank digital currency (CBDC) platforms.

International stock market

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The international equity market is more diversified than the global debt market. In terms of market capitalization, the leaders in the stock market in 2024 were the U.S., China, the EU, Japan, India, the UK and Hong Kong, which together accounted for 80.6% of global equity market capitalization. However, in broader processes of financial globalization — which reflects a country’s integration into the management of international financial flows — the U.S. remains the undisputed leader. As of the end of 2023, the world’s largest 500 asset management companies collectively managed USD 128 trillion, with 62% in equities and other collective investment instruments. Among the top 25 managers with assets exceeding $1 trillion, 19 were American and six were European. Over the past decade, the share of U.S. firms in global asset management has risen from 50.1% to 55.5% ($71 trillion) as a result of European and Japanese companies losing their market shares. Trump’s tariff policies are likely to further stimulate the stock market, given that it is largely driven by expectations of high returns and advances in innovative financial technologies, which are relatively detached from the real economy.

Conclusion

International trade cannot function effectively without the financial infrastructure that services it. The current policy of the White House reflects the U.S.’s natural ambition to retain its leadership in the world economy. As more countries transition to a new technological basis, the outcome of this policy will depend on the ability of U.S. financial institutions to rebuild the international financial architecture in a way that renews other countries’ dependency on U.S.-centric institutions. As warnings of “deglobalization” and “fragmentation” dominate the global information space, U.S. banks are actively investing in the acquisition of the world’s leading blockchain platforms — a key technology for 21st-century world finance. Other countries will face a fateful geopolitical choice: either passively wait for the U.S. to pursue its new global ambitions or establish independent financial architecture that does not rely on American technologies.