20  The Global Implications of U.S. Economic Retrenchment

Over the seven decades following World War II, the United States assumed an unparalleled hegemonic role in shaping and sustaining a liberal international economic order (Ikenberry, 2018). This order was underpinned by U.S.-provided global public goods – open markets, a stable monetary system, support for multilateral institutions, and crisis management mechanisms – which underwrote worldwide prosperity and stability. The U.S. acted as the de facto guarantor of this order, often described as the “first citizen” of the system, anchoring alliances and stabilizing the world economy (Ikenberry, 2018). However, in recent years the United States has shown signs of retrenchment, retreating from its traditional leadership role in the international political economy. This chapter examines the global implications of U.S. economic retrenchment through the lens of International Political Economy (IPE), maintaining a formal academic tone and drawing on leading scholarship. It explores how U.S. withdrawal from hegemonic responsibilities – from providing international economic “insurance” to refraining from coercive uses of interdependence – is reshaping the world. The analysis considers impacts on American allies, emerging market economies, and the global financial system, and assesses prospects for a more fragmented economic order.

U.S. economic retrenchment refers to a deliberate pullback from the country’s post-1945 role of actively managing and supporting the liberal economic order. Symptoms of this retrenchment include a reduced commitment to multilateral trade agreements, skepticism toward global institutions, and an “America First” approach that prioritizes short-term national gains over the maintenance of international economic stability (Ikenberry, 2018). The election of President Donald Trump – who was openly hostile to many pillars of liberal internationalism, from free trade to multilateral cooperation (Ikenberry, 2018) – brought this issue to the fore, but underlying currents of U.S. ambivalence toward global economic leadership predate and outlast his administration. The consequences of U.S. retrenchment are far-reaching. International Political Economy scholars note that when a leading state fails to supply crucial public goods, the stability and openness of the international economy can be jeopardized (Kindleberger, 1973). Indeed, Kindleberger’s (1973) seminal analysis of the 1930s Depression argued that the absence of a hegemonic stabilizer was a key factor in the collapse of the world economy. By contrast, after 1945 the U.S. took on that stabilizing role – promoting free trade, providing liquidity in crises, and building institutions to manage the global system (Lake, Martin, & Risse, 2021). Now, as the U.S. pulls back, questions arise as to whether other actors or arrangements can fill the void, or whether the world economy will slide into fragmentation and instability.

This chapter proceeds by analyzing the erosion of U.S. hegemonic economic leadership and the concept of international economic insurance that the U.S. has historically provided. It then examines the rise of “weaponized interdependence” – the increasing use of economic networks for strategic gain – as a feature of the current era, with the U.S. exploiting and others responding to these tactics. Subsequently, the chapter explores the implications of U.S. retrenchment for various stakeholders: long-standing U.S. allies, emerging market economies, and the architecture of global finance. Finally, it considers the prospects for a fragmented economic order in which no single hegemon provides cohesive leadership, weighing optimistic versus pessimistic scenarios for global governance. Throughout, the analysis is grounded in International Political Economy theory and supported by contemporary academic literature (e.g. International Organization, World Politics, International Security, International Affairs, Review of International Political Economy), using empirical examples and scholarly insights to illustrate key points. Inline citations are provided in APA style, and an APA-formatted References section concludes the chapter.

20.1 From Hegemonic Leadership to the Withdrawal of Global Public Goods

In the latter half of the 20th century, U.S. hegemony was often associated with the provision of global economic public goods. According to hegemonic stability theory, a dominant power can stabilize the international economy by underwriting open markets, providing a reserve currency, acting as lender of last resort during crises, and upholding the rules of the game (Kindleberger, 1973; Keohane, 1984). The United States fulfilled this role by championing trade liberalization through the General Agreement on Tariffs and Trade (and later the World Trade Organization), by supporting the International Monetary Fund (IMF) and World Bank, and by ensuring liquidity in global financial markets when needed (Drezner, 2014). U.S. military power and alliance commitments further reinforced economic stability by providing security in key regions, thereby enabling a predictable environment for commerce and investment (Ikenberry, 2018). In essence, the Pax Americana created conditions in which globalization flourished under U.S. stewardship.

However, we have entered a period in which the United States is stepping back from some of these hegemonic responsibilities. This retreat has been evidenced in several ways. One manifestation is the declining U.S. enthusiasm for multilateral trade agreements: for example, the U.S. withdrawal from the Trans-Pacific Partnership (TPP) in 2017 signaled a reluctance to continue bearing the costs of sustaining a global free trade architecture. Another sign is the U.S. ambivalence toward the WTO dispute settlement system – notably, the U.S. refusal to approve new appellate judges, which paralyzed the WTO’s enforcement mechanism in the late 2010s. Additionally, the U.S. has scaled down its commitment to other global economic initiatives, such as cooperative climate finance and development programs, as seen in threats to reduce funding for institutions like the World Bank and even a temporary pull-out from the Paris Climate Accord. These actions collectively suggest a retrenchment from the notion that the U.S. will consistently provide global public goods for all. Instead, U.S. policy has tilted toward a narrower definition of national interest, emphasizing bilateralism and transactional arrangements over the broad, system-maintaining leadership it once offered (Parmar, 2018). As Parmar (2018) argues, some U.S. strategists came to view aspects of the liberal order as “imperial” burdens or as benefiting others at America’s expense, leading to calls for allies and partners to carry more weight or pay more for their own security and economic stability (Parmar, 2018). The effects of U.S. withdrawal are palpable. Without active U.S. leadership, international negotiations on trade and finance have faced gridlock. The Doha Development Round of WTO talks, for instance, languished for years, and U.S. disengagement removed an indispensable driving force for compromise. In the realm of development finance, U.S. skepticism toward multilateralism has arguably paved the way for others – notably China – to set up parallel institutions such as the Asian Infrastructure Investment Bank (AIIB) to fill unmet needs. The hesitation of the U.S. to uphold past commitments also erodes the credibility of guarantees that undergird the international financial system. If countries believe the U.S. may not ride to the rescue in future crises (as it did in 2008), they may take precautionary measures that themselves undermine collective outcomes, such as hoarding reserves or imposing capital controls. Thus, the retrenchment of U.S. hegemonic economic leadership raises the risk of a less coordinated and less open global economy.

Notably, these developments are not occurring in a vacuum – they intersect with rising challenges from other powers and with domestic political shifts. Scholars have pointed out that the liberal international order was already under strain from both external revisionists and internal dysfunctions (Lake, Martin, & Risse, 2021). Lake, Martin, and Risse (2021) observe that economic and political dynamics internal to the liberal order – such as growing inequality, populist backlash against globalization, and institutional inertia – have weakened its foundations, even as external challengers like China propose alternative models (see also Ikenberry, 2018). U.S. retrenchment thus accelerates an erosion process that may have already been underway. From an IPE perspective, this situation can be seen as a collective action problem: the international economic system needs certain public goods to function (e.g. a stable trading regime, reliable financial safety nets), but if the largest state refuses to supply them or even actively undermines them, it is unclear that others can unilaterally step in to fully substitute. The result predicted by hegemonic stability theory is under-provision of those public goods, potentially leading to more frequent crises or the emergence of regional blocs that try to provide substitutes on a smaller scale. The subsequent sections delve into specific areas – economic “insurance,” the strategic use of interdependence, and impacts on various actors – to flesh out these general concerns.

20.2 International Economic Insurance and the Erosion of Safety Nets

One useful concept for understanding U.S. hegemonic contributions is that of international economic insurance. This refers to the protective mechanisms and guarantees that the U.S.-led order has provided to buffer the world economy against shocks and downturns. Historically, the United States has acted as an insurer of last resort by using its substantial resources and policy tools to prevent local crises from becoming global catastrophes. For example, the U.S. has often been the market of last resort, stimulating global demand when other economies falter by running trade deficits and absorbing exports. It has also been the lender of last resort, whether through support of IMF bailouts or direct interventions like currency swap lines extended by the U.S. Federal Reserve to foreign central banks during financial crises. These roles have provided a form of insurance for other countries: in times of crisis, they could expect that the U.S. would take extraordinary measures to stabilize the system, thereby insuring others against deep recessions or liquidity crunches (Drezner, 2014). As one analyst put it, the U.S. has effectively underwritten a global economic insurance policy that mitigated catastrophes and maintained openness (Sheetz, 2007).

However, U.S. retrenchment calls into question the reliability of this international economic insurance. The 2008 global financial crisis is an instructive benchmark: during that crisis, the U.S. Federal Reserve opened wide-ranging dollar swap lines to provide liquidity to both allied and some emerging market central banks, and the U.S. Treasury coordinated closely with the G20 to inject stimulus into the world economy (Drezner, 2014). In retrospect, Drezner (2014) famously argued that “the system worked” – global economic governance, led in large part by U.S. actions, prevented a repeat of the Great Depression. Fast forward a decade, and the geopolitical climate has shifted. The Fed did once again deploy swap lines in the COVID-19 shock of 2020, acting de facto as an international lender of last resort. But such actions may be more selective and politically fraught in an era of U.S. withdrawal. Research on the Fed’s swap line criteria indicates that not all countries are equally likely to receive U.S. liquidity support – closer U.S. allies were far more likely to be given swap lines in 2008 and 2020 (Cassetta, 2022). In other words, the insurance provided by the U.S. may no longer be a universally available public good, but rather a club good tied to strategic alignment. This marks a shift from the more inclusive ethos that characterized the early postwar decades.

Beyond the Fed’s actions, other elements of the global financial safety net are also in flux. The IMF, traditionally backed strongly by the U.S., has expanded its lending facilities and encouraged regional reserve pooling arrangements. But U.S. political support for the IMF cannot be taken for granted: at times, U.S. legislators have delayed approving IMF quota increases or imposed stringent conditions on U.S. contributions. This raises uncertainty about the availability of multilateral insurance in future crises. Meanwhile, emerging markets have responded by pursuing “self-insurance”, most prominently by accumulating massive foreign exchange reserves as a buffer against capital flow volatility. While holding reserves can protect individual countries, from a system-wide perspective it is inefficient (tying up resources) and can even contribute to global imbalances. It is a second-best solution that countries choose when they doubt that external insurance will be reliably provided by leading powers or institutions. The trend of reserve accumulation in China, Brazil, Russia and others after the Asian financial crisis of 1997–98 reflected exactly such doubts – a lesson that “the U.S. and IMF might not rescue us next time” led to precautionary hoarding.

Another dimension of economic insurance is the provision of stable anchor currencies and payment systems. The U.S. dollar’s dominance has long been a source of stability (and influence) in the international monetary system. By supplying the world’s primary reserve currency, the U.S. has implicitly promised that dollar assets (like U.S. Treasury bonds) will remain safe and liquid, and that the U.S. financial system will stay open to those who need access. Yet the credibility of this promise is being tested. On one hand, the U.S. has used its financial power more aggressively of late (as we will discuss under “weaponized interdependence”), which makes some countries perceive holding dollars or relying on U.S.-centric networks as riskier. On the other hand, high levels of U.S. debt and political polarization raise questions about the long-run stability of the dollar’s value. If global confidence in the dollar were to erode significantly – a prospect still unlikely in the short term, given the lack of comparable alternatives (McDowell, 2021) – the international monetary system’s insurance mechanism would be fundamentally weakened.

Already, there are small but significant moves toward diversifying the global financial safety net beyond U.S. control. China, for instance, has promoted the internationalization of the renminbi and established bilateral swap lines of its own with dozens of countries, positioning itself as an alternative source of emergency liquidity (albeit still on a much smaller scale than the Fed). Regional financial arrangements, such as the Chiang Mai Initiative (a multilateral currency swap arrangement among Asian countries), and the BRICS’ Contingent Reserve Arrangement, are intended to supplement or backstop the global safety net in case the IMF (and by extension the U.S.) is not available or willing to assist. The proliferation of these arrangements can be seen as a direct response to uncertainty about U.S. retrenchment: they are essentially hedges against the withdrawal of U.S.-provided insurance. While these developments might increase resiliency by decentralizing insurance, they could also signal a drift toward a less coherent global system. In a fragmented safety net, crisis responses may be slower and less adequately coordinated, as multiple financial powers jostle or hesitate to help outside their immediate spheres.

Therefore, the U.S. retreat from its hegemonic role erodes the implicit insurance that many countries have counted on in the postwar economic order. From the perspective of International Political Economy, this change forces states to adapt by seeking self-insurance or alternative insurance mechanisms, which can collectively reduce the efficiency and unity of the global financial system. The next section will examine how the same interdependence that undergirded the old order is being repurposed as a strategic weapon – a phenomenon that partly arises from and partly contributes to the changing nature of U.S. engagement in the world economy.

20.3 The Rise of Weaponized Interdependence

An important feature of the contemporary global economy is the emergence of weaponized interdependence (Farrell & Newman, 2019). As countries became highly interconnected through trade, finance, and information networks, they also became vulnerable to the disruption of those networks. Farrell and Newman (2019) argue that states which occupy central “nodes” in global networks can leverage this position to exert coercion or gain strategic advantage over others. In other words, interdependence – previously viewed as a source of mutual benefit and peace – can be turned into a weapon by states that control key choke points. The United States, with its disproportionate influence over international finance, technology, and payment systems, has been at the forefront of exploiting these asymmetries. Rather than providing public goods neutrally, the U.S. is increasingly inclined to use its economic clout to reward friends and punish adversaries, aligning economic networks with geopolitical objectives (Farrell & Newman, 2019).

The paradigm of weaponized interdependence is evident in several domains. One clear example is the U.S. use of financial sanctions. Because of the dollar’s centrality and U.S. jurisdiction over global dollar-clearing (e.g., through New York banks and the SWIFT messaging system for international payments), the United States can effectively cut off targeted states or entities from large swathes of the world economy. In recent years, U.S. administrations have aggressively expanded sanctions against countries like Iran, Russia, Venezuela, and North Korea, among others. By threatening foreign banks and companies with loss of access to the U.S. financial system if they do business with sanctioned targets, the U.S. wields a form of exclusionary power—denying network access to coerce behavior (Farrell & Newman, 2019). This tactic goes beyond traditional multilateral sanctions; it is a unilateral tool enabled by the structural power the U.S. holds in global finance (McDowell, 2021). The downside, as McDowell’s (2021) research in the Review of International Political Economy shows, is that overuse of financial sanctions generates incentives for targeted states to de-dollarize and seek alternative financial channels. For instance, Russia and China have increased efforts to trade in their own currencies and develop non-dollar payment systems after experiencing U.S. financial pressure. McDowell (2021) finds that when countries are hit with U.S. financial sanctions, they implement policies to reduce their reliance on the U.S.-led currency network – essentially a defensive response to weaponized interdependence.

Another arena of weaponized interdependence is technology and data networks. The U.S. and its allies have significant leverage in high-tech industries (semiconductors, operating systems, internet infrastructure), which has been used to block or control flows of technology to rivals. A prominent case is the U.S. campaign against the Chinese telecom giant Huawei: by leveraging U.S. export control laws, the U.S. barred companies globally from selling critical semiconductor components to Huawei, thus undermining China’s 5G ambitions. Similarly, the U.S. has tightened screening of Chinese investment and acquisitions in Silicon Valley industries, citing security concerns. These measures illustrate how deeply interwoven economic ties can be weaponized by a state that dominates key nodes – in this case, intellectual property, software standards, and chip manufacturing equipment. China, for its part, has also used economic interdependence coercively on a smaller scale – for example, by imposing unofficial boycotts on South Korean products and tourism during a political dispute in 2017, or curtailing rare earth mineral exports to Japan in 2010. However, the concept of weaponized interdependence as theorized by Farrell and Newman (2019) is especially potent when applied to the U.S., given America’s unparalleled centrality in global networks (whether financial, informational, or logistical). The U.S. has leveraged its network advantages in areas like counter-terrorism (e.g., by using access to SWIFT data to track terrorist financing) and nonproliferation, as Farrell and Newman note. These actions blur the line between economic policy and national security, illustrating the IPE idea that economic interdependence can serve as both a source of power and vulnerability.

The turn toward weaponized interdependence is closely related to U.S. retrenchment from providing impartial global public goods. When the U.S. was more focused on system-wide outcomes, it tended to support relatively neutral rules (like WTO rules applied equally to all) and aid (like IMF programs) that helped maintain global stability even for states outside its alliance framework. Now, as the U.S. becomes more selective and self-interested in its global engagement, it is more willing to use economic tools in zero-sum ways. The current U.S. approach often communicates that access to the U.S.-led economic order is conditional and revocable. Allies are mostly shielded from harsh measures (indeed, many allies coordinate sanctions with the U.S.), but even allies have felt the sting of tariffs and secondary sanctions under the Trump administration – for example, tariffs on European steel/aluminum and threats to sanction European companies dealing with Iran after the U.S. left the Iran nuclear deal. Such measures unnerved U.S. partners by revealing that interdependence with the U.S., while generally beneficial, could also entail costs if political winds shifted.

From a theoretical standpoint, the rise of weaponized interdependence can be seen as a transformation of the nature of U.S. economic power from predominantly structural (shaping the context and rules of global markets in a way that benefits all, as in Susan Strange’s conception of structural power) toward more instrumental and coercive uses. This does not mean structural power is gone – the U.S. still structures global finance via the dollar system – but it is increasingly wielded in a targeted fashion. Some scholars warn that this approach could backfire by undermining the very networks that grant the U.S. its power (McDowell, 2021). If enough countries build alternatives to U.S.-centric networks (e.g., new payment systems, local currency swaps), the reach of U.S. economic statecraft could diminish over time. Indeed, a fragmented order (discussed later) might limit how effectively any single state can weaponize interdependence, since there would be parallel systems to turn to.

In sum, weaponized interdependence is a defining feature of the current geopolitical economy, reflecting both U.S. willingness to assert power in the economic realm and other states’ reactions to it. This dynamic contributes to a more contentious international environment, as economic ties become arenas for strategic contestation rather than purely for mutual gain. How U.S. allies and emerging markets navigate this new reality is crucial, and it is to their perspectives and adaptations that we now turn.

20.4 Impacts on U.S. Allies and Partners

U.S. economic retrenchment and the shift in U.S. strategy have significant implications for America’s allies and close economic partners. For decades, U.S. allies in Europe, East Asia, and elsewhere organized their economic and security policies around the assumption of reliable U.S. leadership. Allies benefited from the U.S.-led order: they enjoyed preferential access to the large U.S. market, security guarantees under U.S. military alliances (which also fostered stable conditions for investment), and a voice in multilateral institutions shaped by U.S. influence. The implicit bargain was that allies would support U.S. leadership (for instance, by aligning with U.S. preferences in global forums) and in return the U.S. would keep the international system hospitable to their interests. With the U.S. pulling back or acting more self-interestedly, allies have had to reconsider this bargain. Many U.S. partners now face a dual challenge: coping with the direct effects of U.S. policy changes (like tariffs or financial sanctions that affect them), and preparing for a world in which U.S. support in crises or in upholding the rules is less assured.

One immediate impact has been anxiety and uncertainty among allies about the credibility of U.S. commitments. For example, European allies were shocked when the U.S. under President Trump imposed tariffs on European steel and aluminum on national security grounds (Section 232 tariffs) – treating long-standing allies essentially as economic threats. This move not only had economic costs for Europe, but also symbolized a break from past practice where allies were exempted from such measures. Similarly, when the U.S. withdrew from the Iran nuclear agreement (JCPOA) and reimposed sanctions, it decided to enforce secondary sanctions that penalized even European companies for doing legitimate business with Iran. The European Union, which still backed the Iran deal, found its companies caught between EU policy and U.S. sanctions law. In response, European governments attempted to create a special payment vehicle (INSTEX) to facilitate trade with Iran outside of the U.S.-dominated financial system. INSTEX ultimately saw little use and could not fully circumvent U.S. financial power, but its very creation was telling – it reflected Europe’s desire to reduce its vulnerability to U.S. weaponization of interdependence and to preserve a degree of economic autonomy vis-à-vis the United States.

Allies in Asia have similarly been affected. The U.S. withdrawal from the TPP was viewed by Japan, Australia, and other participants not only as an economic loss (given the market access opportunities forgone) but as a strategic setback: it signaled diminishing U.S. engagement and reliability in setting the agenda for Asia’s economic future. In response, Japan led the remaining 11 countries to form the Comprehensive and Progressive Agreement for TPP (CPTPP), essentially salvaging the trade pact without U.S. involvement. This move by a key U.S. ally underscores a broader pattern: allies are starting to hedge against U.S. retrenchment by deepening their own regional integration and seeking new partnerships. Japan and the European Union, for example, signed a bilateral free trade agreement in 2018 (the EU-Japan Economic Partnership Agreement), linking two major economies in a deal that proceeded independently of the U.S. Such initiatives can be seen as allies taking out “insurance policies” of their own – strengthening inter-allied economic ties so that they are not solely dependent on U.S. leadership for economic growth.

Another impact on allies is the impetus to develop greater strategic autonomy. In Europe, the concept of “European strategic autonomy” has gained prominence, especially in France and EU policy circles. While initially this idea was more focused on defense and security (the ability of Europe to act independently of U.S. military support), it has clear economic dimensions too. European strategic autonomy entails the EU being able to uphold a rules-based trading system, regulate Big Tech and other domains, and ensure supply-chain security without always deferring to Washington’s preferences. The drive for autonomy has been reinforced by experiences like the U.S. extraterritorial sanctions and export controls, which demonstrated Europe’s over-reliance on U.S.-controlled systems. That said, achieving true autonomy is difficult. The transatlantic alliance remains very deep, and European economies are tightly intertwined with the U.S. (and also with China, which adds a second dependency concern). Nevertheless, moves such as promoting the euro’s international role, building independent European defense and space capabilities, and crafting EU-level investment screening to protect critical industries all reflect a cautious repositioning by allies in light of U.S. unpredictability.

At the same time, U.S. retrenchment has not led allies to abandon the alliance system altogether – rather, it has produced a mixed strategy of adaptation and reassurance. Allies have often sought to reassure the U.S. of their value, hoping to dissuade Washington from further retreat. For instance, NATO allies increased their defense spending commitments after persistent U.S. pressure, in an effort to show burden-sharing and keep the U.S. engaged in NATO. In the economic realm, allies have attempted to engage the U.S. in new negotiations (e.g., talks for a U.S.-EU trade agreement were floated) to anchor the U.S. in a cooperative framework. The underlying rationale is that allies prefer a U.S.-led order – albeit one where they have a bit more say – to a vacuum or a China-led alternative. Therefore, their response is two-pronged: (1) prepare for a more self-reliant future by diversifying partnerships and capabilities, and (2) entice the U.S. to remain involved by emphasizing common interests (such as coordinating on the challenge from a rising China).

From an IPE perspective, U.S. allies are essentially adjusting to a potential collective action problem left by U.S. retrenchment. If the provider of public goods steps back, small- and medium-sized states must either cooperate to provide substitutes or accept a lower level of public goods. The EU and Japan’s actions exemplify cooperation to provide substitutes (new trade agreements, financial mechanisms), which can mitigate some losses from U.S. retreat. However, these substitutes may not be perfect. For example, the CPTPP without the U.S. is a smaller market and lacks the strategic weight that U.S. participation would have conferred. Likewise, Europe’s economy cannot on its own replicate the role of the U.S. in the global financial system as a source of safe assets and a spender of last resort. Hence, while allies are making progress in regional institution-building, they remain in a somewhat uncomfortable transition – striving to keep the U.S. engaged even as they insure against the possibility of U.S. disengagement.

In conclusion, U.S. allies have been pushed into a recalibration of their strategies due to American economic retrenchment and the more combative use of U.S. economic power. They are increasingly focused on resilience and autonomy: deepening regional ties, pursuing policy independence in selective areas, and reducing exposure to U.S. unilateral actions. Yet, they also recognize the value of the old order and thus work to preserve U.S. commitment where possible. The next section will shift focus to emerging market economies, which face their own set of challenges and opportunities under a retrenched and more self-interested U.S. hegemon.

20.5 Impacts on Emerging Markets and the Global South

Emerging market and developing economies (EMDEs) have historically had an ambivalent relationship with the U.S.-led liberal order. On one hand, many benefited from the openness and capital flows that the postwar order facilitated, enjoying export-led growth and access to finance. On the other hand, some have viewed that order as dominated by Western (often U.S.) interests, sometimes imposing policies through institutions like the IMF that were not always in line with local preferences. U.S. economic retrenchment introduces new uncertainties for emerging markets. The decline of active U.S. leadership can remove some of the supportive structure that emerging economies relied upon, while the more ad hoc and power-oriented behavior of the U.S. (such as weaponized interdependence) can directly harm those who find themselves in the crosshairs or collateral damage of U.S. actions.

One key impact is greater volatility and vulnerability in global financial and commodity markets, which disproportionately affects emerging markets. In recent years, U.S. policy shifts – such as sudden changes in monetary policy or unilateral trade measures – have transmitted shocks to EMDEs. For example, when U.S.-China trade tensions escalated with tit-for-tat tariffs, not only did China’s and the U.S.’s growth prospects suffer, but so did many emerging economies integrated into Asian supply chains (e.g., South Korea, Malaysia, Vietnam) or commodity exporters dependent on Chinese demand (e.g., Brazil, South Africa). In the past, the U.S. might have played a calming role in trade disputes by working through the WTO or negotiating compromises, but in this case the U.S. itself was a protagonist in raising barriers. The resulting uncertainty made the global trading environment more precarious for emerging markets that depend on stable external demand.

In the financial realm, emerging markets have always been sensitive to U.S. Federal Reserve policy (often summarized in the adage: “when the U.S. sneezes, the rest of the world catches a cold”). With the U.S. retrenchment and prioritization of domestic concerns, there can be less coordination or consideration of spillovers. The 2013 “taper tantrum” – when the Fed signaled it would wind down quantitative easing, leading to capital flight from emerging markets – was a reminder of how exposed developing economies are to U.S. decisions. In an era of diminished multilateralism, emerging markets worry that major economy policymakers will give even less weight to global repercussions. To guard against this, as noted earlier, many EMDEs have accumulated reserves or engaged in regional pooling for self-protection. But self-protection has limits. During the 2020 COVID-19 shock, for instance, dozens of emerging economies still needed emergency assistance from the IMF or bilateral creditors to cope with sudden stops in capital flows and health-related expenditures. The U.S., to its credit, supported some of the IMF’s actions in 2020 (such as a new allocation of Special Drawing Rights in 2021 to boost global liquidity), but the broader trend is that emerging markets do not take U.S. support as a given. They have pushed for reforms in global economic governance – greater representation at the IMF and World Bank, for example – to ensure their needs are met even if U.S. enthusiasm wanes. Progress on such reforms has been slow, partly due to U.S. resistance in earlier years. The perception that the U.S. is now less interested in leading the global economic agenda has, paradoxically, increased both the urgency and the difficulty of governance reforms: urgency, because EMDEs need reliable safety nets; difficulty, because without U.S. leadership, forging consensus among diverse nations is harder.

Another significant development is the rise of South-South economic cooperation and alternative institutions, driven in part by emerging powers like China, India, and Brazil. China’s Belt and Road Initiative (BRI), launched in 2013, can be interpreted as a response to gaps in global infrastructure financing – gaps the U.S. and Western-led institutions were not filling sufficiently. Through BRI, China has invested in ports, railways, power plants, and telecommunications across Asia, Africa, and Latin America. While not a direct result of U.S. retrenchment (BRI’s impetus also lies in China’s own ambitions and surplus capacities), the initiative has gained more space to expand because the U.S. has not been offering a competing vision of development finance in the 2010s. From an emerging market perspective, having more options – Chinese loans, AIIB funding, or BRICS Bank (New Development Bank) loans – is attractive, especially if the traditional Western-led options come with stricter conditions or are drying up. However, these alternatives also come with new dependencies and risks. Some countries have experienced debt sustainability problems under BRI projects, and during the COVID-19 economic downturn many turned back to the IMF for help, highlighting that the IMF remains the lender of last resort for sovereigns. The U.S. retrenchment has not yet eliminated the influence of the old institutions, but it has allowed new ones to grow in prominence. Over time, this could lead to a multipolar aid and finance regime where emerging markets navigate between U.S.-led and China-led systems.

U.S. economic coercive tools, as discussed, have also hit emerging economies. Secondary sanctions on Iran, for example, affected countries like India (which historically imported Iranian oil and had to abruptly seek alternatives) and Turkey (which had financial ties with Iran). Sanctions on Russia after 2014 and again in 2022 had spillovers on countries in Eurasia that trade heavily with Russia (such as Kazakhstan or Belarus) and globally via higher energy and food prices. Emerging markets thus sometimes feel caught in great power economic crossfire. If the U.S. uses sanctions widely, emerging economies must tread carefully in their foreign policy and commercial dealings, or else face penalties. At the same time, if they align too closely with U.S. policy, they risk straining ties with other major partners (notably China or regional powers). This puts middle-tier states in a difficult balancing act. Some, like Turkey and India, have tried to maintain non-aligned or multi-aligned stances: e.g., India joined the Quad security dialogue with the U.S. and allies on one hand, but on the other hand, it continues to purchase oil from Iran (until 2019) and more recently increased energy imports from Russia despite U.S. sanctions on Moscow. This reflects a desire to maximize strategic autonomy in a world where relying solely on the U.S. or the U.S.-led system seems increasingly risky or constraining.

In forums like the G20, emerging markets have pushed for initiatives that don’t depend on singular hegemonic leadership. The G20 itself, created in 2008-2009 as a crisis committee of major economies (with U.S. support), is a recognition that no single country can manage global crises alone – collective management is needed. However, the G20’s effectiveness has varied. In the absence of strong U.S. impetus, consensus has sometimes faltered (for example, G20 trade statements watered down as the U.S. grew skeptical of multilateral trade commitments). Emerging economies like India, Indonesia, or South Africa see such platforms as vital to voice their interests; they prefer a multilateral order where rules are agreed, rather than a pure power-based order. Therefore, one could say EMDEs generally favor a cooperative global economy but worry that U.S. retrenchment, combined with great power competition, is steering things toward fragmentation. Their responses include seeking greater inclusion in rule-setting (as with attempts to get more voting power in Bretton Woods institutions), forming regional groupings (ASEAN, Mercosur, the African Continental Free Trade Area), and occasionally banding together in issue-specific alliances (such as the “Alliance of Small Island States” in climate negotiations, or developing country coalitions in WTO talks).

So, emerging markets and the broader Global South face a mixed bag of outcomes from U.S. economic retrenchment. They have slightly more room to maneuver as alternative partners like China rise and as U.S. oversight relaxes in some areas, but they also face a more uncertain and possibly unstable international environment. The erosion of global insurance mechanisms and the potential for great power economic rivalry mean that EMDEs must invest more in self-help and South-South cooperation. These countries’ well-being will depend on how successfully a new equilibrium can be found – one that perhaps features a more inclusive form of global governance or a careful navigation of a multipolar economic order, as will be discussed in the final section regarding fragmentation.

20.6 Repercussions for the Global Financial System

The global financial system sits at the core of the international political economy, and it is uniquely sensitive to shifts in U.S. policy and power. U.S. economic leadership has long underpinned confidence in the financial system: the dollar serves as the world’s primary reserve currency (held by central banks worldwide), U.S. financial markets are a major destination for savings and investment, and U.S.-led institutions (such as the IMF and G20) have coordinated responses to financial crises. As the U.S. retrenches and pursues a more unilateral course, the global financial system is experiencing strains that could herald a more fragmented monetary order.

One major repercussion is the challenge to the dominance of the U.S. dollar. For now, the dollar remains dominant by wide margins – it accounts for around 60% of global foreign exchange reserves and is involved in an even larger share of international transactions (McDowell, 2021). This affords the U.S. what Valéry Giscard d’Estaing famously called an “exorbitant privilege,” enabling the U.S. to finance its deficits cheaply and wield outsize influence (Norrlof, 2014). However, as noted, the aggressive use of dollar-based sanctions and financial controls has led some countries to actively seek dollar alternatives (McDowell, 2021). Russia, for instance, has drastically reduced the dollar share of its reserves and increased holdings of gold and euros; it has also shifted much of its trade with China into rubles and yuan. China has been promoting the use of its currency, the renminbi (RMB), in international trade and as part of central bank reserves (though the RMB’s share remains small, under 3%). Efforts by major economies like China and Russia to de-dollarize parts of their international transactions are directly connected to their geopolitical rifts with the U.S. – essentially, they view reducing reliance on the dollar as a way to insulate themselves from U.S. financial coercion (McDowell, 2021). If such efforts gain traction, the global financial system could evolve toward a more multipolar currency system, where the dollar, euro, RMB (and possibly others like the yen or pound) share reserves and transaction roles. While a full shift is likely to be slow and faces high hurdles (given network effects favoring the incumbent, the dollar), even marginal moves away from the dollar can introduce inefficiencies and new risks. Countries and investors might need to manage currency diversification in reserves, and international liquidity might be less predictably available in crises if not channeled through one dominant currency’s central bank.

Another repercussion is fragmentation in payment and messaging networks. The case of SWIFT – the Belgium-based but Western-governed financial messaging network – has become emblematic. After the U.S. and EU cut off Iranian banks from SWIFT as part of sanctions, and later some Russian banks in response to Russia’s actions in Ukraine, targeted states have accelerated the development of alternative systems. China’s Cross-Border Interbank Payment System (CIPS) is one such alternative, which processes RMB payments and could, in theory, be expanded to reduce dependence on SWIFT for participants. Likewise, Russia developed its System for Transfer of Financial Messages (SPFS) to use domestically and with certain partners. At present, these alternative networks are limited in scale and scope. But their existence and gradual expansion indicate a future where we might not have a single global payments infrastructure, but rather parallel systems aligned with geopolitical blocs (BIS, 2019; Muller & Kerenyi, 2024). A fragmented financial infrastructure could impede the seamless flow of capital and raise transaction costs, much like separate technological standards can segment markets. It also complicates regulatory oversight and crisis management – for instance, coordinating sanctions or anti-money laundering efforts becomes harder if transactions shift into networks outside the traditional Western-led visibility.

Global finance is also feeling the effect of reduced U.S. support for multilateral financial governance. The Trump administration was openly skeptical of multilateralism, at one point even questioning why the U.S. should fund “globalist” institutions. While the Biden administration restored a more cooperative tone (re-engaging with the G20, Paris climate accords, etc.), the years of U.S. disengagement took a toll. For example, the IMF’s resources relative to global GDP have not kept pace with the growth of the world economy, partly due to delays in quota reforms (which require U.S. congressional approval among others). If a truly massive financial crisis were to occur that hit multiple emerging markets at once (beyond what the IMF can currently handle), the safety net might prove inadequate. Emerging powers have signaled willingness to contribute more to the IMF in exchange for more voice (as in the 2010 quota reform deal), but a hesitant U.S. slows this progress. In the worst case, a weakened multilateral financial system could lead each major power to prop up its own regional sphere in a crisis – for instance, the EU rescues Eurozone members, China bails out its BRI debtor countries, the U.S. focuses on the Western Hemisphere – rather than a unified global response. This scenario would represent a clear break from the integrated crisis responses of 2008–09, and it could result in more severe or protracted financial turmoil for countries that fall between spheres or have ties to multiple spheres.

Importantly, not all trends are negative: one could argue that the shock of U.S. unpredictability has galvanized improvements in some global financial governance practices. The G20’s push in 2020 for the Debt Service Suspension Initiative (DSSI) for the poorest countries was a collective action that included both Western and emerging creditors (including China) agreeing to pause debt repayments during the pandemic. This was a modest but notable step toward coordinating North-South financial cooperation without U.S. dominance (the U.S. supported it, but China’s participation was pivotal). It suggests that in some areas, ad hoc leadership by coalitions of the willing can substitute if U.S. leadership is absent. However, the follow-through has been incomplete (private creditors and some state creditors were reluctant to fully participate in debt relief), underscoring the limitations of a leaderless approach.

So, the global financial system is at a crossroads under U.S. economic retrenchment. On one path, the system could become more bifurcated and regionalized – with competing currencies, payment networks, and financial rules dividing the world into blocs aligned with the U.S. or other major powers. On another path, recognizing the dangers of fragmentation, major stakeholders might find new arrangements to cooperate and shore up the system (possibly with a more pluralistic leadership including the U.S., EU, China, etc.). Which path prevails will significantly shape global economic stability. The final section will consider these broader trajectories, exploring the notion of a fragmented economic order and what it portends for the future of international political economy.

20.7 Prospects for a Fragmented Economic Order

The cumulative effect of the trends discussed – U.S. retreat from hegemonic duties, selective economic coercion, adaptive strategies by allies and emerging markets, and stresses on global finance – is a movement toward a more fragmented international economic order. By fragmentation, we mean a system in which economic governance is no longer unified under a single set of dominant rules or leadership, but instead characterized by multiple centers of power, competing regimes, or even a breakdown of the common institutional framework that once undergirded globalization. In the context of IPE, this raises fundamental questions: Are we witnessing the end of the liberal international economic order and the rise of an anarchic or multipolar economic system? Or will some elements of cooperation and order persist even without a benevolent hegemon?

One influential perspective comes from realist scholars like John J. Mearsheimer, who argue that the liberal order as we knew it was destined to fall apart and is being replaced by a narrower order defined by great power rivalry. Mearsheimer (2019) contends that the post-Cold War liberal international order contained internal contradictions and “liberal excesses” that provoked nationalist backlash, and thus “the liberal order…was a failed enterprise with no future”. In his view, the emerging world will consist of a U.S.-led sphere and a Chinese-led sphere, each with its own order, and a more realist form of limited cooperation at the global level to manage shared concerns like basic economic interactions (Mearsheimer, 2019). This essentially sketches a fragmented order: a bifurcation into blocs, moderated by pragmatic arrangements among the great powers. The U.S. economic retrenchment, from this angle, is part of a larger structural transition from unipolarity to multipolarity. The liberal economic institutions may not collapse overnight, but they will be repurposed or sidelined as power politics returns to the fore.

Evidence of incipient fragmentation is visible. On trade, for instance, the collapse of the WTO’s negotiating and dispute settlement functions has led countries to pursue alternative paths: mega-regional trade agreements (CPTPP, RCEP) have proliferated, and some regions (like Africa with the AfCFTA) are creating their own rules. Without universal rules being updated, we have a patchwork of trade regimes. On technology, the world is seeing a splintering into separate ecosystems – often referred to as a “technology decoupling” between the U.S. and China. The U.S. leads a group of allies in advanced semiconductor and AI technology, while China invests heavily to become self-sufficient and even dominant in other areas (like 5G networks). This could result in parallel tech standards and supply chains largely insulated from each other for security reasons. On finance, as discussed, multiple payment and currency arrangements are developing. All these reflect a centrifugal force in the global system.

However, it would be simplistic to assume a clean break into two coherent blocs. There are also strong countervailing forces of economic interdependence that make a complete fracturing costly for all sides. For instance, the U.S. and China, despite their strategic rivalry, remain deeply interlinked through trade and investment (though less so than a few years ago, but still significant). The U.S.’s allies, such as the European Union, have economic ties to both superpowers and are not eager to choose one camp exclusively. So a likely scenario is not a neatly divided Cold War-style bipolar economic order, but rather a more complex fragmentation: certain domains or sectors may split (e.g., internet governance might diverge between a liberal and a state-surveillance model; some financial networks become segmented), whereas other areas might remain global (for example, climate change initiatives or maybe basic trade in commodities might still involve broad cooperation). This can be described as a multiplex world economy (Acharya, 2017) – one where different issue-areas are governed by different groupings and principles.

From the viewpoint of liberal institutionalist theory (Keohane, 1984), even without a hegemon, institutions can persist if they are deeply embedded and if multiple states find them useful. We do see remnants of the old order persisting: the IMF and World Bank are still operating; the G7 and G20 continue to meet; many of the norms of financial regulation (like Basel banking standards) remain widely accepted. It is possible that after a period of adjustment, a new equilibrium will emerge where the U.S. still plays a role, but a reduced one, in a more concerted leadership structure. For example, we might imagine a scenario in 2030 where the U.S., EU, Japan, and maybe China and India collectively steer an updated international economic regime – not as harmonious as the old LIEO, but functional in addressing global public goods issues like financial stability and pandemics. This would be a reformed multilateralism scenario.

On the other hand, a more pessimistic trajectory is also plausible, where fragmentation leads to frequent conflicts and inefficiencies. In a scenario where trust among major powers erodes completely, the world could slip into economic spheres of influence that hardly communicate – a world of high tariff walls, capital controls, and competitive monetary blocs. Global growth could suffer as innovation and investment are stifled by geopolitical uncertainty. Smaller countries could become arenas of competition (for markets, resources, or strategic advantage) rather than partners in development. Essentially, the classical liberal vision of one world economy might dissolve into several semi-integrated zones.

As of the mid-2020s, we likely stand somewhere between these extremes. The liberal international order is certainly not what it once was, but aspects of it endure. U.S. economic retrenchment has accelerated the drift toward a less centralized system, yet U.S. actions (and reactions by others) also show recognition of the dangers of unchecked fragmentation. Notably, even the U.S. after Trump has partially re-engaged with allies to coordinate on certain issues (for instance, a joint approach with the EU on reforming WTO rules on subsidies, or the formation of the “Quad” and “Indo-Pacific Economic Framework” to set standards in Asia). These suggest that the U.S. hasn’t fully abandoned leadership, but is trying to redefine it in a more interest-driven, coalitional way.

In conclusion, the global implications of U.S. economic retrenchment point to an international economic order in transition. The hegemonic stability of the late 20th century is receding, and what comes next is still being forged. Whether the outcome is best described as a fragmentation, a multiplex order, or a reordering with new power configurations, it is clear that the simple unipolar model no longer holds. International Political Economy as a field will closely watch how institutions adapt, how rising powers behave, and whether transnational challenges (from climate to cyber security) compel a measure of renewed cooperation despite strategic rivalries. Ultimately, while U.S. retrenchment creates risks of disorder, it also opens space for reimagining global governance – potentially making it more inclusive and regionally representative, if managed wisely. The coming years will reveal whether the world can achieve a stable new equilibrium or whether we enter an era of economic division and heightened rivalry that undermines the prosperity that globalization once promised.

References

Acharya, A. (2017). After liberal hegemony: The advent of a multiplex world order. Ethics & International Affairs, 31(3), 271-285.

Cassetta, J. M. (2022). The geopolitics of swap lines (M-RCBG Associate Working Paper No. 181). Harvard Kennedy School.

Drezner, D. W. (2014). The system worked: Global economic governance after the financial crisis. World Politics, 66(1), 123-164.

Farrell, H., & Newman, A. L. (2019). Weaponized interdependence: How global economic networks shape state coercion. International Security, 44(1), 42-79.

Ikenberry, G. J. (2018). The end of liberal international order? International Affairs, 94(1), 7-23.

Keohane, R. O. (1984). After hegemony: Cooperation and discord in the world political economy. Princeton, NJ: Princeton University Press.

Kindleberger, C. P. (1973). The world in depression, 1929-1939. Berkeley, CA: University of California Press.

Lake, D. A., Martin, L. L., & Risse, T. (2021). Challenges to the liberal order: Reflections on International Organization. International Organization, 75(2), 225-257.

McDowell, D. (2021). Financial sanctions and political risk in the international currency system. Review of International Political Economy, 28(3), 635-661.

Mearsheimer, J. J. (2019). Bound to fail: The rise and fall of the liberal international order. International Security, 43(4), 7-50.

Norrlof, C. (2014). Dollar hegemony: A power analysis. Review of International Political Economy, 21(5), 1042-1070.

Parmar, I. (2018). The US-led liberal order: Imperialism by another name? International Affairs, 94(1), 151-172.