From tariff hikes to the Iran war, recent US policies have undermined and distorted global economic governance. How can the damage be undone?
The suite of economic and financial policies implemented by the administration of President Donald Trump since he took office for a second time in January 2025 marks the biggest shift in global economic and financial governance since the Second World War.
There have been other dramatic shifts in post-war US economic policy (notably the ‘Nixon shock’ of 1971). However, the ‘Trump shock’ is fundamentally different in five main ways. First, it affects a much broader range of policy areas, including trade, international monetary and financial stability, global energy security, the net zero transition and the global effort to reduce poverty. Second, some of the most important policies of Trump’s second administration, or Trump 2.0, are based on invalid arguments and internally inconsistent theories, most notably on climate change but also in terms of the relationship between the US current account and investment flows. Third, the Trump administration has treated close allies – particularly the EU and Canada – with hostility sometimes exceeding that which it has shown towards strategic competitors such as China. The administration has also combined economic demands with threats of force, as seen in Trump’s insistence that the US be granted control of Greenland, a Danish sovereign territory. Fourth, in economic negotiations the Trump administration has systematically pursued asymmetric outcomes in which the US is the outright winner, rather than pursuing mutually beneficial solutions with counterparties. Finally, some US policy actions have outwardly seemed closely aligned with the financial interests of the president’s businesses, family or associates.
While the US’s chosen role in the world economy has undergone enormous change in barely a year and a half, China’s role is evolving more gradually. China’s economic weight has continued to grow in recent years, consolidating the country’s position as the second largest national economy after the US. This has been matched by China’s development of world-leading capabilities in both green technology and digital technology – notably, in the latter case, artificial intelligence (AI).
China is not as proactive or overt as the US in challenging economic governance norms, and has repeatedly sought to portray itself as a champion of multilateralism. But in practice, China’s approach to the world economy has important similarities with that of the US today, and also poses serious problems for third countries. For example, China has generally complied with the letter of its treaty obligations within the World Trade Organization (WTO), but often not with the spirit of open markets and fair competition. This is reflected in the country’s continuing use of state subsidies, and in a reluctance to allow sustained appreciation in the renminbi despite a surplus on trade in goods exceeding $1 trillion. China has repeatedly deployed economic coercion for political ends, and has supported Russia’s attack on Ukraine (despite Russia being in clear breach of the UN Charter). China has also refused to comply with the rulings of the Permanent Court of Arbitration at The Hague on Chinese claims in the South China Sea.
Faced with these realities in US and Chinese behaviour, third countries or blocs – particularly the traditional economic and security partners of the US – must decide how to respond. Some commentators argue that the current US stance could prove temporary in key respects, and that the best strategy is therefore to wait until America reverts to more rational and orthodox foreign and economic policies. Others have argued that the world is necessarily bipolar (in effect, with global power divided between the US and China). According to this view, third countries or blocs will ultimately have to align themselves economically (and possibly even politically) with either the US or China, however unpalatable this may prove to be.
Other commentators have argued that the world will become multipolar, and that this will result in the emergence of multiple ‘coalitions of the willing’ seeking progress on important issues one by one. These coalitions may be formed by so-called ‘middle powers’, or be led by the US or China. The composition of any given coalition will depend on the issue in question, and on the extent to which participants’ underlying interests converge.
However, this report considers another possible outcome where, instead of a bipolar world, there is a deliberate shift to a tripolar world in which market-oriented economies other than the US establish a permanent alternative ‘pole’ in the world economy, and for global economic governance, distinct from both the US and China.
The goal of this ‘third pole’ would be to preserve and improve, in the largest economic space possible, the core principles and rules underpinning economic openness, absence of coercion and pursuit of mutual benefit that have served the world well since the Second World War. The author argues that over the medium term – perhaps five to 10 years – such an approach would be more beneficial for members of the new group than if they simply accepted the subservient economic relationships on offer from the US and China, or tried to sustain multiple coalitions of varying weight and importance. An architecture of this type would also have the best chance of re-establishing an effective and reasonably fair system of global economic governance in the long term if a future US administration reverts to more collaborative behaviour.
The goal would be to preserve and improve, in the largest economic space possible, the core principles and rules underpinning economic openness, absence of coercion and pursuit of mutual benefit that have served the world well since the Second World War.
While some commentators have argued that a third pole would be impractical, this report shows that there is a plausible way to achieve it, provided the founding members are willing to prioritize mobilization of the necessary resources and take some calculated risks.
But the situation is urgent. The success of a such a grouping depends on moving forward decisively over the next six to 12 months. The existing consensus on preserving a WTO basis for trade among non-US economies is fragile, and could be easily disrupted by further US actions. There is also a risk that some essential participants in the proposed grouping (notably the EU) may choose a more inward-looking strategy unless the potential of an alternative economic pole is quickly realized. Conversely, the next 12 months could provide a window of opportunity for innovation in global economic governance, as President Trump’s ability to deploy tariffs and other retaliatory measures may be constrained by continued domestic legal challenges, by an altered balance of domestic political power following the US mid-term elections in late 2026, and by the growing negative economic consequences arising from his economic and foreign policies, including the war he chose to launch in the Gulf.
