The world is undergoing a great economic reordering, the third such transformation in the past century. The United States has been at the helm of each one, shaping the global economy in ways that advance U.S. interests. But with each successive shift, Washington has exerted its influence more unilaterally and aggressively, pushing partners away and creating room for adversaries to fill the breach.
The first great reordering came at Bretton Woods, where, in the summer of 1944, the United States used its position of strength following World War II to compel the rest of the world to accept a centrally managed international economic order built around the dollar. Harry Dexter White, the U.S. Treasury official viewed by many as the system’s principal architect, believed an arrangement based on dollars and backed by gold at a fixed exchange rate would promote peace and prosperity through greater trade. Fixed currency parities would ensure global economic stability. Conveniently, this system would also make the United States the world’s economic center of gravity and prevent currency devaluations that could harm American exports. Bretton Woods was multilateral in nature, but it favored the United States.
U.S. President Richard Nixon forced a second reordering when he brought down the central pillar of the Bretton Woods monetary system: the dollar’s convertibility into gold. This time, there was no pretense of cooperation. During the weekend retreat at Camp David, in 1971, when Nixon’s team arrived at the decision to untether the dollar from gold, Treasury Secretary John Connally dismissed concerns that allies would be furious. “We’ll go broke getting their good will,” he chided Arthur Burns, the more internationally minded chair of the Federal Reserve. “So the other countries don’t like it. So what?”
Still, in the months after breaking the global monetary order, Nixon’s team shifted to a more internationalist position. George Shultz, who succeeded Connally as treasury secretary, talked tough in public but was the consummate diplomat behind the scenes. He worked closely with foreign counterparts to negotiate the removal of capital controls around the world, which he believed would further enhance American financial influence. The informal “Library Group” of finance ministers that Shultz convened in the White House library, in April 1973, eventually evolved into the G-7, a cornerstone of international economic diplomacy to this day.
The third reordering of the global economy, underway today, is even more explicitly unilateral. U.S. President Donald Trump’s “Liberation Day” tariffs have targeted allies and adversaries alike out of a belief that the United States has unfairly borne the burdens of underwriting the global financial system and acting as the world’s policeman. These actions are a body blow to what remains of the postwar global trading rules.
Trump deserves some credit for forcing the world to grapple with the failures of the existing global trade order. Decades of deindustrialization have harmed large swaths of the American workforce and undermined U.S. national security by creating supply chain dependencies on potential adversaries. The World Trade Organization has presided over an era in which countries have showered their export sectors with subsidies, imposed nontariff barriers with impunity, and implemented protectionist measures that contradict the basic principles on which the WTO was founded. Dissatisfaction with the global economy has made anti-trade policies popular among both Democrats and Republicans and propelled the rise of protectionist political parties around the globe.
Trump is not the first president in recent memory to express concerns about the harms global trade has caused in the United States. Despite his legacy as a free trader, U.S. President Ronald Reagan sought to stem the tide of American deindustrialization with 100 percent tariffs on certain Japanese products and import quotas to protect American industry. Every president since George W. Bush has taken steps to address the flaws of the international trading system around its edges, from Bush’s 2002 steel tariffs to Joe Biden’s decision to maintain most of Trump’s tariffs on China—and impose even greater levies in some cases.
But Trump is the first to attempt sweeping structural change. Unfortunately, his approach undercuts key partnerships the United States needs to shape the global economy and, in its more extreme incarnations that would alter the dollar’s role, would cause substantial financial damage. Countries in Europe, Latin America, and Southeast Asia are already exploring new trade arrangements to limit their exposure to the United States. And the first tsunami wave of tariffs announced in April sent shivers through bond markets, leaving the global economy teetering on the brink before Trump’s advisers convinced him to temporarily pause most of the new tariffs.
Trump is right that the global trading system needs restructuring, but his proposed cure for global trade imbalances threatens to be worse than the disease. What the United States needs is a new system built on global cooperation that promotes fair trade and strengthens American competitiveness.
TREATING THE SYMPTOMS
Trump has been remarkably consistent over the years about his core economic gripe: the trade deficit. In 1987, he spent nearly $100,000 to purchase a full-page ad in three U.S. newspapers that said: “It’s time for us to end our vast deficits by making Japan, and others who can afford it, pay.”
The most serious version of this argument starts from the premise that other countries’ industrial policies have generated artificially large surpluses that the United States has no choice but to absorb through a trade deficit. Because of the dollar’s reserve currency status, the argument goes, the United States must serve as the world’s buyer of last resort and foot the world’s defense bills. This is why the Trump administration views the current global economic order as fundamentally “unfair” to the United States. As the chair of the Council of Economic Advisers, Stephen Miran, has argued, the deficit that Washington runs as a result of its global position has “decimated our manufacturing sector” and driven the decline of the United States’ industrial base. In this view, trade deficits are the original sin, and fixing the global economy starts and ends with deficits.
This framing misconstrues the true nature of the distortions roiling the global economic system. It also fails to account for the fiscal choices driving the United States’ structural budget imbalance. Trade deficits and deindustrialization are symptoms, not causes. The underlying problem with the global trade and financial systems is their failure to prevent unfair practices that undercut the United States’ ability to compete on a level playing field. Other countries, most notably China, offer massive industrial subsidies, overproduce exports, and disregard labor rules and environmental concerns. As a result, the United States is not manufacturing products even in sectors in which it has a true comparative advantage, especially high-tech products, contributing to the broader atrophy of the industrial base.
That does not mean the United States should try to manufacture everything. American manufacturers are unlikely to dominate the global markets for T-shirts and running shoes. But the United States could be a leading producer of advanced manufactured goods, such as sophisticated electronics and medical devices, if everyone had to play by the same set of rules.
Trump’s proposed cure threatens to be worse than the disease.
In recent years, corporate tax havens have also created trade distortions that harm American competitiveness by encouraging companies to move both manufacturing and high-value intellectual property away from the United States to low-tax jurisdictions. Ireland is now the third-largest exporter of digital services in the world—in large part because of American-invented intellectual property. The way Apple operates highlights the problems with today’s global trading system: the company innovates and designs its technology in the United States, manufactures it in China, and reaps the profits in Ireland. In 2018, the International Monetary Fund (IMF) calculated that one-quarter of Irish GDP growth could be attributed to global iPhone sales, thanks to royalties paid to Apple’s Irish subsidiaries, which own the relevant intellectual property. While shareholders in companies that move manufacturing to China and intellectual property to Ireland reap the rewards, the United States’ industrial and tax bases lose out.
These challenges must be addressed, but an approach to trade that neglects allies is unlikely to succeed. As Kurt Campbell and Rush Doshi recently argued in these pages, China’s economy is massive in terms of workforce, manufacturing capacity, and even the scope of its industrial policies. The United States needs allies to counterbalance China’s economic weight—and it is the only country that can build a coalition in response to China’s anticompetitive behavior.
The European Union, the G-7, and others share American concerns about China’s industrial policies and economic distortions on goods ranging from electric vehicles to steel. China’s steel production generates vast amounts of carbon pollution, and the country operates with lower labor standards than advanced industrial economies in Europe and the United States. As tariffs hamper China’s ability to export to the United States, more of Beijing’s excess manufactured goods are washing up on the shores of Europe, Southeast Asia, and other global markets, threatening their domestic industries. The only effective way to prevent China from gaming the global trading system is to work with like-minded countries to put in place tariff and nontariff barriers to address China’s trade distortions.
Dismissing allies and claiming total victimhood when it comes to global trade also overlooks the benefits that the United States has gained from the dollar’s outsize role in the global economy. The dollar is on one side of nearly 90 percent of foreign exchange transactions and more than half of all global payments sent via SWIFT, the financial messaging platform used for much of the world’s trade. Americans enjoy greater purchasing power and a higher standard of living thanks to how this system generates demand for U.S. currency, and American companies benefit because they can import components at a lower cost. The dollar’s ubiquity gives the United States an arsenal of financial weapons that no other country can match: companies across the globe abide by U.S. sanctions because they have no other choice in a world in which the dollar is so central to international commerce.
The dollar’s unique role also affords the United States lower borrowing costs by creating demand for U.S. Treasuries and other American assets. This makes it cheaper to finance everything from defense systems to social welfare programs. But as tariffs, a ballooning deficit, and macroeconomic uncertainty drive foreign investors away, the dollar is weakening—and U.S. borrowing costs are growing alongside rising debt. Now is not the time to cast doubt on the dollar’s global role.
NEW RULES OF THE ROAD
The Trump administration is right to focus on manufacturing—the United States needs more of it. But the current debate over the trade deficit overlooks a key element of the U.S. economy: services. Every time someone swipes a credit card with a Mastercard or Visa logo or queries large language models such as ChatGPT or Claude, it is a reminder of U.S. leadership in the global service economy. The U.S. trade surplus in services totaled nearly $300 billion in 2024, meaning that cutting the trade deficit doesn’t need to rely on manufacturing alone.
Expanding manufacturing and strengthening services are not mutually exclusive. As technology rapidly advances, manufacturing and services tend to complement each other. U.S. strength in technological and financial services enables the country to manufacture more advanced hardware. It is both an economic and a national security priority to continue creating high-quality service jobs and promoting services built on U.S. digital infrastructure.
The majority of Americans work in the service sector today. And although there is much to recommend high-quality manufacturing jobs, service industries offer excellent opportunities, too, including in many blue-collar professions. Service providers such as electricians and plumbers make on average $30 an hour, whereas American textile manufacturers earn an average of only $16 to $19 an hour.
Moreover, most of the jobs created by onshoring manufacturing will not be on the factory floor. Much of China’s formidable manufacturing advantage stems from robotics, automation, and the early adoption of AI. To compete with China, American factories will also need to be highly automated, especially in advanced manufacturing industries such as semiconductors, automobiles, and medical devices in which the United States is best positioned to compete.
A worker loading oranges onto a truck in Minas Gerais, Brazil, July 2025 Adriano Machado / Reuters
Emphasizing the importance of services does not undercut the case for reindustrialization as a way of creating jobs, but it does mean the jobs will look different from what many people imagine. The economist Enrico Moretti has found that every manufacturing job created in a given city generates 1.6 jobs in the city’s “nontradable”—that is, service—sector. For high-tech manufacturing, the multiplier is even greater: each new manufacturing role produces nearly five new service-sector positions. Reindustrialization can help unlock that multiplier effect.
An industrial policy based entirely on punitive, unilateral tariffs will not promote the sustainable growth of the United States’ industrial base. By raising prices without addressing the underlying drivers of trade imbalances, it may even undermine the political case for tackling the flaws in the global trading system.
Unfortunately, the current institutions of global trade—especially the WTO—are not up to the task, either. The WTO has proved incapable of holding China accountable for its anticompetitive policies and has stood by fecklessly as Beijing exports its excess capacity to the rest of the world. The WTO’s requirement of consensus to make decisions and the failure of its dispute-resolution mechanism have rendered the organization unable to effectively guide global trade.
The more significant issue with the WTO stems from the faulty assumptions on which it was founded. The creators of the WTO believed that the major players in the global economy would be market-oriented and that the spread of free trade would go hand in hand with the expansion of fair competition rules. With the benefit of hindsight, however, both assumptions have proved false. To combat the harms of deindustrialization, job loss, and supply chain dependencies, countries have increasingly turned away from free trade in favor of aggressive industrial policy.
China has been the major beneficiary of this breakdown of global trade rules. The United States and its allies still hold enough economic leverage to confront Beijing and stem the tide of unfair trade. But if they fail to act soon, China’s size and deepening trade relationships—by one count, China is the largest trading partner for 120 countries—will cement a set of anticompetitive global trade norms.
The United States needs allies to counterbalance China’s economic weight.
An effective strategy to restore American competitiveness and foster reindustrialization must start with a new set of meaningful global trade rules that target unfair practices and distorted competition. These new trade rules must distinguish countries that abide by high labor and environmental standards and refrain from anticompetitive, beggar-thy-neighbor policies from countries that don’t. Think of it as a fair-trade customs union.
This fair-trade customs union would be built around a set of high standards needed to maintain fair competition. Only countries that upheld ambitious labor standards and environmental rules, the rule of law, and market-oriented regulations would be eligible for full membership. In exchange for membership, states would agree to refrain from pursuing anticompetitive policies such as offering widespread industrial subsidies, undercutting one another on corporate taxation, and dumping excess goods in foreign markets.
Nonmembers that upheld relatively high standards would be subject to meaningful but nonprohibitive trade barriers—perhaps tariffs of up to five percent—to incentivize them to join the union without imposing disproportionate costs. Countries that failed to meet these standards, however, would face significant penalties on trade between themselves and any member of the union. These consequences would protect the industrial bases of countries within the fair-trade union from being overwhelmed by cheap goods flowing from nonmarket economies. The goal would be to create a large common market among like-minded countries, which would enable them to take advantage of one another’s markets and comparative advantages while excluding countries that insisted on breaking the rules and undercutting the standards needed for fair competition.
Any market economies that are members of the WTO could seek to join if they were willing to apply the fair-trade union’s rules and uphold its standards in their domestic markets. Decisions regarding the substance of these rules and standards, how to admit new members, and whether a current member should be expelled for noncompliance would be made on a majority basis, perhaps using a weighted voting formula like that of the IMF or World Bank based on GDP and other factors. The WTO’s universal consensus mechanism has failed; a more flexible system is needed to allow rules to evolve over time alongside changes in the global economy. Although the biggest economies, especially the United States, would have more voting power in this arrangement, they would still need to work with other members to implement major changes.
Trump unveiling tariff rates in the Rose Garden of the White House, Washington, D.C., April 2025 Carlos Barria / Reuters
The rules of the fair-trade union would also include a limited set of carve-outs for national security. Members could apply higher tariffs and offer industrial subsidies to support the domestic production of goods considered critical to their national security, such as semiconductors and missile systems. To avoid spiraling subsidies and overproduction, countries would be encouraged to coordinate and build symbiotic supply chains that further reinforced trade complementarities among member states. Even when national security necessitated the use of protectionist measures, the overarching goal of the union would still be to facilitate market competition based on innovation, cost, and quality.
To be sure, such carve-outs would create challenging borderline cases for goods such as steel that are relevant to national security but are also commonly used for other purposes. In these cases, union members would have to work together to decide how to classify goods. Ideally, union members would agree that as long as they could rely on supplies from one another, they could avoid exercising their carve-out privileges and would let markets function.
The union would also sponsor the development of a new data architecture to better track trade flows and enforce trade rules. Today’s trade data is woefully inadequate for the complexities of modern trade. In some cases, it lacks the granularity needed to distinguish between different types of critical goods, such as semiconductors and batteries. It also does a poor job of capturing the globalized nature of supply chains, in which inputs can be manufactured in a variety of countries, collected and assembled into a partially finished good in others, and then shipped elsewhere for final assembly. Member countries of a new customs union would need to invest in systems to collect the detailed data that would allow the union to apply differential tariffs, enforce its rules, and prevent countries from avoiding penalties through the transshipment of goods through lower-tariff jurisdictions.
In addition, the union would need to develop a set of rules to prevent corporations from taking advantage of tax havens and depriving governments of the revenue they need to function. The global minimum tax agreement proposed by the Organization for Economic Cooperation and Development and endorsed by the Biden administration is a good model. It sets a minimum corporate tax level and allows countries to apply additional taxes on corporations that operate within their borders but domicile in jurisdictions with lower rates. Under these rules, if a company wants to do business with members of the fair-trade union, it needs to pay its fair share—regardless of where it files its articles of incorporation.
A RISING TIDE
Although this fair-trade union is at odds with Trump’s current approach of tariff threats and bilateral trade deals, it aligns with many of the administration’s overall trade goals. And the evidence suggests that elements of the union could attract bipartisan support, whether picked up by the president or pursued by his successors. Robert Lighthizer, the U.S. trade representative in Trump’s first term, has proposed a trade regime that would use high external tariffs and lower, frequently adjusted internal tariffs to achieve balanced trade among member countries. Michael Pettis, an economist popular among Trump’s trade team, has suggested a similar idea based on the proposal John Maynard Keynes put forward at the Bretton Woods Conference before Harry Dexter White got the better of him.
Despite the risks of Trump’s current approach, his attacks on the existing trade order have opened a window during which structural change may be possible. The third great reordering of the global economy is an opportunity to imagine what a better trade system could look like. A new fair-trade customs union that built on American strengths and used cooperative leverage to promote true market competition would reverse the trend toward unilateralism and address the roots of the United States’ trade imbalances. If Trump continues to pursue tariffs at all costs and does not reverse course, the opportunity will fall to the next set of political leaders, Democratic or Republican, to pursue this kind of solution.
Fixing global trade requires pressuring countries that do not want to play by market rules. But the long-term vision of a fair-trade union is not to divide the global economy forever. Instead, the goal is to expand to incorporate new members as more countries understand the benefits of playing by the rules and the costs of losing market access to a substantial share of the global economy if they do not. To ensure that the new union maintains its teeth, membership should be conditional on evidence that countries have already met a high bar. The lesson of China’s accession to the WTO is that real change must precede market access, not the other way around.
Cutting the trade deficit doesn’t need to rely on manufacturing alone.
The size of the U.S. market and Washington’s willingness to establish and maintain a system that provides certainty and predictability to its partners are critical to getting other countries to participate. As other large economies joined, this incentive would only grow. Mature economies in Europe and North America would gain from being part of a coalition with the collective might to stand up to China. Emerging economies would benefit from access to an economic bloc representing a sizable share, if not the majority, of the global economy. Traditionally, these economies worked their way up the global value chain by manufacturing cheap commodity goods such as clothing and toys before moving to basic electronics and eventually to high-end, advanced products. But China’s strategy of large-scale subsidies to businesses, massive industrial overcapacity, and demand repression is blocking this economic path for many developing countries. With China’s export machine flooding emerging markets with goods such as electric cars and telecom equipment, domestic alternatives are crushed before they have a chance to grow.
This customs union would offer emerging economies an alternative: a set of wealthy consumer markets open to accepting their imports provided they follow the union’s rules. Today, countries such as Bangladesh and Vietnam have little reason to risk China’s ire by openly aligning themselves with a Western economic bloc. If they committed to upholding fair trade, however, they would immediately be more competitive than China when trading with union member states. A country such as Vietnam, able to trade with key partners in the union without tariff barriers and protected from China’s economic leverage, would have a path to evolve from a producer of low-cost goods and a hub for Chinese transshipment to an economy that moves up the value chain.
As more of the global market abided by these rules, the harder it would be to compete outside it. If it succeeded, this economic arrangement would present China with a clear choice: restructure its economy to engage fairly in the world economy or pay higher costs to trade with members of the bloc.
This union would impose some costs on the United States, but far fewer than a policy that raises tariffs on all of the United States’ trading partners. Supporting domestic or “friend shored” production among allies and partners would increase costs in the short term, but it would also shift more of the long-term benefits of trade to workers, support middle-class job creation in both manufacturing and services, and enhance the United States’ national security.
The global economy is at an inflection point. The tariff spree will likely fizzle, but the underlying need to reform the international trading system will remain. The United States’ position in the global economy depends on how leaders take advantage of this moment. It is not too late to seize the reins of the next great economic reordering and steer the world economy toward a system that lives up to the promise of free trade.
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