Tariffs, Treasuries, and the Fraying Liberal International Order

Introduction

Recent shifts in trade policies and capital flows are signaling an inflection point for the global economic system. Tariff skirmishes, unprecedented financial sanctions, and quiet adjustments in central bank portfolios all point toward a broader restructuring of the international monetary system. These developments raise doubts about the resilience of the post-Cold War liberal world order, long anchored by U.S. strategic leadership and dollar dominance. An emerging pattern of geopolitical realignment – from the fallout of the Russia–Ukraine war to moves by major economies to reduce dependence on the U.S. dollar – suggests that the liberal international order is weakening and perhaps transforming into a more fragmented arrangement. In this article, we explore how recent tariff moves and capital flows reflect this transition, and what it means for the future of global finance and governance.

The Ukraine War’s Geopolitical Fallout: A Fractured Global Response

The Russia–Ukraine war has starkly exposed cracks in the once-unified liberal order. In response to Moscow’s invasion of Ukraine, Western powers unleashed a barrage of sanctions aimed at crippling Russia’s finances and war machine. The U.S. and its allies froze Russian central bank reserves, banned key Russian banks from the SWIFT network, and embargoed exports of advanced technology, among other measures (rusi.org). Yet outside the Western alliance, many countries have been reluctant to follow suit. Major economies across the Global South – including China, India, Brazil, Turkey, and South Africa – have displayed little enthusiasm for enforcing Western sanctions on Russia (rusi.org). Instead of isolating Russia completely, the war has effectively split the world into blocs: one adhering to Western sanctions, and another “neutral” or non-aligned group that continues to engage with Russia.

Multiple factors underlie this limited response from the Global South. Economic and energy interests play a decisive role – for example, India and China have ramped up imports of discounted Russian oil, prioritizing affordable energy over Western demands. There is also widespread skepticism of unilateral sanctions due to historical grievances. Many developing nations harbor lingering anti-colonial or anti-Western sentiments, and they view the U.S.-led sanctions regime as a tool of Western hegemony (rusi.org). Even those that condemn Russia’s actions in principle are wary of jeopardizing their own ties and trade. In a United Nations vote denouncing the invasion, key players like China, India, and South Africa abstained, reflecting their careful balancing act (rusi.org). As one analysis noted, some countries simply “do not see the benefit of positioning themselves between Western democracies and Russia” (rusi.org), especially given longstanding diplomatic and defense relationships with Moscow. This hesitant stance by much of Asia, Africa, and Latin America highlights a geopolitical divergence: the liberal order’s norms (such as collective sanctions against aggression) no longer command universal compliance. Instead of rallying a truly global coalition to uphold international rules, the West faces indifference or even quiet defiance from many emerging powers. The fallout from the Ukraine war thus reveals a world less unified under Western leadership than at any time since the Cold War – a sobering reality that undermines the notion of a singular “rules-based” order.

Shifting Capital Flows: China, Europe, and the Future of U.S. Treasuries

One pillar of the liberal international economic order has been the near-automatic recycling of global capital into U.S. dollar assets – particularly U.S. Treasury bonds, which serve as the world’s safe haven store of value. That paradigm is now in flux. Both friend and rival nations are rethinking the wisdom of holding so many eggs in the dollar basket. China, the second-largest foreign holder of U.S. Treasuries, has steadily reduced its exposure in recent years, with its holdings falling to about $759 billion as of late 2024 – the lowest level in over a decade (investopedia.com). This marks a drop of roughly one-third from China’s peak holdings in the mid-2010s (wolfstreet.com). Beijing’s motivations are partly financial (diversifying its massive foreign exchange reserves amid rising U.S. interest rates) and partly geopolitical. After witnessing Western sanctions freeze Russia’s dollar assets, Chinese policymakers have an added incentive to de-risk their reserves against the possibility of a future clash with Washington. The trend has raised speculation that China could one day “weaponize” its Treasury holdings by dumping them – an extreme option that analysts say would be difficult and self-damaging for China, but whose mere possibility illustrates the erosion of trust underpinning the old financial order (reuters.com, reuters.com).

European holders of U.S. debt are also navigating new currents, albeit in a more nuanced way. As longstanding U.S. allies, European governments are not looking to upend the dollar system; in fact, aggregate Euro Area holdings of U.S. Treasuries have recently reached a record high of $1.83 trillion (wolfstreet.com), making Europe (in total) one of the largest creditors of the United States. Persistently high U.S. yields through 2023–2024 actually attracted European investors seeking better returns than available on German bunds or Japanese bonds (wolfstreet.com). However, beneath this surface confidence lies a gradual repositioning. A larger share of Europe’s Treasury purchases come from private investors and financial hubs (London, Luxembourg, Dublin) rather than central banks, indicating that official reserve managers in Europe are not significantly increasing their dollar reliance (wolfstreet.com, wolfstreet.com). Moreover, the European Union has its own long-term ambition of promoting the euro as a reserve currency to reduce vulnerability to U.S. financial policies. Episodes like the U.S. Federal Reserve’s aggressive rate hikes (which sent the euro skidding in 2022) and U.S. sanctions impacting European firms have only reinforced Europe’s desire for strategic autonomy in finance. In short, we do not yet see a concerted European selloff of U.S. assets – but we do see a cautious hedging. The continued health of the U.S. Treasury market can no longer be taken for granted as a one-way bet. As economists Paola Subacchi and Paul van den Noord observe, the stability of dollar assets rests on the assumption that U.S. institutions remain strong and credible (project-syndicate.org). Should political turmoil or fiscal showdowns in Washington erode that confidence, a broader diversification away from Treasuries could accelerate, leaving the U.S. suddenly more exposed. The U.S. has financed large deficits for years thanks to the dollar’s “exorbitant privilege,” but that privilege may be slowly fading as major creditors reassess the balance of risks and rewards.

Momentum Toward De-Dollarization and Regional Alternatives

Facing the specter of sanctions and the volatility of U.S. monetary policy, numerous countries have begun boosting local-currency trade and exploring alternatives to the dollar-centric system. What started as murmurs of “de-dollarization” a few years ago has gained tangible momentum through a patchwork of regional agreements and financial innovations. The common thread is a desire for greater autonomy from the dollar – and by extension, from U.S. influence – in conducting trade and storing national wealth. Several notable developments illustrate this global shift:

• Local Currency Trade Pacts: Major emerging economies are increasingly conducting commerce in their own currencies instead of via the U.S. dollar. In a landmark step, China and Brazil struck an agreement in 2023 to settle bilateral trade in yuan and reais, bypassing the dollar as an intermediary. Similar arrangements have proliferated – from India offering to trade with certain partners in rupees, to Russia and China extensively using rubles and yuan for energy and commodity deals. In Southeast Asia, ASEAN leaders formally agreed in May 2023 to expand the use of local currencies in intraregional trade (thediplomat.com), even floating the idea of a unified ASEAN currency framework in the future. These deals reduce transaction costs and currency risk for participants, while chipping away at the dollar’s ubiquity in international trade.

• Alternative Payment Networks: Sanctions on Russia exposed the vulnerability of countries dependent on Western payment infrastructure. In response, excluded states have developed their own pipelines. Russia rolled out its SPFS interbank messaging system as a domestic alternative to SWIFT, and increased use of China’s CIPS network for cross-border payments (asianews.network). Likewise, to reduce reliance on U.S.-based payment giants (Visa, Mastercard), Indonesian and Malaysian officials have advocated using domestic networks and linking regional payment systems (thediplomat.com). The rise of central bank digital currencies (CBDCs) also plays into this trend – China’s digital yuan, for instance, could eventually facilitate international transactions outside the traditional dollar-based banking system. While none of these alternatives individually rivals the scale of dollar channels, together they are creating a parallel financial plumbing that could, over time, blunt the force of any one country’s economic coercion.

• Surging Gold Reserves: Facing geopolitical uncertainty, central banks worldwide are hedging their bets by gorging on gold – a tangible asset outside any sovereign’s control. In 2022 and 2023, central banks purchased over 1,000 tonnes of gold each year (businessinsider.com), more than double the annual average of the previous decade. This record gold-buying spree (accounting for roughly one-quarter of total global gold demand) has been led by countries like China, Russia, Turkey, and India. They see gold as a politically neutral store of value – one that cannot be sanctioned or seized by foreign powers (businessinsider.com). As IMF Deputy Managing Director Gita Gopinath noted, after recent shocks “countries are rethinking their heavy reliance on the US dollar” for reserves and looking to gold as a safe asset insulated from geopolitics (businessinsider.com, businessinsider.com). Gold, of course, will not replace the dollar, but the ravenous appetite for it signals a desire to diversify reserve composition in case the dollar-based system fractures.

• Regional Trade Blocs and Currencies: The architecture of trade itself is becoming more regionalized, which in turn lessens the dollar’s centrality. The world’s largest free trade pact, the Regional Comprehensive Economic Partnership (RCEP), came into force in Asia in 2022 – notably without the United States. Within such blocs, members often consider mechanisms to facilitate trade in local currencies or settlement units. The BRICS grouping (Brazil, Russia, India, China, South Africa) has openly discussed creating a new reserve currency or payment system for member trade, and at their 2023 summit they emphasized the need to use national currencies more in commerce. While these ideas are in early stages, the political will behind them is significant: even U.S. partners in the Gulf and Southeast Asia have entertained switching oil or commodity contracts to non-dollar currencies under certain conditions. In Africa and Latin America, too, there are talks of strengthening regional development banks and swap lines to reduce dependence on the Federal Reserve’s swap facilities. All these moves point to a future where the dollar shares more of the stage with other currencies.

Concrete evidence of de-dollarization is already visible. In Moscow, for example, trading volumes in Chinese yuan have now surpassed those of the U.S. dollar (reuters.com, reuters.com) as Russia leans on China for a financial lifeline. By 2023, nearly two-thirds of trade between Russia and China was being settled in rubles or yuan instead of dollars (peoplesdispatch.org). Likewise, when OPEC+ turmoil or great-power tensions spike, we see renewed chatter about pricing oil in currencies other than the dollar. To be clear, the greenback remains dominant globally – it still accounts for about 58–59% of central bank reserves and is the invoicing currency for most world trade (thediplomat.com). However, the steady erosion of its market share (down from ~70% two decades ago) and the flurry of workarounds being built suggest that the dollar’s supremacy is no longer taken as a given. For countries outside the U.S.-EU orbit, diversifying currency exposure is seen not only as sound economics but as a strategic imperative in an era of heightened geopolitical rivalry.

Japan at a Crossroads: Alliance vs. Autonomy

Perhaps no U.S. ally better exemplifies the delicate balance between strategic loyalty and economic self-interest than Japan. Long a linchpin of the liberal order in Asia, Japan now finds itself pulled in opposing directions. On one hand, Tokyo is firmly embedded in the U.S.-led alliance network – doubling its defense budget, coordinating with the G7 on Russia sanctions, and aligning with Washington’s tough stance on China’s tech sector. On the other hand, Japan’s own economic and energy imperatives demand nuance and pragmatism, especially as global trade tensions threaten to escalate into a more pervasive tariff war. Caught between U.S. strategic expectations and the realities of its geographic and economic ties, Japan is maneuvering tactically to secure its interests in this uncertain early phase of a possible new trade conflict.

Japan’s tightrope walk is evident in its response to Russia’s war and in its dealings with China. When the Ukraine war broke out, Japan surprised some observers by swiftly joining Western financial sanctions and even phasing out most Russian oil imports – a bold stance for a nation heavily reliant on energy imports. Yet Tokyo also carved out a crucial exception: the Sakhalin-2 natural gas project in Russia’s Far East was exempted from sanctions, allowing LNG shipments to Japan to continue uninterrupted (asianews.network). This exemption, explicitly extended by G7 governments, acknowledged that Japan could not simply sever 10% of its LNG supply without crippling economic consequences. It exemplifies Japan’s realist approach: upholding the liberal order’s sanctions in principle, but quietly preserving lifelines vital to its own energy security. Trade data confirm that while Japan’s overall commerce with Russia has plummeted since 2022, imports of Russian LNG and certain other commodities persist at significant levels (asianews.network, asianews.network). In the eyes of Japanese policymakers, supporting Western norms must be balanced against avoiding self-inflicted harm. This is a far cry from the idealistic solidarity one might expect in a fully unified world order; rather, it is great-power politics tempered by national interest – a sign of the times.

The U.S.–China rivalry presents an even starker dilemma for Tokyo. Japan’s economy is deeply intertwined with China’s (its largest trading partner), yet its security depends on U.S. protection against an assertive Beijing. As Washington ramps up pressure on allies to counter China’s rise – through supply chain “decoupling,” export controls, and possibly new tariff measures – Japan has tried to comply without provoking Beijing’s wrath. A case in point came in 2023, when Japan imposed strict export controls on advanced semiconductor equipment, effectively joining the U.S. campaign to curb China’s tech capabilities. Officials in Tokyo insisted the move was about preventing military use of sensitive technology and “not targeting any specific country” (reuters.com,reuters.com). In reality, this policy was seen as a major win for the U.S. and a blow to Chinareuters.com, aligning Japan with American sanctions on chips. Beijing’s response was sharp: Chinese spokespeople accused Tokyo of “weaponising” trade and warned that such actions would harm Japan’s own industry (reuters.com). Here Japan was plainly doing the bidding of its U.S. ally, even at the risk of economic retaliation from its biggest customer. Yet at the same time, Japan avoided a public confrontation, and its ministers flew to Beijing to maintain dialogue (reuters.com). This dual approach – quietly tighten the screws on high-tech exports to China, but keep broader economic relations stable – encapsulates Japan’s strategy of hedging.

Tokyo has a history of deftly managing trade frictions. During earlier tariff showdowns (for example, when the Trump administration threatened steep tariffs on Japanese cars in 2018–2019), Japan quickly negotiated side agreements to placate Washington and avert the worst outcomes. It opened sectors like agriculture to more U.S. imports and promised investment in American projects, effectively defusing U.S. pressure in a transactional manner. Now, with protectionist winds blowing again and talk of “friend-shoring” supply chains, Japan is leveraging forums like the Indo-Pacific Economic Framework and the CPTPP trade pact (which it championed after the U.S. withdrew) to keep a rules-based trade system alive. But if a full-blown tariff war were to erupt between the U.S. and China, Japan would face painful choices. Would it impose tariffs on China in solidarity with the U.S., even if that invited Chinese counter-tariffs on Japanese goods? Or would it stand aside and risk U.S. ire? The early signs show Japan trying to preempt such dilemmas by coordinating closely with the U.S. on strategic controls (like tech exports) while quietly diversifying its economic partnerships across Asia and beyond. Japan has even joined the local currency settlement initiatives with neighbors – for instance, participating in currency swap and local currency trade arrangements with ASEAN and India (thediplomat.com) – which reduce (marginally) its dependence on the dollar system and Chinese yuan alike. This balancing act underscores a larger point: even core members of the liberal order are hedging and adapting in unprecedented ways. Japan’s case illustrates that the binary division of the world into “allies vs. revisionists” is oversimplified; in practice, nations are recalibrating their positions to safeguard sovereignty and prosperity amid great-power economic competition.

A New Global Monetary Structure: Implications for the Liberal Order

The developments above – fragmented responses to sanctions, realignments of capital flows, experiments in de-dollarization, and allies hedging their bets – all point to a world transitioning toward a more multipolar or at least multifaceted international system. The liberal international order that prevailed since the 1990s, characterized by U.S. economic primacy, unfettered globalization, and broad consensus on rules, is unmistakably under strain. We may be witnessing not an abrupt “collapse” of that order, but a gradual erosion and transformation. Several broad implications emerge from this landscape:

1. A Less Dollar-Centric Monetary System: The U.S. dollar is still the world’s reserve currency, but its dominance is slowly receding as alternative assets and currencies gain ground. The share of global reserves held in dollars has been on a two-decade decline (atlanticcouncil.org, reuters.com), and recent events have accelerated the dialogue about finding substitutes. If major economies continue to trim their dollar holdings – whether to diversify risk or to make a geopolitical statement – the result could be a more plural reserve system, with greater roles for the euro, gold, and possibly the Chinese renminbi or a future BRICS currency. For the United States, this means its exorbitant privilege of easy borrowing could be curtailed. Already, U.S. Treasury officials and economists are acknowledging that even a small reduction in the dollar’s reserve share can have a significant impact on U.S. bond markets (reuters.com) – potentially pushing up U.S. interest rates and borrowing costs. In other words, as the rest of the world diversifies, the U.S. will start to feel the financial constraints that other countries do. Maintaining confidence in U.S. institutions and fiscal health becomes ever more critical to avoid a crisis of credibility.

2. Fragmentation into Blocs: The liberal vision of one integrated global economy governed by common rules is giving way to a more fragmented order, often described as bloc geopolitics or a bifurcated world economy. We see the emergence of at least two broad “spheres”: a U.S.-led coalition of advanced democracies and close partners (which still controls the lion’s share of global GDP and high finance), and a loosely aligned grouping of major emerging states (China, Russia, Iran, and many Global South nations) that are creating parallel networks for trade, technology, and finance. The Russia sanctions episode crystallized this divide – Western countries went one way, much of Asia, Africa, and Latin America went another. In monetary terms, this could result in parallel systems: for example, a Western bloc that remains dollar- and euro-centric, and a Eurasian/Global South bloc where alternative currencies and payment systems proliferate. Cross-border capital flows and trade might increasingly stay within these spheres (often termed “friend-shoring” or “decoupling”), reducing the interdependence that defined the post-1990s globalization era. Such fragmentation carries risks of inefficiency and higher transaction costs, but for many nations the trade-off is worth the added security of not being too beholden to any single foreign power’s economic might.

3. Evolving Institutions and Rules: The Bretton Woods institutions and frameworks of global governance will need to adapt or face irrelevance. We may see reforms in the International Monetary Fund’s reserve asset composition (e.g. an expanded role for the SDR basket to include more currencies or commodities), and more influence for emerging economies in setting global financial standards. New institutions might also arise: for instance, the New Development Bank (the so-called BRICS bank) and the Asian Infrastructure Investment Bank are early examples of non-Western-led multilateral lenders. If the liberal order weakens, the norms around free trade could also further erode – the world could normalize the use of tariffs, export controls, and sanctions as routine tools of statecraft, rather than exceptions. In such a scenario, negotiating new global trade deals becomes harder; instead, we might see a web of regional pacts that set their own rules (as with the EU, RCEP, AfCFTA in Africa, etc.). The open question is whether this pluralism leads to healthy competition or chaotic rivalry. Optimistically, one could imagine a reformed international order where power is more evenly distributed and rules are renegotiated to be more inclusive, reflecting the voices of the Global South. Pessimistically, the slide away from a liberal order could bring more frequent financial instability and conflict, as coordination problems increase.

4. The Liberal Order’s Next Chapter – Transformation, Not Total Collapse: It is important to note that the liberal international order is not simply vanishing. Many of its core elements – the prevalence of market economics, the interconnectedness of banking and supply chains, and the desire for growth and development – remain intact. The United States still possesses immense structural advantages: the depth of its capital markets, the innovative power of its economy, and a network of alliances that, if marshaled, represent well over half of global GDP. The dollar, for all the talk of de-dollarization, is still used more than all other currencies combined in global reservesimf.org and is likely to remain preeminent in the near future (businessinsider.com). However, the events of recent years suggest the liberal order is evolving into something less centralized. We are likely entering a period of contested leadership and parallel systems – a hybrid order where liberal principles coexist with realist power plays and regional arrangements. The Western powers can no longer assume that their financial rules or political values are universal; they must contend with alternative models championed by rising powers.

In practical terms, businesses and investors will need to navigate a more complex terrain. Currency risk management will grow in importance as trade in non-dollar currencies expands. Supply chains may be rewired to align with geopolitical fault lines, affecting everything from the price of semiconductors to the availability of rare earths. Smaller countries may exploit the competition between great powers to extract better deals or to play one side against the other – a dynamic reminiscent of Cold War non-alignment, but now in the economic realm. International institutions will be tested: can they incorporate divergent interests, or will they be bypassed by ad hoc groupings?

Conclusion

The broader restructuring of the international monetary system underway is both a symptom and a cause of the liberal world order’s weakening hold. Tariff salvos, selective sanctions, and shifts in reserve assets all reflect a world that is no longer converging on a single model of capitalism or a single dominant currency. Instead, we are seeing the early stages of an unwinding – a movement toward a multi-nodal global economy where different blocs set different rules. This does not mean a global free-for-all; rather, it means a new balance will have to be negotiated. The coming years will reveal whether the liberal international order can be reformed to accommodate the legitimate grievances and aspirations of emerging powers, or whether it will be largely supplanted by a new paradigm.

One thing is clear: the assumptions that defined the past three decades no longer hold as firmly. Western sanctions can be blunted by alternate partners; U.S. deficits can no longer be financed without question; and the dollar’s throne, while secure for now, is being cautiously approached by would-be competitors. For policymakers in Washington, Brussels, Beijing, and beyond, the task is to manage this transition without letting it descend into disorder. For all its flaws, the liberal order delivered relative stability and prosperity for many years. Its fraying could portend turbulence – but also opportunity for creative renewal. The world stands at a crossroads: if leaders recognize the deeper currents beneath recent tariff moves and capital flows, they might steer us toward a more stable multipolar financial system. If not, we may look back at the 2020s as the decade when the old order faded and a more uncertain era of fragmented globalization took its place. The stakes could not be higher, as the structure of the global monetary system will profoundly shape international politics and economics for decades to come. In this moment of flux, a clear-eyed understanding of these trends is the first step toward navigating the uncharted waters of a post-unipolar world.

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Sources: Western sanctions and Global South stance (rusi.org, rusi.org); Chinese and European U.S. Treasury holdings (investopedia.com)(wolfstreet.com); De-dollarization initiatives (thediplomat.com)(reuters.com); Japan’s strategic balancing (reuters.com)(asianews.network); Central bank gold purchases and IMF perspective (businessinsider.com, businessinsider.com).

Disclaimer: This article is for informational purposes only and does not constitute financial or investment advice. All investing and lending involves risk, and readers should perform their own due diligence or consult with professional advisors before making decisions. The views expressed here are based on market trends and sources as of the date of writing, and future conditions may change