Trump’s new wave of protectionism is shaking faith in the US dollar and prompting nations to rewire trade and financial relationships.
The global trade order has entered a period of profound uncertainty. Longstanding alliances are shifting, financial norms are being questioned, and countries are scrambling to revamp their economic strategies. Globalization isn’t dead, however; it’s just reassembling.
Much of the disruption begins in the US, where President Donald Trump’s abrupt, aggressive shift in trade policy has injected a new volatility into global markets. His “Liberation Day” tariff package, unveiled April 2, aimed to revive domestic manufacturing by imposing steep duties on imports, promising a new “golden age of America” powered by reshored jobs and greater market access for US goods abroad.
Rather than resetting the global playing field, Trump’s trade shock has set off a cascade of recalibrations. The US dollar has weakened, its role as a reserve currency is being reevaluated, and foreign investors are quietly retreating from US assets. At its lowest point in early May, the US dollar index had fallen 8.9% year-to-date before partially recovering. Treasury bonds, once a byword for safety, are being shed at an accelerating pace.
“We have been arguing over the last few months that the market is reducing its willingness to fund the US twin deficits,” George Saravelos, global head of foreign exchange research at Deutsche Bank, wrote in a recent note. “We worry this is brewing a major problem for the dollar—and potentially the US bond market too.”
As the US continues one-on-one tariff negotiations with China and more than 100 other governments, other countries aren’t waiting for Washington to set the rules. From Latin America to Asia and the Middle East, trade alliances are being redrawn and export strategies are shifting. The map of global commerce is changing in real time.
Call it the Great Realignment.
For over 50 years, the US has occupied a peculiar place in the global trading landscape, importing vast volumes of consumer goods and relying on foreign capital to finance the resulting trade deficits. Foreign governments bought trillions in US Treasury bonds, cementing the dollar’s dominance as a global reserve currency. That “exorbitant privilege,” as it’s sometimes called, is now under pressure.
“China doesn’t mind the decoupling; it’s only the speed that is upsetting them.”
Andrew Polk, Trivium China
Washington’s pivot toward tariffs and economic nationalism is forcing allies and rivals alike to reconsider their exposure to the US system.
“Unpredictable and maximalist US policies, such as claims on territory owned by traditional US allies, serve to increase concerns about coercion and lead states to insure against it,” Deutsche Bank’s macro strategists, Oliver Hardy and colleagues, wrote in a May note, “e.g., by reducing reliance on the US financial system and the dollar as a medium of exchange and store of value. Moreover, as alternatives become more developed, the opportunity cost of moving away from US financial networks declines.”
The US-China dynamic remains central. After the US imposed 145% tariffs on Chinese goods, Beijing responded with 125% levies on US exports. A 90-day truce was agreed to in Geneva in May, scaling back tariffs to 30% and 10%, respectively. While the deal provides temporary relief, it has not erased concerns that the world’s two largest economies may be heading toward a long-term decoupling.
New Alliances Take Shape
Other governments aren’t standing still. Even as the US pursues a broad slate of trade talks, it has announced only one new agreement so far—a framework deal with Britain, signed in May, many details of which have yet to be worked out. Meanwhile, many countries are accelerating their own trade diversification strategies to hedge against further disruptions.
The effects of this realignment are already playing out on the ground, nowhere more clearly than in Latin America, where some of the biggest beneficiaries of the Trump policy are located. As US trade relationships grow more uncertain, many of its former hemispheric partners are deepening ties with China and other global players to safeguard their export markets.
Even before the current tariffs were announced, Chinese imports of US agricultural products had declined 14% to $29.25 billion in 2024, which followed a 20% decline in 2023, a legacy of the first Trump Administration’s earlier round of tariff hikes targeting Beijing. By contrast, Brazil exported $49.7 billion in agriculture to China last year, with soybeans the main export crop. Eyeing an opportunity to replace US farm exports to China, Brazil sent a 150-member trade delegation, its largest ever, to Beijing in May, headed by President Luiz Inácio Lula da Silva, and opened a new office in Beijing to promote coffee and other exports.
Meanwhile, China signed a letter of intent with Argentine exporters to buy $900 million worth of soybeans, corn, and vegetable oil to avoid sourcing them from US farmers, putting further pressure on Washington.
It’s not only the Chinese who are shopping for South America’s agricultural products.
“There are increasing opportunities for Latin American countries to strengthen trade links with both Asia and Europe,” says Andrés Abadía, chief Latin America economist at Pantheon Macroeconomics. The EU signed an agreement with the Mercosur countries—Argentina, Brazil, Paraguay, and Uruguay—in December, he notes, creating a free trade area between the two blocs, a market encompassing a quarter of global GDP. The pact, when ratified, will remove 90% of tariffs on agricultural exports to Europe and the EU’s industrial exports to Mercosur countries.
The new attention is welcome in Latin America—up to a point.
Asian countries are strengthening trade ties with the economies of Peru, Chile, and Colombia. But with Chinese exports to the US becoming problematic, more cheap goods from China could be entering the Latin American region, “which could cause problems, especially for emerging Latin American manufacturing sectors,” Abadía warns.
The first signs of this shift emerged in April, when China reported a 21% decline in goods shipments to the US. At the same time, exports to Latin America were $43.8 billion, more than double the $21.2 billion reported in the same period in 2024. Chinese exports to Europe rose to $46 billion in April, up from $43 billion in April 2024.
The Europeans are also concerned about a flood of cheap Chinese imports. In April, European Commission President Ursula von der Leyen spoke with Chinese Premier Li Qiang about preventing a repeat of the wave of Chinese goods that washed over the EU during the first Trump presidency. There is a need for “a negotiated resolution” to the growing trade imbalance, von der Leyen warned. In an apparent olive branch to the Europeans, China lifted sanctions on several members of the European Parliament.
The European Union is also trying to broaden its trade relations elsewhere by putting finishing touches on a free trade deal with India, which it hopes to conclude by the end of this year.
“We both stand to gain from a world of cooperation and working together,” von der Leyen said when she met with Indian Prime Minister Narendra Modi in New Delhi in February to discuss the agreement. The EU is India’s largest trade partner, importing $77 billion worth of goods in 2024, eclipsing both the US and China.
Canada offers another example of diversification away from the US. While Canadian goods exports to the US fell 6.6% in March, the biggest drop since the start of the pandemic, exports to other countries rose 24.8%, driven by commodities like oil and gold, which nearly offset the loss from the US market. A big part of the export decline consisted of a decrease in automobile shipments, which now face a 25% tariff.
Not only did Canadians buy fewer US goods, but fewer Canadians chose to vacation in their neighbor to the south in response to President Trump’s comments about annexing Canada as the 51st US state. In March, the number of Canadians crossing the border by car fell 32% compared to a year earlier, according to Statistics Canada; air travel fell 13.5% in the same period.
Canada’s new prime minister, Mark Carney, visited Trump in Washington in early May, but they did not announce any progress on a trade deal.
China’s Dilemma
China has been taking steps to prepare for a trade war with the US ever since Trump’s first term, notes Andrew Polk, cofounder of Trivium China, a business consultancy in Beijing.
“They have already reordered their trade flows and will do more with Europe and Southeast Asia,” he observes. “They don’t mind the decoupling all that much; it’s only the speed with which it happened that is upsetting them.”
As noted earlier, China is quickly replacing the US as a source of agricultural products, with increased imports from Latin America, Canada, and Australia. The Chinese are keenly aware that midwestern US farm states tend to vote Republican and hope the loss of business will bring pressure to bear on the Administration.
But China is also eager to develop new markets to replace the US, which imported $438 billion worth of Chinese products last year. Soon after Trump declared “Liberation Day” in April, putting heavy tariffs not only on China but on exports from Vietnam and Cambodia, Premier Xi Jinping visited Vietnam, Malaysia, and Cambodia to demonstrate that China is a more reliable partner, signing 45 cooperation agreements covering trade, infrastructure, science and technology, and supply chains.
Southeast Asian countries are in a bind since they depend on China for investment and inputs and the US as a market for their finished goods.
The Trump Administration is attempting to crack down on the practice of transshipment, whereby partially finished Chinese goods are sent to Vietnam and Cambodia and then re-exported after minor changes. Trump announced a 45% tariff on Vietnamese products, for example, but paused it for 90 days while a trade deal is being negotiated. US imports from Vietnam in April were up 34% from a year earlier, driven by US companies frontloading orders ahead of the new tariffs.
Washington, of course, would like to isolate China economically from other Asian countries. But Rajiv Biswas, CEO of Asia-Pacific Economics, a Singaporebased consultancy, doesn’t think that policy is likely to succeed.
“China is such an important market for many countries, I don’t think any of the countries in East Asia want to choose sides,” he says, noting that while Australia is a close security partner of the US, China buys one-third of the country’s exports. “They’re very uncomfortable with the situation where they’re being asked to pick.”
Similarly, while China and Japan have their political differences, China is Japan’s largest trade partner and Japan is China’s second largest.
And when Chinese businesses suffered a virtual shutdown in trade, Beijing responded with an economic stimulus plan that included a 10-basis-point cut to the key policy interest rate, a reduction in banks’ reserve requirements—freeing up $138 billion in additional liquidity—and a mortgage rate cut to support home purchases.
Dollar’s Domination Dented
Historically, China has allowed the yuan to weaken against the dollar to blunt the impact of US tariffs. That dynamic briefly held in early 2025, when the yuan dipped to 7.33 to the dollar after Trump’s tariff plans were unveiled. But as the dollar began its own slide, the picture shifted. By later May, the yuan had appreciated to 7.20, reflecting broader pressure on the greenback.
The dollar’s decline has spurred rapid shifts in capital flows. Japanese investors—long major holders of US Treasuries—began selling off US assets and repatriating funds, driving up the yen. The Taiwan dollar surged more than 9% in two days of trading in May, its sharpest rise since 1988, as insurers and exporters moved assets back home.
One of the more surprising developments has been the strength of the euro, which gained as much as 12% against the dollar—from it’s January low—following April’s tariff announcement. Traditionally seen as too fragmented to rival the dollar’s safe-haven status, beset as it has been by budget crises in Greece, Italy, and elsewhere, the eurozone is now benefiting from both renewed investor confidence and signs of economic stabilization.
“The strength of the euro against the dollar is based on both the deterioration in the economic outlook for the US economy and the improvement in the prospects for Germany,” Jane Foley, senior FX strategist at Rabobank, said in March. “There are certainly signs of a shift away from dollar assets.”
The ripple effects are already hitting the corporate world. Multinationals reliant on a strong dollar could see earnings erode. European and Asian companies that purchase dollar-denominated commodities, like oil, are facing higher costs. And for emerging markets, the shift could reverse the 1997 Asian financial crisis dynamic. Back then, capital fled the region; today, it’s flowing in.
Currencies across Southeast Asia and surrounding markets—including in Singapore, South Korea, Malaysia, Thailand, Hong Kong, and Taiwan—are gaining momentum as investors diversify away from the US market. In a twist of economic irony, the weakening dollar may help Trump achieve one of his primary goals: a reduction in US imports.
But when it comes to exports, the forging of new trade regimes around the world may leave him knocking at the door.
