April is the Cruelest Month

Investing in the US has been a good bet for well over a decade. America’s tech industry, its indefatigable consumers, highly profitable firms, and pro-growth fiscal policy has made the country a highly attractive option and contributed to the narrative that its economy is unassailable. This is what has been referred to as the “US exceptionalism” trade, a phenomenon that appears to have come to a sudden end.

April was the cruelest month. In the wake of Trump’s on-again-off-again tariff announcements, plus the general erosion of the rule of law domestically, investors are now properly spooked. In previous bouts of market turbulence, investors fled “risky” assets into the safe haven of US Treasuries. Now, investors have dumped  US company shares at a record pace and, in a dramatic turn, in mid April, Treasury yields rose (in other words, US sovereign bonds were being sold off) and the dollar weakened simultaneously. This combination of weakening currency and sovereign bonds implies a lack of confidence rarely seen in developed economies—Liz Truss’s disastrous mini-budget in her short-lived UK premiership is one exception—let alone in the reserve currency issuer.  Is your “safe” US bond even truly safe with a mad king?

The Fed’s independence is crucial to market assumptions about American stability. When Trump threatened to “terminate” Federal Reserve Chair Jay Powell, then, markets reacted violently. That threat was walked back but Trump has since opined that interest rates should be cut, and with the President able to appoint a new chair when Powell’s term ends in May 2026, worries about the Fed’s independence will persist. As Larry Summers told the Wall Street Journal, bullying the Fed does nothing for rates, but makes markets “nervous, which means higher long-term rates.”

With the Trump administration so far maintaining its soaring tariffs against Beijing, the entire world is facing the prospect of a US-China economic war and the disintegration of global supply chains. Decoupling is a trite misnomer. As Isabella Weber wrote, the term suggests something like “decoupling two railcars: clean and simple.” In fact, “it is more like tearing out organs from a living body.” Such an event, were it indeed to occur, would be catastrophic for the health of the global economy, hurting Americans, antagonizing allies, and slowing planetary climate stabilization.

Hegemony

Claims about the end of American hegemony are not new, but it is new for the White House itself to be declaring that it will no longer be a reliable security partner, trade partner, or reserve currency issuer.

There is no replacement hegemon waiting in the wings to fill the US-sized hole in world affairs. And there definitely isn’t an obvious replacement for the dollar. As Dario Perkins of TS Lombard notes, diversification and dedollarization on the margins does not mean that this is the end of the dollar’s reserve status. The US dollar “has powerful network effects.” Trade is still going to be invoiced in dollars “mainly because it is supported by deep USD funding markets.”

The system was built by the US to suit its own interests and beliefs. “The architect, the master planner, the developer of the rules-based multilateral system of economic integration,” as Singapore’s foreign minister Vivian Balakrishnan put it, “has decided that it now needs to engage in full-scale demolition of the same system that it created.”

Countries and investors are not only responding to the dramatic and chaotic impulses of the Trump White House, but taking actions to reduce their dependence on the US over the coming years. These actions can build on the 2020s resurgence of industrial policy, economic interventionism, and a broader repudiation of the type of liberal globalization that’s prevailed since the Second World War. Neo-mercantilism—defined by Eric Helleiner as the “belief in the need for strategic trade protectionism and other forms of government economic activism to promote state wealth and power in a post-Smithian age”—is back, and states are reshaping the global order.

The G20 responds

G7 and G20 countries alike are taking steps to capitalize on and hedge against a fundamental shift in American power. They are strengthening their domestic economies with deficit financing and directing investments into green, defense, and digital sectors.

The monumental shift in German fiscal policy will now enable investments in climate, defense, and, if pledges are to be believed, social infrastructure. The provision has allowed more than €100bn at the EU level to support clean manufacturing, while the Commission has delivered a proposal to invest €800bn in common defense spending.

In Canada, perhaps the most antagonized of American allies, Mark Carney is campaigning on a platform of strength and security, and has similarly pledged to ramp up defense and green manufacturing. He intends to collaborate with Europe on security and to stitch together a larger domestic market by loosening trading rules between Canadian provinces.

As tensions between the US and China accelerated during the first Trump administration, emerging middle powers began to use nonalignment as a bargaining chip for industrial upgrading and better trade deals.

Since 2020, large developing countries have unfurled industrial policies to strengthen, green, and modernize their economies. Brazilian President Luiz Inácio Lula da Silva launched Nova Indústria Brasil to leverage the country’s largely clean electricity matrix and natural resources into manufacturing opportunities. Along with other Latin American countries, Brazil makes the “powershoring” argument to attract foreign and domestic industry—positioning themselves as producers of energy intensive products in all sectors, such as metal refining and machine manufacturing for the wind and battery supply chains. Mexico’s president Claudia Sheinbaum, an energy systems expert, has announced and funded Plan Mexico for strategic investments with sustainable development and national content goals as a response to US tariffs.

Rest of world

Elsewhere, governments are finding they have less room for manoeuver. In Southeast Asia, ministers are scrambling to placate the White House while also maintaining relations with their most important economic partner by far: China. Vietnam, which has benefited from the “cat and mouse” game of bypassing tariffs on Chinese exports to the US, is cracking down on transshipment while also stressing its close relationship with the US. Cambodia is attempting to walk a similar line. The delicate balance that China’s neighbors have been keeping to maintain the US security guarantees, already narrowed in the past decade, is now unbearably precarious.

But for low-income and heavily indebted countries—those most subject to international financial subordination—options are even tougher. It wasn’t a surprise that countries immediately sought to placate the White House with pledges to import more US products and cut tariffs. A week after “liberation day,” the White House reported that more than fifty countries had requested talks on tariffs.

Whether or not those countries will find an audience at the White House is another question. Lesotho’s largest employing industry is textiles, and it has its biggest export market in the US. When the ninety-day extension period announced by Trump will expire in mid-June, the tiny landlocked kingdom will be facing tariffs of 50 percent. Lesotho’s trade minister, Mokhethi Shelile, told South African broadcaster SABC News that he was unclear on what would happen. “I don’t have a good experience with trying to get meetings with,” he said. It’s possible that “after three months, we have not even been able to sit down with the American government to negotiate.”

Cote d’Ivoire’s agriculture minister, Kobenan Kouassi Adjoumani, didn’t mention appeasement or retaliation, but pointed out that the cost of tariffs would have to be passed onto consumers. He also expressed hope that strengthening ties with Europe might help to offset the 21 percent tariffs on its cocoa exports.

Beijing

In China, Beijing has approved a 7.2 percent increase in defense spending to “firmly safeguard” national security. DeepSeek’s demonstration in January of a super (and IP-free) large language model already threatened America’s presumed predominance in the field; now the prospect of more Chinese tech and innovation fueling growth makes the US appear even more vulnerable.

But China is not lining up to replace the US role on the world stage. China’s central government has its own ways of building strategic power. President Xi has outlined a eight-point agenda designed to support the developing economies of the global South, from scientific cooperation with Brazil and African nations to lowering trade barriers for least developed countries. But while China has been jumping in to fill some of the gaps left by the sudden US exit from USAID global health and development programs, it’s at a much smaller scale. The central government has shown no intention of ramping up the kind of overseas financing that the US and other G7 countries provide, nor of becoming a real reserve currency issuer.

Diplomatic reorientation

In response to recent events, various alliances and investments that bypass the US have been floated, including a proposal to green the world’s largest trade bloc, the Regional Comprehensive Economic Partnership, and the first economic dialogue in five years between key members China, Japan, and South Korea. The EU wants to strengthen and green its trade agreements with Mexico, Canada, and Brazil, and is reaching out to the UAE on a new free trade agreement. An alliance between ASEAN countries and the Gulf Cooperation Council will be discussed by heads of state of Singapore, Saudi Arabia, and Indonesia.

In international relations, trade, security and capital markets, the themes are the same: in place of decades of reliance on the US and its assets, the rest of the world is now seeking to diversify, decarbonize, defend, and dedollarize.

It’s far from clear how a unipolar US-led global order could possibly be repaired. Reforms to institutions like the World Bank and IMF have foundered on Congressional approval, but even with US cooperation any such change to the formal architecture would require new levels of trust and commitment between Europe and China in particular, and with other powerful countries and blocs including Japan, Brazil, and the GCC countries.

Brazil and South Africa are leading diplomatic efforts through their 2025 presidencies of BRICS, COP30, and the G20. Discussion of a new trading and financial architecture, capable of providing policy space to pursue green structural transformation is now accelerating. Developing countries are not passive in the polycrisis but are actively trying to wrestle control over their destinies. With Trump blowing up the world order, there is suddenly more space for such countries to work with China, Europe and East Asia.

Things have changed permanently—even if all the Trump tariffs are rolled back tomorrow, and even if the Republicans enter the political wilderness in 2028. The causal links between de-dollarization, diversification, and decarbonization remain unclear. But states are strategic actors that will not wait for certainty to emerge before they take action to balance against a hostile Washington, protect multilateral institutions that support their growth models, and invest countercyclically in the event of a global recession. The US is becoming poorer and weaker as it dismantles the very system it once built. Now, marooned on a fossil-drenched continent, the question is whether it will watch in sullen silence as others climb toward the solar uplands, or have the power to crush the spring.