The End of US Dominance?

The victory of Donald Trump in the US presidential elections in November 2024 marks another major change to the global multilateral order. Trump’s Make America Great Again (MAGA) view constitutes a shift of the world’s largest economy towards an emphasis on a more narrowly defined national interest, with its tariff policy putting into question the global cooperative free trade system. Trumps demand on the NATO allies to increase defense spending raised questions about the commitment of the United States as a military ally in NATO. The president’s aggressive and unpredictable trade policy prompted China and India to consider a further decoupling from Western markets and currencies, which might challenge the leading role of the dollar in the international monetary system. In its policy forum, this issue of Economists’ Voice covers various dimensions of the world’s (partial) abandonment of multilateral policy coordination, whereas the policy papers look into other topical economic policy issues.

As the lead policy paper David Papell (University of Houston) and Ruxandra Prodan-Boul (Stanford University) analyze under the title Alternative Policy Rules and Post-Covid Fed Policies the response pattern of the Fed to its self-formulated targets. Flexible Average Inflation Targeting as pursued between August 2020 and August 2025 and conventional inflation targeting pursued previously. They find that Federal Reserve policy prescriptions based on the two different frameworks were almost identical. They show that interest-rate inertia, i.e. the Fed’s gradual adjustment of interest rates to shocks, matters far more than the choice of rule or framework in explaining actual policy. Non-inertial rules show that the Fed tended to be “behind the curve”, particularly in the face of rising inflation.

In Accountability in Action: The European Parliament’s Assessment of the ECB 2024 Annual Report Jakob de Haan (University of Groningen) and Fabian Amtenbrink (Erasmus University Rotterdam) make an assessment of the report of the European Parliament on the ECB’s activities in 2024. The report argues that the ECB’s secondary objectives are in conflict with its independence. Although the primary goal of the ECB is to keep inflation in check, the report did not offer an assessment of the ECB’s delayed response to hiking inflation in 2021 and 2022. The report suggests according to the authors that the use of asset purchase programs should be limited to crises, thereby ignoring why central banks introduced these programs in the first place. According to the report, the introduction of a digital euro is ultimately a political decision that has to be taken by the EU legislators and not by the ECB.

In Germany’s Fiscal Turn: Structural Challenges, Political Risks, and European Spillover Effects Michael Christl (Universidad Loyola Andalcuia) argues that Germany’s one trillion debt-financed spending program marks a major shift in its economic strategy, with significant implications for both Germany and the euro area. For Germany the strong fiscal expansion may provide a boost to growth, for the euro area the risks of a rising interest rate level may predominate. The author derives the potential consequences of the fiscal expansion for debt sustainability, financial stability, and European fiscal coordination. According to the author without structural reforms in taxation and public investment, the shift risks weakening fiscal credibility across the EU.

Lukas Hakelberg and Aanor Roland (Leuphana University of Lüneburg) support the European Union’s imposition of the Global Minimum Tax (GMT), despite the United States withdrawing from the project. In Trumpian Neomercantilism, European Fiscal Capacity and the Global Minimum Tax they explain how the Global Minimum Tax acts as a safeguard against third countries with very low corporate tax rates, and highlight the similarities between the Global Minimum Tax and provisions introduced by the first Trump administration in the US tax system. The authors are optimistic that the Global Minimum Tax will secure substantial tax revenues to help finance Europe’s high investment needs.

In Factors Driving India’s Growth: Challenges and Policy Measures, Vandana Jain and Durairaj Kumarasamy (Manav Rachna International Institute of Research and Studies) provide a comprehensive picture about India’s growth potential and strategies. The authors introduce the current growth plans of the Indian government and describe key initiatives centered around firm dynamics and start-ups, health, education, green energy, infrastructure, and technological innovation. Overall, the authors are confident that the current strategy can help the country with its 1.4 billion population to reach the level of a developed economy around mid-century. In this process they see a further strong urbanization as pivotal for the development.

The policy forum provides a wide spectrum of contributions on the future of the geopolitical and geoeconomic architecture, which has been up to the present characterized by a hybrid of multilateral rules and U.S. dominance. The forum tends to the conclusion that the multilateral world order is not dead, but that it remains an open question whether the recent turn in U.S. policies will strengthen or weaken the economic, financial and military dominance of the United States.

Erasmus Kersting (Villanova University) argues that the United States would hurt themselves by a lasting exit from the World Bank. His contribution After Multilateralism: The US and the World Bank describes the history of the Bretton Woods institutions until the recent U.S. withdrawal. His overview of the empirical literature on the determinants of development aid and the revealed preferences of donors confirms that donor countries use aid to exert influence by rewarding and punishing countries. Hence, the Bretton Wood institutions have also provided the United States a channel of influence that is difficult to substitute. Akash Deep and Hannah Wang (Harvard Kennedy School) consider how development aid could adapt to reduced funding in light of the withdrawal of the United States and a general decline in donor commitments. The starting point of their paper The Triple Mandate of Development, Climate, and Humanitarian Aid is an analysis of how the objective function of international aid has diversified. The analysis shows that the objectives of climate and crisis relief are increasingly crowding out traditional development objectives. The paper proposes a better integration and synergies between these objectives by developing a framework to identify areas of alignment and potential integration for international aid.

Lisandra Flach und Andreas Baur (ifo Institute) direct the attention to trade policy with their contribution The WTO Minus One: A Rules-Based Global Trading System Without The US? They convey the message that the WTO can survive without the world’s largest economy. In their sober analysis, they demonstrate that 87 per cent of global trade does not involve the US as an importer or exporter. They argue that the remaining WTO members have a substantial economic interest in preserving multilateral trade rules. They conclude that the focus should now be on preventing a ‘vicious cycle of damaging protectionism’ around the world. As part of this strategy, governments should use the WTO rules and instruments to address the trade tensions arising from the unilateral tariffs of the United States. In the article The Fed in the Crosshairs Barry Eichengreen (University of California, Berkeley) identifies a mounting conflict between the Trump administration and the Fed, asserting that this conflict is “the most serious threat to the independence of the central bank in three-quarters of a century.” If the Fed’s decisions become subordinated to short-term political goals, the effectiveness of monetary policy may decline, inflation and financial instability risks may rise, and long-term credibility may suffer.

Erich Weede (University of Bonn) makes in his paper with the title Will China Replace the USA as the World’s Leading Power an assessment about the future of China as economic and political power. Whether the United States or China will win the race will depend on the avoidance of major policy failures. China must not forget the benefits of decentralized decision-making. In the United States, the Trump government must not neglect the strengths of free trade and the value of foreign alliances. Gunther Schnabl (Flossbach von Storch Research Institute) and Roland Wöller (Kissinger Chair for Governance and International Security, University of Bonn) ask the question Will the US Protect Taiwan in Case of Chinese Military Aggression?. They argue that the United States will protect Taiwan against a Chinese invasion, because Taiwanese semi-conductors are an indispensable input for the US high-tech industry. They stress the role of military threat as discovery procedure that not only explains the extra-ordinary performance of the Taiwanese semiconductor production, but also the non-replicable circumstances.

The paper War in Ukraine: Is Russia Challenging the US Global Dominance? by Alexander Libman (Freie Universität Berlin) deals with Russia, which has been considering US global leadership both as a threat to the great power status of Russia and to its sovereignty. Libman argues that nevertheless the main goal of Russia appears to create a multipolar world with numerous power centers engaging in various alliances and conflicts, with Russia only being one of them. The war in Ukraine, due to the commitment of the Western nations and US support, was currently perceived by Moscow as a way to coming closer to this multipolar world. Federico Mellace, Taro Nishikawa and Jannis Stagge (Kiel Institute for the World Economy) analyze the extent to which additional support from the EU has compensated for the United States’s suspension of financial and military aid following the presidential change in early 2025 (A Fragile Surge: European Support to Ukraine in Early 2025 – New Insights from the Kiel Institute Ukraine Support Tracker). The results suggest that Europe largely managed to fill the gap. However, the distribution of support was uneven, and to some extent relied on financial tools such as the mobilization of frozen Russian assets, the potential of which is uncertain. The authors expect that more balanced European cost sharing could make European engagement more sustainable.

Georg Zachmann (Bruegel) advocates a larger role for international mitigation trading as a strategy in the EU’s climate policy strategy. His contribution A Strawman Proposal to Use International Flexibility in Achieving Developed Countries sets out a three-dimensional approach along these lines. Firstly, the EU should not abandon its ambitious emission reduction targets as this would undermine the global consensus. Secondly, a ‘carbon buyers’ club’ of like-minded countries should agree on the rules for using international allowances to fulfil domestic commitments. Thirdly, countries with high emission abatement costs should be given the alternative option of financing foreign emission reductions, albeit at a surcharge compared to the domestic emission price.