A strong emphasis on American nationalism, prioritizing American interests, and advocating for protectionist trade policies to safeguard American industries and jobs is characterised as “Trumpism”, which initiated tariffs and a trade war in the global economy. These policies include deregulation in American industries to expand business opportunities and enforcing strict immigration policies to protect domestic labor.
Trumpism has contributed to increased uncertainties in the global economy. These policies have significant implications for international trade, cross-border investment, and employment opportunities, and have raised concerns about norms and practices of capitalism and the free market economy.
These policies are adopted in the name of resolving the crisis in the American economy to revive its historical position. A review of the history and impact of American policies on the global economy is necessary to understand the current crisis of the American economy. Several historical events have impacted the patterns of foreign investment and external debt in the US economy.
The origination of the Bretton Woods System in 1944, the Petrodollar agreement in 1974, the abolition of the gold standard by the United States in 1976, the origination of a free trade regime in 2000, and the acceptability of multiple currencies in the international market are included in those historical incidents.
After the Bretton Woods conference in 1944, the United Kingdom and its allies decided to delink their currencies from gold. However, the convertibility of USD into gold for foreign governments was determined at USD 35 per ounce (0.89 grams) of fine gold. The price of USD was attached to this quantity of gold from 1941 to 1971.
The Bretton Woods Conference has established a ‘Bretton Woods system’ of monetary management, which requires countries to guarantee the convertibility of their currencies into US dollars. This system established the International Monetary Fund (IMF) to monitor exchange rates and lend reserve currencies to member countries to manage their current account deficits. This system has introduced ‘IMF lending’ in the global economy.
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The primary objective of this lending was to protect the member countries from default in case of a current account deficit. Later on, this type of lending has become an important type of external financing for low and middle-income countries. However, higher inflation in the United States, a lack of confidence in the strength of the USD, and a severe drain on gold reserves were noted in 1971.
So, the then US government stopped the fixed-rate convertibility of USD and declared the dollar as a fiat currency. Effectively, it was the end of the Bretton Woods system (which was formally endorsed in 1976). It affected the global configurations of external financing due to fluctuations in the value of international currencies. Even some countries restarted barter trade.
The deterioration in the value of the USD after its free-floating affected the real income of oil-producing countries because their oil was priced in USD. So, these countries decided to price oil in terms of a fixed amount of gold. Later on, in an agreement between the USA and Saudi Arabia (later on, the UAE and other oil-exporting countries) in 1974, it was decided that Saudi Arabia would price and settle its oil exports in USD.
The agreement between the USA and major oil-importing countries in 1974 implied that the USA had to maintain a trade deficit because other countries required USD for the import of oil from oil-exporting countries and imports of goods and services from the USA. It ensures the flow of goods and services at competitive prices to the USA from other countries. While oil-producing countries have to use their surplus USD for investment in the USA. This process is known as petrodollar recycling. The effects of the inflows of USD on oil-producing countries are quite obvious.
The rich oil-producing countries supported several developing countries by soft lending and the supply of oil on credit. This provided an interest-free (or low-interest) substitute for external borrowing. The employment opportunities in oil-producing countries have provided a source of remittances to developing countries. These remittances supported the developing countries in building their foreign exchange reserves.
This mechanism converts the trade account deficit of the USA into a financial account surplus. The oil-exporting countries use their petrodollars for the import of goods and services from the USA, building physical assets, keeping their wealth in the USA’s banks, and investing in bonds, equities, and other financial assets in the USA. They maintain sovereign wealth funds by investing in these financial instruments in the US markets.
The removal of quotas and tariffs on international trade in the free trade regime was a major turning point in the global financial flows. The removal or reduction of duties promoted competition in international trade, and producing goods at the lowest cost of production became a challenge for offering competitive prices in the international markets. The cost of labour is a primary element of the cost of production.
Several big corporations have shifted their production units to those countries where the cost of production is significantly competitive. The economies of scale, because of a large domestic market, were an added advantage in shifting the production process from developed to developing countries. Because of the strict implementation of environmental, social, and governance (ESG)-related regulations, the production process in industrialized countries was not beneficial in a free trade regime. The outflow of investment from developed countries and its inflow in developing countries was a natural consequence of this regime. The investment of the US companies outside the USA was recorded at more than USD 9.7 trillion at the end of 2024.
The inflow of foreign direct investment in the US economy from 1990 to 2000 was greater than the outflow of investment, but from 2001 to 2024, the inflow of foreign direct investment was recorded as less than its outflow. Meanwhile, the oil-exporting countries have allowed the purchase of their oil in euros, the Yuan, and other convertible currencies. The diversion of investment to the developing economies was quite obvious.
The size of foreign capital invested in developing countries (excluding China) is greater than USD 12 trillion, while these countries invested USD 6.7 trillion outside their economies. It implies that doing business in developing countries is more profitable in the free trade regime. The lesser growth in GDP, unemployment, and inflation in industrialized countries may be a consequence of this diversion of capital.
The cumulative trade deficit and capital account surplus established the current position of the US economy, which reflects the dependency of the US economy on foreign capital and external debts. The current account deficit of the United States was USD 1.2 trillion in 2024, which is equal to 4.1 percent of its GDP, while the trade deficit was 3.2 percent of GDP. Contrary to common intuition, the USA is a less globally connected economy in terms of its global trade.
The aggregate trade of the USA as a percentage of its GDP is 25 percent only, which is greater than 60 percent in the case of other Western countries. Its export of goods and services is 11 percent of its GDP, which is less than all other countries in the world (Except Timor-Leste, Bangladesh, Pakistan, Comoros, The Gambia, Nepal, Ethiopia, Haiti, and Sudan).
The foreign investors have invested USD 15.6 trillion in US equities, which is an indicator of the dollarization and inflow of foreign investment in the US economy. At the same time, it indicates the dependency of the US economy on foreign capital. The US government debt as a percentage of GDP is 118, which is the highest in the world after Singapore and the United Kingdom. High fiscal deficit is the main driver of rising public debt in the USA. The government has to pay more than 20 percent of its revenue in account of interest on debt, while the tax to GDP ratio is 11 percent.
To finance its fiscal deficit, the USA has to sell its treasuries to domestic and foreign investors. The size of foreign-owned US treasuries stock was recorded at USD 9.4 trillion at the end of November 2025. Japan is the largest foreign holder of US treasury stocks with USD 1.2 trillion, while more than 40 percent of this is held by Western countries: USD 888 billion by the United Kingdom, USD 472 billion by Canada, and USD 376 billion by France.
These details indicate that the aggressive behavior of the US statesmen is a consequence of their economic coercion. They want to protect their economy from a collapse. The attack on Venezuela and the planning of the control of its oil business by the US-based corporations, the demand for US control over fertile land and agricultural farms in Ukraine, the acquisition of Greenland, and even the reconstruction and promotion of tourism and business activities in Gaza seem economic ventures. Such plans, and the imposition of high tariffs, restrictions on tourists, and immigrants, are part of an economic protection strategy. This does not seem like a religious or racial war.
Copyright Business Recorder, 2026
The reviewer is a professor at Iqra University Karachi