China, the United States, and the Shifting Foundations of Global Economic Power

The global economy today is shaped by a complex, often tense relationship between China and the United States. From the collapse of the Bretton Woods system in 1971 to contemporary trade wars and efforts at de-dollarisation, the evolution of Sino-American relations reflects deeper structural transformations in global capitalism. This essay explores how historical shifts in monetary systems, trade dynamics, and financial power underpin the current tensions, and why these conflicts are unlikely to lead to an immediate collapse of the dollar's dominance — even as significant long-term changes are underway.

In 1971, facing spiraling costs from the Vietnam War and Great Society social programs, President Nixon ended the dollar’s convertibility into gold — the so-called "Nixon Shock." Under the Bretton Woods system, foreign governments could exchange dollars for U.S. gold reserves at a fixed rate. However, as economies like Japan and West Germany grew, and as U.S. fiscal deficits mounted, countries began doubting America's ability to honor its commitments. Nations such as France and West Germany started demanding gold in exchange for their dollar holdings, causing a drain on U.S. reserves and risking a global financial collapse.

To stabilize the system, the United States pivoted to the petrodollar: an informal arrangement where oil, the lifeblood of modern economies, would be priced exclusively in U.S. dollars. In turn, oil-exporting countries like Saudi Arabia recycled their dollar revenues into U.S. Treasury bonds. This new system allowed the U.S. to maintain deficit spending, keep interest rates relatively low, and preserve dollar dominance without gold backing.

Post-1978 reforms under Deng Xiaoping launched China onto a path of rapid industrialization. Crucially, China artificially devalued its currency, the yuan (RMB), by buying U.S. dollars and building massive dollar reserves, thus maintaining competitive export prices. By pegging the yuan at undervalued rates, China ensured its goods remained cheap globally, facilitating an export-led growth model.

This policy had two effects:

China accumulated vast holdings of U.S. Treasury bonds, funding American deficits.

The U.S. consumer enjoyed cheap imported goods, keeping inflation low even as wages stagnated.

Thus, a mutually dependent financial symbiosis developed: China recycled its surpluses into U.S. assets, and the U.S. fueled global demand through debt-driven consumption.

Donald Trump's presidency marked a sharp break. Frustrated by persistent trade deficits, Trump imposed unilateral tariffs on steel, aluminum, and hundreds of billions of dollars of Chinese goods — actions widely viewed as violations of World Trade Organization (WTO) rules. Trump also crippled the WTO's dispute settlement system by blocking judge appointments, signaling a broader shift away from multilateralism toward power-based economic relations.

China responded with counter-tariffs and filed numerous complaints with the WTO, accusing the U.S. of destabilizing global trade norms. Internally, China launched initiatives to pivot exporters toward domestic markets, insulating its economy from U.S. dependency — an early step toward economic self-reliance.

The tensions fueled volatility in global markets. Even Trump appeared sensitive to financial fallout: he paused new tariffs in 2025 after stock markets plunged and bond yields surged, fearing recessionary dynamics would damage his electoral prospects.

The weaponization of the dollar — notably the freezing of Russian assets following the Ukraine invasion — shocked policymakers worldwide. China, along with the BRICS bloc (Brazil, Russia, India, China, South Africa), accelerated de-dollarisation strategies:

Diversifying foreign reserves into gold and non-dollar currencies.

Expanding yuan-denominated trade agreements, particularly with Russia and parts of Africa.

Investing in alternative payment systems like CIPS (Cross-Border Interbank Payment System) to rival SWIFT.

Moreover, London has emerged as a hub for selling dollar-denominated securities, but Chinese investors are increasingly wary after observing Western powers’ readiness to seize sovereign assets.

Yet, full de-dollarisation remains unlikely in the short term. The U.S. still offers unmatched financial depth, liquidity, and legal stability. Oil, commodities, and a vast portion of global trade remain priced in dollars. As countries face geopolitical uncertainty, many paradoxically still flee to dollar assets during crises.

Meanwhile, internally, both the U.S. and UK are grappling with the social consequences of globalization and financialization:

Wage stagnation relative to soaring profits has fueled inequality.

Union decline has eroded workers’ bargaining power, weakening social safety nets.

Populist movements, both left and right, have gained traction, challenging traditional elites.

Trump’s domestic policies — like the $4.5 trillion tax cuts benefiting the wealthy and cuts to public healthcare — exemplified this trend. Rather than restoring industrial jobs, protectionist measures raised consumer prices and strained traditional economic allies.

The UK faces similar dilemmas. While the survival of British Steel is symbolically important for sovereignty and employment, the reality is that Britain still imports about 60% of its steel needs. Even if domestic production accounts for 70% of certain types of crude steel, Britain remains deeply enmeshed in global supply chains. Thus, in a genuine trade war or supply crisis, Britain would still face shortages or inflated costs — exposing the limits of "national resilience" rhetoric in a globalized economy.

The U.S.-China rivalry illustrates a broader truth: while nations seek economic sovereignty, the global economy remains deeply interconnected. Protectionist policies, currency diversification, and financial nationalism offer some insulation, but they cannot unwind decades of integration overnight.

Despite growing efforts at de-dollarisation, the dollar's dominance endures — for now — anchored by institutional depth and inertia. Yet the long-term pressures are mounting: rising multipolarity, financial fragmentation, and shifting trade alliances suggest that the global economic order built after World War II is slowly giving way to a more contested, unstable system.

The future of U.S.-China relations, and indeed of global capitalism itself, will hinge on how these contradictions unfold — and whether either country can adapt to the new reality without triggering major crises.