Multipolar

Authors: Ajay Kumar Mishra and Shraddha Rishi*

At the Davos World Economic Forum, Mark Carney, the prime minister of Canada, shared his thoughts on the hegemonic and subservient world order. When integration turns into a source of subordination, one cannot “live within the lie” of mutual benefit in the midst of a collapsing global order. The trading communities appear to have a hegemonic and subservient relationship as a result of the dollar’s adoption as the world’s reserve currency. Furthermore, the competing global order between the US and China appears to be caving in to Chinese modus operandi without investigating the reasons for US authoritarian dominance, which could result in the acceptance of Chinese domination. The recognition of the US dollar as the worldwide currency and its dominance over oil, one of the most traded commodities, have put the US in leadership of the world trading regime. Furthermore, it appears that China’s monopoly over rare earth elements (REEs) is giving the Chinese yuan the same reserve currency power. Therefore, the globe might witness a change of control from the US to China, thus jeopardizing the world trading system to the whims and fancies of the country holding the reserve currency.

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According to this essay, the dollar’s reserve currency status is the true cause of the world order’s disintegration, which equates to allowing the US to take the only seat at the table. It contends that a multipolar currency is essential for a multipolar world order. This understanding is necessary to prevent the rule of any country based on currency supremacy. Diversifying the currency basket for trade transactions is encouraged. To show how the currency dominance of a reserve currency would rise to currency imperialism, this article looks into the petrodollar problem and the duality of reserve currency and trade deficit to delegitimize the necessity of the dollar as a reserve currency. Any currency in question is subject to the same reasoning. Thus, a multi-currency trading framework is advocated in this article.

Geoeconomics of the Petrodollar Crisis’s Spiral

The dollar controls trade, payments, and reserves. About 96 percent of trade in the Americas, 74 percent in the Asia-Pacific area, and 79 percent in the rest of the world is denominated in the currency. About 60 percent of international and foreign currency claims (mainly loans) and liabilities (mostly deposits) are in US dollars. Its proportion of foreign exchange transactions is roughly 90 percent. Approximately 60% of the world’s official foreign reserves are in US dollars. Furthermore, in Q1 2025, the US dollar’s percentage of global foreign exchange reserves dropped to 53.6%. Additionally, the 50-year security agreement with Saudi Arabia to price oil only in dollars and invest surpluses in U.S. Treasury bonds in exchange for military protection expired in 2024. This could result in a shift toward accepting different currencies, albeit it won’t happen right away. Additionally, countries like Russia, China, and Iran are increasingly using non-dollar currencies for energy trade, aiming to reduce reliance on Western financial networks.

To achieve its geoeconomic goals, US authorities have attempted to preserve the dollar’s reserve currency status in several ways, compensating for economic weaknesses such as a lack of competitiveness in particular. The US appears to be addressing the growing trade deficit by maintaining the dollar as the world’s currency and matching China’s hegemony over rare earth elements. The US’s current dominance over the trade regime is largely due to dollar-based trade. The oil trade in dollars gives the US significant influence to shape geopolitics globally, both bilaterally and multilaterally, as oil holds a premier position in the international trading landscape.One commodity (oil) and one currency (the US dollar) have the power to both destabilise and stabilise the global price system. Its “as good as gold” quality can only be maintained in a world where the dominant currency is no longer associated with gold if it is associated with oil, that is, if wealthy people have faith that oil prices won’t continue to rise relative to the US dollar. The US gains influence over the oil trade by controlling the petro-dollar trade.

The globe is essentially on an “oil-dollar standard” during the post-Bretton Woods system, when currencies are meant to be “floating.” The US is under pressure to control oil sources, which it does through coercion or persuasion, to maintain wealth-holders’ faith in the value of the dollar, without which the global economy will experience severe financial turmoil, particularly given the ongoing US current account deficit. In a nutshell, war is a result of today’s necessity to preserve US financial stability. It does, however, produce a spiral effect. To control a significant oil source for financial stability, the US attacked oil-rich Iraq and, more recently, Venezuela. However, as a result of the opposition this strike provoked, oil prices skyrocketed, increasing the threat to financial stability and the temptation to wage war on other oil-rich nations like Iran. Additionally, the US would experience the same spiral consequences in a much more severe form if it decided to go to war with Iran.

The Reserve Currency and Trade Deficit “Trade-off”

Trade deficit and reserve currency operate in a trade-off scenario wherein a nation whose currency serves as the world’s reserve currency must maintain a trade deficit. It is based on two fundamental ideas. The first is the ‘policy trilemma’ or ‘impossible trinity’ thesis of economists Robert Mundell and Marcus Fleming. It contends that an economy cannot sustain unrestricted capital flow, a fixed exchange rate, and an autonomous monetary policy at the same time. The second paradox bears the name of Robert Triffin, an economist. This states that where their money works as the global reserve currency, a nation must run huge trade deficits to meet the demand for reserves. Any candidate for a new global reserve currency position must run significant current account deficits and risk an intolerable loss of economic control.

However, trade imbalances are thought to be self-correcting. A nation’s currency is predicted to lose value when it has a trade imbalance. Exports will then rise, while imports will fall, resulting in a reduction in the trade deficit. However, as the dollar is the world’s reserve currency, this idea does not apply to the US economy. A large portion of a country’s foreign exchange reserves is invested in US government securities. As a result, the dollar is overpriced. A chronic trade deficit results from higher imports and lower exports due to an overpriced dollar. Therefore, the US has a trade deficit not because it imports more goods, but rather because it supplies the world’s reserve currency.

In the face of “unfair” trade and an overpriced currency, how can the US bring manufacturing back and lower the country’s trade deficit? Enter duties on imports. Tariffs will decrease imports and increase their cost, lowering the trade imbalance. By shielding American manufacturers from import competition, they will promote domestic production. However, the US’s return to a more protectionist policy through tariffs has led to increased bilateral commerce in non-dollar currency. For instance, India-Russia oil trade and China’s increasing use of bilateral currency swaps with its trading partners have caused major concern for the US reserve currency supremacy. Moreover, it caused a spiral effect. For example, the reserve currency of the central banks has become less dollarized as a result of the recent US policy of reciprocal tariffs to safeguard trade transactions in dollars. It promotes asking about options for a reserve currency basket and the possibility of de-dollarization. Trump has made no secret about retaining the US dollar’s global supremacy, even threatening the BRICS nations with 100% additional tax should they move forward with a unified currency to “degenerate” and “destroy” the dollar. After all, de-dollarization has the potential to tip the scales against the United States and reduce its capacity to influence international financial markets and the global economy. Furthermore, to protect dollar dominance from the assault of renewable energy, the US withdrawal from India’s solar alliance must be considered.

Economists fear that tariffs go against the concept of economic efficiency. Tariffs, they warn, will imply greater expenses for American consumers, an increase in the inflation rate, and an inefficient manufacturing sector. Moreover, tariffs will encourage nations to undermine the dollar’s standing as a reserve currency by making imports more expensive. It will portend the trading of multiple currencies. Even when Trump managed the inevitability of a trade deficit because of having a reserve currency, the US was still faced with two additional problems: the increasing bilateral trade in member countries’ currencies and China’s control over modern-era gold, ‘rare earth minerals’ critical for key industries. China’s hegemony over REEs and chip production challenges the US dollar’s hegemony.

Conclusion

It reflects that the actual geo-economic strength of the US lies in the acceptability of its currency as a global reserve and its hold over one of the most traded commodities, oil. The rise of China and the evolving structure of international trade are changing the dynamics of this area, even though the US dollar continues to be the most important reserve currency. However, there wouldn’t be any surpluses to invest or deficits to finance if trade were more bilaterally balanced over time, which would lessen the demand for a reserve currency like dollars. The world looks to be headed towards a multi-currency structure for harmonious commercial ties. By encouraging alternate payment methods among trading nations and choosing the currency used for the IMF’s reserve holdings, for instance, it is necessary to end the US monopoly on currency arrangements. The structure can be extended to incorporate trading blocs, where imbalances net out amongst members when aggregated. It suggests a world with several reserve and trade currencies.

This bilateral or multilateral currency autarky might unleash the potential to trade freely as well as to obtain investment capital for emerging economies. Moreover, this strategy is embedded in the evolving industrial structure driven by economic sovereignty. Meanwhile, the US’s capacity to finance its ongoing budget and trade deficits would be impacted by the dollar’s declining value. Dollar interest rates may have to climb, and the currency may depreciate. The role of its capital markets and financial institutions would shrink. It would give more space for the formation of a multipolar currency regime.

*Shraddha Rishi teaches Political Science at Magadh University, Bodhgaya. She has obtained her PhD from the Centre for South Asian Studies, JNU, New Delhi.