Joseph,
We have a Gemara/Mishna that says covering arms is Daas Yehudis (i.e. minhag of tznius) and if a woman frequently violates this Daas Yehudis she can lose her Kesuba (according to some because this gives the man a right to be choshesh for znus). Now in our modern day American secular culture people can do what ever they want, but there are still judgments made and manners of clothing that are considered modest or immodest. Just dressing immodestly is not considered to be bad thing unless it is in an inappropriate place like the office or a funeral. Boruch Hashem, the standards of modesty in the Modern Orthodox world are higher than the secular American world.
The key for Daas Yehudis is that the mode of dress cannot be viewed within the community as immodest. When a woman wears clothing that within the community is viewed as immodest she violates Daas Yehudis and her husband has a right to divorce without a kesuba.
So long as there is a difference between modest dress and immodest dress, those who dress modestly will be within the bounds of Halacha (presuming of course not like the Mishna Berurah and those that hold that Daas Yehudis can’t change l’kula from the Gemara). The problem is if a society ever reached a point where there was no difference between modest and immodest. I don’t know what the halacha would be in such a circumstance. Fortunately, that is not the situation in any frum Jewish community.