How Donald Trump will change how the world works

Even before Donald Trump was re-elected US president there was a lot of discussion of a post-globalisation world. Once he’s back in the White House, we might get a clearer idea of what that world looks like.

It was Trump’s first term in office, his trade wars and then the pandemic, which ignited the discussion about deglobalisation and the shift towards reshoring, friend-shoring and a focusing on securing national supply chains. Joe Biden’s mis-named Inflation Reduction Act and CHIPS, with their massive incentives for US domestic investment, could be seen as a manifestation of deglobalisation.

Donald Trump’s “America First” policies will rattle the global economy. Credit: AP

Despite the talk, the increasing competition and friction between the US and China and, to a lesser extent, between the European Union and China, in the post-pandemic environment global trade volumes have increased, not decreased, and global capital flows are at record levels.

Trade between China and the US might have decreased but, while there has been a change to trade patterns, the globalised trading environment has remained largely intact, albeit under stress from the outbreak of protectionism in the US and the swelling backlash against China’s export-led economic strategy.

The multitrillion-dollar question is whether it will remain intact if Trump follows through with his promised trade war on everyone, a baseline tariff on all imports to the US of 10 to 20 per cent and a 60 per cent tariff rate on imports from China.

Bain & Co’s Karen Harris, managing director of its Macro Trends Group, who is in Australia to talk to Bain’s boardroom-level clients, says there is a pushback against multilateralism developing, with a re-invigoration of the centrality of the nation-state and a more transactional environment.

Post-globalisation, she says, means balanced trade and a less mercantilist world, although the path towards that outcome won’t be smooth or straightforward.

It will also be characterised by less globally-roaming capital, a redistribution of capital flows and fragmenting capital markets.

Interestingly, she doesn’t think Trump’s return will create an isolationist America, characterising his policies as an “America First” doctrine that will shift from the country’s post-war embrace of multilateralism and globalisation to transactionalism and bilateralism.

In the new, more transactional, US order, the trans-Atlantic (and, for Australia, trans-Pacific) assumption of shared values that underpin broader relationships wouldn’t remain intact. The lens through which Trump sees the world is narrow and focused tightly on whether a relationship directly benefits America.

Trump has vowed to take a much more aggressive approach to trade with China. Credit: Getty

Harris said the AUKUS nuclear submarines deal between Australia, the US and UK was an example of the transactional approach the Trump administration would adopt.

With his nominees to key economic and national security roles studded with China “hawks”, it is probable the new Trump administration will adopt a far more aggressive attitude towards China than the more targeted policies of the Biden presidency.

As Harris says, China’s strategy of pursuing export-led growth while suppressing domestic demand means its economy and most important companies are dependent on global markets.

While the most successful Chinese companies are extremely efficient – she likens the torrid domestic competition between China’s companies before the less efficient are weaned out and industry leaders emerge to the Hunger Games – they, and China, need access to markets offshore.

A post-globalisation environment will be a headwind for China and, indeed, for the Europeans, who she says haven’t built on their common market to develop economic and capital market depth. Both of those economies have been reliant on US demand for their exports. Both are vulnerable to a more protectionist and transactional US.

China may be able to blunt some of the impact of Trump’s tariffs by diverting some of its exports through other economies within its spheres of influence but, ultimately, it may have to do what it has been very reluctant to do and shift its priorities from exports to boosting domestic consumption.

Europe is in an invidious position if the US does become more transactional and driven by self-interest.

It would be hurt by an increase in US tariffs and America’s elevation of trade and its own interests over historical relationships, shared values and mutual national security interests.

It can’t, however, align its trade too closely with China without risking being overwhelmed by a deluge of exports. It will have to somehow position itself between the two great economic and geopolitical powers, which is a vulnerable place to be.

Europe is in an invidious position if the US does become more transactional and driven by self-interest.Credit: Bloomberg

The post-globalisation environment appears likely to be, broadly, a multipolar world, or a tripolar world, with Western Europe the weakest of those poles within what could be an even more volatile geopolitical environment.

That might force the Europeans to consider completing a very incomplete “European Project”, or the integration of Western Europe that remains unfinished more than 30 years after the Maastricht Treaty created the European Union.

The fragmentation of global trade also has implications for the developing world, where access to subsidised finance via multilateral institutions and a relatively open global trade regime have significantly influenced their economic development.

A post-globalisation environment will be a headwind for China and, indeed, for the Europeans.

An America with high tariff walls that is sceptical of multilateral institutions and global trade – even hostile to them – will make life difficult for those developing economies with high debt levels or that rely on low labour costs and outsourcing from developed economies to compete in international markets.

If the global flows of goods are disrupted by very aggressive US trade policies and the expected retaliation from its trade partners, global capital flows will also be affected.

A key feature of the post-war environment is that China, the oil-rich Middle East and Japan in particular developed excess savings that economies with a deficiency of savings relative to investment – like the US – have relied on to fund their investments.

The world is dependent on US Treasuries to fund trade, as Harris says. Equally, of course, the US relies on the rest of the world’s savings to fund its investments.

Unbalanced capital flows are the mirror image of unbalanced trade and therefore a realignment of trade flows, and perhaps their shrinkage, should have implications for the direction and volume of flows of capital.

That may be a long-term threat to US economic growth and stability, given the apparently inexorable growth in its deficits and debt. The rate of growth in American government debt could accelerate if Trump implements his trade, tax and immigration policies.

In the new post-globalisation world order that seems to be emerging, countries – and companies – may face some difficult choices.

In a multipolar and more transactional world, it might be possible to do deals, through trade or geopolitical alliances, with the US or China. However, particularly during the Trump presidency, it would be more difficult to do deals with both.

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