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Tariffs, protectionism and geopolitical tensions: how US trade policy is reshaping the global order
key takeaways.
Political choices in the United States are redrawing the contours of global trade and geopolitics
China is capitalising on US weakness, but has structural challenges of its own
A rise in protectionism is creating economic friction, but also new opportunities to ‘invest in resilience’
Despite uncertainty and volatility in the wake of President Trump’s ‘Liberation Day’ tariffs, we don’t expect a recession.
Since 20 January this year, investors have been preoccupied with the uncertainties of Donald Trump’s second presidency. The US President’s early-April “Liberation Day” trade tariffs were almost as quickly followed by reductions, pauses, and negotiations – markets that had initially been sent reeling, swiftly recovered their losses.
Significant broad US tariffs remain, however, with the threat of further increases should the numerous bilateral trade negotiations now taking place not succeed. In particular, markets remain wary of renewed tariff increases on China and the EU, both of which are major exporters to the US.
Against this uncertain backdrop, Lombard Odier hosted an event at its Geneva headquarters recently, to explore the a key question for many investors: “What impact will US trade policy have on the global economy and geopolitical world order?”
The event brought together leading voices – including Samy Chaar, Chief Economist and CIO Switzerland at Lombard Odier, and Frédéric Koller, renowned geopolitical journalist and China specialist at Le Temps – to offer their insights on the medium- and long-term outlook for the global economy, and to ask whether China now has a historic opportunity to take the US’s place as the leading global superpower.
US weakness…
Frédéric Koller, opened the event by examining whether US foreign policy is undermining its own global leadership credentials.
“US leadership has been a feature of the international order for over 80 years,” he began. “This is the so-called Pax Americana – military alliances such as NATO, the backbone of European defence; free maritime trade, safeguarded by a global US military presence; custodianship of international norms through the UN and its agencies; and American soft power.”
We are witnessing the start of an unprecedented phenomenon – a ‘brain drain’ from the United States
However, he continued, “Trump is weakening this international order. Tariff wars against even America’s closest allies – such as the EU, UK, Japan, South Korea and Australia – are threatening their alliances with the US. JD Vance’s attack on European values at the Munich security conference was a thunderclap. Meanwhile, Trump’s claims on Greenland directly call into question the future of NATO, and his suggestion that Canada should become the 51st US state destroys North American solidarity. The very foundation of Pax Americana is now in question.”
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Further, he added, “Attacks on academic freedom are calling into question the country’s capacity for innovation, and heightened border restrictions are reducing the attractiveness of the US to foreign talent. We are witnessing the start of an unprecedented phenomenon – a ‘brain drain’ from the United States.”
…meets Chinese strength
Trump’s aggressive policy-making is playing into the hands of Chinese President Xi Jinping, Frédéric Koller continued. “China is gaining in credibility. China now looks stable and predictable, as opposed to the fragility of Western democracies today. This is a big change from 20 or 30 years ago, when democracy meant stability. This weakening of democracy benefits the Chinese model.”
The very foundation of Pax Americana is now in question
“China had already caught up with the US spectacularly – today, it accounts for 18% of global GDP. China now appears to be the only country with the power to stand up to the US and say ‘no’ – for example with their high reciprocal tariffs. Trump is adding to this strength by reinforcing China’s position as leader of the BRICS bloc [Brazil, Russia, India, China, South Africa]. China is also asserting itself more at the UN, as the US takes a backward step.”
‘Decoupling’ between the US and China has further benefits for the East Asian power, Koller explained. As the two nations separate China is strengthening its capacity for innovation, stepping up its military capabilities, and promoting the yuan as an alternative to the dollar for settling international trade. In short, China is being pushed towards “strategic autonomy”.
China is strengthening its capacity for innovation, stepping up its military capabilities, and promoting the yuan as an alternative to the dollar for settling international trade
China at the head of a new geopolitical order?
Despite this, Frédéric Koller warned against assuming that China will replace the US as the world’s leading superpower. “China has structural problems. They have become the world’s factory, but that model has limits – overproduction. The CCP [Chinese Communist Party] must rebalance growth, but can they get domestic consumption to take over from exports?”
China has other disadvantages, too, Koller continued. “Will China grow old before it gets rich? They are experiencing ageing and demographic decline. China remains a developing power with significant poverty.”
“Also, it is a constrained power,” he added. “Unlike the US, China has no true allies. Russia is currently their closest ally in terms of a shared vision of international relations, but this is not based on shared values or trust, still less on mutual esteem.”
While acknowledging that “Trump’s policies are a historic opportunity for China to rise geopolitically at the expense of the US,” he concluded, “However, there will be no major US decline or replacement by China. The US is a younger country, and democracy remains a US advantage through institutional flexibility. Ultimately, we should anticipate a more multipolar world, with a rebalancing of power between the United States and China.”
Samy Chaar agreed that we are headed for a more fragmented and less certain world. For investors, he said, “We have entered a new economic reality. A world of interdependence depended on China for cheap goods, and Saudi Arabia and Russia for cheap energy – it was efficient. Today, however, we are living in a fragmenting world.”
“Reliance on others is being reduced. Countries are seeking autonomy in energy, defence, technology, infrastructure. And new alliances are forming. The liberalisation era is giving way to a new logic of strategic blocs.”
Autonomy comes at a cost, however, he explained. “The Americans were the first to understand this. They put USD 3 trillion on the table, the equivalent of two post-World War Two Marshall Plans. They invested in infrastructure, computer chips, defence, and energy. The US went from being the world’s third biggest oil producer to number one. They’ve shown that when you invest heavily, you get results.”
The liberalisation era is giving way to a new logic of strategic blocs
After years of lagging investment, Europe is now beginning to catch up, he continued. “Historically, Europe has over-saved. The EU has been reluctant to get into debt to invest. The US has gone to 125% debt to GDP, while Europe is at 85%. But this is changing. Today, Europe recognises they need to invest to secure energy and value chains. Germany has amended its ‘debt brake’ rule. Now they will invest EUR 600 billion, and Ursula von der Leyen has announced another EUR 800 billion investment, mainly in defence.”
While the sums needed are large, Samy Chaar continued, financing is possible thanks to the private sector. “The public deficit is a concern in Europe. But we need to consider the private sector. Accounting for private saving surpluses, France is in balance, for example, and there are also surpluses in Germany and Switzerland. The US has long been a magnet for investment, but Europe is now investing in autonomy, and this will affect capital flows.”
Trump wildcard puts markets in flux – but not in crisis
“President Trump’s policies are a wildcard for the US and the rest of the world,” Samy Chaar continued. However, despite uncertainty and rising political risk, he explained that the macroeconomic fallout remains manageable. Global supply chains have shown resilience – adapting rapidly to new geopolitical tensions. The price of sea freight – which underpins the majority of world trade and had surged during the pandemic – has mostly normalised.
Similarly, he said, “The economy will adapt to US tariffs. Residual inflation can be partly offset by wage growth – real incomes and consumption should remain positive.” However, in the US, he noted, “President Trump’s tariffs are not just a trade issue, they are an inflationary force. If reintroduced or expanded they could complicate the Federal Reserve’s path to policy normalisation.” Even with tariffs at today’s levels, he concluded, the Fed is likely to keep interest rates higher for longer than the European Central Bank or Swiss National Bank.”
Across the global economy, he concluded, “There will be some slowdowns. But, despite tariffs, we remain in a world of expansion – we are not heading for a recession. The global economy is reorganising and, as it does, we need to ensure our portfolios are positioned flexibly, so that we can also adapt as quickly as possible.”
Despite the tariffs, we remain in a world of expansion – we are not heading for a recession
Navigating the new order
Nicolas Chatillon, Partner and Senior Private Banker at Lombard Odier, closed the event with a look at how investors should navigate the new order.
“In a world that is becoming increasingly complex, it is important to filter out the noise and focus on long-term trends and what really drives the economy. This is what builds the performance of our investments. We believe that the current economic and financial environment justifies remaining close to our strategic allocations, and seeking returns,” he concluded.
At Lombard Odier, we rethink the world around us to develop fresh investment perspectives. And we are ready to seize opportunities when others see only challenges. We believe that today’s emergence of a new, more fragmented global order presents just such an opportunity. As the globalised trade framework is replaced with blocs, new investment opportunities will emerge as governments seek to secure their supply chains across multiple industries. In energy, defence, technology, infrastructure and manufacturing, we believe opportunities will emerge to ‘invest in resilience’, as public-private partnerships unleash a wave of domestic investment on a vast scale.
Convention calls this a time of caution for investors. Instead, we believe competition between the world’s great powers is reshaping where opportunity is to be found.
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