How will Trump’s trade deals reshape the world?

You are in for a treat today, Swampians, because my respondent is the brilliant Princeton historian Harold James. I spoke to him for my column this week and wanted to expand upon some of the themes we touched on in today’s note.

James is a scholar of globalisation and de-globalisation and believes, as I do, that we are at an important pivot point right now. In past columns, I’ve posited that we would see a shift away from neoliberalism and towards de-globalisation, with more regionalisation and even the emergence of a tripolar world in which the US, Europe and Asia, led by China, moved into significantly separate economic spheres.

In the wake of Donald Trump’s US-China deal on tariffs, markets are making the opposite bet now. Stocks are up, gold is somewhat down, and many are arguing that better days are ahead. The administration says it’s on the verge of a new deal with India, and Trump is pursuing a fresh foreign policy in the Gulf, where he has secured a big Saudi commitment to invest in the US. Some are likening this to Richard Nixon’s famous deal to recycle excess oil money into US Treasury bills, which of course set the stage for both growth and financialisation of the US economy. (I wrote about the latter point in my first book, Makers and Takers.)

I’m still sceptical that we’ve seen the end of trade-related volatility in Trump’s second term. But more than that, I’m interested in how the seismic forces that have now been set in motion will reshape the global economy.

I was fascinated by a presentation that James did recently at the Hoover Institution in which he laid out some of the large shocks of the past 150 years or so that shifted the direction of globalisation — things like the great famine in the 1840s, the 1873 financial crisis, the first world war and the great power competition around it, the Great Depression, the end of the fixed dollar in the 1970s, the Great Recession, Covid-19, the war in Ukraine and now Trump’s efforts to end the neoliberal system and rebalance trade between the US and surplus nations such as China.

Professor James, you’ve pointed out that supply shocks (like the famine of the 1840s) tend to increase globalisation, while demand shocks (including the 1929 market crash and the ensuing Great Depression) tend to push the world apart. This time around, we are in a situation where we may get both at once — a trade supply shock and a recessionary demand shock. What does history tell us about what happens in such situations? And what will it mean for the US and the world?

Recommended reading

Catholics in America may be surprised to see how Pope Leo XIV does and doesn’t share their worldview, as Sam Sawyer explains in The New York Times. At the very least, he’ll be a fascinating counterpoint to Trump — Leo is a pro-immigrant globalist who cares about the poor. Also, for more on the politics of faith and how it will define the midterms and the 2028 presidential election, have a look at this panel I did on the topic at the FT Weekend Festival.

This Economist piece on how the Maga economy is performing relative to its blue state counterpart is fascinating. Red and blue states not only see the country differently, but they also are buying different products, hiring and investing in different ways, and so on. Maga areas represent only a third of the country’s wealth, but Maga companies seem to outperform.

Li Yuan’s piece in The New York Times on the two Chinas is a must read. It cuts through the binary way in which people tend to think of China’s future prospects.

And finally, my colleague Martin Wolf’s piece on the challenge of excess global savings raises important questions about the difficulty we are going to have in rebalancing the global economy.

Harold James responds

Great to be talking with you, Rana. Indeed, I think there are many indications that globalisation is at inflection point, though not necessarily in the throes of a radical de-globalisation. The dramatic shift of the US administration has increased the likelihood that the US will become marginalised.

The history of demand and supply shocks shows how negative supply shocks prompt more rather than less globalisation, dramatically so in the mid-19th century and in the 1970s. What Trump’s tariff measures did was to create a negative large supply shock for the US, and a demand shock for the rest of the world.

The supply shocks affect consumers in the US, and they will focus on ordinary products that become more expensive, or scarce or even unavailable. The impact on high technology will be even greater and more devastating: particular supply constraints, for instance, of the metallic element dysprosium, will restrict high-tech developments — in data centres, supercomputing and AI, but also in the key technology of nuclear fusion. Cuts in research funding will also reduce the capacity for long-term scientific innovation. If the Trump administration maintains this course, the 21st-century American experience will appear as a repetition of the long decline of imperial Spain, or of 20th-century Britain. 

The good news for everyone else is that globalisation will still work for most countries, and that new drivers of globalisation will emerge, big emerging market countries but also many smaller dynamic countries. Even Ukraine, for instance, may develop as a result of its martyrdom as a leader in military technology, notably the rapidly changing area of drone warfare.

Perhaps the US will come to a realisation that the tariff regime is shooting oneself in the foot, or maybe rather in the head (because it is stupid) and the heart (because it is cruel, especially to smaller African and Asian economies). It may even be that the tariff pause is the beginning of such a reorientation. For most other countries, a new technology-driven globalisation holds many opportunities and chances.