What Trump's Global Order Could Look Like

For half a century, Bridgewater has focused on building a deep understanding of global markets and economies to deliver insights for the most sophisticated institutional investors. In this newsletter, my co-CIOs and I will share key themes from this research.

As Karen wrote earlier this month, change is definitely in the air. Like all investors, my job is to make sure we understand these changes so that we can prepare for them. One of the biggest shifts I’m tracking is the move to a new system for how economies and commerce will be managed. The previous global consensus around free trade and limited government intervention is hanging by a thread, and a different system—something I call “modern mercantilism”—is increasingly ascendant, with the election of Donald Trump representing another dramatic step in this direction. I want to share with you how I’m processing this new world that we’re entering, because I think it will have major implications for asset portfolios. Below, I’ve included my view of what’s happening and why it matters.

Greg Jensen
Co-Chief Investment Officer, Bridgewater Associates

We Are All Mercantilists Now

When society’s beliefs about the role of government shift, it affects investors. Philosophical shifts alter how people expect the government to respond to changes in economic conditions and determine to what extent policy drives economies. The rise of Keynesianism, for instance, became critical for understanding the global financial crisis and Covid shock.

For much of the post-World War II era, neoliberalism was the mainstream economic ideology. Countries lowered tariffs, integrated their economies, and specialized according to areas of comparative advantage. The US helped create global institutions, like the World Trade Organization, to enforce freer trade.

This system of global cooperation and robust institutions has been crumbling as China in particular, and other countries to varying degrees, has pushed the boundaries. With Donald Trump’s election, the postwar economic order is poised to change for good.

It will be replaced by a quasi-modern mercantilist system. The term “mercantilism,” popularized in the 18th century, was used to describe economic policies of colonial powers that focused on managing the economy to build up state power.

As engineers building our model of the global economy, this new system poses new challenges, as it’s organic and not particularly well-defined to date. Nonetheless, we think it is better to roughly model and deal with the differences than not model at all.

The four tenets of Modern Mercantilism that we have modeled at Bridgewater include:

1. The state has a large role in orchestrating the economy to increase national wealth and strength.
   
2. Trade balances are an important determinant of national wealth and strength, and trade deficits should be avoided.
   
3. Industrial policy is used to promote self-reliance and defense.
   
4. National corporate champions are protected.

Mercantilist ideology is contagious. The postwar system of free trade relied on America’s soft power and the general respect that many nations had for the system. But as countries defected and adopted mercantilist policies, the global system lacked sufficient authority to stop them. Each time another country adopted mercantilist policies, it pushed others to react similarly.

China turned a slow drip into a death spiral. While many countries pushed the boundaries before China did, its economic size and the effectiveness of its mercantilist policies broke the pre-existing order. Through currency management, public procurement, state subsidies, protectionism, and other implicit subsidies, China has developed a range of leading industries, including electric vehicles, solar power, and batteries.

China’s emergence as an economically powerful strategic competitor to the US worries many in the free world. It has raised concerns about supply-chain dependencies, the lack of robust manufacturing, and an ailing defense industrial base. The political and social consequences of lost domestic manufacturing jobs are leading policy makers to second-guess whether cheaper consumer goods and a more market-efficient allocation of capital are worth it. Over the past eight years, the Trump and Biden administrations have chipped away at the WTO order—putting tariffs on Chinese imports, using export controls to limit China’s access to advanced semiconductors, and pushing industrial policies like the Inflation Reduction Act and the Chips Act.

With China and the US now in the mercantilist camp, pressure is growing for Europe to follow. The Continent is torn between its commitment to WTO principles and the need to respond to competitive threats.

French President Emmanuel Macron, who’s pushing for a more independent Europe, had some sharp remarks following the US election: “The world is made up of herbivores and carnivores. If we decide to remain herbivores, then the carnivores will win and we’ll be a market for them.”

Modern mercantilism will reshape the global economic order. Government policies will reduce the competitive pressures companies face, as their survival will be a matter of national interest. Tariffs, industrial policy, and export controls will define a market for the kinds of companies the government wants to exist. The market’s role in determining companies’ success will diminish.

Countries that rely on rising, persistent trade surpluses to achieve growth are the most at risk in a mercantilist world, as the US—the world’s largest trade-deficit economy—becomes unwilling to absorb these surpluses. And retaliation to mercantilist policies is likely to extend beyond tariffs.

Countries with trade deficits will have the upper hand in trade wars because they will have more imports to tariff than their trading partners. Competing countries will likely respond with a range of measures. Retaliation could be explicit, such as China adding more companies to its Unreliable Entity List, which restricts investments in China and participation in China-related export activity. Or retaliation could be subtle, such as Europe intensifying antitrust efforts or digital service taxes that would affect large US tech companies.

Capitalists have long worried that socialism would end the Reagan-Thatcher economic system. Instead, modern mercantilism is poised to strike the final blow. We are all mercantilists now, and the implications are profound and unavoidable.

A version of Greg’s research was published in the Wall Street Journal.

_{This research paper is prepared by and is the property of Bridgewater Associates, LP and is circulated for informational and educational purposes only. There is no consideration given to the specific investment needs, objectives, or tolerances of any of the recipients. Additionally, Bridgewater's actual investment positions may, and often will, vary from its conclusions discussed herein based on any number of factors, such as client investment restrictions, portfolio rebalancing and transactions costs, among others. Recipients should consult their own advisors, including tax advisors, before making any investment decision. This material is for informational and educational purposes only and is not an offer to sell or the solicitation of an offer to buy the securities or other instruments mentioned. Any such offering will be made pursuant to a definitive offering memorandum. This material does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual investors which are necessary considerations before making any investment decision. Investors should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, where appropriate, seek professional advice, including legal, tax, accounting, investment, or other advice. No discussion with respect to specific companies should be considered a recommendation to purchase or sell any particular investment. The companies discussed should not be taken to represent holdings in any Bridgewater strategy. It should not be assumed that any of the companies discussed were or will be profitable, or that recommendations made in the future will be profitable.}

_{The information provided herein is not intended to provide a sufficient basis on which to make an investment decision and investment decisions should not be based on illustrative information that has inherent limitations. Bridgewater makes no representation that any account will or is likely to achieve returns similar to those shown. The price and value of the investments referred to in this research and the income therefrom may fluctuate. Every investment involves risk and in volatile or uncertain market conditions, significant variations in the value or return on that investment may occur. Investments in hedge funds are complex, speculative and carry a high degree of risk, including the risk of a complete loss of an investor’s entire investment. Past performance is not a guide to future performance, future returns are not guaranteed, and a complete loss of original capital may occur. Certain transactions, including those involving leverage, futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Fluctuations in exchange rates could have material adverse effects on the value or price of, or income derived from, certain investments.}

_{Bridgewater research utilizes data and information from public, private, and internal sources, including data from actual Bridgewater trades. Sources include BCA, Bloomberg Finance L.P., Bond Radar, Candeal, CBRE, Inc., CEIC Data Company Ltd., China Bull Research, Clarus Financial Technology, CLS Processing Solutions, Conference Board of Canada, Consensus Economics Inc., DataYes Inc, DTCC Data Repository, Ecoanalitica, Empirical Research Partners, Entis (Axioma Qontigo Simcorp), EPFR Global, Eurasia Group, Evercore ISI, FactSet Research Systems, Fastmarkets Global Limited, The Financial Times Limited, FINRA, GaveKal Research Ltd., Global Financial Data, GlobalSource Partners, Harvard Business Review, Haver Analytics, Inc., Institutional Shareholder Services (ISS), The Investment Funds Institute of Canada, ICE Derived Data (UK), Investment Company Institute, International Institute of Finance, JP Morgan, JSTA Advisors, LSEG Data and Analytics, MarketAxess, Medley Global Advisors (Energy Aspects Corp), Metals Focus Ltd, MSCI, Inc., National Bureau of Economic Research, Neudata, Organisation for Economic Cooperation and Development, Pensions & Investments Research Center, Pitchbook, Rhodium Group, RP Data, Rubinson Research, Rystad Energy, S&P Global Market Intelligence, Scientific Infra/EDHEC, Sentix GmbH, Shanghai Metals Market, Shanghai Wind Information, Smart Insider Ltd., Sustainalytics, Swaps Monitor, Tradeweb, United Nations, US Department of Commerce, Verisk Maplecroft, Visible Alpha, Wells Bay, Wind Financial Information LLC, With Intelligence, Wood Mackenzie Limited, World Bureau of Metal Statistics, World Economic Forum, and YieldBook. While we consider information from external sources to be reliable, we do not assume responsibility for its accuracy.}

_{This information is not directed at or intended for distribution to or use by any person or entity located in any jurisdiction where such distribution, publication, availability, or use would be contrary to applicable law or regulation, or which would subject Bridgewater to any registration or licensing requirements within such jurisdiction. No part of this material may be (i) copied, photocopied, or duplicated in any form by any means or (ii) redistributed without the prior written consent of Bridgewater® Associates, LP.}

_{The views expressed herein are solely those of Bridgewater as of the date of this report and are subject to change without notice. Bridgewater may have a significant financial interest in one or more of the positions and/or securities or derivatives discussed. Those responsible for preparing this report receive compensation based upon various factors, including, among other things, the quality of their work and firm revenues.}