The market is in the process of digesting the implications of Donald Trump’s and the Republicans’ resounding election victory. The kneejerk reactions in terms of a strong US equity market and weaker bond market seem to be broadly correct. This week we consider one of the potential less discussed longer-term effects.

The Great Game refers to the rivalry between the British and Russian empires in the 19th Century over control of the Middle East and Central Asia. Trumps’ foreign economic policy appears to be an economic version of the same. By using the combination of the USA’s economic scale and military, might mean Trump can pursue his Make America Great Again agenda. This is a huge break from the past. In the globalisation era, the economic orthodoxy was very much laissez faire based on the view that free international trade was to the benefit of all parties and would maximise the growth of the overall pie. Arguably, international trade has never achieved this theoretical state. All nations to a lesser of greater degree sought to bend the ‘rules’ to their own benefit. A particular recent case would be China favouring export sectors with cheap capital from its state-controlled banks.

In the second Trump term, we will no doubt see an ongoing shift towards a tit-for-tat trade policy. Trump’s background in property appears to guide his philosophy in the negotiations. He recognises the US holds the strongest hand, and is very willing to use this position to the benefit of the domestic economy. The Chinese are also philosophically aligned with this approach, culturally transactions are seen to create winners and losers, rather than the European belief that both sides benefit from a fair trade.

Trump has already suggested replacing income tax with tariffs. Obviously, this is not feasible in practice given the relatively small size of US imports to the overall economy and the current size of the US budget. However, the direction of travel is clear. In response to the current tariffs China’s exports to the rest of the world have grown strongly as Chinese goods are diverted through third parties into the US. In practice, China hasn’t lost out except at the margin.

Starting in Trump’s first term we have already seen a significant growth in US industrial investment as production is moved onshore and US industries benefit from a relatively more favourable competitive situation.

Census Bureau US Construction Spending, Manufacturing

Source: Bloomberg/U.S. Census Bureau, from 30.11.2002 to 31.05.2024

Considering the hand that the major players have in this new Great Game, the US has huge supplies of natural resources, energy and agricultural production. It has a highly skilled, flexible and growing workforce. Importantly, the USA is the world’s largest consumer market that everyone wants access to, that is a big bargaining chip.

China still has a huge and cheap workforce and urbanisation can continue for some time yet, even if the workforce is now shrinking. Although other economies, such as Vietnam, are gaining share from China they are not nearly large enough to replace it. At the same time China is moving rapidly up the value chain in many key industries, such as autos, renewables, semiconductors and other electronics. Basically, its large workforce is becoming rapidly more productive. While China suffers from a lack of key minerals, such as iron ore and copper, it does have vast reserves of energy, in the form of coal and a rapidly growing nuclear fleet. Its lack of oil and gas explains its focus on electric vehicles over ICE, these it can build and power with its coal.

The big loser from a move aggressive global trade environment is Europe, which basically has a very weak hand in this new Great Game. Europe has chosen to not tap into its abundant fossil fuels, and its mineral resources have long since been exploited. This leaves its highly skilled work force at a substantial disadvantage, having as it does to import raw materials and energy. Its sizeable domestic market can be further protected with tariffs, but it needs growing exports to pay for its imports. Yet its exports are becoming increasingly uncompetitive.

In the world we see going forward the game is likely to be played much more aggressively and those with a weak position must choose to shore up their hand or suffer. Those who play their stronger hands well will be the relative winners, as will those with something unique to offer.

From an investment point of view, it is dangerous to read across directly from economic prospects to stock market performance as most large companies in every market are to a lesser or greater degree global in nature. That said, the narrative of a stronger and more assertive government in the US will likely lead to an even greater preference from investors towards the US equity market.