Clocktower: Far-reaching impact! Trump reshapes the triple order of global security, trade, and currency

President Trump’s radical policy agenda is ushering in a new era, and this new geopolitical and macroeconomic landscape may profoundly affect global investors' expectations for decades to come.

In the past six months, several well-known investors have frequently pointed out that Trump is dismantling the global economic and political order that has persisted for 80 years since World War II, significantly damaging America's credibility on the global stage. In their view, this loss of credibility not only undermines the "American exceptionalism" that has dominated global financial markets in recent years but may also shake the safe-haven status of U.S. Treasury bonds and the core role of the dollar as the global reserve currency.

Many investors believe that the rapid decline of American financial hegemony can be attributed to President Trump's "poor leadership." The dissatisfaction of the U.S. financial industry with President Trump is not surprising. After all, during the decades dominated by the U.S., which supported the post-war liberal international order and the process of globalization, the American financial industry was undoubtedly one of the main beneficiaries of this historical process.

Figure: Globalization has supported American financial hegemony

However, it would be overly simplistic to attribute America's current predicament entirely to Trump. As we analyzed in our March report "All Along the Clocktower," Trump is merely the first U.S. president to openly acknowledge that "the world is no longer unipolar." In the context of a multipolar world where global power is shifting, it is inevitable for the U.S. to adjust its national strategy in response to its declining relative position. Compared to its previous tolerant stance, today’s America is more assertive and prioritizes its own interests, even if it means sacrificing the interests of other countries, including traditional allies.

Figure: The shifting global power dynamics lead to a decline in America's relative position

That said, while the strategic contraction and isolation tendencies of the U.S. have a certain logical inevitability under the trend of multipolarity, whether the Trump administration's response to this structural change is appropriate remains a widely debated topic.

However, as investors, our responsibility is not to make moral judgments about Trump’s policies but to assess their outcomes and their impact on asset prices. In our view, the systematic deviation of the U.S. from the liberal international order may trigger three major long-term trends and fundamentally reshape the global geopolitical and economic landscape

I. Reconstruction of Global Security Order

As the United States gradually weakens or withdraws its global security commitments, the geopolitical situation is becoming increasingly turbulent, and the frequency of conflicts between nations is expected to rise significantly.

Figure: The international situation is becoming more turbulent in a multipolar pattern.

As the "law of the jungle" gradually replaces the rule-oriented international order, intense security competition between nations is almost inevitable. Countries that have long relied on U.S. military protection will become direct victims of this strategic adjustment. It is anticipated that more traditional U.S. allies will follow Germany's example by increasing fiscal spending to rebuild their military capabilities. Recently, defense stocks in Europe, Japan, and South Korea have surged, possibly signaling the beginning of this long-term trend.

The U.S. contraction of security commitments also provides greater autonomy for relevant countries, including China. After witnessing the chaotic scenes of the U.S. withdrawal from Afghanistan and the fluctuating support for Ukraine, America's strategic competitors see the current moment as an important window to advance their own geopolitical interests and strategic agendas. This situation creates new space and opportunities for China to deepen its diplomatic relations with neighboring countries and expand its global influence.

II. Reshaping Trade Order

The United States is no longer willing to absorb global excess savings at the expense of its own industrial competitiveness.

The economic globalization of the past few decades has essentially been built on the foundation of the U.S. continuously expanding its current account deficit to attract global capital inflows. While this mechanism has reinforced U.S. financial hegemony, it has also brought about numerous structural side effects, including the long-term overvaluation of the dollar, increasing hollowing out of manufacturing, and traditional industrial regions like the Midwest falling into prolonged difficulties.

Figure: The continuously expanding U.S. current account deficit is the foundation for attracting global capital inflows.

Now, faced with increasingly sharp domestic social divisions, a warming global geopolitical situation, and the real need to rebuild industrial capacity in a multipolar landscape, the U.S. is attempting to reshape the imbalanced structure of the global trade system through the "weaponization of market access." The paths to achieve this mainly include two: enhancing domestic supply capacity and expanding overseas market demand for U.S. products.

To strengthen domestic supply capacity, the U.S. must enhance the relative attractiveness of domestic manufacturing, making it more economically rational for companies to "stay in America" than to relocate their supply chains abroad. From this perspective, tariffs are not only bargaining chips in negotiations but may also become a long-term policy tool. Only by continuously raising the relative costs of overseas production for a considerable period (possibly lasting several years) can the U.S. truly promote the return of manufacturing and reshape its domestic industrial chain.

Therefore, we hold a reserved attitude towards the view that "Trump's reciprocal tariff policy will trigger a global 'race to cut tariffs'." In our opinion, if tariffs remain at a "reciprocal" level, it will still be insufficient to drive companies to restructure their supply chains and return to the U.S. mainland After all, overseas production still has significant cost advantages. We believe that the Trump administration is likely to set the 10% base tariff as the bottom line in future negotiations and view it as a non-negotiable strategic foothold.

Figure: Tariffs must be high enough to drive manufacturing back

At the same time, to expand external demand, the United States may also "persuade" or even "pressure" surplus countries to adjust their economic policies and enhance domestic demand. In this context, tariffs play more of a role as a bargaining chip. In our article "Bracing for A New Plaza Accord" published in July 2024, we proposed that one of the fundamental goals of U.S. tariffs is to force surplus countries to accept some form of macroeconomic coordination mechanism. If these countries can transform their growth models by increasing consumption and reducing savings, the external imbalance issue for the U.S. will naturally ease.

However, recent developments in Europe indicate that the true driving force behind global policy adjustments often does not stem from U.S. tariff pressure, but is rooted in geopolitics itself. Germany's historic shift in fiscal policy reflects its deep concerns about being marginalized in the global economy and geopolitical strategy amid the current turbulent multipolar landscape. Ironically, from the perspective of global trade rebalancing, Germany's "shift" aligns closely with the policy goals of the Trump administration, as it helps reduce Germany's long-standing current account surplus. In fact, among countries with significant trade surpluses with the U.S., Germany's imbalance is particularly pronounced.

However, for the U.S., achieving true rebalancing of the global trade system hinges on China, which is undoubtedly the most critical variable. This is mainly because China's trade surplus is far greater in absolute terms than that of other countries. Compared to Germany, China has its own considerations regarding the pace of trade adjustments at this stage and has not shown the same sense of urgency. Therefore, the U.S. may still believe that maintaining tariff policies against China is an effective external means to encourage China to accelerate its economic structural transformation and promote internal rebalancing. In this context, the Trump administration is expected to continue using tariffs and other non-tariff tools to push the Chinese government to implement more robust macro support policies, further unleashing domestic consumption potential.

Additionally, the U.S. may explore another adjustment path, attempting to construct a "parallel trade system" relatively independent of China. This idea aligns with U.S. Treasury Secretary Scott Bessent's concept of "regional economic and security structures," as well as the strategy of establishing a "tariff wall" against China advocated by Stephen Miran, chairman of the President's Council of Economic Advisers. The Trump administration seems to be advancing similar ideas by renegotiating trade agreements and encouraging other countries to take similar measures to impose certain restrictions on exports to China However, we believe that this strategic path is primarily based on the framework of "U.S.-China bipolar" opposition, which requires the international community to generally view China as a collective containment target. The reality is that the current international landscape is trending towards multipolarity. In this environment, it is not easy for the United States to establish a unified stance towards China globally; especially given the continuous release of uncertainty and even hostile signals to its traditional allies, diplomatic coordination faces significant obstacles.

Moreover, from the perspective of global economic reality, attempting to exclude China from the international trade system is also difficult to achieve. China is not only a core country accounting for nearly 30% of global manufacturing but also plays a pivotal role in intermediate goods trade. If China is forcibly marginalized, it will inevitably raise global inflationary pressures, thereby posing systemic risks to supply chain stability.

Figure: China occupies a core position in global manufacturing and intermediate goods trade

Therefore, a more likely outcome is that the United States establishes a "dual tariff system": imposing high tariffs of 40% to 45% on Chinese goods while uniformly levying a basic tax rate of 10% on other countries. To strengthen enforcement, Washington may also establish a systematic tracking mechanism to identify and block Chinese goods that may circumvent through third countries to enter the U.S. market. This change may prompt some supply chains to accelerate their migration to other emerging markets, leading to a new round of adjustments in the global manufacturing landscape.

From a geopolitical perspective, this adjustment path has a certain strategic rationale for the United States, aimed at reducing global supply chain dependence on China. For some emerging market countries, this also brings new opportunities for their own industrial development. For a long time, some emerging economies have held different views on China's dominant position in global trade and hope to gain more market share in specific areas. For example, before Trump proposed "Liberation Day," countries like Vietnam, Brazil, and Indonesia had already taken anti-dumping measures against certain Chinese products, reflecting a certain competitive dynamic in trade interests among emerging markets.

For China, while this change brings certain challenges, it also helps to push for a more balanced economic structure. China's current account surplus has significantly expanded in recent years, facing structural sustainability pressures. Even without changes in U.S. policy, this trend would eventually prompt external reactions. In the current global landscape, the most feasible response path remains to accelerate internal economic rebalancing, strengthen the development of consumption and services, and gradually narrow the structural gap shown in the following figure, thereby achieving a more stable and sustainable development direction.

Figure: Structural differences between China's consumption and production sides

III. Reshaping Financial and Monetary Order

The contraction of the United States' global security commitments and the restructuring of trade patterns are simultaneously undermining its financial hegemony, posing substantial challenges to the US dollar and US Treasury bonds.

Fundamentally, if the United States successfully promotes a global trade rebalancing while continuously reducing security commitments to its allies, the global financial and monetary system is bound to undergo profound changes. Stephen Miran, chairman of the President's Council of Economic Advisers, pointed out in his widely cited paper that the dollar's status as the global reserve currency has created a "rigid demand" for US assets such as Treasury bonds. However, what Miran did not fully elaborate on is that the true root of this demand is the long-term imbalance in the global trade structure—surplus economies continuously accumulating foreign exchange reserves have constituted sustained buying pressure for dollar assets.

Once this trade imbalance is disrupted, the overseas demand for US financial assets, especially the willingness to allocate to US Treasury bonds, is likely to experience a structural decline.

This means that if the United States achieves external rebalancing as desired, while its fiscal deficit remains large, the US Treasury bond market will face severe challenges. In this context, President Trump and Treasury Secretary Mnuchin have prioritized fiscal consolidation as a policy imperative, which is of significant practical importance, as US Treasury bonds remain the foundation of America's financial hegemony.

However, data from the past decade indicate that the pace of expansion of US government debt has far exceeded the new allocations of global foreign exchange reserves to US Treasury bonds, strongly refuting the view that "overseas reserve demand is a key driver of US fiscal expansion." In fact, Washington has largely abused its position as the issuer of global reserve assets, primarily to stimulate its domestic economy rather than to meet the demands of foreign investors.

We believe that the "structural supply-demand gap" revealed in the left chart below is a potential time bomb. Once overseas surpluses significantly shrink or international investors experience a systemic loss of confidence in US credit, this bomb will be quickly detonated. Ultimately, the policy goal of Trump's push for global rebalancing will force the US government to face a fundamental choice: either accept a structurally higher level of interest rates or confront the systemic risk of dollar depreciation.

From a specific mechanism perspective, once global trade rebalancing leads to a narrowing of foreign surpluses, these countries will be unable to continue purchasing US financial assets on a large scale, especially US Treasury bonds. After losing overseas buyers, the responsibility for filling the financing gap will gradually shift to the Federal Reserve or the domestic private sector. This shift has begun to manifest since 2015, when the holdings of US Treasury bonds by overseas institutions began to decline continuously.

Figure: The US has abused its fiscal policy (left) Overseas institutions' holdings of US Treasury bonds continue to decline (right)

If the financing responsibility shifts to domestic private investors, their demands for interest rates will be much higher than those of foreign exchange reserve managers. The demand from private investors is more elastic and depends on the relative attractiveness of various financial assets. Therefore, the term premium on US Treasury bonds may rise significantly, leading to higher long-term interest rates.

Figure: If private investors bear financing responsibilities, the term premium on U.S. Treasuries will rise.

If the U.S. government continues to monetize its fiscal deficit through the Federal Reserve, it may eventually restart yield curve control (YCC) to artificially suppress Treasury yields. However, persistently low real interest rates will reduce the attractiveness of dollar assets, potentially triggering capital outflows and currency depreciation. In this scenario, the U.S. economy and financial system will exhibit more "emerging market characteristics," and the risk of a dollar crisis triggered by extreme monetary policy operations will significantly increase.

From a historical perspective, the current situation in the U.S. bears a high resemblance to the 1960s. At that time, the U.S. also prioritized meeting domestic fiscal needs, leading to a global supply of dollars far exceeding actual reserve demand. This directly prompted French President Charles de Gaulle to question the "excessive privilege of the dollar," ultimately resulting in the Nixon administration's termination of the dollar's convertibility into gold in 1971, triggering a dollar crisis and the subsequent collapse of the Bretton Woods system.

Editor's Note: To help everyone learn to understand geopolitics from a market perspective, Wallstreetcn has invited Kevin Wang, Chief Strategist of Clocktower, to be the keynote speaker at the Alpha quarterly closed-door private class held on August 17 in Shanghai. In this closed-door class, Kevin Wang will delve into the core methodology of geopolitical investment analysis and the constraints analysis framework, sharing his distilled five key lessons, to help Alpha members and master class members present understand geopolitics from a global market perspective, see the dominant logic and key trends behind geopolitics, and anticipate the medium to long-term trends of major asset classes, aiding in critical personal decision-making. Please click the image below to register.