Will US Policies Drive a Great Reglobalization?
The coming decades may bring a historical reshuffling of the global economic and financial order.
Globalization has radically reshaped world economies over the past 30 years. Economies have become so tightly woven together that the consensus view until relatively recently was that globalization is here to stay. “Globalization is not something we can hold off or turn off,” said Bill Clinton in a 2000 speech. “It is the economic equivalent of a force of nature, like wind or water.”
These days, of course, the world is reckoning with the Trump administration’s aggressive posture on tariffs. The United States’ stilted, will-they-or-won’t-they approach to tariffs has fueled uncertainty and distrust among its trading partners. It also has led to grave concerns that US policies could lead to rampant deglobalization, with negative implications for global economic growth and the financial markets.
We can’t rule out that scenario, but we think it’s unlikely. It’s true that the trade policies enacted or announced by the Trump administration are likely to reduce globalization and harm economic growth. Even if US tariffs are removed, other countries may be less inclined to trust the US as a trading partner. But we don’t believe these policies pose the threat of rampant deglobalization. Instead, we believe US protectionism may drive a period of reglobalization outside the United States.
Such reglobalization may even have positive implications, as countries outside the United States forge stronger relationships among each other and increase their own fiscal investments. These changes could support healthier economic growth for those countries, potentially driving stronger asset returns in international markets relative to the US dollar and US assets more generally.
Can the World Rely on the United States?
The US is the world’s most voracious buyer, importing nearly $3.3 trillion in goods in 2024.1 It is also one of the world’s most active sellers: The US last year exported more than $2 trillion in goods, much of which went to key trading partners such as Canada, Mexico, China, Japan, and countries in the European Union.
US administrations in recent years have tried to close the more than $1 trillion trade gap. During the first Trump administration, the US imposed tariffs on foreign-made goods ranging from washing machines to steel. The Biden administration worked to bring more manufacturing back to the US through heavy incentives in the CHIPs Act and the Inflation Reduction Act. The second Trump administration has shifted protectionism into overdrive, levying tariffs on trading partners around the world. The heaviest hit is China, which was slapped with tariffs of 125% or more and retaliated with similarly steep tariffs of its own. US protectionism is likely to reduce US demand, forcing other countries to step up measures to drive demand in their own economies. The degree to which they can replace US demand will have major implications for global economic growth.
Meanwhile, the Trump administration has taken steps to pull back from the security role the United States has played around the world since the end of World War II, including threats to reduce troops in Eastern Europe, require greater direct compensation for military support, and even withdraw from NATO. In addition to their geopolitical implications, these changes carry financial risk: America’s security shield is one reason the US dollar serves as the world’s reserve currency.
The World Responds
Tariffs are likely to cause exports to the US to fall sharply. To offset the drop in demand, some countries may ramp up domestic investments and slash regulations. For example, Germany recently announced a €500 billion defense and infrastructure package.2 Canada is considering easing domestic trade regulations to drive more trade between provinces, a move officials say may add CAD $200 billion to the Canadian economy.3
Others are pivoting to new trading partners. Representatives from the EU and India met in March to start hammering out a free-trade agreement,4 and the EU is trying to strike new deals with Mexico, Malaysia, and countries in South America.5
Meanwhile, countries are likely to invest more in their own defense capabilities. In addition to Germany, countries that have announced intentions to ramp up domestic security investments include Sweden, Spain, Finland, New Zealand, Singapore, and the Philippines. For its part, China recently announced plans to increase its defense budget by more than 7% this year.6
The combination of deregulation, increased supply-side investment, and new global trade agreements could give the world outside the US an economic boost over the next decade, even as greater security capabilities make other countries less dependent on the US These changes are likely regardless of the specifics of individual tariffs or other US policy moves; those details will simply dial the urgency of countries’ responses up or down.
Risks to Our Outlook
Although reglobalization ex-US is the most likely outcome, in our view, it’s not a foregone conclusion. Other countries may follow the United States’ lead and become more protectionist, potentially fueling the great deglobalization that worries many observers. In that case, the world could enter a painful scenario in which corporate earnings, risk assets, and global economic growth all suffer.
Another apparent risk to reglobalization is internal politics. Countries pushing for deregulation, higher domestic spending, and more trade with non-US partners could run into political roadblocks. For example, any plan for the EU to increase defense spending will require consensus among those 27 countries — a challenging prospect for such a weighty issue. Canada may face similar political realities in efforts to build consensus among the country’s 10 provinces.
Geopolitics also may limit attempts at reglobalization outside of the United States. The most obvious example involves the EU and China, which may find that competing interests and worldviews — such as those related to Taiwan, North Korea, or parts of Africa — limit deeper economic cooperation.
We think these challenges could slow the push toward reglobalization. But we think they’re unlikely to stop the process, especially given countries’ strong incentives to depend less on a less-dependable United States.
Investment Implications of Reglobalization
The United States has had a structural growth advantage over the rest of the world for years, made possible by high productivity, resilient capital markets, stable leadership, world-class educational institutions, and other qualities. Reglobalization that does not include the US would call that structural advantage into question.
That potential shift could upend the global investment landscape. After decades of outperformance by US equities and a nearly 15-year bull market in the US dollar, non-US assets and currencies may be poised to lead. We believe the US dollar is likely to remain the primary reserve currency over the next 10 or more years, given the difficulty in replacing the current, US dollar-based ecosystem of assets, financing, and payment systems. But dollar dominance is likely to weaken. Facing protectionist US policies, other countries have greater incentive to establish payment networks that avoid the US banking system. That process will surely become easier as financial technologies continue to advance. At the same time, the potential for greater investment, fiscal spending, and trade cooperation outside the US may boost long-run growth expectations and investment opportunities.
Our Takeaway
The global economy and financial markets are large, resilient, and adaptable. Although the United States is the dominant player, other countries have agency to improve their global economic and financial standing. The more these countries believe the US is unreliable as a trading and defense partner, the more they’re likely to build relationships and capabilities that serve them better.
We believe fears of deglobalization on a grand scale are overblown. Reglobalization ex-US seems to us to be a more plausible result of the shifts in US trade and security policy. It would drive a seismic reordering of the global economic and financial landscape — and would be likely to have positive implications for investments outside of the United States.