Trade and the US Presidential Campaign

One of the less heralded political-economic transformations of the past decade has been the shift from a bipartisan consensus for free trade to a bipartisan consensus against it. This was not due to any change in economic thinking; professors continue to teach the logic of comparative advantage. Rather, it was mainly due to a political reaction against income inequality and deindustrialization in wealthy democracies combined with fears of Chinese weaponization of international dependence on Chinese production. The current presidential campaign is being portrayed in apocalyptic terms by both sides. Yet on the critical question of how the United States interacts with the global economy there is an identifiable bipartisan center that is likely to grow.

Donald Trump’s aggressive use of tariffs as president was criticized by Democrats and most economists, but many of those tariffs were kept under President Biden. Biden’s use of industrial policy to direct federal resources at helping certain US industries do better in international competition was itself a variant of the “economic nationalism” that Trump had advocated, but one that involved spending tax dollars rather than imposing costs on imports and thereby on consumers. The Biden administration’s recent imposition of 100% tariffs on Chinese electric vehicles, while symbolic — Chinese electric-vehicle sales in the US are negligible — continues the theme of imposing costs on imports.

In his campaign, Trump has doubled down on promising to implement tariffs, even saying that he would use them to replace some types of tax as government revenue. Such proposals have alarmed Republican officials as well as Democrats. 

Kamala Harris’s position is difficult to locate. In public statements before becoming vice-president, she vigorously attacked what she called “Trump’s trade tax” which resulted in “American families spending as much as $1.4 billion more on everything from shampoo to washing machines” and “farmers in Iowa with soybeans rotting in bins, looking at bankruptcy.” At the same time, she stressed that she wanted trade deals to “protect American workers” and to address climate change. Her opposition on these grounds to NAFTA, USMCA (NAFTA’s replacement, negotiated under Trump) and the Obama-negotiated Trans-Pacific Partnership (TPP) was, taken as a whole, unusual for a Democrat of generally mainstream views aspiring to national office.

Harris did not work directly on trade issues as vice-president. The Indo-Pacific Economic Framework (IPEF) is the only Biden-era international agreement that has embodied the types of environmental initiatives that Harris has praised. She supported it in Thailand in 2022. While it is unclear how much priority would be given to it under Harris, the reality is that multilateral trade talks are popular among American allies but not Americans. The leading examples are the Asian Regional Comprehensive Economic Partnership (RCEP, led by China); the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP); and the IPEF.

The CPTPP is a particularly egregious example, given that it was a US initiative until President Trump withdrew. (Hillary Clinton, in her campaign against Trump, distanced herself from the pact.) Democrats had perceived the political power of Trump’s economic nationalism and tacked in his direction. Ever since, there has been little domestic political support for re-engaging with the TPP. Yet the US-brokered past has lived on, its membership including such key US allies and trading partners as Japan (which picked up leadership when the US left), Australia, Canada and, in 2023, Britain.

Harris will at least be less likely than Biden to ignore or downplay such multilateral talks as those that are ongoing for the IPEF. But Harris needs working-class and union voters, who tend to distrust international trade, and she and Tim Walz have green commitments that are not easy to honor in trade deals. Harris is unlikely to declare new tariffs although she might continue existing ones, such as on EVs and their components. Her environmental and jobs priorities will find positive expression in continuing Biden’s industrial policies, with their strong green and strategic anti-China aspects.

Trump’s prioritization of tariffs is likely to be tempered in office. In addition, he does not have Harris’s environmentalist commitments and he was, after all, the last president to bring in a major trade deal, the USMCA.

Whoever is in the White House, that agreement will be due for a review in July 2026. Measured by the growth in US trade deficits with Mexico and Canada, the USMCA cannot be reckoned a great success. Yet the bipartisan consensus on trade and industrial policy suggests it will be celebrated anyway.

Are We Already in World War III?

By Dee Smith

The question in the title has been asked in policy forums, and often dismissed. But there are recent developments that make it important to take the possibility more seriously.

First in importance is what is being called an “Axis of Disruption”: China, Russia, Iran, North Korea. These states are arguably more coordinated today than the old Axis powers were at the beginning of World War II. They have mutually reinforcing interests. Primary among these is an interest in weakening the United States, Western allies and the so-called rules-based international order.

It is not so much that Axis of Disruption goals are shared as it is that the interests of the players are self-reinforcing. China would welcome a situation in which the military and diplomatic attention of the US is drawn into simultaneous conflicts in the Middle East, centered on an Israel-Iran confrontation, and in the North China Sea, focused on sharpened tensions between North and South Korea. The focus of the US on these two theaters of action would draw its capabilities away from other areas, particularly Taiwan. Russia likewise would prefer to have the attention of the US pulled away from Ukraine. In this analysis, China would be the sub rosa moving force behind seemingly disparate actions — all of which satisfy the interests of it and its allies.

Simultaneous major military action by members of the Axis of Disruption in the Korean Peninsula, Taiwan/South China Sea, the Middle East and Ukraine could be considered to constitute world war.

Is this realistic?

It depends to a significant extent on whether China really wants to pursue a forceful reunification with Taiwan, and if so, when. China considers Taiwan a breakaway province, and in some ways sees it as the last pillar standing of the “century of humiliation” Chinese schoolchildren are taught: “100 years of national disgrace” of China at the hands of Western powers and Japan. Chinese leader Xi Jinping has clearly stated that he sees his legacy as the reunification of Taiwan with the mainland, by force or otherwise. For several reasons, including changing demographics (an older population and the results of the one-child policy in the 20th century), his own advancing age, and the changes resulting from ever closer ties between tech sectors and defense, Xi may see his window of opportunity closing.

On the other side, the outlines of a broad counter-alliance are emerging. NATO has significantly expanded its territory along the border of Russia. A number of cooperative groups of nations who share strategic interests in various ways — the European Union, the “Five Eyes” (Australia, Canada, New Zealand, the UK and the  US, with varying collaboration with France, Israel, Singapore, South Korea and Japan), AUKUS (Australia, UK, US), the Quad (Quadrilateral Security Dialogue: Australia, India, Japan, and the US), the Abraham Accords (Bahrain, Israel, the UAE and, indirectly, Morocco and the US) — seem also to be consolidating into something like an informal alliance.

The US has just entered into an expanded defense agreement with Japan. And Israeli Prime Minister Benjamin Netanyahu’s speech before the US Congress on 24 July could almost be read as a statement of intent to go to war with Iran.

The situation is unlike the Cold War, in which there were more clearly delineated sides. There are many countries sitting on the fence with regard to their alliances. The new non-aligned movement is expanding, with significant “middle powers” like Turkey exploring options outside its long-standing associations with the West. It is no longer outlandish to ask if Turkey might leave NATO. The BRICS (Brazil, Russia, India, China, South Africa) group of nations is expanding, with countries like Egypt joining, and is seeking to introduce its own currency.

India is both a member of the US-oriented Quad and of the BRICS group, and the UAE of BRICS and the Abraham Accords. Which way would they fall if the proverbial push comes to shove?

Adding further instability, the US dollar — the world’s reserve currency — is under mounting pressure due to continuing US government budget deficits and the US debt load of over $35 trillion. A number of nations, China among them, have been dumping dollars and buying gold (this includes Chinese households). The US may eventually find it difficult to finance its debt.

When a world war begins is often a matter of hindsight. It still seems unimaginable to many, and it is to be fervently hoped it never happens. “Recency bias” is the belief that the near future will be like the recent past. Most people cannot believe things outside their experience can happen. But they can . . . and do.

Private Fusion Takes Off

US-led Western policies aimed at the technological and, in effect, commercial isolation of China — exacerbated by China’s ongoing cooperation with Russia despite sanctions over its invasion of Ukraine — have created a situation in which leading-edge innovation is becoming fragmented in both the private and the governmental spheres. This is inherently inefficient. Yet it is also spurring state investment at new levels, such that the overall effect, over the medium term, could well net out as positive. Nuclear fusion is a particularly interesting example that merits a closer look.

Fusion has always seemed five years away, rather as Brazil has proverbially been called “the country of the future … and it always will be.” (The unkind line is attributed to De Gaulle.) But as the US-China dynamic has become an enduring feature of geopolitics investment in fusion has increased dramatically, particularly in terms of public-private partnerships.

The main global fusion project since the 1980s has been the International Thermonuclear Experimental Reactor, known as ITER. Born from a meeting between Ronald Reagan and Mikhail Gorbachev and based in southern France, ITER has the US, China and Russia among its permanent members. Each member state contributes some particular part of the central project, a reactor based on the tokamak method. There is no practical way to excise one or another ITER participant. Sanctions against Russia for invading Ukraine have so far not dislodged Russia from ITER, although its participation has been controversial since the invasion.

ITER illustrates a type of international cooperation typical of the Reagan-Gorbachev era and now apparently a thing of the past. However, the swift decline of globalist cooperation has been matched in the fusion sector by a growth in government financing, private investment and public-private partnerships. Public funding, according to a new report from the Fusion Industry Association, went from $271 million in 2023 to $426 million in 2024 so far, or roughly half the private share of $900 million. (Funding to date is on the order of $7 billion.) The US, EU, British and Japanese governments have all shown significantly increased interest in working with private fusion companies. ITER itself is turning more toward private partnerships. Meanwhile the Chinese government continues to prioritize fusion work in government labs, universities like Tsinghua, and the (Chinese-style) private sector.

The growth of the fusion industry is a demonstration of how private-sector approaches differ from governmental ones. Tokamak is just one of several leading technologies for fusion, and companies are placing a wide variety of bets on various technologies, any one of which could prove to be the winner. The number of private fusion companies has doubled in the past six years. Some major companies, like Shine (US, $800 million in funding to date), are working to develop viable revenue streams, such as producing Lutetium for cancer treatment, while keeping an eye on the moonshot of clean, cheap energy. Others, like tiny Terra Fusion, also in the US, are startups pursuing one particular technology that they hope will be the breakthrough. Roughly half of fusion companies are in the US. Globally, most fusion companies have university and defense partners — in the US case, the national labs (managed by the Department of Energy, as their earliest priority was nuclear power) and the Department of Defense.

There is also significant US participation from ARPA, one of many echoes of the Internet  development process of the 1970s. (The earliest Internet was the ARPAnet.) Unlike in that era, geopolitical fears are now combined with climate change.  Fusion promises an end to carbon-based energy systems. However inefficient it might be to have politically structured private sectors, it could also prove to bring a technological solution to climate change sooner than would otherwise have been the case.

Vance Notice

This post was published on Friday, 21 June, two days before President Biden renounced his candidacy for reelection.

The current high level of partisanship in the media, even the business press, has made it difficult at best to find objective analysis that favors neither party. For example, former President Donald Trump’s announcement of J.D. Vance as his running mate was generally met with a certain dismissiveness. The Economist’s midweek newsletter read: “Mr Vance will not swing many votes. A 39-year-old articulate anti-globalist, anti-big business, anti-immigration, pro-worker, MAGA enthusiast, he does little to broaden Mr Trump’s electoral appeal.” SIG’s analytical view is that Vance will indeed broaden Trump’s appeal to working-class, lower-middle-class, and non-white voters. Trump has been steadily taking these formerly core Democratic constituencies into his column since the 2016 campaign. And in a number of states they could very well make the difference between a Trump presidency and a Biden (or Harris) one.

Trump’s remarks at the convention Thursday night included an appeal to “every citizen, whether you are young or old, man or woman, Democrat, Republican, or independent, Black or White, Asian or Hispanic,” and in the previous days convention-goers had heard from a Muslim woman offering a prayer in Arabic, a black pastor, and a variety of non-white lawmakers and officials. The Republicans’ big-tent approach began in the campaign of the younger George Bush but Trump has steadily extended it. He did better in 2016 with nonwhite voters than Mitt Romney had four years before, and somewhat worse with white voters as a whole. Trump also could not have won without taking some Obama voters away from Hillary Clinton. Trump did noticeably well with working-class and less-educated voters. Those two groups, of course, contain a great many non-white voters. Given the national white majority and the realities of racial discrimination, working-class politics and non-white politics have often been treated as highly distinct and even antagonistic. Trump seemed to be following a different path.

Biden and the Democrats, meanwhile, were losing their once solid hold on the non-white vote. In 2012, Barack Obama carried the non-white working class (non-college-educated) by 67 points over Romney. In 2020, running against Trump, Biden carried the same demographic by just 48 points. By February 2024, one reputable poll was finding that Biden’s margin had slipped to 6 points: 47 percent to 41 for Trump. The same poll found that white and non-white voters without college degrees were converging in their views on the respective qualities of Biden and Trump and on the state of the economy. Indeed, non-white voters in this category were slightly less likely than their white counterparts to feel that Biden’s policies had benefitted them.

The Democratic party has long prioritized the non-white vote as such. What seems to be happening is not that Biden and the Democrats are losing non-white voters so much as losing working class-voters, among whom non-whites are disproportionately represented. (A 2024 poll found that 55 percent of non-whites identified themselves as in the lower or working classes, compared to 36 percent of non-Hispanic whites. The white-non-white ratio in the US is roughly 60-40.) At the same time, Democrats’ association with prioritizing the non-white, and particularly the black, vote might also have led some less-educated whites to back Trump. Both lines point in the same direction.

Trump’s working-class support is a principal reason why he is doing well against Biden in polls. In Virginia, for example, Biden has gone from a 10-point margin in 2020 to 3 points in recent polls, and possibly less. Trump, meanwhile has seen his margin of the Virginia working-class vote grow from 6 points in 2020 to 24. In the battleground state of Pennsylvania, Trump’s lead among likely working-class voters has doubled over the same period. Nationally, Trump carried the working-class vote by 4 points in 2020 and now is polling at a 17-point margin or above.

Trump and Republican officials know all this, and the party platform, which Trump had a decisive hand in shaping, reflected it. The platform was noticeably less strong than in the past on fiscal rectitude, more supportive of Social Security and Medicare, more emphatic about creating jobs (particularly in manufacturing) and less emphatic about abortion. These new positions are all in line with data about working-class policy preferences.

This waxing working-class and non-white Republican constituency is the large target at which J.D. Vance is aimed. His convention speech on Wednesday was preceded by an introduction from his nonwhite, Hindu wife, Usha Chilukuri Vance, a child of immigrants, who went on to take a seat next to Trump. Vance then gave a speech squarely focused on promoting Trump and the party as ardent defenders of the American working class against their enemies foreign and domestic. His biography enabled him to do this with a believable passion that Trump has not been able to reach. But more than that, Vance brought to bear the skills of a correspondent and public-affairs specialist (his position in the Marines), an undergraduate student of political science and philosophy, and a successful author (Hillbilly Elegy). (Usha Vance studied history as an undergraduate at Yale then went on to get a history MPhil from Cambridge as a Gates scholar.) Vance was able to position his working-class story within a 250-year narrative of patriotic struggle. He referred repeatedly to his family’s graves on a hillside in Kentucky, generations of poor ancestors whom he expected to join, and whom he expected his family — the Vances have two sons, Ewan and Vivek, and a daughter, Mirabel — to one day join as well.

Vance brings a distinctive and potentially quite powerful kind of patriotic narrative in support of the years-long trend of growing working-class and non-white support for Trump and his party. That trend in turn is likely to be decisive in this year’s contest. Among the many implications for investors are the solidification of industrial policy and protectionism in the world’s most important economy, government prioritization of onshoring and the preservation of the existing social safety net.

After the New Cold War

To what extent will the U.S.-China struggle take the rest of the world along with it? Recent developments in the technology sector suggest that containment of China has a long way yet to run, regardless of who becomes the next U.S. president. At the same time, China is showing no signs of abandoning its core strategy of using state policy to control citizens at home, build Chinese companies that can crush competition abroad, and exert maximal autarkic control of its domestic market. However, the great success of globalization has been the creation of a global middle class with incomes, educations and expectations all on an unprecedented scale. There is now a generation or two in adulthood that has grown up watching the West destroy itself and slowly abandon the freedom of movement of capital, goods, services and people that was the premise of globalization. This generation, outside the West and (perhaps) China, does not think it is helpless. SIG’s view is that the global generation in its late 20s and early 30s is already pivoting away from attachment to the world of their parents and the disastrous end-game that appears to be their parents’ legacy.

U.S. policy for the technological isolation of China has been steady and focused since about halfway through the first Trump administration. It has expanded in breadth and sophistication under the Biden administration. Technology companies have integrated this into their strategies, giving what began in the government sector strong private momentum. Consider a project with the very Bondian acronym HEIST. It is a private-public-academic partnership now backed by NATO. Its goal is to create ways for Internet traffic to be switched from undersea cables to networked outer-space satellites in the event an ocean cable is disrupted. (Students of Internet history will recall that the Internet itself was developed out of private-public-academic programs for ensuring continuity of communications in the event that land-based systems were disrupted.) HEIST is just one example of how the private and academic sectors are factoring in a long-term tech conflict between the U.S. and China. Another is OpenAI’s decision to clamp down on use by Chinese developers of ChatGPT. China was never on OpenAI’s list of “supported countries and territories,” but the move is nonetheless significant.

Of course, moves like this all call forward responses from China and Chinese companies. China’s GPS alternative, BeiDou, has had this problem set firmly in view for over 20 years. Coverage of the OpenAI decision has emphasized how quickly — measured in days if not hours — Chinese tech companies offered “moving packages” to OpenAI customers on the mainland whose VPN and other outward connections to OpenAI would no longer work. Huawei has retooled itself to deal with the expanding bans on its use overseas. It is too much to say that U.S. tech containment of China has been a good thing for Chinese businesses but it has been a spur, if of a peculiar kind.

The Trump policies on China that Biden kept and developed were guided by people such as Robert Lighthizer (Trump’s trade representative) and Matt Pottinger (Trump’s deputy national security advisor), who are expected to be part of any second Trump administration. There is every reason to anticipate policy consistency, in this particular field, regardless of the victor in November. The same is true in China.

In a real Cold War, this bifurcation between two hostile major powers would extend itself to the rest of the world. There is an element of that today. Germany, for example, after years of U.S. pressure, has decided to take Chinese technology (from Huawei and state-owned ZTE) out of its 5G networks. However, most states and national economies with any choice in the matter have opted either to blend U.S. and Chinese systems or, better yet, to develop their own.

To opt out of a forced choice between major-power antagonists while opting in to the cross-border platforms that are being shaped by that antagonism is a characteristic move for the generation that is now starting its first companies and reaching the lower rungs of government. Chinese autarky and U.S. industrial policy alike have made it clear to the rest of the world that its interests are not of lasting concern to the major powers. At the same time, the spread of middle-class wealth, education and expectations has empowered people around the world to feel they have options. Their politics is shaped by the possibilities for identifying and exercising those options. Ironically, perhaps, for a generation formed by borderless globalization, the chosen venue for exercising those options is not a transnational one but the nation and national or regional economies.

This should not be surprising. Neither the U.S. nor the EU is in any mood to guarantee the sanctity of the global public sphere. China, despite its protestations, is even less globally minded. The fact that addressing global climate change, the signature challenge of the coming generation, is being hobbled by electric-vehicle and solar-panel legislation is truly telling. The major powers that are alone in a position to see through global solutions to global problems are now the very powers making them impossible.

In such a situation, for the world outside the West and China (plus Russia), nationalism and regionalism are the least-worst solutions. The coming generation will be elderly by the time COP75 rolls around and the U.S., EU, Russia and China all bury their many hatchets and rediscover globalism. Meanwhile, away from the current agon, a busy world is identifying problems and designing solutions with no expectation of rising to the universal plane. Globalization has lost its teleology.  But it has created a world in which ambitious people can remain anchored and protected in national economies while also staying closely connected to the world outside, steering their diverse courses with as little reference as possible to great-power conflict.