Under President Donald Trump, the US is defecting from its decades-long position as an ‘open door’ in preference for a global order that embraces spheres of influence. This will have vast implications for geopolitics, trade and investment.
Global investors and policy-makers face a time of unprecedented uncertainty. The magnitude and timing of proposed US tariffs are not clear. China unveiled DeepSeek, which appears to give other advanced language artificial intelligence models a run for their money and calls into question the valuations of the Magnificent Seven (a group of influential companies in the US, including Alphabet, Amazon, Apple and Meta) and the effectiveness of technology curbs.
Trump has indicated a desire to take back the Panama Canal and acquire Greenland, explicitly not ruling out the use of force, and telling Canada that tariffs could be avoided if it were to become part of the US. Russia’s invasion of Ukraine, the war in the Middle East and China’s harassment of its neighbours have also dominated the geopolitical story.
Shaping the post-war order
A historical framework helps make some sense of these developments. The post-second world war period was characterised by the evolving freer cross-border movement of goods, services and capital. There was nothing natural or inevitable about it.
As the revisionist power early in the 20th century, the US embraced the spirit of Pax Britannica and dubbed itself the ‘open door’. It was specifically articulated by the US secretary of state at the time and offered an alternative to the carving up of China by European imperialist powers and Japan through political concessions, like Hong Kong or the Bund District, for example. The US elites were not convinced, and the rejection of the League of Nations and reluctance to replace the UK in international finance signalled that the US open door was not ready for prime time.
However, the second world war experience persuaded Americans that peace and prosperity required it to shape the post-war order. In effect, the US globalised the open door. The US was instrumental in constructing a multilateral system anchored by institutions like the International Monetary Fund, World Bank and General Agreement on Tariffs and Trade. This liberal international order promoted open trade and co-operative conflict resolution, with the US serving as the primary global rule-enforcer. It has veto powers at the IMF and, by tradition, picks the World Bank president.
The end of the cold war, the rise of China and arguably growing disparities in wealth and income in the US, Europe and Japan undermined the domestic alliances that embraced the open door. The shift appears to have intensified around the time of the 2008 financial crisis and was reinforced by the pandemic.
In the US, the Tea Party – a fiscally conservative movement – predated the financial crisis, but Make America Great Again and Project 2025 are much more than the Tea Party ever envisioned. In Europe, there has long been a segment of countries’ electorates that did not embrace regional integration or globalisation but, since the 2008 financial crisis and the sovereign debt crisis, those forces appear to have strengthened.
A ‘G-zero world’
Despite calls for another Bretton Woods, the material conditions do not exist. Eurasia’s Ian Bremmer calls it the ‘G-zero world’. The idea is that international capitalism works best when there is one country strong enough and willing to impose and enforce rules of engagement. That does not exist now and, if that is the case, the open door may not be the optimal strategy for the US.
The abandonment of the open door and the return to spheres of influence may offer a useful framework for understanding the changes being ushered in by the new US administration. The ‘need’ to retake control of the Panama Canal, make Canada a state within the US and possess Greenland may not have been part of the campaign, but they seem to be a logical extension of eschewing the open door.
Trump wants the US to secure its sphere of influence for the 21st century. Embracing spheres of influence also implies that the US may not spend American lives blocking another power from securing a sphere of influence. Trump’s team seems to be willing to concede some Ukrainian territory (in addition to Crimea) to Russia and perhaps reduce its presence in East Asia, which the US may now view more in economic competition terms rather than as strategic partners.
Reaching a tipping point
The dissolution of the post-second world war order is in the making and has reached a tipping point. The restoration of the former elite that embraced the globalisation of the open door after Trump’s first term was given the benefit of the doubt under President Joe Biden. Once may be dismissed as an accident, but the US has now withdrawn twice from the 2015 Paris agreement and the World Health Organization.
Spheres of influence? Open door? It is a bit like Heisenberg’s ‘uncertainty principle’. The mere fact of measuring the world like this makes it so. The US defection from the open door will encourage other defections. If the US no longer has the will or strength to defend the rules of engagement, the tectonic plates of the global order will shift.
What does this mean for global investors and financial markets? If the past few weeks are anything to go by, the shift from the open door to spheres of influence will be unsettling for businesses, investors and policy-makers, as transitions often are. In the first instance, it means greater volatility, which in the capital markets means risk. It also means uncertainty, and the lack of visibility is often associated with cautiousness on the part of business in making investment decisions.
Ironically, an international order characterised by spheres of influence is likely to be most disruptive to US allies that have relied on the American market and military protection. The result may be lower short-term rates as the immediate economic shock is addressed but higher long-term rates as military spending will most likely be ramped up.
The US Dollar Index, a basket of major currencies, peaked on 13 January, a week before Trump’s inauguration, though it remains extremely elevated. Gold, meanwhile, is at record highs amid central bank and private investor purchases.
Marc Chandler is Chief Market Strategist at Bannockburn Global Forex.
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