Donald Trump’s second term seemingly marks a radical break with the past. Ruling by decree, he is upending government both at home and abroad. However, while his abrasive style is a departure from that of Biden’s, there is continuity in many policy areas – most notably in the spheres of tariffs and industrial policy. Underlying these policy shifts is the rise of China as a global challenger to the US and the shift from a unipolar (single superpower) to a multipolar world, where multiple powers influence international affairs.
The shift from a unipolar to a multipolar world is a key investment theme that will shape the global economy and financial markets for decades to come. While predicting its course is difficult, some of the contours of the new world order are becoming clearer. Investors should expect a more fragmented world where national strategic interests dominate. Now, more than ever, investors need to build diversified, multi-asset portfolios that are robust to the sweeping geopolitical changes underway.
A new multipolar world order
After World War II, the United States was the dominant global economy, as Europe, Russia and Japan’s economies had been devastated during two world wars. While the Soviet Union provided a military challenge to the US, it never seriously challenged the US’s dominant economic role. Its collapse in 1991 left the US alone in dominating the global order – a global order it shaped as it wished, exporting liberal
democracy and free market capitalism. With China’s accession to the World Trade Organisation (WTO) formalised in 2001, the triumph of the US world order appeared complete.
Ironically, though, China’s entry into the global economy marked the beginning of the end of US dominance. China’s meteoric growth since then has seen its share of the world economy grow at the expense of the US. Importantly, China has not only grown in size but has also come to pose an evergrowing military and technological challenge to the US.
Striking as China’s rise has been, the last twenty-five years have not just been about China’s emergence as a challenger to the US. Alongside the US and China, a number of regional powerhouses have emerged. These range from the European Union and Russia in the “old world” to emerging giants like Brazil, India and Indonesia in the “new world”. Indeed, emerging economies’ share of the global economy has more than doubled, from one-third to two-thirds since 1980.
If the post-WWII world was one in which the US largely dominated, shaping the global political economy through organisations like the WTO, World Bank and International Monetary Fund (IMF), the new world order is one marked by a rising challenger in the form of China and a significant number of regional powers. This is a far more fragmented world, in which the US is in retreat from global affairs, while China and other regional powerhouses are increasingly asserting their influence. At the same time, other regional blocs, like the European Union or the Arab and Gulf States or major economies like India or Brazil, increasingly wield regional influence. Old powers like Russia have also used the increasingly fragmented nature of the new multipolar world order to flex their muscle.
The retreat of globalisation
A defining feature of the unipolar world in the post-WWII era was globalisation. With the US dominant economically and militarily, the world was shaped to its end. Tariffs and other trade barriers were broken down, and with the accession of China to the WTO, national supply chains became global supply chains – optimising production on a “just-in-time” basis. The rise in global trade relative to GDP ended abruptly in the 2008 Global Financial Crisis. Since then, globalisation has been in retreat. The Covid pandemic laid bare the vulnerability of global supply chains to disruption, serving as an imperative to rebuilding national self-sufficiency in key sectors, from healthcare to chip production. And while the pandemic has receded, the drive to build national self-sufficiency in critical areas of the economy has not.
Trade tariffs, restrictions on foreign investment and national industrial policies, including subsidies, will increasingly shape the global economy. In this sense, Trump’s agenda is nothing new or indeed unique to the US. Trump is using tariffs to force both friend and foe to align with the US’s strategic interests. At the same time, China is asserting its influence through strategic initiatives like the One Belt One Road programme, which drives regional infrastructure while binding participants to Beijing’s priorities. The cost to the world is likely to be less efficient production, higher prices and slower global growth.
The end of the peace divide
A benefit of the post-WWII era, particularly after the decline of the Soviet Union, was the US’s ability to police the world. The result was a significant decline in military spending as a share of GDP, allowing resources to be allocated elsewhere. In the US, for example, military spending fell from 9% of GDP in 1960 to less than 4% by 2023. Total global military spending fell from 6% of GDP in 1960 to 2% in 2023. This trend is now reversing. A multipolar world is likely to be more prone to conflict and regional powers will assert their influence, in part, through military power. For instance, Russia is aggressively countering the drift of the former Soviet Union countries towards the European Union. This, combined with Trump’s insistence that Europe increase its funding of NATO, will see Europe’s military spending rise considerably. China and the US, too, are likely to prioritise military capability. The higher share of GDP allocated to military spending requires a reduction elsewhere and, to the extent that it is financed by government borrowing, adds to the risk premium investors are likely to demand for holding long-term government bonds.
Higher prices as countries pursue national interests
The retreat from globalisation and greater spending on military and defence are both likely to be inflationary. In a multipolar world, regional powers will focus on national strategic interests. Industries critical to national economies and to national security will be shaped by national interest. A good example is the global semi-conductor industry. Whether under Biden or Trump, the US government is prioritising building national security in chip supply. Not only are chips vital to the modern technology-driven economy across virtually all sectors, but they are also critical to modern military capability. The Covid pandemic demonstrated the vulnerability of global just-in-time supply chains and now governments are focused on building national resilience, even if it comes at the expense of higher costs of production. Higher costs and inefficiencies are evident in the chip industry. For instance, TSMC estimates that producing 4nm chips at its Arizona plant is about one-third more expensive than producing them at its plants in Taiwan.
Strategic minerals is another key area where national strategic interests will drive increased competition and higher costs. Minerals like cobalt, copper, lithium, nickel and rare earth metals are vital to the transition to clean energy. As the world attempts to decarbonise, demand for these and other minerals will continue to rise. However, reserves and processing capacity are not evenly distributed globally and access to these minerals will be a key source of global conflict. It also means national efforts to secure or control the supply of these minerals will likely drive prices higher.
Fragmentation of global supply chains, increased competition over scarce resources such as chips and critical minerals, and increased military spending are all likely to drive a greater role of government in the economy and are likely to be inflationary. The retreat of globalisation in a multipolar world is likely to be a key inflationary force over the coming decades. Unfortunately, it coincides with a reversal in another major deflationary force. Since the 1970s, the fall in the dependency ratio (the ratio of non-working-aged population to the working-aged population) has been a significant factor driving lower inflation in the global economy. However, dependency ratios are rising globally, including in China. The combination of deteriorating demographics and the retreat in globalisation means the odds are tilted towards higher medium-term inflation. While inflation is likely to moderate from the still elevated post-Covid levels, our base case is that inflation in developed economies is unlikely to settle back at the sub-2% levels that prevailed before Covid.
The beginning of the end of the US Dollar?
A feature of empires historically is that as trade and investments come to be dominated by the empire, so too the empire’s currency comes to be the world’s reserve currency. This has been true for the US dollar as well. It seems hard to imagine a world where the US dollar isn’t the dominant currency. However, while it may take many years to come to pass, if the US influence in the world order is waning, then so too will the US dollar’s status as a reserve currency. Indeed, while Trump is aggressively attempting to corral both foe and friend to his purpose, a possible outcome of Trump’s second term might well be an increase in foreign distrust of the US and its institutions.
It is noticeable that central banks’ holdings of gold have spiked since Russia’s foreign currency reserves were frozen by Western powers following Russia’s invasion of Ukraine. Over the longer term, too, the share of global central bank foreign currency reserves held in US dollar also appears to be gradually declining. Any erosion of trust in the US under Trump’s administration is likely to see these trends accelerate,
undermining the role of the US dollar as a reserve currency and supporting the fundamental case for holding gold as central banks seek alternatives to US dollars.
What does this mean for investors?
The shift to a multipolar world holds important consequences for investors. From a world dominated by the US, we are shifting rapidly into one in which China is a serious challenger for superpower status. Surrounding the two major powers are several other important countries or regional blocs competing for influence. Expect a world less globalised and more prone to conflict, with a growing state role in the economy as national strategic interests shape economic policy.
One clear consequence for investors is a world with significant inflationary pressures, as regional powers emphasise national strategic interests and self-sufficiency. Another potential outcome is that as the US’s power ebbs, the US dollar’s importance as a reserve currency will wane. For investors, this means that, more than ever before, building robust and diversified multi-asset portfolios is important to achieving long-term investment goals.
If you found these insights valuable, we invite you to explore the full long-term perspectives report to understand the data and thinking shaping today’s investment decisions.