Irregular: 100 Days That Shook the World
Fish out of water and the changing geopolitical environment.
Hello from Sydney,
Almost every morning for the past 100 days, we have all woken to news of significant policy announcements, unusual and sometimes bellicose rhetoric, and statements implying profound changes to long-held presumptions about the international system.
Donald J. Trump’s Foreign Policy Q1 Report Card includes launching (then pausing) a global trade war, throwing NATO and the transatlantic alliance into question, ramping up tensions with China while cosying up to Russia, causing trust in the United States to fall to an all-time low, and gutting key structures of global governance and instruments of American power.
Even with the three-month pause on reciprocal tariffs — seemingly driven by the reaction of bond markets, but allowing foreign nations the chance to negotiate deals to reduce rates — the United States has raised its overall effective tariff rate to around 20%, the highest level since the 1930s. Tariffs on China have reached up to 245%. And foreign trade delegations heading to Washington, told the US wants to do 90 deals in 90 days, have returned with little clarity about what America wants of them.
With such significant changes to American foreign, trade and financial policy, as well as the personalisation of policy, flip-flopping and challenges to the rule of law — all, it seems, without a clear strategy — investors have started to view the United States almost like an emerging market. The dollar has weakened by about 5%, the S&P 500 has declined about 10%, and investors have begun openly questioning the ongoing viability of the US dollar as the global reserve currency. In a topsy-turvy world, China is now (with some credibility) positioning itself as the guarantor of stability, multilateralism and free trade, developing country institutions are buying Chinese bonds, and American allies are completely rethinking their own security with the United States perceived as unreliable, untrustworthy and unhinged. No wonder leading volatility, economic uncertainty and geopolitical risk indices have all spiked.
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Above all, what Trump has done — and what we can only presume he will continue to do over the next several years — is unleash an unprecedented degree of turbulence, uncertainty, volatility and complexity into American policymaking and international affairs and, consequently, the economy, financial markets and business planning. Trump’s approach is not without historical parallels, from the Boxer Rebellion and the fall of the USSR to medieval England and Rome’s Crisis of the Third Century, but few are flattering.
So it is unsurprising that the world’s central nervous system has been activated. Some have gone into flight-mode, with investors fleeing US equities in favour of European stocks, gold and cash. Others have gone into fight-mode, with China holding its ground and punching back with trade barriers of its own. But most have gone into freeze-mode: newly tariffed nations are, by and large, waiting to see if Trump will back down or be willing to strike low-cost “Phase One”-style trade deals. And with so much uncertainty, businesses have stopped spending, with capital expenditure nose-diving.
Internationally-exposed businesses and investors are in a particularly tricky predicament. Freeze-mode is a decent response to immediate threats. But you can’t stay frozen forever, as any deer in headlights will attest. Strategy, in its essence, is the art of acting under uncertainty. Those who are able to act while their competitors freeze stand to gain an advantage. There is always opportunity in crisis.
Over the past few years, when talking to audiences about the changes afoot in international affairs, I would often quote the late David Foster Wallace, who, during a 2005 graduation address, recounted a story:
There are these two young fish swimming along and they happen to meet an older fish swimming the other way, who nods at them and says “Morning, boys. How’s the water?” And the two young fish swim on for a bit, and then eventually one of them looks over at the other and goes “What the hell is water?”
As Wallace explained, “the point of the fish story is merely that the most obvious, important realities are often the ones that are hardest to see and talk about”.
When it comes to geopolitics, for the past 80 years, us fish — whether citizens, business leaders or investors — have been swimming in a pretty clean, predictable, safe and nourishing environment: an international rules-based order underpinned by American leadership, its “hub and spoke” system of alliances, and its general support for free(ish) trade and international law, rules and norms.
Since we started Geopolitical Dispatch two years ago, we have often written that the fundamental nature of the international system was changing. Power was becoming more diffuse. Protectionism was rising. Trade was being weaponised. International institutions were ossifying into irrelevance. And the rules of the game were changing, with the global order entering a liminal period — what we often called an “interregnum” — where the American-led order was eroding but a new order had yet to emerge.
Over the past 100 days, markets have begun to agree, and this broad macro thesis has become more widely accepted. Just in the past week, for example, Blackrock wrote that “For the last 80 years, the US has been at the centre of geopolitics: an economic stabiliser and a provider of global public goods. With a new administration now in place, we are seeing a fundamentally different view and approach” (my emphasis). JP Morgan put out a note saying “this time is different” (their emphasis), recounting speakers at a conference arguing that “the world is on the precipice of a new world order characterised by reduced global economic interdependence.”
In other words, we’ve become aware of the geopolitical water — and the water is changing. Whether it’s becoming hotter or colder, calmer or more turbulent, cleaner or dirtier, depends on your perspective. As an old adage from diplomacy goes, where you stand depends on where you sit. But there is little doubt that it’s changing (and it sometimes feels more like being in a washing machine than the great blue sea).
Just as the character of water matters greatly to fish, often without them realising it, companies and investors frequently overlook how profoundly dependent they are on a stable, predictable geopolitical context. But geopolitics affects markets in myriad ways.
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For the most part since the end of the Second World War, at least for Western businesses, that geopolitical context has been like clear, calm, stable waters — a context that allowed for supply chain stability, smooth international logistics and operations, safe passage into new markets, accurate pricing or risk, confidence in capital allocation, relatively stable currencies and financial frameworks, and predictable rules, secure property rights and enforceable contracts.
But with America under Donald Trump questioning the fundamental principles of the global order it created, actively withdrawing or undermining the institutions that have upheld it, weakening ties with its allies who supported it both financially and rhetorically, and taking actions that — deliberately or not — are reducing trust and confidence in America’s currency, democracy and stability, the geopolitical context is quickly changing. It’s instructive that for years, Donald Trump’s nickname in the Kremlin was “America’s Gorbachev”.
It’s not all about Trump, however, as much as he wishes it were.
One of the great — and unresolved — intellectual debates is about whether history is driven by extraordinary individuals (often called the “Great Man” theory) or impersonal historical forces (secular trends like social, economic and cultural conditions). Both matter. And today, there is clearly a mix at play. Donald Trump is taking a wrecking ball to the international order, Vladimir Putin’s idiosyncratic worldview has impacted millions of lives, and Xi Jinping’s consolidation of power gives him an outsized influence on global affairs. But secular trends — the rise of China, US-China tech competition, the emergence of multiple global power centres, resource scarcity and environmental pressures, and demographic and economic changes — are also affecting the shape of the global order. Or, to continue our analogy, changing the nature of the water the world is swimming in.
Getting to grips with how all these drivers will mould the geopolitical context over the next few years is no mean feat. No one can possibly know how they will interact. Nor can they accurately forecast what the precise outcomes for the global order — and therefore the international business environment — will be. But even without perfect visibility, we must keep swimming.
That’s why next week we’ll run through our Eight Steps for Navigating Geopolitical Complexity that all organisations — government agencies, financial institutions and internationally-exposed businesses — can use to identify the precise risks the changing global order pose to them, fossick for opportunities, develop long-term, all-weather positioning strategies, and implement dynamic systems for monitoring change and pivoting as required. And then the week after, we will present our Top Ten Geopolitical Risks for Businesses and Investors over the coming year.
Swimming in murky, choppy waters may not be pleasant, but there’s no alternative. And we hope these two guides will help you and your organisations navigate the new normal.
Best wishes,
Damien
Co-Founder & CEO, Geopolitical Strategy
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