Global Uncertainties, Trade Disputes, Canada as Potential Additional State: Elements of a Shifting World Structure
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Fed Stays the Course Amid Uncertainty: A Look at Tariffs, Global Tensions, and the Changing World Order
The Federal Reserve is standing pat with its current policies, grappling with a murky economic landscape and dialing back previous growth estimates. This fogginess stems from potential "tariff-induced inflation" caused by President Trump's erratic tariff strategy and his controversial spat with Canada's new leader, Justin Trudeau, over their nations' border issues.
Historically, economists have referred to these geopolitical shocks as significant pieces of the changing world order puzzle. Ray Dalio, the manager and founder of the world's largest hedge fund, Bridgewater Associates, has developed a powerful analytical framework to dissect the intricate mechanisms underlying shifting global dynamics.
Deciphering the Changing Tides: External Conflicts and Economic Rivalry
Dalio's framework anchor points five distinct dynamic forces driving power shifts between world powers, primarily focusing on the U.S. and China. This analysis provides critical indicators, revealing how China's global influence lags behind that of the U.S., but is steadily growing, whereas the U.S.'s diminishes. Once the power imbalance tips in China's favor, the world order will flip.
The first of Dalio's elements, external conflict, encompasses military, economic, and political disputes. Recently, tensions between China and Canada have escalated, with some analysts pointing to military factors being the root cause. Steve Bannon, a former senior advisor to President Trump, shed light on the preparations for potential showdowns during an interview with Toronto Sun political columnist Brian Lilley.
In the realm of naval strategy, Bannon discusses the U.S.'s strategic posture to protect its interests as China and Russia assert their power. Central to this plan involves safeguarding U.S. control over North America. Bannon highlights that melting Arctic ice is opening up new sea lanes, making it crucial for countries like the U.S., Canada, and Russia to fortify their Arctic borders. Canada, however, could face significant challenges in defending its northern provinces.
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As the Arctic ice recedes, Bannon is concerned that China and Russia will establish cold water ports in the Arctic to circumvent Canada's naval presence. Russia has already made headway in this area, and China has aspired to be considered an Arctic nation. Bannon suspects that Canada won't receive support from Europe, as it underinvests in military capabilities. Only the U.S., Bannon suggests, can deploy sufficient military resources to secure Canada's vulnerable northern borders.
Trump's contentious remarks about absorbing Canada into the United States have enraged Canadians. Bannon counters that Canadians are overly complacent about the threats posed by China and Russia. He advises Canadians to be proactive and initiate talks with the U.S. about establishing a strategic partnership to mitigate the risks. Such a partnership wouldn't require Canada to surrender its sovereignty and become the 51st U.S. state.
Beyond military considerations, Dalio's framework tackles trade policies, technological innovations, and educational initiatives. The imposition of tariffs on Chinese goods aligns with this framework, whereas targeting Canadian and Mexican goods is more challenging to explain, as theories suggest they are used to exert leverage in US-Mexico-Canada Agreement (USMCA) discussions.
Trademark competition is a priority for Trump, as evidenced by the prominence of technology executives at his inauguration. On the other hand, education seems to be a low priority for the administration, with drastic budget cuts proposed at the National Science Foundation, National Institutes of Health, and National Oceanic and Atmospheric Administration, as well as plans to dismantle the Department of Education.
Over three decades, the percentage of global Science, Technology, Engineering, and Mathematics (STEM) majors in China has surpassed 30%, whereas the U.S. share remains just above 10%. This startling discrepancy mirrors the significant shift that occurred from 1980, when the U.S.'s share was approximately 30%, and China's stood at around 5%.
Debt Cycles and Fiscal Policies: A Balancing Act
Dalio's second flagship concept, the debt cycle, focuses on the cyclical behavior associated with debt, both short-term and long-term. The Federal Reserve confronts the possibility that both a recession and elevated inflation will result from the implementation of tariffs. Consequently, they are waiting to see how the situation unfolds before making a move on interest rates.
Former Treasury secretary Larry Summers cautions that continuing with the current tariff strategy raises the risk of an imminent recession. The Tax Foundation estimates that the president's tariffs, without foreign retaliation, will slash U.S. GDP by 0.4%. However, trade wars involve retaliation, which could escalate the damage. In the Trump administration's first term, Trade Foundation data shows that tariffs instituted in 2018 and 2019 decreased long-term GDP by 0.2%.
economists believe that the U.S. must whittle its deficit down from its current 7% to around 3% to maintain financial stability. Achieving this objective may require a combination of reduced government spending and increased taxes. A deficit of this magnitude is notoriously challenging to address and requires a multi-tiered approach to tackle spending and tax reform.
Bannon offers insight into Trump's interest in the U.S.-Canada relationship, stating that the president dedicates significant time and attention to the issue. Trump's handling of Ukraine and its president, Volodymyr Zelensky, can be understood as part of his broader geostrategic vision, with an "America First" policy that regards Ukraine as a part of Russia's sphere of influence.
Innovation and technology are major concerns for the president, evident in his emphasis on technological advancements during his administration. Conversely, education appears to be a low priority, with proposed budget cuts affecting key agencies and plans to dismantle the Department of Education.
Despite Trump's rhetoric about generating revenue for the Treasury through tariffs, an analysis by the Committee for a Responsible Federal Budget shows that the president's tariffs on China, Canada, and Mexico would bring in $139 billion in 2025 and $1.5 trillion over the next decade. However, the overall tax revenue decline resulting from various initiatives still moves the deficit in the wrong direction.
In conclusion, external conflicts and debt cycles are key components of Dalio's theory on changing world orders. These forces are highly relevant in the current environment, with polarized politics, natural disasters, and productivity gains from technology influencing the U.S.-China competition. As global tensions rise, it's essential to have a coherent, systematic framework to make sense of unfolding events and navigate the evolving world order.
- Amidst the changing world order, experts like Ray Dalio have highlighted that the ongoing tariff wars and external conflicts, such as the escalating tensions between China and Canada, can significantly alter global dynamics.
- Mark Carney, in the context of the increasing instability caused by tariff-induced inflation and debt cycles, may find it challenging to maintain the Federal Reserve's current policies as the world order evolves in 2025 and beyond.
- The disagreement over tariffs and the aggressive stance towards Canada by some world powers, including the United States, could lead to instability in the global economy, ultimately threatening international trade relations and triggering a series of debt cycles.
