It is critically important that investors realize something: The trade policies of President Donald Trump, which have sparked a trade war with China, are anything but unprecedented.
Indeed, bilateral - and multilateral - trade conflicts were perfectly normal aspects of international commerce for virtually the whole of human commercial history, and certainly for the majority of modern history.
Trade wars are as common in history as real wars.
War of the worlds
The long period of geopolitical and economic peace that has been was brought about first by the bifurcation of global commerce into two discrete spheres, the U.S.-led democratic capitalist order and the Soviet-led totalitarian communist order (sometimes known as the first and second worlds).
International trade among countries within the U.S.-led sphere spent decades in a fairly predictable pattern of increasing interconnectivity and lowered barriers, thanks to a confluence of factors, including the overwhelming political and economic dominance of the U.S., fear of Soviet incursion and a growing consensus among increasingly prosperous nations that free trade benefits all participants.
The era of good feelings
The collapse of the Soviet Union in the early 1990s left no meaningful alternative to the U.S.-led order, resulting in the latter’s effective entrenchment as the de facto international order. In other words, the ascendance of the U.S.-centric economic and trade order rose from mere ascendancy to global dominance during the 1990s.
In the decades since, few have challenged this American-made international trade order, while increasing interconnectivity between economies continued to enjoy bipartisan support in many countries.With decades of trade peace, many began to conclude this was a new "new normal" in world affairs.
This conclusion was reinforced by the accession of former adversaries, such as the Russian Federation, into the global order, as well as by the entry of previously excluded nations like China. Indeed, China’s accession to the World Trade Organization was considered by many to mark a major turning point in history or, as political scientist Francis Fukuyama called it, “the end of history.”
The end of the end of history
Today, the cozy international trade order is facing its greatest threat since its establishment. It is a threat exacerbated by the fact it is being challenged both from within (the Trump administration) and without (China, with a helping hand from a couple less consequential fellow travelers like Russia).
As a result, it is difficult to imagine what the next "new normal" will be. But if history is any judge, it will not be a return to the cushy internationalism we have enjoyed for the past couple decades. Thus, an assumption that things might return to "business as usual" after Trump and Xi Jinping meet at the G20 summit is a fraught one.
Moreover, a hope that trade may return to its old normalcy once Trump is out of office, whether that be in 2021 or 2025, is likewise misguided. The genie is very hard to put back in the bottle. Likewise, restoring a fractured trade order is a horrendously difficult task, especially when the biggest economic actors are so manifestly at odds with one another.
Verdict
Investors should act with great caution in the months - and years - ahead. Assuming the economic liberalization and low trade barriers that have prevailed for the past couple decades will be restored once the current trade spat is resolved is wishful thinking.
Exposure to companies that can suffer at the whims of either of the great economic powers (or indeed, any country) will become increasingly dangerous. Large supply chains may be threatened and costs of production may rise.
For savvy investors, the right path is not to hope for the best, but rather to prepare for the worst. After all, the worst has been the norm of international commerce throughout most of history.
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