CPD: A new global order and implications for investors

What are the structural changes to the new global order and the implications of this change on investors?

The new global order differs from its predecessor in four ways, as outlined in the following article from GSFM’s investment partner TD Epoch.

For decades, the US has been unrivalled in all three domains of power: economic strength, technological prowess and defence capabilities. However, with the ascendance of China, the world has entered a bipolar era.

The America First agenda places less emphasis on comparative advantage and market efficiency, instead prioritising supply chain resilience, national security and industrial policy (including tariffs). This applies to manufacturing, semiconductors, energy, healthcare and the defence industry. And just as President Biden reversed few of the economic policies implemented during Trump’s first term, Epoch expects season two’s agenda to remain largely intact regardless of who next sits in the oval office.

The four dimensions of the new global order

The new global order has four distinguishing features, with the first being the transition from a unipolar to a bipolar world. China, in just a few decades, has challenged the US in each of the three domains of power: economic strength, technological prowess and defence capabilities.

How did China become the global manufacturing superpower? Especially for industries of the future such as batteries, electric vehicles (EVs), autonomous vehicles (AVs), robotics, drones and hypersonics.

China’s economic model: Incompatible with the post-War global trading system

China became the factory for the world through an extreme form of mercantilism, featuring lavish export subsidies, formidable state-directed lending, favourable tax treatment, generous land grants and aggressive strategic plans like “Made in China 2025.” Its relentless industrial policy also features onerous import restrictions and is wind-assisted by an undervalued currency. Altogether, these direct and indirect subsidies amount to over US$500 billion annually and have driven a quadrupling of China’s share of global manufacturing, while America’s share has declined by a third (Figure 1).

China only believes in one-way trade: Such extreme mercantilism is unsustainable

China’s manufacturing dominance would be much less of a concern if it wasn’t for the flip side of the coin. That is, an astronomical trade surplus, currently exhibiting a run rate of US$1.2 trillion (Figure 2). The surplus has more than doubled from its pre-COVID level, which was already the largest experienced anywhere in history, and is increasingly referred to as the “Second China Shock^[1].” In many ways China’s big bet on industrial policy has paid off handsomely. However, it has resulted in an enormous and growing backlash from abroad, especially the US.

Deindustrialisation: America forgets how to make things, creating an enormous vulnerability

The economic rise of China has in many ways been a wonderful development, lifting hundreds of millions of people out of poverty and providing them with opportunities unimagined by their grandparents. However, from America’s perspective, it has been at best a mixed blessing, great for consumers but terrible for both factory workers and national security.

The US needs its own industrial policy otherwise it will end up importing an ever-larger share of China’s excess production and becoming increasingly dependent and vulnerable. It is no exaggeration to assert that the industrialisation of China has resulted in the deindustrialisation of America. Since China joined the WTO in 2001, US manufacturing employment plunged by one-third, its share of global manufacturing production cratered by 40 percent and the US trade deficit has soared (Figure 3). Further, the COVID experience illuminated the degree of dependence on China, America’s biggest adversary, especially for semiconductors and healthcare products.

US plummeting labour share: The rise of national populism

A key reason for America’s backlash against Chinese mercantilism is the cratering labour share, the beginning of which coincides with China’s entry into the WTO (Figure 4). Since 2000, US workers have been hit by the double whammy of offshoring jobs and digital tech transforming the nature of employment. While offshoring is set to moderate, at least in sectors critical to national security, the AI revolution is accelerating and will further exacerbate income inequality. Unsurprisingly, voters have become increasingly angry about an economy they feel does not work for them.

China is also challenging the US in tech and industries of the future

China’s economic strength is now conspicuous and indisputable, but most Americans seem unaware of the depth and breadth of its tech prowess. To illustrate its impressive accomplishments, Chinese companies now produce 80 percent of the world’s drones and 70 percent of batteries. China is also developing leads in EVs, robotics and hypersonic missiles. Additionally, China possesses 232 times the shipbuilding capacity of the US and is home to the world’s dominant telecoms equipment manufacturer.

A key reason Beijing’s industrial policy agenda emphasises industries of the future is that all technology is dual use, and they zealously promote “Military-civil fusion.” China’s tech ascendence is reflected in the number of STEM PhDs awarded annually, with an estimated 77,000 this year (up eight-fold from 2000) vs 40,000 in the US (of which 23,000 are considered “domestic”). Further, China authors more research publications ranked in the top 1 percent or 10 percent than the US, especially in engineering, technology and physical science topics^[2].

China has also risen to prominence in software and AI. It has 30 percent more software developers than the US (3.9 million vs 2.9 million). Similarly, China was granted 50 percent more AI patents in 2024 (although American patents are more impactful, cited seven times as often). Further, among the AI models expected to score the best at end-2025, four are American and two are Chinese^[3]. U.S. pre-eminence in state-of-the-art LLMs is fading and is likely to disappear in 2026 (Figure 5).

The end of Pax Americana: Good-bye to the peace dividend and our holiday from history

Since 2000, China’s defence spending has risen at an 11 percent compound annual growth rate (CAGR), more than twice America’s five percent, but still well below Russia’s 17 percent. As a result, the two allies together represent 20 percent of global defence spending, already leapfrogging past the EU (Figure 6). Defense specialists believe official statistics dramatically understate China’s actual expenditure.

As Chinese and Russian defence spending continues to grow at double-digit rates, the US military is feeling increasingly overstretched. This is especially true given that the US has commitments in three major theatres, while its rivals have only one each. This is why America is demanding its allies step up (Figure 7). NATO is the most successful military alliance in history, but that is largely because the US has represented an unsustainable 64% of total spending. Although several NATO countries remain below the 2% of GDP commitment, the good news is that combined spending ex-US rose by 18 percent in 2024, and there exists significant support for raising the NATO target to 3.5 percent.

The new global order is characterised by four transitions, with the first two being from unipolar to bipolar, and from free trade and hyper-globalisation to tariffs and trade wars. The third transition is from the long era of Pax Americana to rising geopolitical tensions. From that perspective, in what year does Epoch estimate the old-world order ended? Some commentators believe it was with the GFC in 2008 when global exports/GDP peaked. Others suggest it was 2012 with President Xi’s ascendency, or 2016 with both Brexit and Trump’s first electoral victory, or 2020 with COVID. Those are all reasonable views, but Epoch favours 2010, when the number of state-based conflicts soared after having been stable in the five to 10 range since the end of WWII (Figure 8).

A transformational, America-first presidency: Four policy priorities

From free trade and hyper-globalisation to tariffs and trade wars

Trump has hiked tariffs to the highest level in over a century (Figure 9). There are four reasons why Trump loves tariffs. First, he has unilateral power with enormous discretion, so he does not need approval from Congress. This makes tariffs by far the easiest form of industrial policy to implement.

Second, tariffs are a tempting source of funds, especially as Trump and Congress negotiate over tax policy and 2025’s “big, beautiful bill.” He could make a credible case that tariffs will add US$300 billion to government coffers, which would go a long way to fund policy priorities, such as reducing the corporate tax rate to 15 percent for companies producing in the US^[4].

Third, tariffs provide Trump with a great deal of bargaining power to negotiate on both trade and non- trade issues. This is important as trade representatives in previous administrations complained loudly and bitterly that they had little in the way of leverage. Finally, tariffs incentivise companies to home shore jobs and investment and can target sectors that are critical to national security.

Beyond arms and farms: What sectors are critical to national security?

Bringing factories back to America is a priority because manufacturing jobs are special, and the industrial base withers without them. Even if digital tech is the source of most innovation and value creation in equity markets, we still live in a world of atoms. Further, Wright’s Law suggests manufacturing costs decline by about 20 percent with each doubling of output. This implies that, once you exit an industry or out-source production, re-entering and catching up is fiendishly difficult, at least without the benefit of tariffs and massive subsidies.

Regarding onshoring, the sector that has received the most press and the biggest wallop of cash is semiconductors (Figure 10). Other potential vulnerabilities or chokepoints include medical supplies, defence equipment and critical minerals. The latter are required for America’s industrial and defence sectors, and for which US import dependence on China is often 80 percent. The bad news is that Beijing’s countermeasures to “Liberation Day” tariffs include export restrictions on these critical minerals. The good news is that America has achieved energy independence, agriculture vulnerabilities are manageable, and policies are being drafted to eliminate critical mineral chokepoints.

Another sector that has received a lot of attention lately is shipbuilding, with headlines asserting “Ships are the new chips.” The US accounted for 0.1 percent of global shipbuilding in 2024, de minimus relative to China’s 54 percent, South Korea’s 29 percent and Japan’s 13 percent. This chokepoint has caught the attention of the White House, which released an executive order on April 9^[5]. America’s inability to build is especially concerning if hostilities result in ships being sunk, particularly given the elevated risk of a blockade of Taiwan and China’s emergent naval capabilities.

Is reshoring likely? Yes, but more jobs for robots than people

Tariffs and other forms of industrial policy can stop America’s manufacturing heartland from atrophying even further. There is already compelling evidence of an investment renaissance (Figure 11). However, little of this can be attributed to the 2018 or 2025 tariff hikes. Rather, the revival has been driven by industrial policies, such as the Chips and Science Act, as well as the perception that supply chains have become riskier and more vulnerable (due to COVID, the Ukraine War and tensions in the Taiwan Strait).

How many jobs is the manufacturing revival likely to create? Employment in the sector averaged 17.5 million from 1965 until 2000, when China joined the WTO (Figure 12). However, employment then plummeted, with one-third of manufacturing jobs eliminated within a decade, wreaking havoc in communities across America.

Manufacturing today is a vastly different activity than it was in the 1980s; most plants are now highly automated, and most jobs require advanced skills such as machine operators or programmers. That is why, even with significant homeshoring, the manufacturing share of employment is unlikely to rise above today’s eight percent (it peaked at 30 percent in the 1950s and has been declining steadily ever since).

Art of the deal: Trade negotiations with most countries are straight forward but the EU is challenging, and China is exceedingly difficult

In addition to incentivising homeshoring, tariffs provide the Trump administration with bargaining power to negotiate trade deals. Agreeing on the contours of a deal is relatively straightforward for most of the fifteen countries the White House is focused on. To illustrate, as of 21 April 2025, the betting site Polymarket believed a trade deal can be reached before July with Japan (76% probability), India (75%), Vietnam (74%), UK (72%), Argentina (70%) and South Korea (67%). Even the most challenging negotiations, those with the EU (65%) and China (55%), receive a more optimistic take from betting sites than you would infer from doom scrolling the news headlines.

Although negotiations with China will be extremely difficult, we believe a narrow trade deal is possible. It could include increased imports (of energy, agriculture, and aircraft), promises to reduce select non-tariff barriers and possibly build factories in the U.S. (e.g. batteries). However, China will not make significant concessions, primarily because President Xi is not constrained by an election timetable, and he believes time is on his side.

Last year, China exported US$440 billion of goods to the US but imported only US$140 billion in return. This massive imbalance will decline in 2025, but largely through less bilateral trade and reduced interdependence. Fair, balanced, and reciprocal trade is not in the cards until China jettisons its neo-mercantilist economic model and there is a near zero chance of that happening this decade. Rather, the current battle just marks the beginning of a long war in which the two superpowers increasingly weaponise the chokepoints at their disposal. Unfortunately, such trade skirmishes are an integral part of the new order.

Tech trumps tariffs: The AI arms race

The new Global Order is not primarily about tariffs and trade wars. Over the next decade, tech innovation will prove even more important and transformative than the trade war. That is why a second focus of the Trump administration is maintaining global leadership in digital tech and AI.

Three tech policy developments are especially important. First, AI safety concerns are being dialled way back. President Biden’s executive order on AI safety was rescinded within hours of Trump assuming office on 20 January 2025. Similarly, Vice President J.D. Vance’s speech at the AI Summit in Paris in February proclaimed to the world that US policy would be all about innovation, not safety^[6].

The second advance involves deregulation measures to fast-track the buildout of AI infrastructure and physical AI. This will include data centres, semiconductor fabs and energy (natural gas, and even nuclear). The future of AI is physical AI, according to Nvidia’s Jensen Huang, so there will also be a focus on robotics, drones and AVs. For these measures, the President is being closely advised by America’s tech heavyweights, virtually all of whom are regular visitors to Mar-a- Lago.

The third development concerns defence tech and applying lessons learned in Ukraine. The Department of Defence is beginning to pivot away from aircraft carriers and stealth bombers toward drones, hypersonics and advanced information systems.

Enabling this pivot requires a transition away from the prime contractors and toward Silicon Valley-type startups such as Anduril, Shield AI and Skydio, as well as more established firms like Palantir and Space X.

Deregulation and the abundance agenda: It’s time to build

Moving on from pro-tech policies, a second non- trade focus is deregulation, with Trump’s declared goal of removing ten regulatory rules for each new regulation implemented. This is critical for the economy’s dynamism as the number of regulations has grown with every administration, regardless of party (Figure 13). Sectors impacted include tech (discussed above), energy, construction, and finance, all of which are crucial for homeshoring and reducing America’s vulnerabilities.

The Trump administration wants a weaker Greenback: Mar-a-Lago Accord?

The Trump administration’s fourth policy priority is to weaken the USD and repudiate its role as the primary global reserve currency. This is a corollary of relinquishing America’s vocation as the global policeman and disavowing its status as the world’s primary export market. These are the burdens of modern hegemony, and the US intends to purge all three, perceiving the costs now far exceed the benefits. With the rise of China, they have simply become too heavy a load to bear any longer.

Stephen Miran, Chair of the Council of Economic Advisors, argues that the root of US economic imbalances (trade deficits, de-industrialisation, wealth inequality) lies in persistent dollar overvaluation (Figure 14). Further, he asserts that excessive USD strength is driven by demand for reserve assets, especially by countries like China that intervene to keep their own currencies artificially weak.

In response, Miran’s November 2024 paper describes potential policies for both multilateral and unilateral currency adjustment. The article is thoughtful and emphasises potential risks, including severe and highly disruptive market volatility. For this reason, Miran stresses that policy makers need to proceed gradually, in baby steps. He also posits that forward guidance is critical so that markets and central banks understand where policy is headed and why.

Miran and other key advisors to Trump contend that America’s financial dominance comes at a cost. While it is true that demand for dollars has kept its borrowing rates low (by an estimated 25-75 basis points), it has also kept currency markets distorted and the USD extremely overvalued. Following the unilateral Nixon shock of 1971 and the multilateral Plaza Accord of 1985, the last six presidents have taken a hands-off approach to the USD. Trump is determined to take a Nixon-like route and unceremoniously dump the 1944 Bretton Woods agreement into the dustbin of history.

What policies could America implement to discourage capital inflows? They are all some variant of taxing holdings of US Treasuries by China (and other reserve managers). This would intensify efforts to create competing currency blocs and find alternatives to the USD-based financial system and drive a structural increase in market volatility.

In a recent poll undertaken by the University of Chicago, 86 percent of prominent economists agreed that “The USD’s status as the dominant reserve currency substantially raises its value.^[7]” Further, 84 percent agreed that US policy measures to discourage overseas central banks from holding US treasuries would substantially diminish the USD’s reserve currency status. However, 64 percent also warned that such policies would not only weaken the USD but also damage the government’s ability to finance its deficits.

Two scenarios for 2025-2026

There are two potential scenarios regarding how the transition could unfold in the months ahead of next November’s house election.

Epoch’s optimistic scenario has Trump’s policies progressing in four chapters. First, announcing aggressive tariff hikes, a phase that is 90 percent behind us. Second, negotiating trade deals, beginning with relatively straightforward countries (Japan, India, UK, Argentina, and South Korea), before moving onto the more challenging EU and finally, the critical test with China.

Chapter three pivots toward promoting the pro- growth elements of Trump’s agenda, including tax cuts, pro-tech policies and deregulation. The fourth stage, weakening the Greenback, is still the subject of active debate within the administration, so its timing is less clear.

The biggest surprise so far this year has been the sequencing of policies. During his first term, Trump began by emphasising his pro-growth agenda, including massive tax cuts, and did not start to hike tariffs until mid-2018. Tariffs are always controversial, so the timing was unfortunate for the president.

A few months later the Republicans suffered an electoral disaster with the Democrats gaining forty- one seats (their biggest improvement since 1974, just after Watergate) and taking control of the House.

Yearning to avoid the fate of his first term, Trump is now leading with tariffs to get the bad news in early. That way the focus should have moved onto his pro-growth agenda well before next November, increasing the GOP’s chances of keeping the house and maintaining control of Congress.

The more pessimistic view can be summarised by this quote Lawrence Summers from Harvard has been emphasising lately: “It takes a generation to grow a forest and an hour to burn it down”. The Bretton-Woods system has prevailed since 1944 but is quickly unravelling. Countries that have been staunch allies for decades are being treated even worse than some adversaries. With a transactional modus operandi, America has no permanent friends or enemies, only permanent interests. This threatens to destroy trust and isolate the US, resulting in a world of competing currency blocs and a chaotic breakdown of global trade.

This downside scenario is one in which America First devolves into America Alone. Such an outcome is plausible, especially as the US ditches rules- based multilateralism, adopts populist nationalism, employs tariffs as a weapon and degrades the dollar’s role. However, it is not Epoch’s base case as it is so contrary to US interests. America still needs allies, among other reasons to ensure the vibrancy of its tech sector. An isolated America cannot win the mission critical AI race. It takes a global village; America needs to attract talent and ideas from all corners. It also needs to ensure its AI innovations diffuse across the planet and define the new global standards. Ten trillion US dollars of market cap are at risk if America slips into isolationism.

Implications for investors

The America First agenda prioritises national security, supply chain resilience and state-directed industrial policy, placing less emphasis on comparative advantage and market efficiency. This especially applies to manufacturing, semiconductors, energy, healthcare, and the defence industry.

Trump’s policy agenda is not primarily about tariffs. Rather, it is about responding to the rise of China and preparing America for the new global order. Epoch expects his pro-growth agenda to start driving markets from the second half, beginning with a mid-year tax cut, and then an emphasis on his pro-tech policies and deregulation. In the optimistic scenario this transition proceeds smoothly, and markets are significantly higher at year-end. The pessimistic scenario is one in which America First devolves into America Alone, resulting in a chaotic breakdown of global trade and severe supply-side disruptions. This would be much worse than the COVID 2020 experience.

Epoch’s base case view is closer to the optimistic scenario. Regardless, the transition to the new global order is necessarily going to be highly disruptive. This is doubly true given it is occurring in parallel with the acceleration of digital tech and AI. Also, the only real law of history is the law of unintended consequences. It is fiendishly difficult to foresee second and third order effects.

We expect elevated volatility in equities, interest rates and foreign exchange, reflecting the transition to the new global order and the acceleration of AI. In Epoch’s view, this is the most disruptive and challenging macro environment since the end of the first Cold War. At minimum, investors need to diversify beyond the Mag7, US equities and the USD, which were the big, concentrated bets at end-2024.

Among asset classes, infrastructure looks especially compelling, followed by select commodities and subsets of real estate. Epoch also recommend a significant allocation to Tech. It will remain the key market driver over the long term, as that is where the lion’s share of innovation is occurring. Additionally, Epoch believes the USD is overvalued by more than 20 percent and is likely to weaken against most pairs.

Finally, Epoch recommends an emphasis on quality. For equities that means companies with sustainable free cash flow and a demonstrated track record in capital allocation and shareholder return.

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Notes:
[1] The first “China Shock” occurred from 2000-2007 when rising Chinese exports reduced US manufacturing employment by an estimated 550,000 to 2.4 million jobs. Some sectors and communities were hit particularly hard. For example, furniture industry employment fell by around 300,000, or 45%. The sector was concentrated in the North Carolina piedmont, employing one in every six workers.
Source: “China’s Very Bad, No Good Trillion-Dollar Trade Surplus,” by Paul Krugman, January 2025.
[2] The latest ranking (updated regularly by the academic publisher Nature) shows that China leads in high-quality research papers. This is a dramatic change from ten years ago when China’s research output was modest relative to the US.
[3]  https://polymarket.com/event/which-company-has-best-ai-model-end-of-2025
[4] The US imported goods worth US$3.3 trillion in 2024. An average tariff of 10% would raise US$300 billion assuming import volumes decline by 10%.
[5] “Restoring America’s Maritime Dominance” https://www.whitehouse.gov/presidential-actions/2025/04/restoring-americas-maritime- dominance/
[6] https://www.presidency.ucsb.edu/documents/remarks-the-vice-president-the-artificial-intelligence-action-summit-paris-france
[7] 9 April 2025, https://www.kentclarkcenter.org/surveys/debt-and-the-dollar/

The information included in this article is provided for informational purposes only and is general advice only. It does not take into account an investor’s own objectives. The information contained in this article reflects, as of the date of publication, the current opinion of TD Epoch and is subject to change without notice. Sources for the material contained in this article are deemed reliable but cannot be guaranteed. We do not represent that this information is accurate and complete, and it should not be relied upon as such. Any opinions expressed in this material reflect our judgment at this date, are subject to change and should not be relied upon as the basis of your investment decisions. All reasonable care has been taken in producing the information set out in this article however subsequent changes in circumstances may occur at any time and may impact on the accuracy of the information. Neither TD Epoch, GSFM Pty Ltd, their related bodies nor associates gives any warranty nor makes any representation nor accepts responsibility for the accuracy or completeness of the information contained in this article.