MEGA: Is Trump Making Europe Great Again?
A year ago BNP’s Koen De Leus and Philippe Gijsels published The New World Economy in Five Trends, a book that examined the shifting drivers of the global economy and the implications for investors.
Their focus was 5-10 years into the future, but as I thought about the chaos and uncertainty unleashed by the Trump administration, I wondered if De Leus and Gijsels (DLG) had changed their minds about these trends or investment ideas. So, I invited them back on The Ideas Lab to discuss.
Multi-Globalization
Of the five trends they identified (multi-globalization, innovation, climate, debt and ageing), multi-globalization seems the one mostly likely to have been altered by recent events. The term refers to their skepticism that frictions in the US/China relationship would lead to reduction in global trade.
The Covid supply shock laid bare the fragility of finely-tuned global supply chains. The Russian invasion of Ukraine, and the West’s Chokepoint economic warfare response, added a further layer of vulnerability to multi-national economic ties. In reaction, the future was said to be one of localization and friend-shoring. But DLG didn’t see it that way. The US might try to reduce its reliance on China, but they felt the idea of an end to the growth in global trade was wrong.
The graph below provides a hyper-simplified illustration of their point. Since 2015, the US current account deficit with China has actually improved by $120 billion. At the same time, its deficit with Korea, Taiwan and Vietnam has grown by almost $200 billion. Manufacturing hasn’t been brought home from China, it’s been re-routed.
Can this “multi-globalization” survive tariffs of 46% on imports from Vietnam? Here’s De Leus:
Tariffs of 46% on products that are imported from Vietnam is not viable…If American companies can’t outsource to countries like Vietnam, or South Korea because there are tariffs of about 50%, I don’t think the American people are going to accept that. The closer the mid-term elections are, the more I think that Donald Trump will have to reverse course.
Making Europe Great Again?
Okay, so some form of multi-globalization survives. But from my perspective the more important concern is the long-term impact on US growth from the Chokepoint strategy that Trump is applying to all economic relationships. Countries can no longer buy US goods like LNG or Nvidia chips, or US services like university enrollments or satellite internet, without fearing that those relationships will be used against them. Financial assets might not be immune either - there is a clause in the “Big Beautiful Bill” that allows the US to apply a tax on foreign holdings of US Treasuries.
This strategy relies on a “there is no alternative” perspective. And while that may hold true now, no one likes being choked. Alternatives can and will be developed.
I asked DLG if they agreed:
Europe is in a situation where we are very, very dependent on the United States for energy, for our safety, and for our exports…So yeah, we really realize we have a big, big problem. In this new world economy, we can’t be too dependent anymore on anybody. Not on the United States for technology or for defense because, certainly, with Donald Trump, it’s all about coercion. Now it’s about trade. Next time maybe he will use SWIFT to put pressure on Europe. He has used SWIFT already to put pressure on Russia, on Iran, why not to put pressure on Europe?
Europe is at a crossroads. One path - the path to being a force able to project power - requires integrated capital markets, less regulation, more energy independence and a credible defense capability. The other path is splintering - with some states accepting far greater US dominance in return for protection and perhaps others trying their luck with China.
Which path will it choose? In the past, at each crisis point Europe has doubled-down on integration. DLG think the same will happen now, but they admit it’s far from certain.
We have a lot of building blocks. We have good universities, we have centers of innovation, we have quite a bit of savings. But you have to do it. And in Europe, scaling up is always difficult. We build good companies but we do not scale them up fast enough…We have to be independent in technology. That’s a very noble cause to strive for, but it’s not a walk in the park…I totally agree with you, either you get your act together and you go forward as one, or, indeed, you run the risk that it falls in different parts.
Metallica
When we first talked last year DLG were bullish on the prospect for metals prices, particularly gold and copper, where they envisioned a “wall of demand” hitting limited supply. With the gold price up over 40% since then are they still bullish?
Yes.
Their view is that buying to date has been almost exclusively by central banks while Western investors were, until recently, net sellers. The chart below offers some evidence of this. It compares the gold price since 2022 with flows into the biggest US gold ETFs. Net flows have been only modestly positive, although inflows spiked dramatically this year.
Globally, investor portfolio allocations to gold are only around 1%. Even a modest increase - say to 3% - would bring additional demand into a market where supply only expands very gradually each year.
While DLG expect the gold price to trend higher, they see “extreme undervaluation” in the mining companies that extract gold. The stock prices of these companies are exceptionally volatile but DLG say they have a place in investor portfolios as a type of call option exposure to rising prices.
Copper has not moved up with gold and it typically falls in anticipation of an economic downturn, so its short-term prospects remain uncertain. Regardless, DLG retain their bullish long-term view as it is the metal least likely to get replaced with new technology. Existing mines cannot meet anticipated demand and new mines take a long time to develop. The situation is further clouded by seismic activity that is disrupting production at one of the world's most important mines.
A big part of the copper story is its role in the technologies that underpin renewable energy. Listen to our discussion to hear more about this, as well as their views on the coming impact of AI on productivity and employment:
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the China line is fascinating… what happened in 2023?