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President Donald Trump is reshaping America’s role in the world. In his view, America ceases to underpin global security and still provide peace. He has pressured allies to increase their defense budgets, taken credit for mediating conflicts in Africa and the Middle East and vowed to end wars in Europe.
Trump was given severe punishment. He entered office during the ongoing wars in Gaza and Ukraine. The US share of global gross domestic product (GDP) – the basis of its geopolitical dominance – is in long-term decline. The question is whether his approach is a blueprint for restoring stability or increasing chaos. Eight months into his second term, the peace deal in Gaza remains weak, but many areas have seen the worst clashes in decades, and the war in Ukraine continues.
Our base case is that US sorties remove guardrails that prevent conflict, increasing the risk of regional wars. In a nightmare scenario, this could set the stage for a great-power showdown.
Trump does not like foreign entanglements. In his view, wars abroad have strained the American military too much. Their response has been to push allies in Europe and Asia to shoulder a greater burden for their own defense, reduce U.S. aid to Ukraine, and avoid U.S. military involvement in foreign conflicts.
There are some exceptions: Latin America, which Trump regards as a US sphere of influence and where he has increased military activity, and Iran, where he ordered attacks on nuclear facilities earlier this year.
Trump has also called on others to stop fighting. He has pressed for an end to Russia’s war in Ukraine, though he has stopped short of using full American power to achieve that goal. When foreign hostilities escalate, he immediately urges de-escalation, with the threat of tariffs.
Trump’s bet is that a more concentrated US military and allies will invest more in their defense, thereby strengthening deterrence. Their argument has merit: decades of costly wars and the associated reliance on American security commitments have strained the armed forces and diverted resources from priorities like China. Underinvestment from allies has weakened collective security.
If Trump’s gambit succeeds, its impact on the global economy will be positive. Less fighting means less shocks to markets and disruptions to supply chains. Higher defense spending boosts GDP – although at the expense of rising public debt and higher borrowing costs. The big winner will be the US, which could enjoy a cheaper version of Pax Americana, in which the costs of paying for global security would be more widely shared.
Still, this is a risky bet and one we believe is unlikely to pay off.
Our base case is that US retrenchment would only open the door to more conflict.
The US plays a major role in dealing with international threats such as piracy and terrorism, and may leave behind a void that other countries are unable or unwilling to fill. Increasing the defense budget is slow and politically risky. It takes years, not months, to convert that money into power. And tariffs, Trump’s favorite stick, don’t deter every country — especially those less dependent on the U.S. market.
The likely outcome: a world with fewer obstacles to war. Rivals like India and Pakistan or Israel and Iran will collide more often. Weak or small states are at risk of being victimized by stronger neighbors. China, Russia and the US will only work harder to dominate their sphere of influence, while the region with multiple competing powers could turn into a battleground for dominance.
This scenario may already be playing out. In the first eight months of Trump’s second term, Thailand and Cambodia, India and Pakistan, and Israel and Iran all engaged in their deadliest clashes in decades – Europe’s largest land war since World War II.
More conflict means more setbacks. This means more moments when Treasuries, the dollar, the yen and defense stocks rise, while equities exposed to conflict zones suffer. Supply chains are particularly vulnerable where they cross disputed areas, such as the production of semiconductors in Asia and oil from the Middle East. The growing military budget means higher debt burden and borrowing costs. We estimate that Europe alone needs to spend $2.3 trillion over the next decade to meet NATO’s new goals.
These shocks will be felt around the world, but most acutely in areas of fierce rivalry, in fragile states open to exploitation, and in neighborhoods where regional hegemons are jostling to assert their advantage.
The most dangerous possible outcome: conflict between the world’s great powers. History shows that great-power wars are most likely to occur during moments of transition – see Napoleonic Europe and the First and Second World Wars.
The layoffs could encourage rivals to test those states once protected by U.S. guarantees. Russia may consider NATO’s eastern flank exposed. The US commitment to Taiwan has always been vague, and China may decide to explore the boundaries.
The economic fallout from a great-power conflict would be staggering: markets would be disrupted, supply chains would be disrupted, trade routes would be severed, and the capital stock would be massively destroyed.
• A Russian invasion of the Baltics could cause a loss of $1.5 trillion to world GDP in the first year alone. • A conflict between North and South Korea could lead to a loss of more than $4 trillion in global GDP. • A war between the US and China over Taiwan could cost the global economy $10 trillion as the world’s single supplier of advanced semiconductors would be taken offline.
The good news: A great power war is unlikely. The staggering costs of conflict – from economic devastation to nuclear devastation – have historically been a powerful deterrent to escalating tensions between major powers.
Trump’s view is that allies should spend more so that war does not arise. This is a gamble to share the burden without bloodshed. If it fails, the consequences will be significant.
This article was generated from an automated news agency feed without any modifications to the text.
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