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What an “America first” foreign policy may mean for markets

Brij Khurana, Fixed Income Portfolio Manager
January 2025
6 min read
2026-01-31
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Archived pieces remain available on the site. Please consider the publish date while reading these older pieces.
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The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.

“Geopolitics and economics are like two sides of the same coin; one cannot be understood without the other.”

Zbigniew Brzezinski

In my last piece, I discussed how President Trump’s domestic economic plans might affect growth, inflation, and markets. It is also worth discussing what an “America first” foreign policy might mean for the next four years, given that he has spent much more time talking about geopolitics since November than following his election in 2016, when he focused mostly on the US economy.

Three pillars of Trump’s “America first” foreign policy

There appear to be three main components of Mr. Trump’s foreign policy plans: a return to regional hegemony, global economic dominance, and tariffs designed to affect geopolitical outcomes. I’ll tackle these issues separately and discuss their various market implications.

Regional hegemony
Since the election on 5 November, Mr. Trump has commented repeatedly about the strategic importance of Greenland and the Panama Canal for the US, and he has taken a more adversarial tone with the leaders of Mexico and Canada than have his predecessors. His comments suggest that he may pursue a much more interventionist approach in the Americas, including potential military strikes against Mexican drug cartels, significant curbs on immigration at the US southern border, and attempts to influence Canada’s energy production and distribution.

At the same time, Mr. Trump has also distanced himself from NATO Article V obligations — under which NATO makes a pledge to assist fellow members in the event of an armed attack — unless governments (particularly in the EU) spend a larger percentage of their national budgets on defense. Mr. Trump views many of the foreign military campaigns undertaken by US presidents over the last few decades as unnecessary and expensive, particularly because (as he noted in a recent press conference) the US is separated from other great powers by two oceans. His rhetoric is likely meant to further pressure European countries to pay for their own defense against Russia. I’ll return to this point in a moment. 

Global economic dominance
While President Trump may be focused on solidifying regional hegemony, in the economic sphere he still believes in global American dominance. Here, he is focused on a few key areas. First is the emergence of AI as a potential economic growth engine. The US has a first-mover advantage in AI, with the largest US companies investing significantly more in these technologies than their overseas competitors. Mr. Trump views AI as a strategic asset, and he will likely do what he can to protect America’s leadership in the space. Another area seen by the incoming administration as a competitive advantage is energy production. Both Mr. Trump and his nominee for Secretary of the Treasury, Scott Bessent, view US energy exports as key to maintaining global economic dominance. Finally, the President is adamant that the US dollar continue to be the global reserve currency, and he has threatened placing tariffs on the BRICS1 countries if they move toward settling trade outside the US dollar. 

Tariffs and trade policy
The final piece of Mr. Trump’s foreign policy is likely to be the use of tariffs for strategic geopolitical gain. This would be a meaningful departure from his first term, when he viewed tariffs primarily as an economic tool to reduce the US trade deficit and improve trade agreements he viewed as unfair, including the North American Free Trade Agreement, or NAFTA. A recent social media post in which Mr. Trump suggested that Europe should buy more liquefied natural gas (LNG) from US producers indicates that he now views tariffs as a means of geopolitical leverage as much as a tool for economic rebalancing. 

The ostensible objectives of the incoming Trump administration are all significant shifts from post-Cold War US foreign policy, which could be largely characterized as aiming to maintain global US hegemony while remaining open to economic liberalization, globalization, and free trade.

How the world (and markets) might react

US allies and adversaries alike are likely to respond very differently to an “America first” foreign policy than during Mr. Trump’s first term. First, Europe. Ironically, these policies might be exactly what Europe needs to heal its economic woes. Since Russia’s invasion of Ukraine in February 2022, European consumers have been hoarding excess savings in anticipation of higher commodity prices (Figure 1). While inflation has subsided, domestic consumer demand remains quite weak. If a Trump presidency leads to a swift resolution for the Russia/Ukraine war, then European energy prices could fall, boosting domestic industrial competitiveness and allowing excess savings to draw down. 

At the same time, Mr. Trump’s insistence that Europe increase its defense spending and buy more US-produced LNG may also benefit EU countries over time. European leaders appear to recognize the need for stronger national security in a world where the US no longer seeks to be the global hegemon. Recently, the largest EU countries proposed joint defense bonds to finance more spending. Increasing LNG purchases from the US would also enable Europe to lessen its dependency on Russian natural gas. The point is that a win-win deal is possible, with Europe increasing defense spending and importing US-produced LNG in exchange for limited tariffs.

Figure 1

Could ex-US equities begin to outperform US equities?

In contrast to Europe, an “America first” foreign policy makes a trade deal with China much less likely. China, unlike Europe, has taken significant steps to dissociate itself from US markets since Mr. Trump’s first term. It has largely let its US Treasury portfolio run off, choosing to invest in gold, other commodities, and emerging markets instead. Additionally, Mr. Trump will likely continue to aim to stall China’s pursuit of regional control in East Asia without using direct military force. As a result, the Trump administration may be even more restrictive than the Biden administration in curbing AI chip exports.

China also needs to stimulate domestic consumption, which has been difficult given its leveraged corporate sector and weak housing market. China’s vast industrial base and national savings, however, could be redeployed to boost military spending. If China perceives the US as focused on regional balance of power, reticent to deploy troops abroad, and keen to use economic leverage against rivals, it may ramp up spending on strategic sectors, including defense, AI, and other cyber capabilities. As for market reactions to these scenarios, curbs on AI chip exports could dent the outlook for US tech companies, which could be a drag on the entire US equity market for some time. An increase in Chinese defense spending could create a tailwind for commodity markets, as inventories might be stretched due to increased demand. As of this writing, commodity markets have outperformed both US stocks and bonds year to date, potentially reflecting the increased geopolitical risk premium for these assets.

Typically, markets are quick to look past the impact from geopolitical shocks, recovering their upward climb after events like Brexit, Russia’s invasion of Ukraine, Hamas’s attack on Israel, and many others. Unlike those individual events, however, an “America first” foreign policy that prioritizes regional hegemony, global economic dominance, and tariffs designed to meet strategic geopolitical objectives presents a vastly different backdrop than markets have become accustomed to over the past few decades, with implications that investors cannot ignore.


1Brazil, Russia, China, India, South Africa, Egypt, Ethiopia, Indonesia, Iran, and United Arab Emirates.

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