In February 1972, US President Richard Nixon made a historical trip to China, in which he met mainly with the Premier Zhou Enlai, but also had the chance of meeting with the Chairman Mao Zedong and other dignitaries of the Chinese Communist Party. In his own recollection, “Nixon’s trip to China in 1972 ended twenty-five years of isolation between the United States and the People’s Republic of China (PRC) and resulted in the establishment of diplomatic relations between the two countries in 1979.”
The rationale of the trip was to open a wedge between the two communist countries of the time, the senior partner of which was the Soviet Union, and the junior partner being China, which was then still much poorer and under-developed. We have recently discussed why the recent opening that the current US President Trump has made to Russian President Vladimir Putin cannot be considered a re-edition of that trip in reverse, for a variety of reasons.
What really matters here is what happened after that trip. First, in 1973 Nixon ended the Bretton Woods agreement that was in place since 1944, ending the anchoring of the US dollar to gold. This meant currencies started fluctuating and their relative value was determined by market participants rather than by governments. Second, the US, under the Republican leadership of Nixon and (from August 1974) Gerald Ford, began a series of market-oriented reforms that would distribute income more towards profits and less to labour. These were continued by Ronald Reagan in the 1980s.
Third, after the death of Mao in 1976, a new, reformist generation of leaders, led by Deng Xiaoping, took the helm of the Communist Party of China and initiated a series of market-oriented reforms that led to a massive increase in economic activity. China entered the global economy at the same time as the US was promoting a liberalisation of markets. For this reason, Nixon’s trip to China has been widely regarded as the beginning of the most recent phase of “globalisation.”
Fast forward 53 years to the present, and another highly divisive figure, Donald Trump, has just adopted a series of actions, culminating in the announcement of April 2nd, that has put an end to this preceding phase of globalisation. The raft of tariffs announced on “liberation day” has led to a strong reaction in many countries, including China which announced retaliatory counter-tariffs of 34% on all US imports. Markets have reacted in turn with a sharp sell-off, which has shed trillions of dollars in market capitalisation around the globe, as equity price anticipate the nasty combination of higher inflation, lower economic activity, and reduced global trade given rising protectionism and a potential trade war. In fact, the probability of a recession in the US in 2025 has risen above 50% (to 60%, according to JP Morgan). And if a recession hits the US, it is likely that it will spread to other countries around the globe.
After this disaster, what will happen next? Will Trump retreat and de-escalate, or will he double down and escalate further? The most influential member of the government in favour of the “escalate to de-escalate” approach is Scott Bessent. But there are rumours that Bessant is considering leaving the administration. Negotiators from various countries, including the EU, are going to the US to try to reduce the tariffs the US administration has imposed. But countries with more leverage, such as China, know that they can inflict pain on Trump and the US by resisting short-term pressure. If the US goes into a recession, Trump will likely lose the mid-term elections and become a lame duck. At that point his dream of making MAGA a permanent feature of the US political environment, let alone exporting the movement to other countries, would be dead on departure.
