Network effects, freedom of movement, and the imperative to innovate all reward nations that remain open to trade and talent.
The United States and China recently paused their trade war. Amid the pause, during which broader negotiations will take place, US tariffs on China will decline from 145% to 30%, while Chinese tariffs on US goods will drop from 125% to 10%. The original tariff levels were so high that they effectively amounted to a trade embargo.
Trump’s tariff reversals have been the only consistent feature of what has otherwise been a chaotic second term. Trump genuinely loves tariffs and misunderstands trade, and his economic worldview is so distant from reality that the markets punish the U.S. every time he tries to implement it.
While some will claim Trump is using tariffs as a negotiating tactic (start with an absurd offer and negotiate down to what you want), Trump has made numerous unilateral surrenders amid his ‘trade war,’ and has severely damaged America’s image to the point where China is now more well-regarded as noted by Politico:
“A majority of people surveyed had an overall negative perception of the U.S., marking a steep decline from last year. America’s reputation took a particularly massive hit in EU countries — perhaps unsurprisingly, as U.S. President Donald Trump has called the bloc “horrible,” “pathetic” and “formed to screw the United States.”
“Meanwhile, China kept improving its global standing, overtaking the U.S. for the first time and recording mostly positive perceptions in all regions except Europe. Russia, the reputation of which tanked in the wake of President Vladimir Putin’s full-scale invasion of Ukraine in 2022, is still (slightly) more unpopular than the U.S. — though its image is also improving.
Trump’s reputation is in line with that of his country. The survey showed he’s less popular worldwide than his Russian and Chinese counterparts, Putin and Xi Jinping.”
Is wrecking America’s reputation, leading to long-term shifts away from US influence, the ‘art of the deal’?
Fighting against the inevitable
There are many reasons Trump’s trade agenda and overall approach to other nations is backfiring, but one stands above all: He is fighting against forces that are, in the long term, inevitable.
I’m not talking about some shadowy group or conspiracy, rather, I’m talking about the long-term trend of greater human interconnectedness.
Organized groups of humans have evolved from tiny tribes, which then became larger tribes, small communities, small towns, cities, kingdoms, nations, and now a largely interconnected global economy. While individual countries and subnational jurisdictions still exist, and while norms, laws, and living standards vary widely across the world, the trend towards greater interconnectedness is undeniable.
Wherever you are right now, look around and consider how many different people in how many different countries had to contribute to building and producing everything around you. If you’re reading this on a phone, where was your phone made? What about your computer? How many people had to cooperate for that device to be in front of you now?
The more deeply we think about it, the more astounding it is. We – humanity as a whole – have built a truly immense, complex, and powerful global economy. And we’ve done it despite wars, pandemics, uprisings, and political movements that promised an end to deeper global integration. Even global wars, genocide, and unbridled hate have only temporarily stopped the trend of a more integrated planet, a trend that always picks back up again in the long run.
But why is this?
Why is the trend towards deeper integration inevitable?
For the same reasons people tend to gather in urban areas, English is the language of trade, and a few social platforms dominate. Network effects are powerful, and the benefits of being embedded in a network are significant.
If one country isolates itself from a powerful network (the US trying to put up walls to open trade, for example), the network adjusts. We have experienced this in Canada, as Canadian exports to other nations rose and offset lower exports to the U.S.
To the extent the US can withstand lower external trade for a short time, it should be noted that it is already a highly interconnected nation comprised of 50 states that are part of a free trading zone encompassing over 300 million people. Even excluding global trade, any wealthy nation is already a highly complex economic system that integrates millions of people.
Consider the few nations that try to eschew global interconnection. North Korea languishes in brutality and poverty, while South Korea has become a relatively wealthy and technologically advanced nation. Ironically, North Korea is still largely reliant upon trade with China (90% or so), meaning ‘isolated’ North Korea only survives because it has some integration with a nation that is heavily integrated in the global trading system.
Further, given that global talent flows are relatively free, countries that isolate themselves and oppress their people will lose their most talented citizens. Again, the U.S. – despite being a wealthy and powerful nation – underscores this point, as the anti-intellectual and authoritarian drift of the U.S. is pushing many scientists to consider leaving.
Talented people will go where they can be free, thus boosting the long-term economic power of freer jurisdictions at the expense of more restrictive ones.
Donald Trump opposes this trend of global integration. He leads a political movement that resents it. He wants to wall off the U.S., both figuratively and metaphorically. He may have short-term success in doing so, as he holds a position of power and can impose his will due to a temporarily supine Congress and Senate. In the medium to long term, however, the inevitable power of network effects will either force a consistent reversal in U.S. policy (rather than the back-and-forth chaos of the current administration) or lead to other nations benefiting at America’s expense.
Wealth, talent, innovation, and trade won’t disappear; they will simply divert around America to a greater or lesser extent, depending on how free America remains.
There is a lesson here for Canada. We are well-positioned to take advantage of global network effects, particularly when it comes to attracting talent and investment. By embracing free trade internally, reorienting our immigration system to focus on bringing in top talent from around the globe, and expressing our commitment to keeping our word with allies and honouring our trade agreements, we can ensure the global network effect works to our benefit.
The alternative would be to embrace the de-growth agenda of the far-left, or the isolationist agenda of the far-right, both of which represent resistance to inevitable trends, but both of which can nevertheless do significant damage in the short term by restraining Canada’s potential.
As Canadians, it would be wise to learn from the chaos and uncertainty of the Trump Administration and go in the other direction, a direction that eschews extremes and embraces openness to trade and talent. Rather than waste money and time fighting against a more interconnected planet, let’s make sure it works for us.
Spencer Fernando
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