Trade Policy, AI Disruption, and State-Centric Cooperation

The hidden costs of trade policy and the fragility of globalism are the core, non-obvious implications revealed in this conversation. Listeners seeking to understand the deeper currents beneath geopolitical and economic decisions will gain an advantage by recognizing how historical patterns, systemic incentives, and the inherent limitations of international institutions shape outcomes. This analysis is crucial for policymakers, strategists, and investors who need to anticipate the delayed consequences of seemingly straightforward trade actions and the evolving dynamics between nation-states.

The Shifting Sands of Tariffs: From Revenue to Restriction and the Echoes of History

The current administration's approach to tariffs represents a significant departure from post-World War II trade policy, which largely focused on reducing barriers and fostering global integration. Historically, tariffs were primarily a tool for revenue generation or, as in the era of Smoot-Hawley, outright import restriction. Professor Douglas Irwin of Dartmouth College highlights this shift, noting that while Congress historically held the power to levy tariffs, this authority has increasingly been delegated to the President. The current administration has leveraged various statutory authorities to impose tariffs, often citing balance of payments deficits or disequilibrium. However, this approach introduces considerable uncertainty.

Irwin points out the precarious legal footing of these new tariffs, particularly as they may require congressional approval after 150 days. This creates a volatile environment where policy can change on a whim, disrupting established business relationships and inhibiting technological development. The consistent finding across multiple studies, including one from the New York Fed, is that the burden of these tariffs largely falls on domestic consumers and businesses, rather than foreign entities. This suggests that the immediate benefits, if any, are outweighed by downstream costs that ripple through the value chain. The historical precedent of McKinley’s Republican party suffering electoral defeat after enacting high tariffs in 1890 serves as a stark reminder that such policies can be politically toxic, especially in an election year when affordability is a key constituent concern.

"So the new tariffs, which are 10%, he's promised 15%, but they haven't issued the executive order on that quite yet. Those will probably be subject to legal challenge, and that's because the statute allows for the President to impose tariffs in the cases of a balance of payments deficit or disequilibrium, and it's not clear that in an era of floating exchange rates whether that actually thing exists anymore."

-- Douglas Irwin

The "Risk-Swap" Market: Navigating AI's Disruptive Tide

In the equity markets, a fascinating dynamic is emerging as investors grapple with the pervasive influence of artificial intelligence. Cameron Dawson, Chief Investment Officer at NewEdge Wealth, describes this as a "risk-swap" market, rather than a purely risk-off environment. Investors are actively moving capital out of companies perceived as vulnerable to AI disruption and into those that either provide the infrastructure for AI or are deemed largely immune to its effects. This trend is exemplified by the Saxo podcast's coining of the acronym HALO: High Asset, Low Obsolescence. Investors are flocking to these HALO companies, which are characterized by high asset intensity and, consequently, lower returns on invested capital.

This strategic reallocation highlights a critical consequence of AI: the potential for widespread obsolescence across industries. While earnings have remained surprisingly robust, with upward revisions for current and future quarters, the market's valuation multiples are not reflecting a long-term extrapolation of current earnings power. This suggests a market that is acutely aware of future disruption. The S&P 500's performance, for instance, has been flat for the year, a stark contrast to the equally weighted S&P, indicating that the gains are not broadly distributed. The software index, a bellwether for tech, is currently testing a critical 200-week moving average, a level that has historically provided strong support. Whether this support holds will be a key indicator of whether the market can absorb the ongoing AI-driven recalibration.

"Effectively, we are swapping out of the areas of the market that we think are AI disrupted into areas that either benefit from the AI infrastructure or those that cannot be disrupted by AI."

-- Cameron Dawson

The Illusion of Globalism: A State-Centric Reality

Nadia Schadlow, Senior Fellow at the Hudson Institute, argues that the prevailing globalist approach to problem-solving has proven ineffective, citing Iran as a prime example. For decades, global institutions have struggled to contain Iran's regional destabilization, nuclear program, and threats to allies. Schadlow contends that power fundamentally resides in nation-states, and acknowledging this state-centric reality is a more productive starting point for achieving better outcomes. This perspective does not advocate for a Hobbesian free-for-all but rather for cooperation grounded in the recognition of sovereign power.

Schadlow distinguishes between effective multilateralism, like NATO, which functions as a military alliance of like-minded states, and the sprawling, often bureaucratic nature of organizations like the United Nations. She suggests that the UN, while funded by states, has become too removed from state control and democratic accountability. Her proposed "new operating system" emphasizes coalitions of the willing and a bottom-up approach to problem-solving, prioritizing cooperation among democracies and like-minded nations. This approach aims to overcome the inertia and ineffectiveness that plague larger, more generalized global institutions, ultimately seeking to restore confidence in the ability of democratic systems to deliver tangible results.

"So I'm arguing for a different operating system, meaning a different approach to solving problems and to going more to a level where you're, you're approaching things from coalitions of the willing, smaller scale, beginning at the local and working your way up, not beginning from, you know, in New York, I think we're all near New York, not from New York, top down, United Nations top down, and solving that way."

-- Nadia Schadlow

Key Action Items

• For Policymakers & Strategists:

  • Immediate Action: Re-evaluate current tariff policies, explicitly mapping their downstream economic impacts beyond immediate revenue goals.
  • Medium-Term Investment (6-12 months): Develop contingency plans for potential legal challenges to trade policies and prepare for increased congressional scrutiny of presidential tariff authority.
  • Longer-Term Investment (18-24 months): Foster alliances based on shared values and strategic interests, moving away from broad, less effective globalist frameworks towards targeted, state-led cooperation.

• For Investors:

  • Immediate Action: Conduct thorough due diligence on companies' exposure to AI disruption, prioritizing those with strong balance sheets and clear strategies for adaptation or resilience (HALO companies).
  • Medium-Term Investment (6-12 months): Diversify portfolios beyond concentrated tech sectors, incorporating value and international equities to balance risk.
  • Longer-Term Investment (12-18 months): Monitor the technological and regulatory landscape for AI, identifying companies that are not only developing AI but also those that can withstand its disruptive force.

• For Business Leaders:

  • Immediate Action: Analyze supply chain vulnerabilities to tariff fluctuations and geopolitical instability; explore diversification strategies.
  • Medium-Term Investment (9-15 months): Invest in operational efficiency and technological adoption that enhances resilience rather than solely focusing on immediate cost reduction.
  • Longer-Term Investment (18-36 months): Build strategic partnerships that reinforce market position against systemic disruptions, focusing on areas of competitive advantage that are less susceptible to obsolescence.