I have written that Election Day might have marked the end of the New Normal and the resumption of the Old Normal for the US economy. In other words, instead of a continuation of “slower for longer,” the business cycle might make a comeback, with increasing odds of stronger economic growth, stimulated by Trump’s tax cuts, and higher wage inflation, because the economy is at full employment, resulting in a more normal pace of Fed rate hikes.

While the US economy may be heading back to the Old Normal, the geopolitical order is clearly moving away from the post-World War II Old Order to a yet-to-be-defined New Order. It’s hard to know whether the latter will be as orderly as the former, though it certainly seems like the Old Order was already spinning out of control under both George W. Bush and Barack H. Obama. Hopefully, Donald J. Trump’s team will make the world a safer place. That’s my hope, not a prediction, which is tough to make right now.

The end of World War II marked the beginning of the latest period of Globalization as national markets became more integrated through free trade that was enabled by multilateral (rather than just bilateral) trade treaties. Today’s global economy is widely viewed as a product of the post-war world. But in fact, its origins can be traced to the efforts of FDR’s Secretary of State Cordell Hull to liberalize world trade in the mid-1930s:

(1) Hull was appalled by the results of the Smoot-Hawley Tariff passed during June 1930. Under his leadership, Congress passed the Reciprocal Trade Agreements Act (RTAA) of 1934. Hull’s legislation established a system of bilateral agreements through which the US negotiated reciprocal reductions in the duties imposed on specific commodities with other interested governments.

(2) Hull’s tariff reductions were generalized by the application of the most-favored-nation principle, so the reduction accorded to a commodity from one country would then be accorded to the same commodity when imported from other countries. Furthermore, Hull was aware of the lingering resistance to tariff reduction that remained in Congress. So he insisted that the power to make these agreements must rest with the president alone, without the necessity of submitting them to the Senate for approval.

(3) Congress renewed the RTAA again in 1943 and 1945. The RTAA would go on to serve as the model for the negotiation of the 1947 General Agreement on Tariff and Trade (GATT), the critical multilateral institution upon which the modern global economy stands. It was the precursor to the World Trade Organization (WTO) established in 1995.

For the US, this free trade system started to cause problems and to raise protectionist pressures during the 1980s as the US trade deficit swelled (Fig. 1 and Fig. 2). Imported autos made in Japan and Germany gained significant market share in the US (Fig. 3).

Many books were written about the “deindustrialization” of America during the decade. Starting in 1981, the Reagan administration responded by forcing Japan to accept “voluntary export restraint” agreements imposing quotas on Japanese car imports. They weren’t removed until 1994. The Japanese responded by building “transplant” production facilities in the US, particularly in the South, where right-to-work laws exist, as opposed to the Rust Belt states with established labor unions.

As a result, manufacturing capacity in the auto industry, as well as overall industrial capacity, continued to expand to record highs during the 1980s and 1990s, belying the “deindustrialization” scare (Fig. 4 and Fig. 5). Arguably, Reagan’s push for fair trade kept the free trade system alive.

Following the end of WWII, the next major events that led to more Globalization were the end of the Cold War in 1989 and the North American Free Trade Agreement (NAFTA) of 1994. Then China joined the WTO during December 2001. The US trade deficit widened dramatically, especially with China, but also with Mexico and the European Union (Fig. 6). Ever since China joined the WTO, industrial capacity has stopped growing in the US in a host of industries. (See our Manufacturing Production & Capacity by Major Industries.)

So here we are with a new president who seems inclined to revive Hull’s bilateral approach to trade deals rather than maintain the multilateral system that evolved after WWII. It is a radical change, but it could work, and it might actually save Globalization if it helps to calm populist discontent with free trade. Trump’s approach can succeed if it convinces its detractors that a bilateral approach allows for more national control to make sure that bilateral free trade deals remain fair to both sides. Reagan succeeded in doing so during the 1980s.

The populist discontent with Globalization has been building for quite some time. For example, in the second 1992 Presidential Debate, Ross Perot argued against the proposed NAFTA treaty:

“We have got to stop sending jobs overseas. It’s pretty simple: If you’re paying $12, $13, $14 an hour for factory workers and you can move your factory South of the border, pay a dollar an hour for labor ... have no health care--that’s the most expensive single element in making a car--have no environmental controls, no pollution controls and no retirement, and you don’t care about anything but making money, there will be a giant sucking sound going south. ... [W]hen [Mexico’s] jobs come up from a dollar an hour to six dollars an hour, and ours go down to six dollars an hour, and then it’s leveled again. But in the meantime, you’ve wrecked the country with these kinds of deals.”

NAFTA was implemented by Bill Clinton in 1994, with some of its supporters predicting that it would increase the standard of living of Mexicans. However, the fact that they are still streaming across the border confirms that hasn’t happened. So does the fact that hourly pay rates remain so low in Mexico. A bilateral deal between Mexico and the US might be better for both parties concerned. (Of course, there’s still the problem of other Latin Americans crossing the border illegally into the US through Mexico.)

By the way, US automakers long have argued that Mexico provides cheaper labor that allows them to afford building small, fuel-efficient cars--the kinds of cars needed to help them meet the US government’s fuel-efficiency standards. In other words, they had to move south of the border to meet US government regulations on their industry.

We conclude that Trump might actually save Globalization from protectionists by replacing multilateral deals, which are difficult to enforce on fairness issues, with bilateral ones, which should be easier for both sides to manage in a mutually beneficial manner.

This may all be wishful thinking, but it beats the system that preceded Hull’s bilateral deals. For now, our bet is that Globalization is likely to survive the current round of challenges. The first test of our thesis is underway now between the US and Mexico. A much bigger challenge will be negotiating a better trade deal with China. We live in interesting times.

Dr. Ed Yardeni is the President of Yardeni Research, Inc., a provider of independent global investment strategy research.