Three nightmare Trump scenarios we should be planning for

In a world suddenly less certain, and with basic elements of the global order on which our prosperity is based — free trade, the US security guarantee — wrenched away, it’s much harder to predict the future. But you can model different scenarios, and attach risk estimations to them, and assess the threats and opportunities they present. Smart policymakers within bureaucracies should be doing this as a matter of course.

What’s worrying is that, so far, our economic policymakers in Treasury and the RBA seem to be relatively insouciant about the impact of the Trump administration, warning that it presents more risks, but not adjusting their expectations about the global economy. But while there are some “upside” risks to a global trade war for Australia such as cheaper imports redirected from the US, there are also some scenarios that are perfectly plausible, but which represent enormous danger for Australia.

Here are three possible scenarios that could emerge from the chaos of the Trump presidency.

1. Trump goes full dictator

Donald Trump and his sycophants are already dismantling key guardrails in the United States — sacking anti-corruption officials and independent oversight bodies, calling for the impeachment of judges who rule against the administration, usurping the authority of Congress and ignoring court rulings. He’s targeted the media for retribution, compelled law firms to fall into line with his demands and used administration-controlled investigative bodies to pursue those who refuse to agree he was robbed in 2020.

It’s a straightforward scenario from here: he uses an outbreak of protests to declare a state of emergency, deploys the US military — now led by compliant, if unqualified, generals — onto the streets, suspends habeas corpus and uses the Federal Communications Commission to censor critical media, and begins dispatching critics to El Salvadoran prisons, safely beyond the reach of even the Supreme Court, should its Trump-appointed judges get a sudden bout of constitutionalism.

What does Australia do when the country that ostensibly guarantees our security turns into a fascist dictatorship? What if there’s no longer any difference between China and the Republic of MAGA in terms of human rights? Where does that leave ANZUS and AUKUS and the Five Eyes? Do we maintain our current position of not offering a running commentary as our key ally descends into dictatorship?

2. Trump imposes capital controls

To the extent that Trump has any coherent policy, it’s to encourage companies and especially manufacturers to onshore production, bringing investment back “home” to the US — although this would drive up the US dollar, making US exports less competitive and imports more competitive (which is why the mooted “Mar-A-Lago Accord” involves forcing other countries to liquidate their US holdings to drive the US dollar down). But so far Trump has achieved the opposite of that: a flight of capital from the US by investors panicked by Trump’s chaotic decision-making and its dire effects on US stocks. Other markets, and especially Europe, look much safer.

If this flight intensifies, driven by a US recession, or by an evident collapse in the rule of law in the US, which makes investors worry about the sovereign risk of large US corporations which are now at mercy of the mad monarch, Trump could decide to impose capital controls in the same way that Malaysian leader Mahathir Mohamad did during the 1998 Asian financial crisis, blocking foreign investors from withdrawing funds from the country (ironically, most footloose capital had already fled Malaysia by the time Mahathir brought in his regulations, thereby only punishing investors who’d decided to stick with his country).

Such an attempt would be unlikely to be successful — financial transactions have accelerated exponentially since the 1990s, and cryptocurrencies mean they do not even need to be denominated in any currency. But it would leave Australian investors, including our biggest superannuation funds, with hundreds of billions of dollars locked up in the US, beyond reach (and what’s the bet Trump would then invite other leaders to come and “kiss my ass” in order to free their capital). It would also cause a global financial earthquake as the last vestiges of faith in the US financial system evaporated.

3. Trump does a deal with Xi

Not merely has China so far refused to blink in the face of Trump’s all-out trade war, it is turning the screws on Trump by cutting off rare earth (or “raw earth”, as Trump calls them) exports and blocking a growing list of American companies from doing business in China. It also holds hundreds of billions of dollars in US bonds. It has spent six years adjusting to US efforts under first Trump, and then Joe Biden, to contain it technologically and economically. It has launched a charm offensive across the region and is improving economic ties with Japan and South Korea. It is Trump who will eventually need a deal with Xi, not the other way round, given Xi faces no mid-term elections or pressure from party colleagues.

Given Trump is comfortable with the idea of a multipolar world in which rival gangsters countries can enjoy their own spheres of influence as long as they don’t tread on each other’s toes, a deal with China might involve giving Xi a free hand in the western Pacific and across South-East Asia, including the nod for retaking Taiwan without US interference once Trump has onshored semiconductor production. In exchange, Xi could push the yuan up, strike a deal on rare earths and other critical minerals, and stimulate China’s domestic demand to lift consumption of US imports. Only Trump could go to China, they’d say, as the mad king delighted at the prospect of his Nobel Peace prize.

That would leave Australia, the former deputy sheriff, without any sheriff in the region — and perhaps a vengeful bully that hasn’t forgotten our reflexive siding with the US or our refusal to engage with China in support of free trade when Trump unleashed his trade war. As for AUKUS, well, turns out, alas, America just can’t produce enough submarines to provide those Virginia-class boats, but hey you don’t need them any more to fight China.

If none of these are likely scenarios, or are more likely to happen only in some attenuated form, they should be what bureaucrats, regulators and our security think tanks are wargaming. What do they mean for Australian investors and super funds? What do they mean for our defence requirements? What do they mean for our foreign policy, which has traditionally paid at least lip service to human rights?

And if they’re not being debated right now, what are our best and brightest doing?

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