Key Takeaways:
In a potential second term as president, Donald Trump will have the power to significantly alter US commitments in Europe, East Asia, and the Middle East – even if he is largely unable to pursue broad structural changes to US foreign policy.
Ukraine and Europe are likely to be the areas which see the most significant changes following a possible US withdrawal from funding Ukraine. An increased burden on European states to support Ukraine creates an opportunity for European and US defence companies to supply ammunition, bombs, and missiles to Ukraine and possibly other European states.
Trump is likely to increase trade competition with China, which will provide opportunities for technology companies to gain further financial support from the US government. Competition in the South China sea is also likely to provide opportunities for US defence companies.
Trump is likely to position the US closer to Israel and Saudi Arabia – an action which will likely increase hostilities with Iran. Consequently, Iran is likely to increase threats to the global shipping industry, which is likely to increase insurance costs and lower freedom of navigation.
Overall, the companies and industries which are most likely to be affected by Trump’s return to office are: US and European defence companies, technology companies, computer chip manufacturers, US electric vehicle manufacturers, mining companies, the shipping industry, and companies which rely on shipping through the Red Sea.
Background
Donald Trump’s demonstrated aversion to the international engagement strategy practiced under President Obama, and his promise for future withdrawal from (or scepticism in) international agreements, raises the possibility that Trump may alter US policy in America’s three key theatres of interest: Europe, the Indo-Pacific and China, and the Middle East. For instance, Trump has suggested altering the US position on Ukraine. In February, Trump questioned why Europe was not doing more to fund Ukraine’s military. Trump’s aides have also reportedly proposed a plan for Ukraine to exchange its eastern territories and Crimea to end the war with Russia.
KSG assesses that Trump does have a significant ability to alter US policy positions in all three of these regions. These changes are likely to have significant effects on other states and international businesses. Moreover, changes in US engagement in these three regions are likely to be uneven, with some theatres seeing larger changes than others.
Europe and Ukraine
Potential changes in US engagement:
KSG assesses Ukraine is likely to be the region in which the US alters its policy the most. Trump is likely to withdraw US support from Ukraine, as Trump is critical of President Zelenskyy’s push for funding from the US. If a Republican House is re-elected, this action is highly likely to be made easier.
US withdrawal from Ukraine is highly likely to increase the burden on European states to meet Ukraine’s ammunition requirements, and fund its eventual reconstruction. This particularly affects Germany, which has been the second-largest donor to Ukraine behind the US. US withdrawal from Ukraine is also highly likely to increase discussions in Europe about providing for its own security, beyond protection from the US and NATO. Under Rishi Sunak, the UK has already pledged to increase defence spending to 2.5% of GDP by 2030 – a pledge which new British Prime Minister Kier Starmer has said will be fulfilled after the government reviews its defence strategy, and when Britain can afford such an increase. German Chancellor Olaf Scholz has similarly stated that Germany was increasing its arms production, both to help Ukraine, and to protect itself; similar actions are likely to proliferate among European states if the US withdraws support from Ukraine. KSG also assesses that Russia may be emboldened by either the withdrawal of US support, or its eventual military victory in Ukraine, to push for influence in Europe. This may constitute a redoubled effort to influence European politics and to increase pro-Russian sentiments. However, the viability of this initiative depends on the outcome of the war in Ukraine, as Russia may neither have the resources nor the influence to pursue it.
Consequences for businesses and governments:
If Trump withdraws US support for Ukraine amid increased opposition to supplying military aide, and if European nations shoulder more of the burden for supplying Ukraine with equipment and funding, KSG assesses that this is likely to increase the demand for equipment from European and US defence companies. For instance, the German government reports that it has already sent 50 Leopard 1 A5 tanks to Ukraine, manufactured by German-French defence company KNDS. These kinds of shipments and production requirements are likely to continue. US companies are also likely to benefit, as Patriot missiles and launchers are also included in the list of supplies Germany has sent (Patriots are manufactured by Raytheon). These trends in demands for additional arms and equipment are unlikely to subside within the next eighteen months, and are likely to increase if the US withdraws support from Ukraine.
The military equipment in greatest demand is likely to be the equipment Ukraine has consistently needed thus far: artillery equipment and shells for attacking Russian targets in Ukrainian and Russian territory, and defensive missile systems and supplies for shooting down incoming Russian missiles. However, a potential US exit from funding Ukraine under Trump may prompt a shift in the tide of the war in Russia’s favour, provided that European nations cannot adequately fill the gap which the US has left. If this occurs and Russia has the mechanized forces to push further into Ukraine, Ukraine may also require the anti-tank missile systems (such as the Javelin) and loitering munitions which it used to forestall Russia’s invasion in 2022.
Furthermore, US apprehension about international alliance commitments following Trump’s re-election, an increasingly hostile international landscape, and/or a new direction in the Ukrainian War, is likely to incentivize European states to purchase military supplies for their own protection. This is in turn very likely to increase the demands on European and US defence companies for military equipment. KSG assesses that the equipment sought from these defence companies is likely to include not only the artillery and types of munitions being sent to Ukraine, but also supplies meant to fill the gaps in current European readiness levels. For instance, Britain’s readiness level to fight a war against a peer competitor is lacking in several areas, one of which being ammunition stockpiles. The House of Commons Defence Committee also noted insufficient armoured personnel carriers, a reduction in the fleet of Challenger tanks as Challenger 3 upgrades are made, and delays in the Dreadnought-class submarine program. Germany may face similar issues. Thus, European and US defence companies have opportunities to supply European states.
China
Potential changes in US engagement:
KSG assesses that if Trump returns to the White House, he is likely to adopt his past and promised position of assertive protection for US businesses from Chinese competition. This stance may have positive consequences for a select number of US businesses, which operate in sectors that the Biden Administration has been pushing for greater national security oversight and/or economic protection over.
KSG also assesses that China likely perceives Trump to be a threat to its short-term interests. Therefore, it is likely that the current US-China economic decoupling will continue, and/or accelerate under Trump’s second term. KSG believes this trend is likely to either result from either direct economic or political action and/or rhetoric which Trump uses, or this trend may result from China’s fear and uncertainty about how US policies may shift in the future. KSG thus expects the US and China to continue to diversify their imports and exports, to avoid mutual dependency out of concern for their respective national and economic securities.
Moreover, the potential abandonment of Ukraine, and greater public scepticism about US alliance commitments, may also make China more confident pressing for control in the Indo-Pacific. KSG assesses that this will most readily impact Japan, South Korea, and the Philippines through increased at-sea incidents between Chinese and East Asian navies. It is also likely to include Chinese military posturing in areas of dispute between China and neighbouring states – such as the Second Thomas Shoal. These actions are in turn likely to increase US attention toward the Indo-Pacific. Relatedly, Trump’s policy on Taiwan is unclear: in an interview with Time magazine, Trump does not give a specific yes or no answer on defending Taiwan, which he says is a negotiating tactic, while his ex-officials provide reassurance that Trump will continue US support for Taiwan if elected. Recently, Trump has asserted that Taiwan should pay the US for defence, raising further questions. China could seize upon this ambiguity and hesitancy to press for territorial claims in the South China Sea and around Taiwan.
Consequences for businesses and governments:
The US and China are likely to continue their pattern of increased trade competition and relocating essential industries to their own soil – or the soil of friendly governments/allies. Generally, KSG assesses that companies which contribute to supply chains for critical hardware and materials for the US are likely to benefit through increased business contracts and possibly subsidies.
For example, no matter who wins the US election, US and Western-friendly companies which manufacture advanced computer chips and are willing to produce them in the US are highly likely to see increased demand and government support. Overall, the US is likely to continue to shift the manufacturing of sensitive technologies to domestic markets where possible. For instance, the White House recently announced $8.5 billion in direct funding for Intel, in addition to $11 billion in loans under the CHIPS and Science Act to construct and improve Intel plants across the country. TSMC, a Taiwanese company, will also begin producing advanced chips on US soil after an $11.6 billion US government subsidy. KSG believes that this trend is likely to continue, and may also include companies based in Taiwan, Japan, and South Korea. However, Trump is most likely to publicly support US companies; this could pose investment risks through stock price fluctuations in companies like TSMC.
As part of this strategy of economic competition, KSG anticipates the US will continue to attempt to weaken China’s dominance over critical mineral supply chains used for the manufacture of semi-conductor chips and other products like electric vehicles. The US and Europe are already attempting to locate the smelting of minerals like Lithium on their own or friendly soil; Western companies which are willing to build or expand production of such operations, like Green Lithium and Livista Energy have received support from private companies and governments. Overall, mining and energy companies can expect to see increased US and European support for their businesses regardless of who takes presidential office. Moreover, KSG believes that there is a moderate probability that Trump will continue current tariffs on Chinese EV and ‘green’ energy products such as solar cells. Although Trump is generally opposed to EVs and may end domestic US support for similar ‘green’ products, KSG believes Trump may retain trade policies which protect these companies against competition from China.
Finally, if the US retreats from Ukraine, and Trump increases pressure on China, KSG believes that US defence companies are likely to receive increased demand for defensive weapons systems for Taiwan. The US recently approved 291 Altius-600M unmanned aerial drones, manufactured by Anduril, and 720 Switchblade drones made by AeroVironment. In combination with reports about the planned US “hellscape” drone strategy to defend Taiwan, KSG assesses the trend of missile and drone sales to Taiwan is unlikely to subside.
Israel and the Middle East
Potential changes in US engagement:
In the Middle East, KSG assesses that Trump is likely to reduce US pressure on Israel to wind down its campaign in Gaza. In the past, Trump has maintained a firm commitment to Israel and Netanyahu. For instance, while president in 2017, Trump recognised Jerusalem as Israel’s capital, and relocated the US embassy there. However, there is a reasonable probability that Trump may succumb to international pressure for change in Israel’s campaign, as he stated during an interview Netanyahu needed to end the war soon, because it was sapping Israel’s international reputation. Despite this potential challenge, KSG assesses that Trump is highly likely to reassume his pro-Israeli position; because of his past staunch support for Israel, Trump is less likely to apply pressure on Israel to adjust its operations in Gaza than a Democratic administration might.
Regarding Iran, Trump is highly likely to return to the approach he took during his first term: a “‘maximum pressure’ campaign” to harm the Iranian economy and combat its military. Moreover, Trump was a close ally of Saudi Arabia during his presidency through arms packages, and has maintained close familial business ties since leaving office. Trump is likely to lean on Saudi support again as president. As tensions with Iran have increased due to US support for Israel in its campaign against Hamas, and Western states have conducted strikes against Houthi targets in Yemen, an increase of US support toward Saudi Arabia is likely to antagonize Iran.
Consequences for businesses and governments:
If Trump positions the US closer to Israel and Saudi Arabia, it could antagonize Iran and Iranian proxy groups; the most immediate threats which would follow are to global shipping and increased hostilities between Israel and Hezbollah in Lebanon. If Trump strengthens US ties with Saudi Arabia, it is likely to be through continuing the arms sales he pursued during his first term. In the past, US arms sales to Saudi Arabia have been controversial because of Saudi Arabia’s conduct in the war in Yemen. However, KSG assesses that depending on how disruptive Houthi attacks become, and depending on the make-up of Congress, there is a moderate likelihood that Congress may be more willing to approve future arms sales. However, opposition from Democrats is unlikely to subside.
Furthermore, KSG assesses that if tensions continue to increase between the US and Iran because of Trump’s increased support for Israel and/or Saudi Arabia, this may prompt Iranian proxy groups like the Houthis to prevent shipping through the Red Sea into the future. A longer-term pseudo blockade of shipping is highly likely to impede supply chains, affect businesses which depend on these supply chains, and affect the supply of liquified natural gas. In response to increased threats or further restrictions to global shipping, KSG believes there will likely be increased demand on other commercial transit routes – notably shipping products by air to East Asia.
Finally, a wider conflict between Israel and Hezbollah appears increasingly likely – a situation which increases risks to US interests and increases opportunities for defence companies if Trump positions America closer to Israel. A second front opening on Israel’s northern border with Lebanon would create increased demand on the US and other allies of Israel for defensive weaponry. For instance, demand is highly likely to increase for missiles manufactured by US-based companies, such as Raytheon, which contribute to the Iron Dome system.
Summary
Donald Trump’s possible return to the White House is likely to usher significant changes to US foreign policy in Europe, the Indo-Pacific, and the Middle East.
Ukraine and Europe are likely to see the most significant changes, as Trump is likely to alter America’s engagement with Ukraine through eliminating military aid and support. Consequently, Europe is likely to shoulder the burden for Ukraine’s defence which will increase calls to strengthen its own security.
Trade competition between the US and China is likely to increase under Trump, and competition in the South China Sea is likely to increase.
Finally, Trump is likely to increase US support for Israel and possibly Saudi Arabia, which is likely to increase tensions with Iran and Iranian-funded groups like the Houthis in Yemen and Hezbollah in Lebanon.
By Joel Battle, Americas Analyst