A new global economic paradigm is taking shape as major economies pivot towards policies rooted in narrow national self-interest, a shift that political analysts at Oxford Economics believe will have lasting repercussions across trade, fiscal management and financial markets.

"President Trump’s first 100 days in office have been the catalyst for a global economic policy shift toward narrowly defined national economic self-interest," say political economy analysts at Oxford Economics. "Europe, China and other economies are adjusting to this new reality and are already adopting idiosyncratic economic policies aimed at reducing their reliance on the US for defence and economic cooperation."

This shift is seen not as a temporary deviation but as the beginning of a structural transformation. "This isn't a short-term adjustment; it's a paradigm shift that we expect will extend well beyond the President's four-year term. And while the swing toward policy centred on narrower national self-interest seems abrupt, the conditions have been brewing for some time – in particular the decades of low-skilled household income growth lagging behind broad economic growth in an era of international competition," the analyst added.

Five enduring trends have been identified in this new environment.

First, surplus countries such as China, Germany and Japan are unlikely to see a reduction in pressure, as global trade imbalances persist. Tariffs may change trade flows but are unlikely to correct structural deficits.

Secondly, trade is set to become more regionally fragmented. Protectionist measures are expected to proliferate as major blocs seek to shield domestic industries. "Just as the US puts pressure on China, other blocs will turn to protectionist measures to manage the spillovers," the analyst noted.

Thirdly, fiscal policy is regaining prominence as a macroeconomic tool, especially in tandem with industrial policy. "Fiscal and industrial policy go hand in hand and are likely to have a more active influence on the economic cycle."

Fourthly, the supply of safe government debt is projected to increase, even as it becomes a less effective hedge for equity risk. Mutable and less resilient supply chains have led to more persistent inflation shocks, reducing the appeal of bonds as diversifiers.

Finally, market risk premia are entering a period of sustained repricing. "Markets are at the start, not the end, of repricing in the new economic landscape. Risk premia reflect much more benign conditions than the global economy is likely to face in the years ahead," the analyst said.

Attempts to reverse course are expected to be fraught with difficulty. "Opposition parties, including the Democrats, are unlikely to gain power on a platform advocating international common interest when the world’s largest economy is so vocally against it," the analyst said. Even if the US were to step back, the international coordination required to fill the void appears improbable.

Historical precedent suggests that once implemented, protectionist measures are difficult to unwind. "It can take decades to roll them back fully, as niche groups that stand to gain from protectionism form powerful lobbies," the analyst observed. In the US, tariffs have increased by 20 percentage points in a matter of months – a reversal of over a century of gradual liberalisation.

While this represents a significant policy shift, the underlying ideas are far from novel. "Policy driven by narrow national self-interest isn't new. Prior to the 19th century, mercantilism dominated economic thinking," the analyst said, listing hallmarks of that system: trade surpluses, industrial policy, state monopolies, military expansion and strategic resource access.

Today’s economic strategies – tariffs, strategic sector subsidies and bilateral deals based on defence and resources – echo these themes. Whether this era solidifies into long-term orthodoxy or gives way to renewed cooperation remains an open question, but the trajectory is clear.

History shows that even when protectionist measures such as tariffs and non-tariff barriers are removed, it can take decades to roll them back fully as niche groups that stand to gain from protectionism form powerful lobbies. This is one of the reasons why trade deals take more than five years on average to be implemented. In the US, where it took more than 100 years for the US effective tariff rate to fall 20ppts, yet it has risen that much in just a couple of months. 

“Our new baseline forecast incorporates many of these long-lasting effects on trade. But there is a risk that the reversing of global economic integration could go even further, and the global economy lands in a state closer to our fractured world scenario,” says the Oxford Economics analysts.

Policy driven by narrow national self-interest isn't new. It has been a reoccurring theme throughout economic history and the philosophy of free trade and economic cooperation on broadly common goals has been relatively unusual.

Prior to the 19th century, mercantilism in various forms dominated economic thinking. Mercantilism encompasses several high-level policy principles, many of which are re-emerging today:

• The pursuit of trade surpluses as a way to accumulate national wealth;
• Applying industrial policy and state intervention to shape the structure of the economy; 
• Promoting state backed monopolies in key strategy sectors;
• Military expansion; and 
• Establishing access to key natural resources.

The current US policy agenda – and the agenda pursued by China for decades now – is not an exact repeat of the economic policies of the past, but there are some common elements, say Oxford. The introduction of tariffs and non-tariff barriers to trade, state intervention in strategic industries such as tech and defence, and international deals based on access to natural resources and defence spending are all recent examples of narrowly defined national self-interest playing a role in economic policy.