Welcome back to the TSG Issue Brief, where we take an in-depth look at geopolitical and economic trends. With the next global AI summit occurring in India next week and amid high-tech trade and policy tensions among the US, China, the EU, and others, this piece explores the landscape of global AI governance and discusses what to watch for in the near term.

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Issues related to AI advancement and regulation have increasingly captured the attention of audiences worldwide in recent years. From the release of ChatGPT (2022); to the Biden administration’s use of export controls and outbound investment restrictions on AI-related technology and equipment as a key feature of competition with China (2023-2024); the landmark passage of the EU AI Act (2024); the shock over the release of DeepSeek’s AI model (2025); and the Trump administration’s treatment of high-tech controls as a bargaining chip in relations with China, AI is making global headlines. The upcoming Feb. 16-20 AI Impact Summit in New Delhi will once again shine a spotlight on competition over “winning” the AI race and setting the AI governance world order (or lack thereof).

Who are the relevant players in the AI race and who is likely to be “at the table” for setting the AI governance world order?

The US: Innovation Forward

• US AI labs and tech firms — along with Chinese counterparts — are considered to be leading AI innovation and development. Some prominent names include OpenAI, Anthropic, Microsoft, Meta, DeepMind, xAI, and more.

• Yet the US is not a first mover in governing the emerging technology, particularly under the current administration (the US had taken some governance steps under the Biden administration, but those have been rolled back). Despite some state-level efforts (namely out of California) to mitigate some of the risks of AI, the US has little national regulation. The Trump administration, which largely emphasizes deregulation, has even sought to stifle state-level regulation.

• The White House released a US AI Action Plan in July 2025. The three pillars of the AI Action Plan consist of pushing innovation (e.g., reducing regulation, increasing adoption), building supporting infrastructure (e.g., reducing regulation, expanding grid infrastructure), and promoting US AI leadership (e.g., enforcing export controls, “countering Chinese influence”), which align with the administration’s emphasis on deregulation and investment. The Trump administration also released three related executive orders, two of which bolster the US AI Action Plan pillars: one order focuses on increasing US AI exports (from chips to AI models, cloud services, and data systems), and another prioritizes enhancing AI-related infrastructure, such as semiconductor manufacturing, energy grid expansion, and data storage.

• Some of Trump’s trade deals have been in the service of AI infrastructure, such as the deal with Taiwan that includes a pledge for Taiwan to invest at least $500 billion in US high-tech industries. This is all occurring amid fluctuating White House attitudes towards chip controls as Trump uses chips as a bargaining tool in broader negotiations regardless of national security implications. Whereas bipartisan consensus on the security concerns over China’s access to US high-tech exports previously drove chip export controls, which the US secured allied alignment on, the White House’s decisions to permit sale of Nvidia’s H200 chips and to purge China hawks and security and industry experts demonstrate personality politics and profits can take precedence over national security concerns.

The EU: Governance Forward

• EU AI models are lagging behind in the “race” compared to those of the US and China. But the EU is a leader in the governance and regulation spaces. The EU AI Act is considered the most comprehensive AI governance bill passed thus far, and the EU’s large market size has forced companies worldwide to comply with its tech regulations like the EU Digital Services Act (DSA) in order to access its market. While EU AI Act proponents hail it for taking steps to mitigate the most catastrophic effects of AI, critics within the bloc argue the legislation is preventing EU companies from excelling in AI and thus keeping them from realizing the profits seen by US companies from the “AI boom.” Meanwhile, external critics like the US have accused EU tech regulation more broadly (e.g., the DSA) as discriminating against foreign companies and targeting their profits.

• The EU AI Act has been implemented in phases. The last main wave (governing high-risk AI systems) will become enforced this August. But the EU is trying to balance staying competitive with implementing safeguards given the internal and external criticisms. The EU’s AI Continent Action Plan seeks to improve Europe’s competitiveness in the AI space with approaches similar to Washington’s AI Action Plan – by streamlining regulation, increasing adoption, and building support infrastructure and human capital. Europe will continue to try to thread the needle between responsible governance and economic competitiveness.

• Countries on the continent also have some of the highest percentage of AI users relative to their total populations. And some European companies, namely the Netherlands’ ASML, are integral to semiconductor supply chains.

China: Seeking Both Innovation and Governance Primacy

• DeepSeek surprised with what it could achieve despite lacking access to the most advanced chips (e.g., improvements in efficiency). The surprise amped up the race dynamics. In addition to DeepSeek, China has some big-name champions developing AI models, including Alibaba, ByteDance, Moonshot AI, MiniMax, and Zhipu AI. China’s models are considered the leading edge for open-source AI models. China is pushing its models not only domestically but also in international markets. DeepSeek alone makes up the majority of AI use in Belarus, for example, and a high percentage in other nations with which China has warm ties — e.g., Cuba (49%), Russia (43%), and Iran (25%).

• Yet China has also sought to demonstrate its leadership in governing AI. Although Beijing did not pass a comprehensive AI regulatory framework in 2025 (as it had originally envisioned in laying out its legislative plan for 2025), it has continued to take an issue-by-issue and place-based pilot approach. It recently targeted regulating “human-like interactive” chatbots to mitigate risk of the AI applications increasing self-harm and other destructive behavior (e.g., gambling). Measures to address labor impacts of AI are expected to be forthcoming from the Ministry of Human Resources and Social Security.

• While re-export through third countries has helped China to access restricted technologies, Beijing recently has sought to limit tech titan’s purchases of US chips to promote development of domestic options to reduce dependence on the US in AI supply chains. Meanwhile, the US is also reliant on Chinese inputs; China has used its critical mineral and rare earth exports as leverage in trade negotiations with the US. China also stopped exports of finished chips (basic power chips used in the auto industry and other electronic applications) from its Nexperia arm in retaliation for the Dutch seizure of control. The Netherlands took control over Nexperia out of concern that the US Bureau of Industry and Security’s “50% Affiliates” rule (later suspended for a year in US-China negotiations) would subject the Dutch arm of Nexperia to US limitations due to its Chinese parent company Wingtech being on the US Entity List. Although the Netherlands walked back its control over the company following China’s export restrictions of the completed chips, the case is still awaiting a verdict in the Dutch court system, leaving in place court-appointed Dutch administrators.

Middle Powers: Rising Players

• Not only did South Korea co-host the second AI safety summit (with the UK in 2024), but it also started enforcing its own national AI legislation, the Basic AI Act, Jan. 22. The legislation is allegedly aimed at encouraging AI adoption by ensuring users feel safe utilizing the models, rather than aimed at hindering innovation and development. Seoul has sought to promote development of domestic models, though it has proved difficult to avoid US or Chinese inputs due to their dominance in AI-related technology. LG, SK Telecom, and Upstage are making the most progress. US lab OpenAI signed a deal with South Korean firm Kakao to collaborate following DeepSeek’s R1 surprise. South Korea is also part of major global tech supply chains, though South Korean firms play a bigger role in memory chips than leading-edge chips.

• India will host the 2026 global AI summit (now re-branded — for a second time — to an impact summit). It released its governance guidelines November 2025. In line with AI race dynamics and a US-led trend towards deregulation, the guidelines explicitly state to prioritize “innovation over restraint” and emphasize voluntary commitments. It finally establishes an AI Governance Group and clarifies the role of India’s still-emerging AI safety institute. New Delhi has said it intends to reveal India’s first AI models at the Feb. 16-20 summit.

• Japan passed its AI Basic Plan in late December 2025. Its governance model is similar to China’s: promoting innovation while also seeking to be a leading voice in global AI governance. Most of the plan calls for ramping up innovation and AI adoption to make Japan “the most AI-friendly country in the world,” but its governance section (towards making AI “trustworthy”) doubles the staffing of its AI safety institute and promotes international cooperation including through the G7 (Hiroshima Process) and ASEAN. Like South Korea and India, Japan is also pushing for sovereign AI model development. Starting with the 2026 budget, Tokyo announced over $6 billion in support for domestic AI development through 2030, and it recently announced a deal with TSMC to produce more of TSMC’s advanced chips in Japan to support Japan’s AI industry.

• The Gulf States are also emerging as key players in the AI space. The UAE has partnered with US firms to construct a US-UAE AI campus in Abu Dhabi (home to Stargate UAE), projected to open this year. Washington also approved Microsoft’s export of Nvidia chips to the UAE – the first company to do so – as part of the tech firm’s $15.2 billion investment plan from 2023 to 2029. Qatar is investing in cloud computing and working on creating a niche for itself in the AI workforce pipeline. Saudi Arabia is investing heavily, particularly in AI infrastructure. Its sovereign wealth fund AI subsidiary (HUMAIN) is partnering with Nvidia to build “hyperscale AI data centers” and with Global AI to expand AI infrastructure.

• Malaysia, Singapore, Thailand, and Vietnam are also increasingly important players in semiconductor supply chains as hubs for chip manufacturing (especially amid some companies diversifying away from China).

What do international governance efforts require to be successful?

International governance can be broadly distilled down to four steps:

• The first step is the emergence of a consensus that there is a need for international governance over the issue. Despite some global back-pedaling since Washington’s stance towards AI turned to deregulation in 2025, there is generally a shared recognition of a need for AI governance, including on an international level.

• The second step is the actual policymaking stage (determining how to govern AI), the current focus of international powers. This can be in the shape of unilateral or multilateral efforts, such as international summits.

• The third step and fourth steps are interconnected and may prove as tricky as policymaking: implementing the policies, enforcing implementation, evaluating the outcomes, and monitoring compliance.

What progress have multilateral approaches made?

• Bletchley Park (2023) and Seoul (2024) AI Safety Summits: The UK convened the inaugural global AI Safety Summit at Bletchley Park in 2023. The summit explicitly focused on recognizing risks from AI and “the need for collaborative action on frontier AI safety.” The resulting Bletchley Declaration, while still groundbreaking, focused more on agenda-setting than making concrete commitments or requiring specific actions on safety. Still, the summit boosted the creation of national AI safety institutes (AISIs), beginning with the US and the UK. The Seoul summit (co-hosted with the UK) did not attract as high-level participation as the Bletchley summit, but it continued to encourage establishment of AISIs (e.g., Japan, South Korea, and Canada announced their AISIs), announced the interim international scientific report on AI safety, and included some more specific language on AI safety and evaluation in its declaration.

• Paris (2025) AI Action Summit: In response to shifting global trends, the Paris summit re-branded away from safety to focus on “action.” The shift reflected industry criticism that the EU AI Act stifled innovation, criticism from the US that EU tech rules discriminated against US firms, and Washington’s own tone shift on AI as a new president took the White House (the US AISI had the word “safety” removed from its title). The 2025 international scientific report on AI safety released ahead of the summit, but the summit was focused on seeing the opportunities of AI and ensuring that there would be equitable access, although there was also a focus on sustainability and environmental risks of AI (the latter was cited by the US as to why it did not sign the summit’s declaration). The UK did not sign the declaration, highlighting that it did not center on implementing governance nor addressing security issues.

• UN efforts: At UNGA 2025, the UN launched an independent panel to produce its own annual report and created a new global summit (Global Dialogue on AI Governance), which will convene for the first time in July. The first report of the panel is expected at the upcoming summit.

• G7 efforts: The 2023 G7 summit launched the Hiroshima AI Process, which in late 2023 resulted in the International Guiding Principles for Organizations Developing Advanced AI Systems and Hiroshima Process International Code of Conduct for Organizations Developing Advanced AI Systems. The recommendations under the Hiroshima Process are broad and non-binding, though they were useful to advance global conversations around best practices for mitigating AI risk. Under Italy’s 2024 presidency, G7 tech ministers finalized a Reporting Framework for the Code of Conduct (launched by the OECD in early 2025).

What are some of the biggest challenges with global governance of AI moving forward?

• AI governance has drawn parallels to governance of other major global risks, such as nuclear safety (e.g., an enforcement mechanism for AI governance could look similar to the IAEA for global nuclear governance). While such structures can still be worthwhile, it is important to understand that AI governance poses its own unique challenges; AI technology can develop at an extremely rapid pace, which could be too fast for legislation to keep with, and one day it could progress at a pace too fast for humans to regulate.

• The unreliability of the US and other global powers highlights compliance issues. Looking at Russia with the New START strategic arms control treaty, for example: Russia has been in noncompliance with the verification and monitoring aspects of the treaty since 2023. For the part of the US, leadership changes have led to frequent and large swings on global commons issues. Under Trump administrations, the US has withdrawn from the Paris agreement on climate and from the World Health Organization. Though subsequent administrations can join new agreements or recommit the US, the cyclical nature adds challenges for international partners coordinating with the US.

What to watch in the months ahead

• The AI Impact Summit in New Delhi (Feb. 16-20): The 2026 international scientific report on AI safety was published Feb. 3, again just ahead of the annual summit. But as with Paris last year, the AI Impact Summit is expected to focus more on developing models (recall India is expected to reveal some new sovereign AI models at the summit) and promoting applications of AI than on risk and safety. Like Japan’s approach to governance, New Delhi is concerned about trustworthiness of AI as a factor in adopting AI and driving economic growth. Several high-level political and tech leaders are set to attend, including French President Macron, Brazilian President Lula, Nvidia CEO Huang, Google CEO Pichai, OpenAI CEO Altman, and Anthropic CEO Amodei.

• The anticipated meeting between Trump and Chinese President Xi (April): AI-related supply chains (e.g., semiconductors and critical minerals) have been heavily impacted by US-China relations. Watch the run-up to the summit for further concessional actions on tech, as the about-face on the US direction of high-tech policy continues to drive uncertainty for allies and companies alike.

• G7 Summit (June 15-17): AI governance under the G7 Hiroshima Process did not take many new strides in 2025. With France the original re-brander of the AI safety summits, it will be worth noting if the G7 summit features AI and if Paris will continue the emphasis on innovation over safety.

• UN Global Dialogue on AI Governance (July): Hailed as the most “inclusive” approach to AI governance, the inaugural UN conference on AI governance will include the release of the UN panel’s report. Watch to see how the tone of both the report and the summit take shape – will it promote AI adoption and innovation, or will it take a more cautionary approach and discuss mitigating catastrophic, global AI risks?

• The final major implementation stage of the EU AI Act will come into effect Aug. 2 (all remaining parts of the act except for Point 1 of Article 6). The European Commission was due to provide specific guidance on complying with the high-risk AI systems portion (except for Point 1) by Feb. 2, but it has missed the deadline and reportedly intends to provide a final draft for feedback by the end of February.

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Welcome back to the TSG Issue Brief, where we take an in-depth look at geopolitical and economic trends. We assess the status of trade talks between the US and major partners as the year comes to an end.

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While most trading partners await the Supreme Court disposition of the IEEPA case before finalizing actual deals, the major agreements that have been announced lack enforceability and have not insulated those parties from US pressure over trade, investment, defense spending, and other issues. Tariffs are at historic highs (as USTR Greer himself says, “The year 2025 will be remembered as the year of the tariff”), and US protectionism is expected to continue regardless of the IEEPA outcome. As the year comes to a close, we review the current status of trade talks with major partners.

Canada, Mexico, and the USMCA:

There is no agreement with either of the two largest US trading partners and USMCA signatories. While the majority of products are exempted under USMCA, many products remain subject to 35% and 25% IEEPA tariffs for Canada and Mexico, respectively.

• Negotiations with Canada stalled following the Trump administration’s ire over an anti-tariff ad campaign run by Canada. But talks are slated to resume mid-January.

• Mexican President Sheinbaum’s effective management of Trump thus far – mostly in the asymmetric currency of immigration and border control measures, as well as efforts to reduce Chinese investment – could put US-Mexico talks on a separate track. Mexico’s tariffs on China and other Asian countries with which it does not have a trade deal take effect Jan. 1.

• Regardless of the SCOTUS ruling on IEEPA, Canada and Mexico face high sectoral tariffs, including 50% on steel and aluminum. Canada also seeks to negotiate over lumber, which received new Sec. 232 tariffs effective from October.

• Both Mexico City and Ottawa see time as on their side with impending US midterm elections.

China:

As part of the trade agreement announced following the Trump-Xi meeting in Seoul, reciprocal tariffs on all products were reduced from 34% to 10%, with some exclusions. Further, the US reduced the additional tariff on China for its involvement in the fentanyl trade from 20% to 10%.

• Sec. 301 and 232 tariffs add to the effective overall rate China is assessed for exports to the US and is estimated to be anywhere from 39.2% to 47.5%.

• China agreed to purchase 12 million metric tons of soybeans by the end of 2025 (though is unlikely to do so before end of February 2026) and 25 million tons in 2026 and 2027. China’s compliance record is not encouraging, and it is uncertain whether it will buy other ag products in bulk, e.g., wheat and barley.

• China suspended expansive control measures on exports of rare earths and began selectively issuing general export licenses. China retains the right to review rare earths end users and indicated it will critically eye exports to what it deems as defense and security-related companies.

• The US suspended until Nov. 10, 2026 the implementation of the interim final BIS “Affiliates Rule.” In return, China suspended retaliatory non-tariff countermeasures taken since Mar. 4, 2025.

• The US intends to grant licenses for Nvidia H200 chip sales, a significant loosening of tech export controls.

• Both sides will suspend certain trade investigations and provide exclusions for previous trade actions.

The EU:

A framework deal was announced Aug. 21, with Washington implementing Sep. 25 a 15% tariff rate for most goods (retroactively effective Sep. 1) including aircrafts/parts and autos/parts (the latter retroactively effective Aug. 1).

• Friction remains over EU tech/digital regulations; Washington wants Brussels to roll back legislation in order for the US to reduce steel and aluminum tariffs. The USTR Dec. 16 called out nine major European countries it said has benefitted from “expansive” US market access and threatened, “If the EU and EU Member States insist on continuing to restrict, limit, and deter the competitiveness of U.S. service providers through discriminatory means, the United States will have no choice but to begin using every tool at its disposal to counter these unreasonable measures.”

• Relief in other sectoral tariffs including pharmaceuticals is yet to be implemented and remains part of ongoing negotiations.

• Other issues challenge talks (e.g., agricultural access, industrial subsidies, carbon border adjustments).

• Major EU investment commitments ($600 billion including defense procurement and $750 billion in energy purchases) lack timelines and enforcement.

The UK:

The UK was the first country to read a deal. Implementation of the deal resulted in 10% baseline tariffs (no additional reciprocal tariffs).

• It benefits from lower Sec. 232 tariffs on steel and aluminum of 25% compared to 50% for other countries (though the original deal suggested an even lower rate). UK autos saw the tariff rate drop from 25% to 10% for the first 100,000 cars exported annually and 10% for parts.

• But recent tensions over digital and food safety rules threatened to delay final action on the deal. The US also suspended a portion of the UK’s favorable treatment (the tech MoU from September).

Japan:

An initial framework deal was reached July 22. Follow-up talks produced a Sep. 4 executive order (EO), under which the 15% tariff rate was retroactively effective from Aug. 7. The EO also set the 15% tariff rate for autos/auto parts.

• Sectoral tariffs for other key industries including steel, aluminum, and copper remain high at 50%.

• The $550 billion investment pledge, frequently highlighted alongside South Korea’s $350 billion commitment in White House press releases, remains in flux. Trump’s meeting with Prime Minister Takaichi on the APEC sidelines produced some insight on general buckets, and the first meeting of the bilateral committee to determine specific projects (which require Trump’s final approval) convened last week. Importantly, it is unclear how Tokyo would finance the full $550 billion. Japan’s economy contracted 1.8% from July to September facing tariff strain, and there is no clear government vehicle resourced to make such purchases beyond reports that the Japan Bank for International Cooperation and Nippon Export and Investment Insurance will be heavily involved.

South Korea:

The trade deal secured tariff relief (including auto tariffs cut from 25% to 15%) in exchange for massive investment commitments totaling $350 billion ($200 billion in cash and $150 billion in shipbuilding). But like Japan, certain sectoral tariffs remain high (e.g., steel, aluminum, and copper at 50%).

• Seoul secured concessions that Japan and the EU did not – e.g., a $20 billion per year cap on disbursements and a foreign exchange stability clause.

• It is unclear whether Seoul can sustain these investment commitments. It must balance rising defense spending and large-scale AI and semiconductor investments while channeling capital abroad. Domestic politics add risk, with the National Assembly debating whether the $350 billion MoU requires formal parliamentary ratification.

• The $150 billion MASGA (Make American Shipbuilding Great Again) program remains the least-defined component of the deal and exceeds current US shipbuilding demand; $150 billion would approximate the capacity of an entire major Korean shipyard group. Seoul agreed to provide loans, financing guarantees, and private-equity investments to US yards, with profits shared 50-50 until initial cost recovery. A bilateral investment committee will approve individual projects (Washington will have substantial input into allocation of funds). However, Seoul assumes that a future US administration could revisit the agreement after January 2029, so it is pacing its obligations.

India:

In addition to 25% IEEPA tariffs, the US added a 25% tariff on exports from India in August, citing India’s purchases of Russian oil. Bilateral negotiations gained momentum with Indian officials eyeing a deal before the end of the year. US delegations traveled to New Delhi for talks Dec. 9- 11, and Trump spoke with Prime Minister Modi Dec. 11.

• The outlook for a deal remains uncertain, with the White House recently threatening anti-dumping tariffs on rice from India as Washington faces pressure over a struggling agriculture industry.

• Meanwhile India has focused on diversifying its trade ties, concluding deals with the UK, Oman, and New Zealand this year, with talks progressing with the EU as well.

Indonesia, Malaysia, and Vietnam:

• Indonesia reached a framework for further negotiations in July, which also lowered the reciprocal tariff rate to 19% effective from August. Since then, talks continued towards finalizing an actual deal but met some bumps, with Washington earlier this month noting that it was concerned Jakarta was “backtracking” on prior commitments. Indonesia’s lead negotiator Hartarto met with USTR Greer in Washington Dec. 22 and said Trump and Indonesian President Prabowo are expected to sign a finalized deal in January.

• Malaysia also has a 19% reciprocal tariff rate effective since August but with exceptions. In October, Washington and Kuala Lumpur signed a trade agreement that holds 19% tariff on some products but slashes the rate to 0% on others (either immediately or over several years depending on the product). The agreement requires several legal and other regulatory changes from Malaysia, and the deal does not enter into force until 60 days after both governments notify that they have completed such changes.

• Vietnam similarly reached a framework deal for further negotiations in October, which maintains its 20% tariff rate from August on some products and identifies others to receive a 0% rate from a September proposed list. A final deal is yet to materialize, with talks ongoing around Vietnam purchases of US defense exports, issues related to transshipment of Chinese products, and preferential market access for US goods. On Dec. 20, Hanoi replaced Vietnam’s trade minister, who was overseeing the US trade talks. (The National Party Congress runs Jan. 19-25).

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Most notably, the top risk for 2026 originates from the US itself.

• Washington’s diminished capacity and retreat from international fora continue to weaken its own global standing and undermine international efforts to address key global commons challenges (e.g., conflicts and related migration, pandemics, poverty, natural disasters and other climate change effects). China and Russia exploit the vacuum, particularly in the Global South.

• The Trump administration’s overhaul of trade and security policies and interference in other nations’ sovereign affairs, especially in favor of populist parties in elections, further encourages allies to diversify ties and invest in self-reliance.

• The shift to focus on Latin America (instead of Asia and Europe) escalates tensions with Venezuela and expands the antidrug campaign, with potential for spillover effects to strain ties with Mexico, Colombia, or other parts of the region.

• Continued deployment of security forces and immigration raids raises the domestic temperature and risks political violence and social unrest.

• US protectionism, unpredictable trade policy, and restrictive immigration policy result in performative deals, blows to key sectors (e.g., agriculture), and inflationary pressures in the US economy. Other countries may be enticed to retaliate with their own protectionist policies.

Partners in Asia (e.g., Taiwan, Japan, and the Philippines) may suffer as the US makes concessions towards an underwhelming Trump-Xi summit.

• The Trump administration’s treatment of strategic exports and other traditional security domains as levers in trade negotiations will be exploited by Beijing to gain concessions – possibilities could include further loosening of high-tech export controls, delaying arms deliveries to Taiwan or preventing politician stop-overs, or reducing US monitoring in the South China Sea.

• Allies seek to diversify ties; failure to reach a trade deal with India and increasing pressure over its oil purchases from Russia could push New Delhi away from Washington and towards Brussels, Tokyo, Moscow, and others.

Conflict and destabilization in Europe and the Middle East continue from Russia and Israel, respectively.

• The conflict in Ukraine continues without a credible path to long-term peace, and Russia keeps it foot on the gas of its destabilization campaign (hybrid attacks, election interference). Drone incursions and other escalations challenge NATO deterrence efforts. Europe works to fill the defense assistance gap left by the US though it is challenged by fiscal constraints and domestic political pressures (especially as far-right, Euroskeptic parties, emboldened by Trump, mount election challenges).

• Israel will probably initiate further military action against Iran and/or Hezbollah in Lebanon ahead of elections in October that could unseat Prime Minister Netanyahu. The ceasefire in Gaza remains fragile and follow-on talks have stagnated. Saudi Arabia and the GCC seek to deepen defense, trade, and investment ties with the US (especially on advanced AI chip imports) while lobbying Trump to restrain Israeli regional escalation after the shock of Doha strikes.

Disruption is the central theme facing the global economy and the digital and green transitions.

• Global growth faces a modest slowdown and is uneven – arising from AI (investment, productivity gains) and industrial renaissance (investment in manufacturing, infrastructure, energy, supply chain resiliency, and defense) upsides meeting headwinds from high sovereign debt, trade tensions, labor and supply shocks, and policy uncertainty.

• Rapid AI growth continues, driving energy and minerals demand, investment (and debt) related to data centers and other AI infrastructure, and labor market uncertainty. The US deregulation stance stymies global AI safety efforts. AI tools combined with cybercrime-as-a-service marketplace may exacerbate cyberattacks on critical infrastructure and other targets.

• Climate change is an undervalued and persistent risk, with climate financing and legislative efforts further undermined by the US and far-right movements. Private and public investments increase in natural gas as a “bridge fuel.” The green and tech/digital transitions raise competition for critical minerals and natural resources (supply chain concerns maintain reshoring and friendshoring efforts). Increased energy demands further hinder environmental regulatory efforts around mining and electricity generation — though note increased deployment of renewables persists, particularly in China, as costs continue to fall.

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Welcome back to the TSG Issue Brief, where we take an in-depth look at geopolitical and economic trends. Jessica Yoon thoroughly examines the trends shaping the growing role of the renminbi and offers an outlook for its continued rise but cautions it is still constrained as a replacement for the US dollar.

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Geopolitical tensions, US protectionist policies, Western financial sanctions, and China’s desire to be a more consequential player in international financial affairs have accelerated China’s push to promote the renminbi (RMB) as a global currency and reduce international reliance on the US dollar (USD) and Western financial systems. Beijing’s efforts to internationalize the RMB coincide with a broader “de-dollarization” trend that China also seeks to exploit. Concerns over existing and potential US-led sanctions (e.g., those targeting Russia after the Ukraine invasion) have prompted many countries to seek alternatives to the USD to insulate themselves from US financial pressure. Sanctioned states and their partners have increasingly turned to local currencies and alternative payment systems. Russia’s exclusion from SWIFT spurred greater use of China’s RMB for bilateral trade, lifting the RMB’s share of global trade finance from under 2% before 2022 to 6.1% in 2025 (still a distant second to the USD at 83%).

To expand its global footprint, Beijing has promoted RMB trade invoicing, extended currency swap lines, built payments infrastructure, and launched a digital currency. It has also leveraged international forums such as BRICS to advocate trade settlement in local currencies, not only promoting the RMB but also marketing local currency use as part of a broader strategy to erode USD dependence across emerging markets. At the same time, volatility in US policies has undermined confidence in the USD, bolstering interest in currency diversification and aligning with China’s strategic goal to reduce its own USD dependence and expand the RMB’s global use. Beijing has explicitly advocated a more multipolar international currency order, positioning the RMB’s rise as a linchpin of that vision.

But wider adoption of the RMB remains constrained; it ranks 4^th among global payment currencies at 3.79% after the USD (50%), EUR (21%), and GBP (6.9%). China’s strict capital controls, limited financial transparency, and the absence of safe and transferable RMB-denominated assets for international investors continue to impede its full globalization, leaving the USD still dominant.

Surge in RMB trade settlement and payments

China has rapidly expanded RMB use in cross-border trade settlement. In the first quarter of 2023, the RMB overtook the USD in China’s trade transactions for the first time, with 53% of China’s cross-border trade settled in RMB vs. 43% in USD, a reversal from a decade prior when the USD made up more than 80% of China’s trade payments. This shift has been fueled by China’s trade partners (especially in Asia, Africa, and sanctioned states) accepting RMB for exports to China, as well as Beijing’s encouragement of RMB invoicing for imports. (RMB settlement now accounts for about 26% of China’s goods trade, up from 15% before 2022.) Energy trade is also slowly diversifying – Gulf oil exporters, most notably Saudi Arabia, have discussed pricing oil in RMB as China becomes a top buyer, with Beijing strengthening its financial ties through a $7 billion currency swap agreement with Riyadh.

While the RMB’s overall share of trade finance remains modest, its rise to the second-most-used trade finance currency has been exponential, and its growth is expected to continue as more emerging economies integrate with China’s financial infrastructure. Much of the growth stems from China’s Global South trading partners opting to settle trades in RMB, especially where Western banks have withdrawn or where USD costs have risen. More non-Western countries, including Argentina and Brazil, are using RMB for imports from China and even some inter-regional trade.

While the RMB’s international use is expanding, the USD remains unchallenged as the dominant reserve and settlement currency. Chinese companies and banks, with the encouragement of Beijing, policymakers, have nonetheless embraced the RMB for international dealings. The share of Chinese non-bank companies’ cross-border transactions conducted in RMB surged to about 50% in 2023, reflecting both policy incentives and the RMB’s growing acceptance abroad. Major state-owned enterprises have been instructed to favor RMB in contracts where feasible. Meanwhile, foreign central banks have increasingly signed currency swap deals or established RMB clearing accounts, including Brazil ($27.7 billion) and Thailand ($9.7 billion) in 2025, making it easier for their local firms to invoice and pay in RMB. These trends show the RMB carving out a role as the leading non-dollar currency for trade, particularly in the Global South, even as the USD remains dominant worldwide.

Financial infrastructure: CIPS and swap lines bolster RMB use

China has constructed a financial infrastructure to support greater RMB use internationally. A pillar of this effort is the Cross-Border Interbank Payment System (CIPS) – China’s alternative to -based networks like SWIFT (financial messaging) and CHIPS (dollar clearing). CIPS, launched in 2015, allows banks worldwide to clear and settle payments in RMB. The network has expanded steadily: by 2024, CIPS had 168 direct participant banks and 1,683 indirect participants across 119 countries, a 20% increase in participants from the year prior. Notably, 76% of new CIPS members in 2024 were overseas banks, indicating rising global connectivity to China’s system. CIPS handled a record 8.2 million transactions in 2024 (up 24% yoy) as more banks routed cross-border payments through the RMB network.

CIPS cleared $24 trillion in total transaction volume in 2024, a 43% increase from 2023. While still much smaller than SWIFT/CHIPS (which handles about $1.8 trillion per day in dollar payments), CIPS’s rapid growth underscores its rising importance. Critically, CIPS provides an alternative messaging and settlement channel insulated from potential Western sanctions. Its use spiked after Russian banks were barred from SWIFT in 2022. In addition to using Russia’s own alternative, SPFS, Russian institutions shifted a large volume of payments onto CIPS, contributing to a 21% increase in CIPS settlements that year. China has promoted CIPS as a neutral platform, with dozens of regional banks joining to facilitate RMB clearing (e.g., African Export-Import Bank, the Central Bank of the UAE, Bangkok Bank).

Another key tool is China’s extensive network of bilateral currency swap lines. The People’s Bank of China (PBOC) has swap agreements with the central banks of over 30 countries, totaling roughly $590 billion in swap facilities. These allow foreign central banks to exchange their local currency for RMB, providing liquidity to local banks and importers for RMB-denominated trade. Since 2009, China has steadily expanded these swaps to support trade settlement in RMB; it is also being used as a form of emergency lending (e.g., including to markets during COVID-19 disruptions). Beijing has used swaps and direct loans to act as a “lender of last resort” in RMB. In recent years, China extended sizable RMB liquidity support to distressed borrowers to help them avoid default and keep projects financed; in April, for example, Argentina renewed a $5 billion portion of a yuan swap line. This has the dual effect of encouraging greater RMB use in those countries and laying groundwork for the RMB as a reserve currency in their central banks. China is leveraging its financial ties – through swap lines, development loans, and the Belt and Road Initiative (BRI) – to internationalize the RMB by embedding it in trade, finance, and aid relationships.

The digital yuan and fintech pathways

China’s embrace of financial technology is providing new avenues to promote the RMB globally. Foremost is the digital yuan (e-CNY), China’s central bank digital currency (CBDC). The e-CNY, still in the pilot phase, is the world’s largest CBDC project. By mid-2025, cumulative e-CNY transactions reached $7.3 trillion across over 29 cities. The $6 trillion increase in volume yoy reflects rapid adoption in domestic retail use, including sectors ranging from transit fares to government stimulus payments. While primarily focused on internal use and financial inclusion, China has begun testing cross-border payments with digital yuan in collaborations like Project mBridge. These pilots aim to enable instant, low-cost transfers between countries using CBDCs, potentially bypassing traditional correspondent banking networks. A successful rollout could make it easier for foreign businesses and tourists to use RMB digitally without Chinese bank accounts, thus expanding RMB usage abroad. (Meanwhile, the Trump administration has discouraged progress toward a US digital dollar; Trump’s 2025 “Strengthening American Leadership in Digital Financial Technology” executive order and the “Anti-CBDC Surveillance State Act” prohibit federal efforts to issue or promote a US CBDC.)

Beijing is promoting the digital yuan as a hedge against US-controlled payment systems. A digital RMB widely used in cross-border payments (e.g., BRI projects or through overseas Chinese firms) could reduce exposure to SWIFT or dollar clearance networks, offer an alternative for global transactions, and lower costs (e.g., reduce the compliance and correspondent-banking costs embedded in other networks).

However, significant barriers remain before the digital yuan can meaningfully chip away at the USD’s role – including achieving interoperability with other systems and building trust in its security and privacy features. Still, China’s head start in launching a usable CBDC (most major economies are far from issuance) positions the RMB to gain a first-mover advantage in the future digital currency landscape. Alongside the e-CNY, Chinese payment platforms (e.g., UnionPay, WeChat Pay) are expanding abroad, and new multilateral digital payment projects (e.g. African and ASEAN QR code networks) are connecting with China’s systems – developments that could incrementally boost RMB-based transactions over time.

Across the fintech industry, Chinese companies are pushing for RMB-pegged stablecoins to promote wider RMB use abroad. Hong Kong’s 2025 stablecoin regulatory framework may allow fully-reserved stablecoins pegged to the offshore yuan (CNH). Firms like JD.com and Ant Group have applied for Hong Kong stablecoin licenses and are lobbying Beijing to authorize CNH-backed stablecoins, seeing these as useful for e-commerce and trade settlement. Their push reflects concern that USD stablecoins like USDT have gained traction with Chinese exporters (over 99% of global stablecoin volume is USD-denominated), and without yuan alternatives, USD-pegged stablecoins could become the default for cross-border digital transactions and further reinforce USD reliance. An offshore yuan stablecoin could facilitate 24/7, low-cost transactions outside traditional banking – complementing the official e-CNY by serving overseas merchants and investors who require a freely transferable RMB token. If approved, a CNH stablecoin could bolster yuan usage in digital commerce networks that currently default to the USD. Together, China’s digital currency initiatives, payment networks, and swap lines form a multi-layered strategy to chip away at dollar infrastructure and promote the yuan as a viable alternative.

RMB in regional frameworks: BRICS+, BRI, and bilateral deals

Beijing is also leveraging regional blocs and partnerships to broaden RMB usage, especially among countries seeking an alternative to Western-led systems. In the BRICS+ circle (Brazil, Russia, India, China, South Africa, Saudi Arabia, Egypt, United Arab Emirates, Ethiopia, Indonesia, and Iran with additional partners), the yuan’s profile has grown markedly. Trade between China and sanctions-hit Russia is now overwhelmingly conducted in local currencies; by 2024, more than 95% of the transactions were settled in yuan and rubles, and China-Russia trade reached a record $237 billion, a 3% growth year-on-year. Over 40% of daily FX trading volume on the Moscow Exchange is now in yuan, surpassing the USD’s share, and by late 2023, Russian banks held more yuan ($68.7 billion) than USD ($64.7 billion) in deposits. Other BRICS members are also exploring greater RMB use. Brazil signed a pact in 2023 to settle China trade in yuan and reais, establishing a yuan clearing bank in Brazil, and Indian refiners have used yuan for Russian oil purchases. Such moves reflect a broader interest among major emerging economies to reduce USD reliance. Leaders openly endorsed using non-dollar currencies for trade at the 2025 BRICS+ summit.

The BRI is another major conduit for RMB internationalization. China increasingly issues loans and contracts in RMB for BRI infrastructure projects, shifting away from USD funding to minimize currency risk. Many BRI partner countries now hold RMB obtained from project disbursements and trade, which they can use to import Chinese goods. To support this, China set up RMB clearing arrangements across the developing world. For example, a clearing bank and swap line enable Pakistani importers to pay China in yuan. Pakistan in 2023 made its first-ever oil import payment in RMB (buying discounted Russian crude) to conserve USD. While the USD finances the bulk of BRI transactions of up to 75%, the trend toward RMB-denominated projects is growing, creating regional pockets of yuan liquidity.

RMB and commodities

The RMB is now more significant in global energy trade. China, the world’s biggest oil importer, is gradually shifting some oil and gas purchases into RMB. Russia and Iran accept yuan for much of their oil exports to China, with Chinese buyers paying for Iranian crude in RMB via small banks. Iran uses those RMB proceeds to purchase Chinese goods or invest in China, as the currency is not widely accepted elsewhere. In 2023, the UAE completed its first LNG trade with China in RMB through the Shanghai Petroleum and Natural Gas Exchange. This was followed by talks between Saudia Arabia and China on pricing a portion of oil sales in RMB instead of USD – a move that, if realized, could mark a significant shift from the Petrodollar system toward a “Petroyuan” framework.

Additional efforts to circumvent Western sanctions and USD oversight include China and partners reviving barter trade mechanisms for commodity deals, a significant return of Cold War-style exchanges. In August, officials and businessmen in Moscow and Beijing began drafting plans for commodity barter deals – e.g., steel and aluminum in exchange for engines – to avoid payment clearance delays and exposure through conventional financial channels. Barter trade, by definition, sidesteps currency use entirely, but it highlights the lengths China and partners are exploring to reduce dependence on Western-controlled financial systems. If implemented, barter deals will be niche transactions, but they could reinforce broader efforts (RMB settlement, greater use of local currency, small local banks, CIPS, etc.) to make trade sanctions-resistant.

Outlook: Incremental gains, no imminent replacement

The RMB’s internationalization is clearly advancing. In trade, finance, and technology, the groundwork laid by Beijing is boosting the RMB’s global usage, and the RMB is now the leading non-Western currency in cross-border trade. China’s ability to offer an alternative development model – through initiatives like BRI funding in RMB and emergency lending – further promotes use of its currency. Over time, if these trends continue, more of the world’s commerce and financial flows are likely to be settled in RMB, reducing (at the margins) the ubiquity of the USD.

However, Beijing’s policy choices impose fundamental structural constraints on the RMB’s internationalization. China maintains tight control over capital flows and the exchange rate, prioritizing domestic financial stability over full currency convertibility; this limits foreign demand for RMB assets. China’s currency is not widely convertible, and its financial markets lack the depth and openness of those in dollar economies. China must offer broad, liquid markets and strong legal protections – areas where it needs progress to further internationalize the RMB, but there are no signs Beijing will accept the risks of a freely floating RMB or fully liberalized capital account. (Watch for some signs of increased openness in the 15^th Five Year Plan set to begin in 2026.) Without those reforms, the RMB cannot become a true global safe-haven currency. Additionally, China’s recent economic troubles (slowing growth, property sector strains) and authoritarian governance may deter foreign investors from holding RMB long-term. China’s reluctance to open its tightly managed financial system remains a key obstacle to building international confidence.

The USD’s dominant position remains secure for the foreseeable future. The US currency still underpins the bulk of global reserves, debt issuance, and payment networks. No other economy – including China’s – offers the same combination of economic size, market credibility, rule of law, and currency stability that undergirds the USD’s status. Even as strategic competition spurs efforts to diversify away from the USD, the network effects and trust in the dollar-built system are hard to undo. In practice, the RMB’s rise parallels rather than replaces the existing order, supplementing it by providing additional currency options and contributing to a slow diversification of currencies in trade and reserves. But even if the RMB is not a near-term competitor to USD’s status as the global reserve currency, the fact that it increasingly facilitates an ecosystem that is separate from the US and Western financial architecture is strategically significant. As an alternative trading and settlement currency, especially for sanctioned states or countries seeking to hedge against US financial pressure – including through tariffs increasingly used as punitive tools – the RMB’s role is expanding. This trend reflects and reinforces the broader push for trade and currency diversification, with China’s pre-existing financial architecture making the RMB a leading non-Western option despite its structural drawbacks. The RMB’s trajectory is continuing upward, with its internationalization representing an emerging parallel to USD dominance – one that reflects an evolving multipolar economic landscape even if the USD-led system remains predominant.

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Welcome back to the TSG Issue Brief, where we take an in-depth look at geopolitical and economic trends. In this Issue Brief, Fritz Lodge explains how new US sanctions are a first step toward Trump finally starting to follow through and threats to apply new pressure and force Russian President Putin to the negotiating table. Notably, this shift is partially the result of a new and more effective Trump-management strategy by Ukrainian President Zelensky and European leaders. However, the sanctions don’t go into effect until Nov. 21 and Trump may yet walk back these measures.

This article originally appeared in Policy Magazine on November 6.

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In few areas of U.S. foreign policy has the “TACO” (Trump Always Chickens Out) meme been so apparent as with Donald Trump’s relationship with Russian President Putin.

The U.S. President has, time and again, parroted Russian talking points about the war in Ukraine, disparaged Ukrainian President Zelensky, and sought bilateral peace deals with Moscow over the heads of Zelensky and European leaders, only to be rebuffed by Putin’s intransigence. Trump then turns to threats of sanctions and increased support to Ukraine (notably mooting deliveries of Tomahawk cruise missiles) to force Russia to the table. He repeatedly fails to follow through on those threats.

However, this dynamic is now finally shifting as Trump’s apparent frustration with Putin appears to have reached a boiling point. After cancelling a planned summit with Putin in Budapest, the Trump administration announced significant new sanctions on October 22 against Russia’s largest oil majors, Rosneft and Lukoil (sanctions now cover roughly 75% of Russian oil production). These measures don’t come into effect until November 21, and their impact will depend on enforcement, but they do mark a new willingness to impose real costs on Moscow for its failure to negotiate in good faith. That willingness – in combination with continued US weapons sales and battlefield support – underlines a strikingly positive shift from the disastrous Trump-Zelensky Oval Office meeting in February, when Trump appeared ready to abandon Ukraine.

What’s changed? First, Zelensky and European allies have learned how to appeal to Trump’s better instincts and manage down his worst. Second, Trump appears to be learning that he has less leverage over Ukraine than he first believed and must increase leverage over Russia if he hopes to force any concession from Putin.

Recent reports that Kyiv and European allies are working on a “12-point” peace proposal underline the first observation, less for the substance of the plan than for showing how the Trump management strategy of Zelensky and European leaders has improved since February. Three thoughts underscore this dynamic:

1. The reported proposal of a “Peace Board” chaired by Trump demonstrates a stronger understanding in Kyiv and European capitals of the need to play to Trump’s ego (with a nod to Trump’s 20-point Gaza peace plan) and place him at the center of any peace effort (playing to his obsession with the Nobel Prize). This builds on previous efforts to appeal to Trump’s priors (e.g., flattering him with a summit of European leaders in Washington after the Trump-Putin Alaska summit, Ukraine signing a critical-minerals deal that matches his transactional instincts.

2. The plan’s preemptive appeal to Trump’s desire to play peacemaker (as well as Ukraine’s loud and repeated commitments to agree to a ceasefire) puts Kyiv and European leaders on an inside track against Putin, forcing him to either agree to reasonable confidence-building measures or prove he has no intention of ending, or even pausing, the war. For example, Russia’s rejection, again, of Trump’s ceasefire proposal helped lead to the cancellation of the Trump-Putin summit in Budapest.

3. Perhaps most important, Europe’s sustained and growing practical military and financial support to Ukraine reduces Trump’s leverage to force Ukraine into a bad deal. (The failure to agree to a €140 billion loan for Ukraine backed by frozen Russian assets shows there are some limits to this support, but the trend remains). Even if the U.S. decides to abandon Ukraine, it likely could maintain its war effort, with Europe able to backfill much of U.S. support. Key intelligence, reconnaissance, and logistical support may be exceptions, but Europe is reportedly moving to fill even some of these gaps.

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While Trump is always susceptible to Putin’s influence – demonstrated by his pre-bilateral call with Putin and subsequent repetition of Russian talking points during his October 17 meeting with Zelensky – Ukraine and its European leaders are now better able to counteract this influence. This erects a much stronger backstop to the risk of a U.S.-Russia deal that cuts out Ukraine and Europe.

The second factor influencing the Trump administration’s shifting policy comes more from a slow recognition of two fundamental realities than any change in facts on the ground. While Russia’s possible capture of the city of Pokrovsk in the coming days would be a blow to Ukraine, it would not be likely to significantly change the course of the war.

1. Trump’s initial conviction that Russia is destined to win the war and that Ukraine doesn’t “have any cards” without US support is simply wrong. Ukraine has suffered terribly and faces serious constraints (most notably on manpower), but there is no indication that it is losing the war. To the contrary, this year’s Russian offensive has fizzled out with only marginal gains while Ukraine has inflicted significant losses on Russian forces (over 100,000 soldiers dead this year alone) and brought the war home to Russia with strikes on refineries that have spurred gas shortages. (As I wrote recently for Policy, the Kremlin’s propaganda campaign stating that Russian victory is inevitable in fact suggests a certain level of concern in Moscow about realities on the ground).

2. The U.S. does not have sufficient leverage to force Kyiv accept an agreement on Russia’s terms, which would essentially threaten the existence of an independent Ukraine. On the flip side, Trump’s belief that his personal relationship with Putin and tendency of bowing to nearly every Russian demand would coax the Kremlin into a workable peace deal has also been proven wrong.

All things being equal, Putin seems unlikely to back down from his maximalist war aims (which include the demilitarization of Ukraine and replacement of its government with pro-Russian proxies). Three years into the war, he has not only staked the legitimacy of his regime on winning this conflict but also transformed much of the Russian economy to support the war effort while cannibalizing civilian industry; backing down is now not only a politically difficult but economically painful prospect. The only way to bring Putin back to ceasefire and peace negotiations on terms that offer any hope for success is to build additional leverage by further damaging oil revenues and bolstering Ukraine’s military to prove that Russia cannot win on the battlefield. The new sanctions demonstrate that the Trump administration is now closer to recognizing this fact. It is a positive departure from Trump’s early strategy of only carrots for Putin and sticks for Ukraine, but this new strategy will require commitment and patience to work.

For the measures to have teeth, Trump must not only fully implement the sanctions on November 21, he must also follow through on secondary sanctions threats targeting additional entities within the major purchasers of Russian oil – notably China, India, Turkey, the UAE. Without such enforcement, importers of Russian oil will quickly develop workarounds to the new sanctions. Comments following Trump’s meeting with Chinese President Xi – the largest purchaser of Russian oil – at the APEC summit in South Korea suggested that Trump is unlikely to follow through with major secondary sanctions on China, but ratcheting up pressure on other buyers like India and Turkey could still have an effect.

Importantly, the new oil sanctions should also be married with enhanced military support for Ukraine. European purchases of U.S. weapons for transfer to Ukraine and talks on a deal to exchange Ukrainian drone technology for US weapons purchases are positive signs. For more immediate effect, the Trump administration could loosen restrictions on the use of U.S. and European long-range strike weapons inside Russia. (Trump has decided against sending Tomahawks, but this issue was largely a red herring, there are a number of other suitable long-range systems).

It remains possible that the TACO meme will once again reassert itself if Trump backs down from sanctions threats after another call with Putin in which the Russian president reasserts his influence or makes more empty promises. That would be an unfortunate development that only delays real peace talks and extends the war. But it does now appear, at least, that Ukraine and European allies have developed the means to push back and tell their own story.

This article was originally published in Policy magazine. To view the original article, click here.

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Donald Trump’s Gaza ceasefire and hostage deal carries all the optics of a branding reset for a president whose second-term trademark so far has been one of doubling down on belligerence, not peace. What substantive impact this will have on events at home and abroad remains an open question.

The 20-point deal between Israel and Hamas signed in Sharm el-Sheikh, which picked up the outline of President Joe Biden’s January agreement that the parties would not implement, is a welcome break in the cycle of Mideast violence. Its value will be tested by time and the unpredictability of the regional actors.

While its peacemaking currency is belied by Trump’s autocratic gamesmanship and militarization of U.S. cities at home, the deal could provide Trump with an inflection point from which to pivot from being a source of chaos to a stabilizing influence in global affairs. At this writing, there is no evidence that the U.S. will return to such a role and little reason to believe Gaza has predictive value for managing the inevitable next crisis.

In the early days of the Trump administration, we identified three systemic risks of Trump 2.0 that marked a qualitative shift in policy from Trump’s first term. These were: 1) the risk of US debt repudiation if Congress has not acted, 2) the risk of manipulation of federal data, and 3) the risk to rule of law if Trump repudiates Federal Court rulings.

The lack of confidence in Trump and his senior ranks is now a settled fact in the conduct of global policy. The U.S. is neither believed nor trusted.

The debt repudiation risk has morphed into a government shutdown that reveals a great deal about the depth of US dysfunction and polarization. All these dangers compound what we had described as diminished capacity of governance: from drastic reduction in public health research and disease prevention to unprecedented cuts in the federal workforce that are undermining basic program functions.

The US reaction to an international crisis that is neither self-initiated (e.g., tariff escalation) nor optional (e.g., Russia-Ukraine, Gaza, Iran peace efforts) has been previewed by the confused and much diminished response to domestic natural disasters. The cuts to early warning capabilities of the National Weather Service and politicized and diminished reactions of FEMA presage what will happen when an unexpected security, health, or natural disaster confronts a curtailed intelligence early warning system and a dearth of international expertise across issues.

Several important features of Trump’s operating style that carry extraordinary risks for crisis management have emerged in the past eight months:

1) Officials Without International Stature. There is a stunning and near-universal lack of personal history, experience, or professional connections among top Trump appointees in the three domains where we have spent our professional careers: economic and energy policy, national security and defense, and intelligence. With the exception of former Senate Foreign Relations Chair Rubio and – to a lesser extent – Trump 1.0 veteran and current CIA head Ratcliffe, no cabinet official and few subcabinet choices have any significant experience or network in international relations and little prior government experience.

People are policy, and the fact that the top tier of Trump officials lacks a reservoir of shared experience, cooperation, and trust with allies and adversaries powerfully undermines their position in trade talks, security conversations, and intelligence tradecraft. The shared experiences of American and foreign experts were the connective tissue that allowed the US to weather and play a coordinating role in the financial crises of ’97 and ’08, after 9/11, and in realms as diverse as monetary policy coordination and antiterrorism. Nothing builds confidence more than shared experience in solving problems, whether that is a collision between American and Chinese military aircraft or coordination in releasing Strategic Petroleum Reserve (SPR). No one at senior levels in Trump 2.0 enjoys that goodwill.

2) No Process, Only Personalities. In an ironic reversal of the famous Henry Kissinger quote, “Who do I call when I want to speak to Europe?”, foreign officials have repeatedly registered their frustration about who they should speak with in the American system and whether they can trust what they are told when they do. This uncertainty is compounded by Trump’s preference for “special advisors” for the most crucial policy decisions. As a consequence, even Secretary of State/NSC Director Rubio is often left unaware of key policy actions within his responsibility. The preference for special advisors undermines executive agencies and embassies, weakening trust at high working levels.

Adding to this confusion, Trump has repeatedly made clear he is the sole (and reliably mercurial) decider on key issues, meaning even the special advisors cannot entirely be trusted to represent US policy. For example, recall Trump’s acquiescence to (and eventual coordination with) Israeli strikes on Iran just days before Special Envoy Witkoff was preparing to return to talks.

3) Course Correction Is Not Possible. This lack of confidence in American policymakers is not solvable within Trump’s governance style, for two reasons that pose a particular and growing risk to crisis management:

First, Trump delights in fostering competition and uncertainty within his team – a product of both his business behavior and reality-show persona. This “scorpions in a bottle” model has decayed into threats and physical contests, but the day-to-day result is uncertainty and lack of coordination. Cabinet and deputies’ committee meetings, as well as NSC gatherings, virtually never occur – except for theatrical purposes. The president has stopped relying on the CIA’s President’s Daily Brief, preferring to canvass a small group of confidants. If there are one or more shocks to the system, this Fight Club style among principals means habits of resilience and cooperation simply do not exist in a system where distrust is endemic and all choices are made at the top.

Second and most important to crisis management, no decision matters until Trump has his say and any of his decisions can have a short shelf life. From disposition of the TikTok matter to Mideast peace or Ukraine, the need for Trump’s approval – and his willingness to change direction – invites exploitation by adversaries and reduces trust and the instinct to cooperate among America’s closest allies. Those countries observe Trump’s contest of wills with the Fed, his inconsistent industrial policies, and his indifference to ground truths in international relations and conclude (as one senior allied official told us) “Nothing anyone other than Trump says matters and what he says can change without notice.”

The lack of confidence in Trump and his senior ranks is now a settled fact in the conduct of global policy. The U.S. is neither believed nor trusted. American policy and political leadership have moved from the ultimate source of ballast and stability in the global system — Madeleine Albright’s “indispensable nation” — to the largest single source of risk.

The cost of that transformation won’t be fully metabolized by markets until an unpredictable event shatters the remaining illusion of U.S. credibility. We cannot recall any two-year period in the past half-century when an emergency of some sort didn’t intrude on policy expectations. And in a context of pre-existing chaos, every crisis becomes a polycrisis.

This article was originally published in Policy magazine. To view the original article, click here. Thumbnail graphic sourced from the Pew Research Center.

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Welcome back to the TSG Issue Brief, where we take an in-depth look at geopolitical and economic trends. In this Issue Brief, Fritz Lodge explains why the persistent myth of the inevitability of Russian military success is false and how Russian efforts to push this narrative may signal weakness, not strength.

This article originally appeared in Policy Magazine on September 19.

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More than a month after the Donald Trump-Vladimir Putin summit in Alaska, the path to a negotiated settlement of the war in Ukraine appears more distant than ever.

Russia continues its current offensive against Ukrainian targets (recently launching several of the largest aerial attacks of the war). Its unprecedented drone incursion into Poland September 9-10 (since followed by violations of Romanian and Estonian airspace) led Warsaw to invoke NATO’s Article 4 for allied consultation.

President Trump, for his part, has returned to expressions of frustration with Putin’s intransigence and threatening new sanctions (although these must be taken with a grain of salt after multiple reversals).

In truth, there was little reason to expect real progress in US-mediated negotiations following the Alaska summit. President Putin had signaled — and continues to signal — no compromise in his core war objectives, which extend well past territorial aims to include Ukraine’s demilitarization (neutering its ability to resist future attack), “denazification” (effectively the replacement of its government with pro-Russian proxies), and an injunction against NATO membership, or indeed the presence of any Western forces in Ukraine.

Several of these goals are non-starters for Ukraine and Europe (and likely the US as well), so why was there any expectation of progress?

There are a number of explanations for this disconnect — including Trump’s oft-repeated desire for a swift end to the war and Special Envoy Steve Witkoff’s apparent misinterpretation of meetings with Putin — but one that has gone relatively unremarked is the recent emergence of a distinct narrative that presents a sense of inevitable Russian victory. In this narrative, Russia’s advance is grinding but unstoppable over time and Ukraine must eventually accede to Russia in the face of that fait accompli.

That narrative is likely wrong. Of course, the severe challenges Ukraine faces should not be diminished. Most notably, it has struggled with recruitment and understrength based on serious manpower shortages.

Most tragically, Ukraine’s civilian death toll is at least 13,883 and continues rising as Russia intensifies an unrestrained campaign of aerial strikes on civilian targets. However, none of this means that Russia is winning the war; several factors undermine the myth of Russian strength:

• Contrary to the often-breathless reporting around relatively marginal advances, Russia’s so-called “summer offensive” against Ukraine has made very little progress. Indeed, Ukraine recently recovered some territory from Russia’s summer advances. The UK Ministry of Defence estimates it would take Russia 4.4 years and nearly 2 million more casualties to conquer the rest of the four Oblasts in Ukraine that it claims. The offensive is likely to continue into the fall, but colder weather could increasingly favor Ukraine on the defensive (e.g., Russian forces will lose leaf cover to hide their small-unit infiltration advances from Ukrainian drones).

• Russia has advantages in manpower, equipment, and munitions, but its losses are staggering – e.g., nearly 1 million casualties, over 4,000 vehicles, nearly 2,000 tanks. Its manpower advantage may also be finite as voluntary recruitment slows down and Moscow is increasingly forced to turn to North Korea and Central Asia for soldiers. Putin is wary of the political consequences of forced conscription, especially in the more populated regions between Moscow and St. Petersburg.

• Ukrainian long-range strikes have become increasingly effective (and may become more so if the Trump administration decides to remove range limitations on US weaponry). Strikes on Russian gas infrastructure, in particular, are bringing the war home to Russian civilians with price hikes and fuel shortages; these shortages forced Russia to temporarily ban fuel exports.

• The Russian economy is not collapsing, but it is increasingly strained. GDP growth hovers at 1% this year and may drop to 0%, high inflation from wartime spending has forced the Bank of Russia to push interest rates above 18%. Lower oil prices and European sanctions targeting Russia’s shadow fleet are also depleting oil revenues. A new EU sanctions package unveiled September 19 caters to Trump’s demands for sanctions against China over its Russian oil imports (it is unclear if Trump himself will follow through on new sanctions).

So where does the myth of Russian inevitability come from? In Washington, this is an argument mostly made in good faith and out of concern over the devastating toll the war is inflicting on Ukraine.

But its emergence ahead of and through the Alaska summit attests to a significant propaganda effort emanating from Moscow that seeks to shape Western perspectives towards a belief that Ukraine’s situation is ultimately hopeless.

The good news? Far from demonstrating faith in victory, this propaganda effort may in fact demonstrate the Kremlin is increasingly concerned about its ability to sustain the war in the long term. Putin may hope to achieve via disinformation and negotiations what he cannot achieve on the battlefield.

Denying him that option and continuing to bring the costs of war to Russia is the fastest — and perhaps only — way to peace, forcing Putin to reconsider his maximalist demands and approach negotiations realistically.

This article was originally published in Policy magazine. To view the original article, click here.

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Welcome back to the TSG Issue Brief, where we take an in-depth look at geopolitical and economic trends. Tom Gallagher and Kevin Nealer use the case of Canada to explain how Trump’s approach to tariffs is changing investment and supply chain patterns and what risks this creates moving forward. This article originally appeared in Policy magazine.

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Even as there is new evidence of the near-term negative impact of Donald Trump’s tariffs on the US economy, Trump’s recent, unprovoked escalation of duties on Canada prompts the question: Where is US trade policy headed and what long-term systemic changes does it portend for bilateral trade and investment?

There are two underappreciated structural features of Trump’s tariff activism that are rewriting supply chains and investment patterns in North America and globally. Understanding why they are different from past trade activism is essential to right-sizing the Trump tariff risks now and going forward.

First, after WWII, the US presided over successive reductions in government’s role in the international economic sphere. This was based on a positive-sum view of trade. Key to realizing those benefits were highly credible commitments on trade and investment that were honored by subsequent presidents and incorporated into global regimes by trading partners.

The largest previous burst of protectionism — under President Ronald Reagan —consisted of short-term measures designed to accommodate political pressures for import restraint before returning to the long-term trend of more open and expanding trade. Reagan’s tariff and quota regimes (for steel, autos, semiconductors) were time-bound, as tariffs are meant to be under international rules.

Trump’s tariffs are meant to permanently rewrite trade flows and address systemic deficits, not to placate short-term import sensitivities. They promise no goal or end date, and nothing the affected country can do will stop them. They are in no sense negotiations since trading partners are offered nothing in return for their compliance save the end of contrived, coercive uncertainty via the dubious reward of a fixed long-term duty.

This departure from the longstanding “most favored nation” (MFN) commitments of global rules, notably in our trade dynamic with Canada — as well as the consultation and dispute resolution processes laid out in 20 US free trade agreements (FTAs) and the World Trade Organization’s dispute settlement system — effectively means the US has quietly quit those obligations without formal notice to trading partners or Congressional approvals.

The Washington consensus is dead; most participants simply haven’t recognized that new reality dictated by unilateral US actions that have produced a new status quo.

Second, for decades, the US (and almost all foreign governments’) resort to tariffs has been product specific. Import-sensitive sectors were given time to adjust by application of tariffs, quotas, or other border measures (e.g., restraint agreements). Trump’s tariffs are not on specific products; they are (mostly) on countries. (Sec. 232 penalties on steel, aluminum, chips, and pharmaceuticals are a separate punitive track, also not dependent on fair trade rules.)

The Trump tariff regime does not even pretend to address unfairly traded goods (dumped, subsidized or less-than-fair value sales). In addition to injecting an element of nationalism into the trade system, this produces anomalous results, such as tariffs on our largest export market, Canada.

The potential for transshipment to lower-tariff countries is massive and involves the kind of microeconomic details this administration is not likely to master, especially because the cutting edge of the policy is International Emergency Economic Powers Act (IEEPA) authority and sectoral Sec. 232 cases, neither of which rely on US private sector comments or guidance (the former due to its original design as an emergency authority and the latter due to the highly accelerated pace of investigations).

The policy is focused on two completely non-traditional goals:

• Trump policy characterizes trade deficits as a sign of unfair trade policies and is based on a zero-sum view of trade, with higher tariffs the means to grow the US slice of the pie while increasing revenue.

• In addition to re-wiring current account trends, Trump tariffs are also focused on behavior modification in non-economic spheres. They are sanctions by another name, meant to bend the behavior of other countries to US will in domains as varied as defense spending, immigration, drug policies, or personal vendettas that Trump has against the internal politics of target countries. The result for trading partners has been a cacophony of demands across different government functions – often contradictory or made inconsistently by US negotiators.

How much certainty do private-sector decision makers now have on tariffs?

Trump’s policy produces a substantial increase in government’s role in international economics. As that role in his second term has been largely defined by disruption, volatility and misrepresentation, a major change under Trump is that the credibility and integrity of US commitments is simply gone. Any hoped-for stability in policy will be short-lived.

Going forward, Trump will inevitably change tariffs to influence future developments. Anyone contemplating an investment in a business that imports into the US, or even anyone who wants to build a business that would replace now-discouraged imports, has to ask the question: How long will current tariff rates remain in effect?

This effect may continue – in some form – beyond the end of this administration, for two reasons:

• Even if a future administration seeks a return to the old order, Trump has expanded the Overton Window defining what is now possible; trading partners can no longer be safe in the assumption that a deal reached under one president will be respected by another.

• The allure of tariffs as a source of federal revenue (now at the highest level since 1913) means the tariffs risk becoming a “sticky” feature of government policy – harder to roll back even if goods trade deficits self-adjust.

As a macroeconomic own goal, the parallel to Brexit is instructive; Brexit didn’t cause a recession, but it depressed growth by discouraging investment. Characterized as a change in trade policy, by far the most important artifact of Britain’s withdrawal from the EU has been felt in a systemic reduction of investment in the UK that shows every sign of being a permanent penalty on British growth.

In the US, there is every indication that Trump’s trade policies are producing a similar investment effect, both in significantly diminished FDI directly attributable to tariff instability and in evidence of foreign investor diversification away from the US.

What about the quid pro quo investment commitments agreed by the EU, Japan, and South Korea? Our base case is that they are unenforceable press releases, unsupported by sovereign wealth funds (SWFs) or other channels through which those governments could move huge sums – even if local politics would permit such diversion of assets to the US.

But it wouldn’t take much for these hollow promises to morph into a major step-up in government involvement in cross-border capital flows. If any version of these commitments does materialize and isn’t offset by other foreign capital flows, it would result in a higher US current account deficit. And it would entail an unparalleled US government intervention in directing capital.

For Canada, the country most impacted by America’s every economic challenge, the pace and nature of these policy changes will require an approach both vigilant and adaptive. Countries that took the lower tariff deals thus far seem to have varying degrees of buyer’s remorse, now realizing that path offers no safe endgame because the demand signal from Washington may not stop.

This article was originally published in Policy magazine. To view the original article, click here.

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Welcome back to the TSG Issue Brief, where we take an in-depth look at geopolitical and economic trends. Jennifer Lee and Fritz Lodge explain the Trump administration’s changing tech policy amid US-China trade talks. This article originally appeared in the Australian Strategic Policy Institute’s The Strategist.

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A shift is underway in the Trump administration’s approach to tech policy. Nvidia’s July 14 announcement that the US government would soon grant it licenses to resume exports of its H20 chips to China (expected for AMD’s MI308 chips as well) may appear surprising after multiple statements from Trump administration officials that controls on the export of higher-end AI chips like the H20 to China were off the table. However, rather than signaling a change in the broader bipartisan consensus behind restricting China’s access to strategic tech, this move fits into a pattern of recent decisions that demonstrate tech export controls — previously viewed as a non-negotiable issue of US national security — can now be used as bargaining chips in trade talks (the next talks are scheduled between Treasury Secretary Bessent and his Chinese counterparts in Stockholm July 28-29). This shift not only exacerbates uncertainty for domestic and international tech firms but also will encourage Beijing to push for further loosening of controls in future negotiations.

In late May, the US Commerce Department’s Bureau of Industry and Security (BIS) sent letters to semiconductor electronic design automation (EDA) software companies informing the companies with little warning or detail that the US would impose restrictions on their business in China. Yet just weeks later in early June, some Chinese customers were able to once again access EDA servers — shortly after President Trump’s call with Chinese President Xi Jinping. On July 3, reports emerged that Commerce had informed major EDA software providers that the restrictions had now been lifted, which appeared to be the product of the framework agreement reached at US-China talks in Geneva and London. The imposition and then retraction of these restrictions offered an early hint that tech controls could be on the table; indeed, Bessent acknowledged that lifting restrictions on chips were ‘all part of a mosaic’ in negotiations with Beijing.

Policy improvisation is nothing new for the Trump administration’s tech policy approach. Earlier this year, the administration had sent mixed signals about whether it would restrict Nvidia’s H20 chips, which it did ultimately implement. And while US National Economic Council chief Hassett noted around the London talks that high-end chips were at the time not on the table for US-China negotiations, relenting on the EDA software controls despite strong bipartisan concerns over export of US chip-related technology to China marked the beginning of the shift for Washington’s tech policy, which progressed to the H20 announcement.

That said, the instinct to hinder China’s access to strategic US technology is not gone. BIS head Kessler recently made comments threatening to revoke the waivers that allow South Korea’s Samsung and SK Hynix and Taiwan’s TSMC to export US chip-related tech to their fabs in China. Additionally, Malaysia’s decision to require permits for exporting high-end US chips reflects Washington’s concerns over the transshipment of chips to China. But that instinct is now being balanced with efforts to soften some controls as part of trade negotiations to reduce some of China’s curbs on exports to the US of critical minerals and rare earth magnets.

Still, for US allies this means that they will feel pressure from the Trump administration to cooperate with US restrictions while feeling pressure from Beijing not to make deals that disadvantage China. For domestic US and international businesses alike, the shifting policies further exacerbate existing regulatory uncertainty that challenge their abilities to make investment and supply chain decisions. Giving ground on these controls also may create an incentive for Beijing to make new demands for further easing of export controls.

From Beijing’s perspective, changes to Washington’s tech policy will not divert China from its current direction on promoting tech-led growth and self-sufficiency — if anything, it could further catalyze these trends. China’s upcoming Five-Year Plan will emphasize 'new quality productive forces' (growth led by high-tech), investment towards innovation and research & development, and increased funding for AI and semiconductor development to improve cutting-edge capabilities and self-sufficiency. For example, Beijing recently revealed its latest tech investment fund, dubbed ‘Big Fund III,’ will target specific parts of the semiconductor supply chain where China historically lags the most: chip design (US dominated) and lithography equipment (concentrated in the Netherlands).

As trade negotiations continue with the US, Washington’s shifting approach to tech policy is likely to add further uncertainty for governments, national security practitioners, and businesses alike.

This article was originally published in the Australian Strategic Policy Institute’s The Strategist. To view the original article, click here.

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Welcome back to the TSG Issue Brief, where we take an in-depth look at geopolitical and economic trends. Kevin Nealer explains how trade policy under the Trump administration has upended basic assumptions about how the global goods trade operates.

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The trade policy community has indulged in the understandable conceit that Trump’s tariff activism is best explained as a version of traditional American trade policy on steroids. While current tariffs (before whatever happens after Aug. 1) are at five times the pre-Liberation Day level – a 70 year high – these are commonly explained as a coercive opening gambit in trade negotiations that are somehow analogous to US trade pressure on Japan in the 1980s or the never-ending disputes with the EU. This framing is similar to putting Trump national security policy through the filter of existing US defense obligations and taking comfort in the notion that NATO and Asian partners have benefited from free rider status. The recent commitment to heightened defense spending is proof of concept that Trump’s methods are crude, but not really ahistorical. It’s all normal, just done with an excess of arm waving and “just Trump” game show presentation. “Nothing to see here. Let’s move on.”

This is a complete failure of imagination and analysis. As the latest barrage of threats to Canada (our largest export market), the EU, Mexico, Japan, and Brazil make clear, the outcomes of any and all of Trump’s trade activism will be 1) changed assumptions about the real world features of the trading system and 2) guaranteed long-term risks to the movement of goods and investment flows. The investment implications are thus far the result of businesses temporizing: the true price will come in damage to US innovation, human capital, and a changed view of investing in the US market. (Pre-tariff stockpiling mitigation efforts are likely at or near the end of depleted inventories now.) It is worth keeping in mind that the biggest impact of Brexit on the UK economy was the drag on investment. Despite breathless White House claims of increased inbound FDI, that may well be true of Trump’s never ending tariff wars as well.

These are not adjustments at the margins of global trade. Trump’s trade activism has changed basic assumptions about the way global trade in goods works. The US has effectively left the WTO and all twenty of its Free Trade Agreements. Full stop. Trump 1.0 taught that withdrawing from international obligations like NATO can be messy and (back when Congress still exercised some oversight) could require Congressional action. Indeed, Trump’s NATO allergy in his first term provoked enough antibodies on the Hill to result in legislative speed bumps to an alliance exit.

That’s not a mistake Trump 2.0 is making on trade policy this time. Without even pretending to get negotiating approval through the convention of Trade Promotion Authority, Team Trump is simply ignoring the dispute resolution and consultation processes under US law and international agreements. Trade partners faced with coercive tariffs understandably have employed basic good game theory, not calling out the violation of these US obligations. They have adopted an “eat me last approach” whereby they play along with US asymmetric trade demands to buy down trade imbalances. What is the point of standing alone to call for “playing by the rules” when your opponent has upset the game board? Foreign negotiators get this; American trade elites seem blithely unaware.

What is the marked-to-market price of Trump’s “quiet quitting” of the US-created global rules for trade?

• The US no longer has the moral or political authority to define the terms of trade liberalization. Having violated (without actually leaving) the WTO’s two key precepts – most favored nations treatment and national treatment – the US has rejected a global system it created based on nondiscrimination to embrace unapologetic mercantilism. The true cost of that change in the policy narrative cannot be predicted; it is not nothing. Not only are US WTO commitments now meaningless, but all twenty US Free Trade Agreements have been invalidated by an “America First” ideology that disregards the dispute resolution channels of those deals – many decades old. The learning is clear and permanent: an American commitment to trade rules is now meaningless. Trump has proven that there is no guarantee an agreement reached under one administration will be respected by a future president. This isn’t an academic point – predictability is an important part of cross-border investment and supply-chain decisions.

• Trump’s “negotiations” are completely asymmetric. In no case has the US offered any new US market access or other advantages that lower trade barriers here for trading partners. The only question these negotiations answer is when and to what extent the US will stop penalizing foreigners for trade deficits in their advantage, defense spending misalignment, border policies, or any other bilateral grievance unrelated to market-based realities. (Note that we have a trade surplus with Brazil, but Trump’s bromance with Bolsonaro, rivalry with Lula, and allergy to BRICS still make them a target.) Said another way, what price is the other party willing to pay to end unilateral US penalties without changes in American policies, no matter how discriminatory?

• There is no endpoint to US demands. As our largest export market, Canada, discovered after renegotiating NAFTA during Trump 1.0, no commitment by the US to a “new, improved” trade reality is permanent. The American demand signal for mercantilist advantages never stops; the goal posts move and the messaging from US interlocutors is inconsistent. Similarly, Trump’s threat of an additional 10% tariff on BRICS countries shows tariffs will often be his go-to response to foreign government actions he does not like. Tariffs – at whatever levels agreed – will not write an end to Trump trade activism and trade negotiations will continue to conflate trade issues with non-trade related demands. Team Trump has deployed and plans on expanding sector-specific cases under Sec. 232 of US trade law. The sudden increase of steel and aluminum tariffs from 25% to 50% and addition of copper duties are the latest evidence of unpredictable sectoral activism. These duties will be in addition to the foundational 10% and any other country-specific tariffs. By one estimate, Sec. 232 cases could cover as much as 40% of all US imports. The recent threat to pharmaceutical imports and semiconductors should be taken seriously.

• Retaliation – the equal and opposite reactions by injured trading partners – thus far has been muted as trading partners seek to engage in the pretense of trade negotiations to mitigate the damage of Trump tariffs. That is certain to end as the theatre of trade talks gives way to the asymmetry of punitive duties dictated by the US. EU members have already approved retaliation of up to 25% tariffs on €21 billion worth of US goods by Aug. 1 if a deal is not reached, and the Commission is seeking support for tariffs covering an additional €95 billion worth of US goods (agricultural and industrial), as well as potential action against services (including tech companies and limiting access to public procurement contracts) and export restrictions (steel and chemicals).

China’s response to Trump tariffs has mitigated somewhat after talks in Geneva and London, but it remains to be seen how next-round talks – Commerce Secretary Lutnick, Treasury Secretary Bessent, and USTR Greer may meet their counterparts in early August – will progress; we have high confidence that any further US duties and export control activism could still provoke further curbs on Chinese exports in response.

The long-term impact of the Trump trade wars is to deny the predictability of any American trade commitment and assure that Trump tariff activism means continued instability in supply chains and investment. Trump’s legislative and SCOTUS success – and the fact that US attacks on Iran have yet to metastasize into a wider conflict – has amplified a White House view that Trump’s policies are winning and that economic doomsayers continue to be wrong while duties play an ever-larger role in revenue. Trump has been made lusty and bold by equity market indifference to tariff risks.

Trump trade policy has blown open the Overton Window of expectations about the continuum on which American economic policy may move. Prudent trade and investment partners have permanently repriced America’s commitments – none more decisively than our largest export market. The past may be a country no one may visit, but too many American trade analysts are living there rent free.

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Welcome back to the TSG Issue Brief, where we take an in-depth look at geopolitical and economic trends. This piece analyzes the role of the war in Ukraine and Trump’s reelection in accelerating de-dollarization efforts.

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Geopolitical tensions and economic instability – recently exacerbated by Trump 2.0 policies – have helped revive sentiments of de-dollarization, or gradual migration away from the USD, that first surfaced in the 1960s and were popular in the 1980s. The weaponization of the USD as a sanctions tool, instability in American politics that has spilled into markets (as exemplified by the debt ceiling negotiations and the threat of default), and the impact of US economic shocks (such as recessions, interest rate fluctuations) have moved countries to increasingly seek ways to mitigate risks emanating from the US.

As geopolitical rivalries increase, countries are finding it more challenging to separate financial interests from political ones. The Trump administration’s protectionist trade policies, attacks on US institutions, and potential threats to foreign investors in the US (e.g., Sec. 899, CFIUS investigations), are motivating “de-risking” and diversification from the US. For emerging markets in particular, a multi-currency world economy could help insulate growth against USD fluctuations.

Geopolitics and de-dollarization

Two geopolitical risks associated with de-dollarization concerns should be highlighted: Russia’s invasion of Ukraine and President Trump’s reelection.

The war in Ukraine has had a significant impact in the world economy by adding pressure to food and energy costs in countries already struggling with a post-pandemic recovery and rising inflation; this makes them more vulnerable to a strong USD. Another side-effect of the war is the impact of sanctions on Russia, notably blocking Russian banks’ access to US and Western financial systems (including exclusion from the SWIFT payments system) and the freezing of Russia’s foreign currency reserves. US-led sanctions have damaged trust in Western financial systems and fed a desire to reduce exposure to the USD to better insulate from sanctions risk. Central banks have been reducing their USD reserves – 2022 saw central banks purchase gold at the fastest rate since 1967, and the bull market for gold has continued. Countries are setting up non-dollar trade deals, central bank swap lines, and plans to facilitate further trade and payments denominated in their own currencies. Those trading or engaged in projects with Russia have sought to evade sanctions by using alternative payment options, e.g., making payments in local currencies and using SWIFT/CHIPS alternatives like China’s CIPS (cross border internet payment system) or Russia’s SPFS (financial messaging system); settlements on CIPS increased 21% from 2021 to 2022.

The reelection of Trump has also elevated the US as the world’s top geopolitical risk. Not only are the Trump administration’s policies upending international trade (highest tariffs in a century) and security frameworks, but they are also diminishing capacity in the US government and adding to polarization in Congress, with consequences for budget negotiations and US debt. The latter was reflected in the recent US sovereign credit downgrade.

Alternatives to the USD

The USD’s status as the world’s reserve currency remains unmatched. Its strength is difficult to replicate and replace; no other financial market compares in size, depth, liquidity, and security. American financial markets are (relatively) open with a transparent regulatory environment. Any credible rival to the USD would require the issuing country to undertake significant structural economic changes (e.g., reducing trade and investment barriers, improving regulatory environment and protections for investors, having deeper and broader financial markets) that not only require political will but resources and time to implement. Currency unions are even harder to manage; governments must abdicate monetary and exchange rate policy tools to stabilize national economies, and there needs to be a degree of political alignment that can be shaken by competing interests.

Still, as the dollar’s global influence begins to wane in the face of rising transactions in local currencies and the emergence of alternatives to US-led financial institutions and payment systems, it is worth noting the potential and the challenges faced by its major competitors (though not replacements): the euro and China’s renminbi (RMB).

• The euro is the best positioned currency to take advantage of de-dollarization. The eurozone has been functioning for decades and benefits from a transparent regulatory system and credible central banking. However, to enjoy the benefits that have so far only been allocated to the USD as the world’s reserve currency, the eurozone requires more supply of safe assets and other reforms (e.g., deeper integration of national financial markets, connecting more third countries to its internal SEPA payments system, etc.). The euro must also be used more widely in international trade and credit financing. In terms of sanctions-proofing, the EU is actively engaged in international sanctions regimes, including against Russia and Iran, making the euro a poor replacement for the dollar. Having said that, the uncertainty provoked by Trump (including whether the Fed will continue to offer support in a crisis, like emergency funding or liquidity to foreign banks) and Washington’s demands for greater European spending on defense are helping to address some of these challenges. While gold is still preferred over the euro for investors fleeing the dollar, the symbiotic relationship between defense and trade – as noted by European Central Bank President Lagarde – could help over time to support the euro’s rise. The issuance of more government debt to fund security, competitiveness, and growth is expected to increase the supply of safe assets, the use of the euro in foreign transactions, and the euro’s share in the foreign reserves of allies.

• The RMB competes with the euro for the second-place spot as the largest trade finance currency and is a top active payment currency. The share of global payments in RMB has risen significantly yoy but remains a small portion of total transactions (4.61% in June 2024 vs. 2.77% in 2023). However, those values are likely even lower if a Chinese company or government entity are not involved. The RMB’s potential has been constrained by Beijing’s refusal to make the currency widely convertible. Chinese leaders have long been concerned about the impact of a freely-traded RMB on their ability to control domestic financial markets. China’s economic model would need to change dramatically and its capital markets would need to be open in order for the RMB to become a global reserve currency. As of yet, there are no signs that the government is willing to accept these risks.

The importance of de-dollarization

The Trump administration has threatened tariffs and other penalties to countries undermining the USD’s status as the world’s reserve currency. For instance, Trump said he would impose 100% tariffs on BRICS imports if the bloc attempts to replace the USD as the dominant currency for international trade. (Watch the BRICS summit July 6-7 in Rio de Janeiro for any actions to circumvent the use of the USD.)

The de-dollarization trend emphasizes an undercurrent of rising geopolitical tensions that are shifting global power dynamics, trade structures, and financial markets. It carries significant implications for the global economy and for national security. De-dollarization weakens US economic and soft power and plays into attempts by rivals like China and Russia to underpin an “alternate global order that challenges the US.” It is a symptom of broader challenges in the US and how Washington interacts with foreign nations.

What to watch: De-dollarization indicators

The table below offers a sample of quantitative as well as qualitative indicators that can help evaluate the international value and influence of the USD. Given the lag in data publishing, we recommend monitoring trends over time and against competitors like the euro, pound sterling, yen, and RMB, as well as to looking at market signals (e.g., this year the usual direct relationship between US interest rates and the dollar broke down, arguably because global investors were at the margin reducing their dollar exposure due to actual and feared Trump policies).

To view in email, click the table to expand

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Welcome back to the TSG Issue Brief, where we take an in-depth look at geopolitical and economic trends. Ahead of the June 24-25 NATO summit, Fritz Lodge examines the various efforts to rapidly increase European defense spending and expand military capabilities as the Trump administration wavers on Ukraine and strongly signals it is looking for Europe to do more on defense.

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As Russia’s retaliation continues for a series of incredibly successful Ukrainian drone strikes – notably against strategic bombers deep inside Russia – further progress on Ukraine-Russia talks after a 2^nd round in Istanbul (June 2) seems increasingly unlikely. Overall, the Trump administration’s strategy to date of offering primarily carrots to Moscow and sticks for Kyiv appears destined for failure, if for no other reason than President Putin has shown no inclination to walk back maximalist goals that would essentially eliminate Ukraine’s sovereignty, which Kyiv cannot (willingly or be pressured to) accept. President Trump has repeatedly threatened new sanctions on Russia but has so far failed to follow through, perhaps instead choosing to gradually abandon negotiations to end the war that are proving more difficult than he anticipated.

Now more than ever, with Trump’s commitment to Ukraine and talks wavering, one clarity is that Europe will need to step in to backfill at least some US support – both for Ukraine and potentially for Europe as a whole. While Europe can replace some US military capabilities it will struggle to provide others, such as air defense, long-range strike, logistics (e.g. transport and in-air refueling), and intelligence/satellite reconnaissance. As European countries race to increase defense investment and formulate a new defense strategy, it is worth taking a closer look at these efforts to determine if they are realistic, if Europe is committed to making the necessary sacrifices, and how long it would take to achieve capabilities European allies currently lack.

Source: New York Times

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How has the US shift in policy toward Europe/NATO altered the outlook for European defense and security?

Although the Trump administration has made it very clear that Washington is looking for Europe to do more in terms of bolstering conventional military capability, the US will probably seek to maintain its NATO leadership role in some form. Critically, the US must maintain its nuclear deterrence umbrella over the alliance (of all capabilities, Europe is least able to replace US nuclear deterrence; UK and French nuclear capabilities are not sufficient to provide for other than their own homelands).

There are competing factions within the Trump administration with significantly different viewpoints on Europe and NATO. However, the utility of NATO, especially given the Trump administration’s strategic focus on the Indo-Pacific region, will make it difficult to fully abandon the alliance. More likely is that Washington will continue to insist on increased European burden-sharing while transitioning some military resources from Europe to the Indo-Pacific.

Regardless, European trust and confidence in US security commitments has been deeply shaken. At the same time there is now wide agreement on both sides of the Atlantic that Europe has relied too heavily on US military capabilities for too long. Driven by the threat posed by Russia and the now-real fear of inconsistent US support, European countries will likely follow through on significant investments in defense. To be effective, this must include efforts to align better procurement and security policy across the EU (as well as further integrate with the UK, toward which progress was made at the May EU-UK summit).

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Where do EU defense procurement initiatives stand?

The number of new initiatives is a positive sign for necessary improvements to procurement. They include:

• The ReArm Europe/Readiness 2030 plan (note that Canada’s Prime Minister Carney has said Ottawa would seek to join the plan by July 1)

• The European Defence Fund (EDF)

• The Act in Support of Ammunition Production (ASAP)

• The European Defense Industry Reinforcement through Common Procurement Act (EDIRPA)

• The European Defence and Industrial Base Strategy (EDIS)

The White Paper for European Defence – Readiness 2030 lays out the European Commission’s priorities. However, the incentives currently offered are still too small to address the “home bias” toward domestic procurement over more efficient alternatives elsewhere in the bloc (between 2021-2022, for example, only 18% of total defense equipment investment in Europe was collaborative) and invest in major new “strategic enablers” like military/intelligence satellite constellations, airlift, and refueling. The risk posed by Ukraine’s reliance on Elon Musk’s Starlink, for example, has sparked efforts to improve European alternatives like EUTelsat OneWeb. (These are a long way off, EUTelsat OneWeb has under 650 satellites in orbit compared to Starlink’s 7,000).

Bloc-wide joint procurement mechanisms, which would allow for much more cost-efficient procurement, will be key. EU finance ministers and central bank governors have discussed creating a European Defense Mechanism – based off the European Stability Mechanism – that would organize joint procurement across the bloc, pool member states’ capital to mobilize financing, and include rules preventing home bias in procurement; the idea could potentially include non-EU countries like the UK, Norway, and Ukraine.

The key to all these efforts will be how well the European Commission (led by President von der Leyen) organizes European leaders to coordinate these new initiatives across the bloc.

Fragmentation on this issue is a significant risk (with members engaging at different speeds or, as Hungary has in the past, seeking to block new measures). The headline €800 billion “ReArm Europe” proposal has already been watered down to “ReArm Europe/Readiness 2030” due to concerns from some members – notably Spain and Italy – that the plan’s name was too aggressive. It is also important to note that this €800 billion in proposed defense spending is not guaranteed financing; it is comprised of €650 in authorization for member states to exceed EU fiscal spending caps (using the escape clause of the Stability and Growth Pact) to increase defense spending by 1.5% of GDP. The remaining €150 billion would come from the now-approved Security Action for Europe (SAFE) loan instrument to raise private capital for spending on key areas of defense procurement (e.g., cyber security, missile defense, drones).

Even if the ReArm Europe proposal is fully implemented, it only envisions reshoring 50% of member states’ procurement budgets to European suppliers by 2030 (60% by 2035). As of now, 75% of defense acquisitions are made to non-EU suppliers and the US alone represents fully 63% of EU defense procurements. New investments can begin to restore European defense manufacturing (the ASAP program for investments in EU ammunition production to support Ukraine offers one existing example), but the process of rebuilding Europe’s industrial base will take years to complete.

• European domestic manufacturers cannot meet increased demand within the next 3-5 years.

• With the proper investment, they can eventually replace the majority of US-supplied procurement, but progress will probably be uneven across different capability sets. For example, ground equipment such as tanks, armored personnel carriers, and artillery should be relatively simple. Other areas such as air and missile defense and long-range strike capabilities may be more difficult to scale up quickly due to the extent of reliance on US systems and the lack of equally effective European counterparts.

• Europe has relied heavily on the US for “strategic enablers” like satellite coverage or intelligence support. It is unclear how much time will be required to catch up on these areas of critical ‘connective tissue.’

As the bloc gathers support for common efforts and members individually ramp up spending, perhaps the earliest path to growth in defense acquisition could come from outside the EU. We have already seen elements of this in the struggle to fill Ukrainian ammunition needs, which produced a Czech-led initiative to source at least 1.6 million artillery rounds from outside the bloc. Non-EU European countries like the UK and Norway will play a significant role, but their offerings are already embedded in the European defense market. The most significant growth will probably come from outside Europe. For example South Korea has rapidly expanded defense sales to EU countries – especially Poland – after 2022 and is one of the largest sources for munitions supplied to Ukraine.

But wariness about reliance on US defense products may be a limiting factor due to the deep integration of US and allied defense industries. For example, the Swedish Saab Gripen – often suggested as a European alternate for US fighter jets – is built on a US-made engine, meaning it is subject to US export controls and may not satisfy the need to diversify.

Equally important to the overall effort is that European countries need to increase their armed forces, particularly ground forces. Poland is taking the lead in this area. Of paramount importance however is that defense requirements – both equipment and manpower – are integrated into a coherent overall defense strategy. There is no real substitute for NATO in this regard, so NATO’s European members must continue to work through the Alliance’s defense planning structures.

Source: Chicago Booth

How far will/can diversification from the US go?

European countries will likely continue to rely on US suppliers where needed as they build their own capabilities (likely over the next 3-5 years). But the goal will be to develop the ability to diversify away from the US; the extent to which this actually happens will depend in large part on the shape of the next US administration. European trust in the US has been shaken but it could theoretically be repaired in part under a friendly future administration.

Over the next four years, the process of EU rearmament and diversification from the US will probably create additional friction in the Transatlantic relationship. For example, Secretary of State Rubio has warned Baltic states against excluding US firms from defense procurement.

There is an internal dissonance within the Trump administration between the instinct to force Europe to increase burden-sharing by threatening to (or actually) withdrawing support and the pressure from US defense companies to maintain their contracts with European buyers. The outcome of this tension is unknowable but the uncertainty – as well as other friction points, such as tariffs – will likely push Europe towards diversification. As far as the Trump administration is concerned, the break point will likely be the difference between diversification (acceptable) and deliberately excluding US firms (which will be seen as unacceptable).

Source: Financial Times

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How will defense spending increases affect public policy debates (e.g., debt and fiscal responsibility concerns) in European countries?

The public policy implications of increased spending on defense diverting funds from other government priorities will largely be contingent on two key issues: the fiscal balance/national debt load of the country and the importance placed on defense (not just from the government but also the public). These are different in each member state, reflecting EU fragmentation. For instance, Poland has made clear its intention to grow its military and, as is the case in the Baltics, the threat posed by Russia is clearly understood. Germany approved a massive increase in defense spending – lifting its own budget rules – and is pursuing new initiatives to support Ukraine such as a plan to fund joint missile production. But for other countries with strained budgets and without a history of Russian occupation or that do not view Russia as their top threat (instead prioritizing issues like migration, climate change), there will be more reluctance to boost defense spending and increase their debt load. Heavily indebted Southern European members rejected von der Leyen’s plan to increase defense capabilities via cheap loans and looser EU fiscal rules – the memory of the eurozone crisis and the austerity measures it demanded is very much top of mind. Instead, they favor defense bonds, which the EU’s fiscally conservative states dislike.

Consequently, the mechanism for members to increase defense spending, along with what it covers, is also key to determining the level of buy-in. Southern European states are pushing for a broader definition of defense spending so that fiscal rule exemptions would also include issues like cybersecurity, infrastructure resilience, and border control.

Lastly, the timing of elections and the popularity/presence in parliament of Russia-friendly parties (often far-right populist movements) will also influence discourse around defense spending and how much room to maneuver on the issue the government has.

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Welcome back to the TSG Issue Brief, where we take an in-depth look at geopolitical and economic trends. Graham Nau discusses the role of Argentina’s lithium supply in US economic and national security interests.

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The critical mineral lithium is set to experience rapid global demand growth in the coming decades due to its importance for the energy transition, everyday electronics, and the defense industry. Lithium supply chains are largely dominated by China, which creates risks for the US industry’s access to lithium as geopolitical tensions rise amid President Trump’s protectionist trade policy and China’s use of export controls. Against this backdrop, Argentina has emerged as a potential alternative supplier due to government efforts to rapidly expand the mining sector and strong US-Argentina relations under President Milei. But complex challenges face Argentina’s ability to expand its lithium industry, including the possibility of tariffs on US critical mineral imports, the impacts of a US-China trade war, and domestic challenges to Milei’s reform agenda ahead of October midterm elections.

US lithium demand and rising geopolitical tensions

US demand for lithium-ion batteries is expected to grow nearly six-fold by 2030 to power clean energy technology, military weapon systems, EVs, and household electronics (e.g., phones, laptops) and to store excess energy from renewable sources such as solar and wind. For these reasons, the US Geological Survey identifies lithium as a mineral critical to economic and national security on a list of 50 published in 2022. Global demand is also projected to increase 3.5 times between 2023 and 2030.

Securing lithium supply is now key for economic and energy security and could add to tensions between the US and China.

While China is the source of around 20% of upstream lithium mining, it controls approximately 67% of midstream processing and refining, making it the dominant country in global lithium supply chains. In addition, China is taking an increased stake in mining operations abroad, particularly in South America’s “Lithium Triangle” (Argentina, Bolivia, and Chile) where 60% of the world’s reserves are located. Between 2020 and 2023, Chinese investments in mining projects in the lithium triangle countries amounted to $3.2 billion, nearly double US investments in the region. Following China, most lithium mines in the region are mainly under Canadian and Australian ownership. In Argentina specifically, 6 of the 16 active lithium projects are under Chinese ownership or partnership.

Given China’s oversize role in lithium and other critical mineral supply chains, the US has in recent years made efforts to diversify these supply chains, including launching the Mineral Security Partnership (MSP), which aims to establish resilient critical mineral supply chains among its 30 member countries. But it is unclear what President Trump’s relationship will be with the MSP under its current South Korean leadership. Argentina is one of the newest members to the MSP (joined in July 2024) and has expanded its exports to the US. In 2023, the top suppliers of lithium carbonate to the US were Chile (62.7%) and Argentina (34.4%). Exports of lithium carbonate from Argentina to the US have been steadily increasing. From 2018 to 2023, exports increased 60.7% from $52.8 million in 2018 to $84.8 million in 2023. But China remains the top export destination of Argentine lithium: it imported $361 million worth of lithium carbonate in 2023.

With Argentina holding the third largest lithium reserves in the world – after Chile and Australia – at four million metric tons, the Milei administration has turned to increasing lithium production as part of its economic reform plan. To this end, Buenos Aires intends to grow lithium production by 340% between 2024 and 2035. Although Argentina is expected to increase its lithium output, that goal is challenged by President Trump’s protectionist trade policy and the impacts of a US-China trade war.

The Trump administration’s impact on lithium production

Recent policy initiatives pursued by the Trump administration are expected to negatively target EV growth in the US market. These include prioritizing development of fossil fuel and other non-wind/non-solar energy resources (in the Unleashing American Energy executive order) and proposing to eliminate tax credits for EVs (up to $4,000 for used, up to $7,500 for new) as part of the “big beautiful” budget bill that now rests in the hands of the Senate after passing the House of Representatives. Along with Trump’s protectionist trade policy, these measures may temporarily reduce demand for lithium in the US market. This is due to the fact that the rapid adoption of EVs is the primary driver of lithium demand, accounting for 87% of the market. Meanwhile sales in Europe stagnated in 2024 since the carbon dioxide requirements for cars were the same as 2023, leading some major governments (including Berlin and Paris) to end or reduce incentives for EV sales that year. Trump’s intent to cut EV tax credits is likely to have similar effect in the US though global sales are expected to continue growing, led by China, which accounts for a rising share of global EV sales, up from around half in 2021 to nearly two-thirds in 2024.

Steady growth in global EV sales, along with the necessity to store energy from renewable sources such as solar and wind, and the continued demand driver of consumer electronics all combined will allow global lithium demand to grow 3.5 times by 2030 compared to 2023.

On the supply side, the Section 232 investigation – set to be completed by October 12, 2025 – entails the possibility of tariffs being placed on critical mineral imports. Given that 50% of US lithium supply was imported in 2024, the Section 232 investigation has the potential to hamper US access to lithium particularly from China, while friendly supplier nations such as Argentina will likely have room to angle for exemptions.

While Trump has signed an executive order designed to accelerate US production of critical minerals by directing the Development Finance Corporation (DFC) to invest in domestic mining projects, these efforts will take years to materialize. In addition, the US will continue to remain import dependent for lithium in the medium term, importing 50% of its lithium supply last year. As the second largest exporter of lithium carbonate to the US at 34.4% of market share, Argentina will continue to be integral to US lithium supply.

Pro-mining policy in Argentina and macroeconomic outlook

At the federal and provincial levels of government in Argentina, there is a shared view that lithium mining must be part of Argentina’s economic recovery. In the northwest provinces of Jujuy, Salta, and Catamarca, where most lithium reserves are located, mining rights are granted by the provincial authorities who have sought to bring in private companies to develop the industry. In support of this goal, Buenos Aires committed to investing up to $4.2 billion in its lithium industry in May 2022 with the goal of increasing output. As a result of this investment, lithium production reached a record high of 18,000 metric tons in 2024, an increase of approximately 100% from the previous year. More recently, the main driver for incentivizing the expansion of Argentina’s lithium industry has been the Incentive Regime for Large Investments (Régimen de Incentivo para Grandes Inversiones or RIGI). RIGI became effective July 8, 2024 and is designed to provide certainty and legal stability to long-term investments in Argentina. Mining is one of the business sectors that RIGI targets, which it does so by offering tax, customs, and currency exchange incentives.

Since the passing of RIGI, installed capacity for lithium production in Argentina has increased by 40%, and six projects have applied for RIGI inclusion, totaling $5.4 billion in investment. As a result of expanded lithium mining, local indigenous communities have raised concerns about water depletion and loss of land. These concerns have led to legal rulings on the environmental effects of lithium mining. This is best demonstrated by the March 2024 ruling by the Supreme Court of Catamarca, ordering the provincial government to refrain from granting mining permits until a comprehensive environmental impact study has been carried out.

Impact of Milei’s reforms

Upon taking office in December 2023, President Milei undertook a series of austerity measures designed to tackle Argentina’s large fiscal deficit and bring inflation under control. These initiatives have paved the way for the country’s recent $20 billion IMF loan package with an immediate disbursement of $12 billion and a 48-month time horizon. With fresh funds from this loan package, Buenos Aires has begun lifting restrictive currency controls imposed in 2019.

Austerity measures implemented by Milei include cutting energy and transportation subsidies, freezing public infrastructure projects, and laying off tens of thousands of government workers. In addition, the Ministry of Deregulation and State Transformation was created to deregulate various sectors including retail, postal services, and agriculture.

Milei’s reforms succeeded in securing Argentina its first budget surplus in more than a decade in 2024. In addition, inflation dropped from 211% at the end of 2023 to 55.9% in March 2025. The “shock therapy” approach opted for by Milei initially resulted in a recession for the Argentine economy – most acute in the construction and manufacturing sectors – but has since resulted in 2% GDP growth in the final quarter of 2024 surpassing a 1.7% expectation. This rebound was largely driven by the agricultural sector as the effects of a historic drought began to subside.

Meanwhile, the unemployment rate experienced a sharp spike following the implementation of austerity measures but has shown signs of steadily dropping due to an improving macroeconomic climate.

With fresh capital from the approved IMF loan designed to strengthen central bank reserves and the lifting of capital controls, Milei hopes to access international capital markets and revive foreign investment in Argentina.

While Milei’s administration will have to navigate the challenges arising from Trump’s protectionist tariff policy and their global repercussions, improved macroeconomic indicators in Argentina including decreasing inflation, fresh IMF funds to bolster foreign reserves, and the influx of projects applying for RIGI tax and regulatory benefits are positive indicators for foreign investment in the Argentine mining sector. This said, the IMF has urged Argentina to stay the course with its reform agenda ahead of upcoming midterm elections in October that pose a key test to Milei’s policies.

Trump-Milei relations and the impact on the lithium trade

Trump and Milei share right-wing ideological similarities, which has seen Milei participate in Conservative Political Action Conference (CPAC) meetings in the US and in Brazil and undertake efforts to deregulate the Argentine government and slash budgets (mirrored by DOGE’s efforts in the US).

While close ideological and political similarities exist between the two leaders, uncertainty remains as to whether that will translate into closer economic ties and tariff exemptions. As the Trump administration pursues a protectionist trade policy, Milei moved to cut down on trade regulations, and as a result Argentina imports have risen 40% from February 2024 to February 2025. Meanwhile, Trump’s protectionist moves add challenges to Milei’s agenda to recover the Argentine economy as the risk of a global economic downturn increases.

Amidst the different approaches toward trade policy between the two leaders and Trump’s imposition of a 10% tariff on Argentine goods, Milei has continued to push for a free trade agreement (FTA) between the two countries, which would also entail critical minerals such as lithium. Argentina is part of the Mercosur trade bloc (alongside Brazil, Paraguay, Uruguay, and Bolivia), which discourages the members from making bilateral trade deals. While Milei has demonstrated support for the EU-Mercosur FTA signed in December 2024, he has indicated a willingness to pull Argentina from Mercosur if it would result in an FTA with the US.

What to watch

As the Section 232 investigation proceeds, it will be important to watch for the Secretary of Commerce’s decision as to whether tariffs on critical mineral imports should be applied. While securing an FTA with the US appears unlikely in the near term, Milei has instructed the Foreign Ministry and Commerce Secretariat to move forward with reducing tariffs and non-tariff barriers for US goods in order to mitigate US baseline tariffs of 10% on Argentine goods. It is worth watching how these adjustments are received in Washington and if they have any impact on tariff reductions for Argentine goods. In addition, following the approval of the $20 billion loan package from the IMF, the results of the Oct. 26 midterm elections in Argentina will be critical to Milei’s ability to continue his reform agenda that supports lithium mining.

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While attention is understandably focused on tariffs, trade negotiations, and recession risks, markets have yet to fully appreciate the foundational economic and structural risks presented by the Trump administration’s approach to governance. The result of such tectonic shifts is not knowable, but they threaten to upend basic assumptions about the US economy. In addition to widespread surreptitious removal of regulations (no public notice or comment period) and attempts to exert influence over independent financial regulators, five categories of risk stand out:

Risk 1: Court cases risk constitutional crises that could undermine foundational market assumptions.

Ignoring court orders could trigger a constitutional crisis by undoing the checks and balances integral to the legal and regulatory regime treated as basic assumptions by markets. In particular, two cases related to deportation are approaching such territory:

• Three courts, including the Supreme Court, have ruled that the Trump administration must work to bring Abrego Garcia, the Maryland man mistakenly deported to a prison in El Salvador, back to the US and allow proper due process. The Court of Appeals for the Fourth Circuit (located in Virginia) emphasized that meeting the Supreme Court’s order that the Trump administration must “facilitate” Garcia’s return means that the government cannot get away with doing “essentially nothing.”

• The Supreme Court also temporarily prevented the Trump administration from using a 1798 law to deport groups of Venezuelan migrants accused of gang activity also without proper due process. The Trump administration has not suggested it will defy the ruling, but doing so would also trigger a constitutional crisis.

Risk 2: Diminished capacity of basic government functions raises the baseline risk of unforeseen crises and shortens warning times.

Reducing staff and funding for essential services undermines the health and safety fundamentals the American public and markets have come to assume. Some of the affected services include:

• Weather and climate (e.g., from cuts to NOAA and NASA)

• Disaster response (e.g., from realized and potential cuts to FEMA)

• Food and water safety and supply (e.g., from cuts to FDA and USDA funding freezes)

• Health research (e.g., from cuts to NIH and elimination of USAID)

• Nuclear safety (e.g., from cuts to NNSA)

• Counterterrorism and foreign influence (e.g., from cuts to violence prevention research and dismissals the FBI and CISA)

Risk 3: Manipulation of federal data could blind markets and economic analysis.

Reducing the reliability of official US data, whether by cuts to capacity or intentional manipulation, upends the integrity relied on by market actors and further diminishes confidence in US fundamentals. Such actions and threatened actions, which have driven some pushback from Democrats, include:

• Dismissal of Labor statisticians and advisors

• Dissolution of a key multi-country demographic study running since 1984

• Secretary of Commerce Lutnick’s comments he would change the way the government calculates GDP

Risk 4.1: Cybersecurity issues arising from DOGE.

The access of unvetted DOGE staffers to critical databases and IT systems raises the risk of data leaks, attacks by foreign agents and other cybercriminals, and accidental systemic breakdowns (many of the federal systems run on legacy code that only select veteran federal IT employees know how to fix). DOGE has accessed or attempted to access databases including:

• Department of Treasury’s Internal Revenue Service (IRS) databases and Bureau of Fiscal Service payments system

• Social Security Administration databases

• Office of Personnel Management databases

• Department of Labor’s National Farmworker Jobs Program system

• Department of Justice’s Executive Office for Immigration Review’s Courts and Appeals System

Risk 4.2: Personnel issues arising from DOGE.

Over 58,000 federal employees have been terminated, laid off, or temporarily suspended (before court orders to delay or reverse some of those decisions), which carries risks in addition to reducing institutional capacity:

• Facilitating recruitment of disgruntled employees by foreign powers (e.g., Beijing and Moscow)

• Driving brain drain as other countries attract former federal experts for high-end research to improve their human capital and gain an advantage over the US in strategic areas like tech and biosecurity

• Demotivating and confusing remaining employees

Risk 5: Lack of experience among key appointees contributes to uncertainty.

Selecting leaders based on their loyalty rather than the competence has resulted in, for example, a Snowden sympathizer leading US intelligence agencies, an antivaxxer leading the department that oversees the CDC, and a retired Army major anchoring weekend TV leading the Pentagon. These leadership choices have two notable effects:

• Decreases the institutional capacity for responding effectively and resiliently to domestic and international crises (e.g., such as public health emergencies – at current vaccination rates, measles could become endemic in the US again over the next couple of decades)

• Increases national security risk, as demonstrated by the Signal leak incident

These risks threaten the reliability, integrity, and security of basic US functions and regulations that market actors take for granted, further exacerbating uncertainty for both domestic and foreign investors.

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Welcome back to the TSG Issue Brief, where we take an in-depth look at geopolitical and economic trends. In this piece we discuss the complications and implications associated with a Mar-a-Lago Accord.

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Team Trump’s vision of a Mar-a-Lago (MAL) Accord to depreciate the US dollar draws inspiration from the 1985 Plaza Accord and imagines an arrangement where foreign countries consent to interventions to weaken the dollar and restructure their Treasury holdings into longer maturities in exchange for US security commitments and tariff exemptions. While such a grand agreement is unlikely, the concept should be taken seriously in that any components or alternatives unilaterally implemented could have disruptive effects.

What is the rationale behind the MAL Accord?

The MAL Accord takes aim at addressing two longstanding issues that have irked President Trump: the idea that other nations are “free-riders” (leading to large trade deficits, small US domestic manufacturing, and the US spending too much on their protection thus driving up US debt) and that the dollar is too strong as a result. Thus, the MAL Accord would coordinate devaluing the dollar and force partners’ cooperation on other Trump priorities (e.g., increased defense spending, addressing trade imbalances) in order to improve their US market access (i.e., avoid tariffs) and retain US security support.

What challenges make a MAL Accord impractical?

Lack of trust in the US as a reliable partner and concerns the US will not hesitate to prioritize its own interests above the good of the global commons or shared long-term priorities with allies discredit the accord.

• Lack of trust on defense: NATO countries may not believe the Trump administration would protect them from Russian aggression – e.g., Washington recently abandoned some initiatives on countering Russian hybrid attacks. Other allies (e.g., Japan, South Korea, Taiwan) share European concerns about the reliability of the US security umbrella, even if they increase spending on defense, contributions to the US regional troop presence, and purchases of American military equipment.

• Lack of trust on economic arrangements: Trump’s back and forth on tariffs against Canada and Mexico and the fact that he is implementing them despite his first administration being the one to have negotiated USMCA (to replace NAFTA) calls into question Washington’s reliability. The upcoming threat of retaliatory and sector-specific tariffs (due Apr. 2) adds to concerns that Trump is not only using tariffs as a coercion instrument (in which case they can be postponed or lifted) but also as a much-needed source of revenue for his economic plan (in which case they will continue to be implemented). Tariffs can also have the side effect of boosting the dollar’s value, which would work against MAL goals.

• China unlikely to agree: After Japan, China is the next largest holder of US debt. Importantly, the 1985 Plaza Accords were signed at a time when major trade partners like Japan were themselves interested in making structural changes to shift to consumption-led growth; it’s not clear that is the case today. And Japan was an ally and thus more inclined to recognize US priorities.

• Ideological clash and conflicting interests: The Trump administration has taken several actions that undermine the international rules-based order and democracy. For example, allies criticize its seeming disregard for national sovereignty (e.g., Panama Canal, Greenland) and interference in domestic politics and elections (e.g., support for Germany’s far-right AfD).

What potential components or alternatives are worth watching?

• The idea of a US Sovereign Wealth Fund (SWF) is moving forward. But usually SWFs are used by countries running a budget surplus (e.g., countries with high revenues from natural resources, like Saudi Arabia) – not a budget deficit like the US – to invest revenue into the stock market or into domestic and foreign companies to potentially reap higher rewards than putting the money into lower rate savings accounts. To fund the SWF, the Trump administration could use sales of state-owned land, US gold reserves, seized cryptocurrency assets, Fannie Mae and Freddie Mac shares, or the Treasury’s Exchange Stabilization Fund. In addition to purchasing foreign securities of other reserve currency countries, the SWF in theory could be used for funding Trump’s bitcoin reserve, “acquiring Greenland,” or buying TikTok (which faces an Apr. 5 deadline to find a US buyer, though Trump has indicated he would extend the deadline if needed).

• Trump’s Chairman of the Council of Economic Advisers Miran, confirmed Mar. 12, has previously proposed using the International Emergency Economic Powers Act (IEEPA) – the authority Trump has used for tariffs and sanctions – to charge a “user fee” on foreign holders of US Treasuries via a withholding tax on their interest payments. He argues this would make buying US reserves a less attractive option for foreign countries’ surpluses and would therefore address “dollar overvaluation [caused by] demand for reserve assets.” Though the Trump administration has not provided any indication they are pursuing this proposal, it could appeal as a source of revenue for making up for GOP tax cuts, which could cost up to $4.5 trillion through 2034. This concept could also be refined further, as Trump’s America First Investment Policy memorandum directed the Cabinet to consider suspending or terminating a 1984 treaty that repealed a 30% levy of Chinese capital inflows, suggesting the approach could be more targeted.

The MAL Accord as it was originally conceived with world leaders gathering in Florida to sign Trump’s grand plan may be a mirage, but potential actions to build towards the plan or replace it could materialize and impact the global financial system.

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Welcome back to the TSG Issue Brief, where we take an in-depth look at geopolitical and economic trends. As our last piece of 2024, JinHua Yip discusses the geopolitical challenges facing the semiconductor industries and implications for 2025.

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Semiconductors underpin growth in emerging industries (e.g., AI and electric vehicles), communications, consumer electronics, and defense. The surging demand for semiconductors presents significant opportunities but also complex challenges due to specialized requirements and a highly concentrated global supply chain centered in the US, China, Taiwan, the Netherlands, Japan, and South Korea. This concentration amplifies geopolitical risks amid escalating US-China tensions, as both nations seek to build supply chain resiliency and vie for dominance in strategic technologies key to economic and national security.

Where is growth in chip demand coming from?

The global semiconductor industry is projected to have $588 billion in global sales for 2024; total market value is expected to reach $1 trillion by 2030. This growth is primarily driven by emerging technologies such as generative AI and electric vehicles (EVs), which are reshaping demand patterns across sectors.

Artificial intelligence

AI technologies have increased the demand for advanced semiconductors. Machine learning (ML) – the process of “training” computers to learn from data to develop new capabilities, as opposed to giving instructions through direct programming – requires three key ingredients: immense amounts of data, training algorithms, and computing power.

Computing power is where semiconductors most directly impact AI development. AI accelerator chips, such as Nvidia's graphics processing units (GPUs), which cost over $40,000 a piece, are critical for high-performance computing tasks required for ML. These are manufactured entirely by Taiwan’s TSMC. As a result, Nvidia (as designer) and TSMC (as manufacturer) have cornered the advanced computing market, with Nvidia’s GPUs projected to reach $274 billion in sales by 2029 (a CAGR of over 33%). In 2024, sales of these chips are expected to surpass $50 billion, representing about 8.5% of total semiconductor sales revenue. While advanced chips (<7nm) are driving growth, legacy chips (>28nm) used for regular servers, supporting the internet-of-things (IoT), cloud computing, and consumer electronics still make up the vast majority of chip volume.

Due to chip production constraints, advanced computing power is a key bottleneck in the power and proliferation of AI models (typically concentrated in data centers, servers, and supercomputers). Energy and water requirements are a concern. US data centers are anticipated to consume 10% of the country’s annual electricity supply by 2030.

EVs and autonomous driving

The automotive industry is experiencing the highest Compound Annual Growth Rate (CAGR) (projected at 13-15% from 2021-2030) of any sector within the chip industry. Modern vehicles contain around 900 chips on average, with new EVs containing up to 1,500 chips per vehicle. These chips control functions ranging from autonomous driving capabilities to basic safety features like airbag deployment. In 2022, the automotive sector made up 14% of overall semiconductor sales.

The growth of EVs and autonomous capabilities is driving auto chip growth. Global EV sales surpassed 14 million units in 2023 – a 40% increase yoy. This expansion is intensifying global competition among manufacturers and spurring supply chain investments in specialized chips and software. Companies like Tesla and BYD are quickly scaling up production, with BYD exceeding 3 million units globally in 2023, making it the ninth largest car manufacturer in the world.

This surge positions the automotive industry as a critical driver of semiconductor growth. It also introduces complex challenges. The specialized chips used in EVs are not easily interchangeable and predominantly rely on mature node sizes greater than 28 nanometers. Leading manufacturers include NXP (Dutch), Texas Instruments, Infineon (German), and Renasas (Japanese). Yet less than $1 in every $6 of private semiconductor investment went to legacy chips, with most investments currently target smaller, more advanced nodes under 11 nanometers, leading to a shortage in capital for legacy chip fabrication plants (fabs).

The elephant in the room: geopolitics and supply chain challenges

Geographical and market concentration

• The concentration of high-end manufacturing and assembly capabilities in geopolitically sensitive regions exposes the industry to great power politics and regional conflicts. Over 75% of global semiconductor fabrication capacity is concentrated in Asia, particularly in Taiwan, China, and South Korea. Taiwan Semiconductor Manufacturing Company (TSMC) alone accounts for 90% of global advanced production (3-7nm nodes), this includes all of Nvidia’s GPUs and “Apple Silicon” series chips. South Korea produces over 60% of the world’s high-bandwidth memory chips. Additionally, approximately 90% of assembly, packaging, and testing operations are located in Asia, predominantly in China, Taiwan, and Malaysia.

• With design, manufacturing, packaging and assembly all concentrated in key geographical “nodes,” geopolitical events that affect one node can greatly affect the wider system. The Houthi attacks on Red Sea shipping, for example, increased shipping costs between Europe and Asia and the cost of chip-based end products. A conflict in the Korean Peninsula or the Taiwan Strait would be catastrophic for the global economy.

• Governments and companies are making substantial investments in fabs outside of the reach of a potential Taiwan Strait and Korean Peninsula crisis. While Taiwan retains its leading edge in <3nm fabrication, overall reliance on Taiwan and South Korea is decreasing, diversifying the supply chain and enhancing overall resilience. Key projects are taking place in US, Japan, EU, Mexico, and Malaysia.

• Advanced manufacturing for the most cutting-edge chips requires highly specialized equipment that only select companies have the expertise to make. Toolmakers are thus key bottlenecks in the supply chain. The most important tools are the Extreme Ultraviolet (EUV) lithography machines supplied exclusively by ASML, a Dutch company. EUV machines work by etching circuitry designs onto silicon wafers at the nanometer level. ASML’s machines are critical for producing advanced chips at 7nm and below. The US and Netherlands have already placed some restrictions on the export of EUV and other advanced lithography machines to China (as well as servicing some of those products).

• ASML in turn is supplied by a network of component makers like Zeiss (optics) and Cymer (EUV light). Over 40% of equipment makers are US companies, and almost all firms make use of US core IP (designs) and US trained talent.

US-China competition

• The US has implemented export controls targeting China’s access to advanced semiconductors for AI, citing national security concerns. Key Chinese companies, such as Huawei and Semiconductor Manufacturing International Corporation (SMIC) have been added to the Entity List, which restricts these companies from accessing US technology and components without US government approval. Companies using US-sourced parts must obtain licenses before exporting certain high-performance chips and chip manufacturing equipment to Chinese entities. This includes hardware capable of AI processing and tools necessary for producing chips at 14nm nodes and below.

• The US is utilizing a combination of suppressive (export controls) and accelerative industrial policy (CHIPS Act) to maintain its edge in critical emerging technologies. Continuation and expansion of US export controls under Trump 2.0 are likely – including enlargement of the entity list and the expansion of controls to cover non-Chinese entities that have investment/exposure to Chinese entities (e.g., UAE’s G42). The Trump administration may use other levers such as defense and trade to pressure foot-dragging allies and third party nations to align with US policies.

• In response to US export controls, China has retaliated with asymmetrical actions – e.g., restrictions and bans on rare earth exports, investigation of US tech firm Nvidia – that affect the semiconductor industry. China dominates critical mineral supply chains, with 60% of the world’s production and 85% of global production capacity. Recently, China responded within 24 hours to expanded US export controls with bans on gallium, germanium, antimony, and other key raw materials (as well as enhanced graphite restrictions). China is also using economic coercion to try to pressure US allies into reducing export control coordination.

• President Xi Jinping issued “Made in China 2025” in 2015, solidifying China’s desire to lead in and achieve self-sufficiency in foundational technologies such as semiconductors where it has indigenous capabilities to produce trailing and legacy nodes (14nm – <28nm). Reports indicate that Chinese companies are making progress in producing 7nm chips using advanced Deep Ultraviolet (DUV) lithography, despite lacking access to EUV technology. Yangtze Memory Technologies Co. (YMTC) has also made progress in replacing foreign high-end memory chips (from Samsung, SK Hynix, and Micron) with indigenous alternatives.

• Though challenging for China to catch up to cutting-edge US-designed chips given US-led export controls, China does have the capacity to produce chips at 7nm and above (Huawei’s Mate60 phone surprised the global industry with a 7nm chip produced by SMIC). These chips, though less power-efficient and less capable by an order of magnitude, are sufficient for most applications. With enough previous-generation chips, China can still develop ML and AI capabilities – they are just comparatively less powerful and less energy- or cost-efficient.

Math and creativity cannot be export controlled. US restrictions are forcing Chinese firms to innovate instead of relying on Western supply chains; in the long-term (20+ year horizon), this may be beneficial for China as it strengthens its domestic tech ecosystem and provides an insulated foundation of talent and capital for future innovation

Other challenges

• Supply chain inflexibility: Limited global capacity for advanced node (<7nm) manufacturing and long lead times (up to 55 weeks) for high-end chips heighten risks of demand and supply shock to industries relying on “just-in-time” manufacturing models – like the automotive sector. The chip shortages during the COVID-19 pandemic, which cost the US economy $240 billion and decreased car production by 8 million units, exemplify these vulnerabilities.

• Water usage and environmental risks: Semiconductor manufacturing is a water-intensive activity. Over 25% of semiconductor plans under construction and 40% of all current semiconductor manufacturing facilities are situated in watersheds expected to face severe water stress risks by 2030, including TSMC’s Arizona fabs. There has also been an increase in severe weather events and that could affect key manufacturing hubs in East Asia. Cooling AI data servers is also water-intensive; AI’s water usage is projected to reach 6.6 billion m³ by 2027 – double the annual water demand projected for 2030 South Africa’s power generation, manufacturing, and mining sectors combined (3.3 billion m3).

• Labor Shortages: Every country has indicated a shortage of skilled labor and talent in both manufacturing and R&D sectors, affecting production and innovation of chips. Even Taiwan, which has one of the highest per-capita talent pools, reported a deficit of 27,000 engineers in 2021. This is most acute for nations seeking to move up the value chain into chip design such as Malaysia, India, and Mexico.

• Cybersecurity Risks: Cyberspace has long been a source of illicit activity, but in recent years it has emerged as a key military domain. Prevalence and severity of cyberattacks, influence operations, and intellectual property theft from both state and non-state actors will likely increase in the short term. Patterns of attack are increasingly targeting periphery players as well – suppliers, distributors, contract manufacturers to glean critical intelligence about key market players, strategic plans, and intellectual property.

Key events to watch for in 2025

The semiconductor industry’s centrality to economic security makes it a focal point for political risk. The G7, G20, and APEC leaders’ meetings are important platforms for leaders to coordinate industrial policies, export controls, and supply chain resiliency strategies. COP30 in Brazil will highlight environmental pressures such as water stress that directly impact chip production. Watch for announcements of new regulatory frameworks that affect emerging technologies (e.g., on sustainability, data, privacy, etc.) and relations between key supply chain hubs (e.g., the US, Taiwan, South Korea, the Netherlands, Japan), particularly US-China ties.

• World Economic Forum (WEF) Annual Meeting (Jan. 20-24, Davos)

• US-EU Trade and Technology Council (TTC) meetings (if continued under the Trump administration)

• G7 summit in Canada (June)

• NATO summit in the Netherlands (June 26)

• US-Japan-Netherlands trilateral deals

• APEC Leaders’ Meeting in South Korea (November)

• COP30 in Brazil (Nov. 10-21)

• G20 in South Africa (Nov. 22-23)

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Welcome back to the TSG Issue Brief, where we take an in-depth look at geopolitical and economic trends. Following COP29 and the US election, this piece looks at the roadblocks to climate action at COP30 and Lula’s sustainability agenda.

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As current G20 president and upcoming Mercosur, BRICS, and COP30 president, Brazil was set to have a hallmark 2024 and 2025. Brazilian President Lula’s return to the presidency in 2023 marked a shift in Brazil’s foreign policy and approach to climate change from his far-right populist predecessor Bolsonaro: Lula declared “Brazil is Back” and placed sustainability and environmental issues at the center of his agenda. But Lula’s ambitions to rebuild Brazil’s international influence and cast it as a leading advocate for the Global South (including climate priorities) are endangered by competing domestic priorities, diplomatic setbacks, the success of right-wing parties (in Brazil, the US, and elsewhere), and the failures of COP29 and COP16 to achieve any implementable progress.

Competing domestic priorities

Deforestation in Brazil fell 71% during Lula’s first two terms (2003-2006 and 2007-2010). Then, under the Bolsonaro administration (2019-2022), deforestation reached a 15-year high. Lula’s return to office buoyed hopes for stronger protection of the Amazon and climate policies. While deforestation fell over 30% yoy from August 2023 to July 2024, Lula’s desire to boost economic growth to meet economic policy priorities (e.g., reducing inequality, increasing welfare programs, promoting critical minerals exports) has conflicted with environmental concerns.

• Brazil joined OPEC+ January 2024 and wants to increase oil exports; it is already the eighth largest producer in the world and aims to become the fourth largest (behind the US, Russia, and Saudi Arabia). In a meeting with Shell’s CEO on the margins of September’s UNGA, Lula said he did not see “any contradiction” between his pro-climate UNGA address and his meeting with Shell’s leadership.

• Brazil’s largest state-owned fossil fuel company, Petrobras, is seeking license authorization from Brazil’s environmental regulator (Ibama) to explore drilling the Foz do Amazonas of the Equatorial Margin. Ibama is negotiating with Petrobras (e.g., Petrobras is working on building a wildlife center and other emergency response infrastructure in Amapa) despite the recommendation by its technical experts that Ibama reject the license. Ibama has permitted approximately 800 licenses for Petrobras since 2003 as the government struggles to balance environmental concerns with the prospect of job creation and economic growth. At a Nov. 27 Mines and Energy Commission hearing, some officials stressed that the states along the Equatorial Margin (including Amapa) suffer from lower human development indexes and would benefit from the income from oil activities.

• Brasilia’s support for an EU-Mercosur trade deal could also impact Lula’s climate agenda despite sustainability and environmental requirements in the deal. Environmental activists criticize the deal for potentially increasing deforestation (as demand for Brazil’s agricultural exports rises), facilitating EU export of pesticides subject to weaker regulations in Latin America, and boosting long-distance trade between the blocs (e.g., shipping emissions, etc.). Parties at the Mercosur summit in Montevideo reached a final agreement Dec. 6, but the deal faces a challenging (and likely long) road to be approved by EU member states and the European Parliament. France and European farmers’ unions are expected to try to gather a “blocking minority” to reject the deal. Brazil will continue to champion the deal during its 2025 Mercosur presidency.

• Sustainability is also challenged by state-level economic priorities. Brazil’s largest soybean-producing state, Mato Grosso, in October passed a law to override the country’s “soybean moratorium” – the original deal prevents properties with deforestation (legal or otherwise) after July 2008 from selling soybeans. Under the state legislation, it removes tax benefits for companies participating in any such agreements that prevent agricultural development of legally deforested lands.

Success of right-wing parties

In Brazil’s October local elections, Lula’s left-wing Worker’s Party (PT) secured only one mayoral victory out of 26 states (Fortaleza) as right-leaning parties dominated at the polls. Leftist candidates lost to center-right incumbents in Rio de Janeiro (Paes of the Social Democratic Party or PDS) and Sao Paulo (Nunes of the Brazilian Democratic Movement or MDB).

• With Brazil’s presidential elections in 2026, the local results weaken Lula’s potential bid for re-election (or that of another PT candidate); local leadership and who controls subnational power centers are key to mobilizing voters for presidential campaigns.

• The sweeping losses also underscore falling public support for leftist policies including Lula’s environmental agenda.

The rising popularity of far-right parties elsewhere in the world – including in the US and other major economies – is also hindering the global climate agenda. The return of President-elect Trump to the White House is expected to further dampen international buy-in for climate action in 2025. Leader-level participation on climate suffered in 2024 (in addition to Lula’s absence, the leaders of the top 3 carbon emitting countries – China, the US, and India – skipped COP29), and US climate leadership will likely worsen under the Trump administration.

• Trump pulled the US out of the Paris agreement in his first term and is expected to withdraw the US again as well as overturn Biden administration climate policies with executive orders including reducing national monument boundaries to allow drilling and mining. He may lift Biden’s pause on LNG terminal permits and reduce the ability of state governments to enforce tighter pollution standards.

• Paris Agreement parties are due to deliver new 2035 Nationally Determined Contributions (NDCs) in February; even if the Biden administration updates the NDC before leaving office, the expected US withdrawal from the agreement (again) may dampen pressure on other countries to deliver ambitious updates.

• During Biden’s November trip to the Amazon, he pledged $50 million to Brazil’s Amazon Fund. But the funds require Congressional approval and may not be voted on before Biden leaves office, which could leave the funding vulnerable to rejection by Trump and the new GOP-leaning Congress.

Disappointments at key multilateral summits

Lula missed the BRICS summit, COP16 in Colombia, COP29 in Azerbaijan, and the APEC summit in Peru – the former three due to a head injury and the latter to prepare for G20. His absence removed key opportunities to promote COP30, demonstrate Brazil’s leadership on Global South issues, and lay groundwork for the priorities of Brazil’s 2025 BRICS presidency. The failures of the G20 summit, COP16, and COP29 to agree on concrete climate action, secure sufficient financing, and plan for transitioning away from fossil fuels further complicate Brazil’s prospects for COP30. Lula called COP30 the “last chance to avoid an irreversible breakdown in the climate system.”

• Lula addressed the BRICS summit virtually and called for a more multipolar global financial system. But expansion of the group has threatened Brazil’s influence within BRICS and highlights tensions between members who view the bloc as explicitly an anti-West alternative and members like Brazil who favor a more general nonaligned approach. Brazil’s priorities for its 2025 BRICS presidency are likely to include sustainability and the energy transition, but cohesion issues and Brasilia’s diluted influence may challenge Brazil’s efficacy in furthering its priority areas.

• Brazil’s presidency of COP30 represents the finale of the oil-heavy troika established with COP28 and COP29 hosts the UAE and Azerbaijan, which both received heavy criticism as petrostates, and Baku’s COP29 failed to reaffirm hard-won language on the beginning of the end of fossil fuels. The Rio G20 summit similarly omitted explicit calls to shift away from fossil fuels in the leader’s declaration. Given Brazil’s push to increase oil exports, it may not revive the COP28 language at COP30.

• Negotiations for a UN plastics treaty in Busan similarly fell apart Dec. 2 after fossil fuel producers blocked efforts to reduce plastic production (the petrochemical sector is a major user of fossil fuels).

Looking ahead: efforts to strike a balance and potential for positive outcomes 

Prioritization of domestic economic growth; the weakened position of Brazil’s leftwing parties; and global gridlock on fossil fuel reduction, climate financing, and other key climate actions, exacerbated by the return of a Trump administration, will hamper Brazil’s sustainability agenda and temper expectations for COP30. Yet there are a few opportunities for Brazil to strike a balance with green growth:

• Brasilia has emphasized growing its bioeconomy, which Environment and Climate Minister Silva characterizes as a part of a resilient economy driven by innovation that preserves biodiversity and traditional knowledge and includes nature-based solutions (NBS). But Silva cautions that there lacks consensus on a definition of bioeconomy among the G20 and other international institutions. On Oct. 23, Brasilia launched Brazil’s Green and Climate Transformation Investment Platform (BIP). BIP will fund seven pilot projects – via Bloomberg Philanthropies, the Green Climate Fund, and state development bank BNDES – to attract foreign investment across three sectors: NBS and the bioeconomy, industry decarbonization, and renewable energy and critical minerals.

• Brazil’s desire to grow its energy sector and its status as the second largest ethanol producer has attracted foreign investment in green jet fuels. In October, Lula signed into law a bill to promote development of Brazil’s biofuel sector, including by increasing the proportion of biodiesel allowed in diesel. Biofuels are also a key component of Lula’s National Energy Transition Policy, announced in August.

• A bill on a carbon market, similar to the EU Emissions Trading System, passed Congress in November and is awaiting presidential approval; Lula’s administration hoped to finalize the system by COP30.

• Critical minerals will likely feature in COP30 talks. Latin American is home to significant critical mineral reserves necessary for the global green transition. BNDES launched a Critical Minerals Fund in October to spur investment (over $165,000) in Brazilian mining SMEs. Colombia intends to announce a global pact on critical minerals supply chain transparency and traceability at COP30 to address sustainability and human rights concerns in extraction.

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Welcome back to the TSG Issue Brief, where we take an in-depth look at geopolitical and economic trends. In this piece we break down different post-vote litigation risks in what is expected to be a tight 2024 race.

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The lead-up to the Nov. 5 election will feature see-saw polling, punditry, and the certainty of a close presidential race with House and Senate control both likely a function of the top-of-ticket outcomes. The 2024 election is expected to be extremely close, with low confidence on Nov. 4 on who the winner will be, and not much more confidence on Nov 6; with the race so close, the next president could well be decided by legal and political maneuvering between Election Day and Jan. 6, 2025.   

2024 will be a closer than 2020.

Looking at polls, election model forecasts, and betting markets, Harris is a slight favorite. She has a polling lead of about 3 points, and a probability of winning in the low-to-mid 50s. But polls and models just aren’t that precise, and Trump is faring better in these metrics than he was at this point of the campaign in 2016, when he won, and in 2020, when he outperformed despite losing. Voters are not likely to have a confident view of the winner before Election Day. 

And as a reference point, 2020 was not that close.

The elections of 2000, 1960, 1876, 1824, and 1800 were closer. What made 2020 seem close was Biden’s narrow wins in AZ, GA, and WI, each of which he won by less than 1%. His margin in those three states was a combined 42,918 votes. But it was not close in that it is difficult to reverse a single state’s outcome, let alone three. Proving fraud in three different states was a nearly impossible hurdle, particularly given the weak case for fraud, as evidenced by the near-unanimous failure of over 60 court challenges by the Trump campaign. A closer election than 2020 could include a result where the apparent winner’s margin is just one or two states (likely this year) and a more balanced set of facts and court decisions.

Legal challenges are not likely to matter in 2024 unless the result is closer than any state in 2020.

Biden’s closest state in 2020 was GA, which he won by 0.24%, a margin never reversed through recounts and court challenges. For such a close and decisive state, you need to go to Florida in 2000, which Bush won by 537 votes (out of almost 6 million total, a margin of less than one-one-hundredth of a percent). In 2022 Congress passed (and Biden signed) the Electoral Count Reform Act (ECRA) that was intended to rectify many problems faced after the 2020 election. Among the changes is an expedited judicial review of election challenges that includes appeals to the Supreme Court (SCOTUS). That should reduce legal uncertainties but raises the possibility of partisan intervention by SCOTUS (this likely could only happen only if a state’s margin was in the hundreds, not thousands). Finally, pandemic-inspired permissive election rule changes in 2020 largely no longer apply.

The most likely way for Trump to reverse an apparent Election Day loss is by denying Harris an Electoral College majority. 

That was the strategy in 2020 – use court challenges as an excuse to refuse to certify key states, forcing the election to the House, in which each state delegation gets one vote, and Republicans currently have 26 such states. How could Trump force the race to go to the House or otherwise undermine results this year? (Note it’s the new House, which is sworn in on January 3, that does the voting.)

• In the unlikely combination of a Harris win but Republican-controlled House, the House could deny counting some of the electoral votes of the apparent winner, preventing an Electoral College majority. On Jan. 6, 2021, a majority of House Republicans voted to reject the electoral votes of AZ and PA. With House Democratic votes, that was not enough to block Biden. But since then, the holds of Trump and election denialism over the GOP have tightened, and defying Trump has become a potentially career-ending move for congressional Republicans. The ECRA raises the threshold for Congressional challenges to state electors, but probably not in a way to prevent the kinds of challenges raised in 2020.

• Local election officials could delay certification in key states. Election deniers have been winning local election races, and some tried to delay certification in hopes of preventing or reversing outcomes in 2022. Those efforts failed as courts compelled them to certify. This will no doubt be closely watched this year, and the risk of partisan process failures is higher.

• Legal stalemate under the ECRA. The law is designed to make it more likely that states’ electoral votes are certified by setting up expedited judicial review of state challenges. But in theory, if the newly created 3-judge special panel rules that Harris won a state’s electors and the Supreme Court stays that ruling but does not issue its own before the Dec. 11 elector certification deadline, that could prevent that state from having its votes counted. Thus it would also prevent either candidate from getting an electoral majority.

• Another route to reverse a state’s apparent outcome is through laws enacted since 2020 to change state election administration. GA allows its state Election Board, which has issued some controversial rules lately, to replace county election officials for an extended time. Given allegations in Fulton County in 2020, this is a possibility this year.

Harris’s opportunities to reverse an apparent Election Day defeat are much narrower.

If Trump is the apparent winner and Democrats win the House (another unlikely combination), it does not serve Democrats’ interests to block approval of state-certified electoral votes next Jan. 6, since Republicans will likely control a majority of state delegations. Unlike 2020, there are Democratic governors in PA, MI, and WI. But state laws generally limit the governor’s role in counting votes and certifying election results. Possible court cases by Democrats could come from what could be perceived as voter suppression or intimidation on Election Day.

Conventional reporting is undervaluing these process risks.

Harris made all her polling gains by the start of the Democratic Convention. Despite a convention well-designed to appeal to swing voters and a decisive debate win according to serious polls, Harris has not gained further and may have slid some, though it is hard to distinguish between subtle polling shifts and statistical noise. With an anticipated tight election Nov. 5, it is important to understand these potential post-vote litigation risks as some – though likely not all – may come into play.

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Welcome back to the TSG Issue Brief, where we take an in-depth look at geopolitical and economic trends. This piece unpacks the interconnected issues of China’s property crisis and local government debt.

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Editorial Note: In the last month, the Chinese government has proposed new policies to address the property crisis discussed in the piece below. These measures include easing restrictions for first-time homebuyers, lowering down payment thresholds and minimum mortgage rates, allowing purchase of multiple properties, and creating a $42 billion People’s Bank of China-funded facility to fund bank loans for state companies to buy up housing stock. An earlier plan called for funding developers to ensure that they finish existing properties. Many economists believe that while this might increase cash flow to developers, the amount allocated by the PBOC is not sufficient to buy up the bulk of unwanted property, and the properties may not be attractive even at reduced prices. Local governments, once dependent on revenues from a burgeoning property market to underwrite infrastructure projects and unfunded central government mandates, need to find new sources of revenue. It is likely that if the decline in new home sales continues in coming months, developers and construction companies will see continued solvency problems and default further on loans. This crisis, years in the making, will take years to resolve.   

China’s economic growth has not rebounded in the aftermath of COVID-19, dragged down by a post-lockdown decline of consumer confidence, an emphasis on personal saving to meet the next crisis, a struggling real estate sector, and a ramped-up deleveraging campaign of local government debt by the central government. At the March Two Sessions meeting, concerns were raised that Local Government Financing Vehicles (LGFVs) are heavily reliant on land sales to meet debt obligations, which surged to $9.2 trillion in 2024. LGFV debt accumulation poses a threat to economic stability. 

Why do LGFVs matter?

China’s decentralized local government financing mechanism, LGFVs, have rapidly accumulated debt due to the economic slowdown and drop in property sale revenues. Local governments are tasked with providing most social services, including infrastructure development, but the central government controls most of the tax revenue, transferring funds to local governments to help them meet their needs. Local governments are under pressure as they are judged by the central government on their ability to provide adequate services, follow the center’s initiatives (particularly security and economic mandates), and promote local economic growth. To supplement insufficient transfers, local governments accumulate additional revenue through LGFVs to fund their projects. This distorted funding structure encourages local governments to run large deficits in pursuit of ambitious development goals such as infrastructure projects, and to comply with key unfunded mandates from the central government: affordable housing, urban village upgrading, construction of emergency facilities. The central government is concerned about risk exposure as looming LGFV debt payments may not be adequately covered by the government budget and land revenue. These debt concerns not only raise questions about the sustainability of local government finances but also impact investor and foreign direct investment (FDI) confidence in China's economy, particularly amid its struggles with attracting FDI and achieving robust growth.

Beijing’s response to growing LGFV debt risk

Total LGFV debt represents around 45% of China's GDP. The central government began tightening control over LGFVs in 2021 to mitigate risk from rapidly expanding debts.

The importance of managing local government debt and controlling additional debt issuance was emphasized by leaders at the April 2023 Politburo meeting, heightened by central bank concerns that they will be responsible for bailing local governments from their debt burdens.

In the July 2023 Politburo meeting on the economy, Beijing revealed they will put forth a "basket of measures" to diffuse LGFV risks. The specifics of this basket have still not been announced, but the Ministry of Finance stated “no central bailout” should be expected. Instead, measures will focus on debt rollover: refinancing, bond swaps, and rate cuts. The central government is also targeting housing reform to encourage a rebound of the property market, including easing some borrowing rules and relaxing home purchasing curbs in some cities. These reforms follow President Xi's April 2023 statement that "houses are for living, not for speculation," referring to the conflicts arising from the infamous pre-sale.

With major real estate developers facing liquidation and increased defaults on corporate bonds, both LGFV revenue and debt repayment have come under increased pressure. In January, Beijing began targeting LGFV offshore bonds for new regulations including bank’s use of repayment mechanisms. In March, regulators announced new limitations for regional banks’ standby letter of credit, or SBLC – a pledge by a lender to repay the debt if the issuer cannot. And in April, the central government’s interbank market watchdog NAFMII halted new registration of credit-linked notes that use LGFV offshore debt as underlying assets.

A broad LGFV system collapse is, however, unlikely due to collateralized loans from central policy banks as well as local and central government interest in stability. The central government will likely continue tightening regulation as it navigates a slow real estate market, low investor confidence, and broader perceptions of a slowing and weakening economy.

How did we get here?

Decentralized local government financing in China emerged in the late 1980s after Reform and Opening. The Chinese government originally allowed local governments to develop trust and investment companies (TICs) – entities owned by local governments or enterprises that facilitated funds from both domestic and overseas investors. In the mid-1990s, rapid leveraging by TICs resulted in a wave of defaults (among the most famous was Guangdong International Trust and Investment Company bankruptcy in 1999), but local revenue shortages and desire for officials to promote investment led to the rebirth of TICs as LGFVs. LGFVs act as subsidiaries of local authorities and use local land as collateral to borrow for municipal infrastructure projects.

Since late 2008, LGFVs increased borrowing rapidly, accumulating 11.4 trillion RMB by 2009. By 2012, debt reached 13.5 trillion RMB, 25% of GDP. The composition of LGFVs loans, which are classified as corporate debt, is approximately 60% bank loans, 30% bonds, and 10% other financings. In 2024, 4.65 trillion RMB ($651 billion) worth of LGFV bonds will be due, the highest on record and an increase of 13% from 2023.

The property crisis

Over the past few decades, China has experienced a massive property boom fueled by urbanization, rapid economic growth, and government policies aimed at promoting real estate investment. LGFVs sell land usage rights to property developers, who sell homes to Chinese property buyers on a pre-sale model: developers sell not-yet-completed property to homebuyers, many of whom put down nearly all of the amount of the residence in cash at the time of purchase. This process allows property developers to operate like a shadow bank by using deposits and mortgage payments from homebuyers to invest in additional property development. Housing demand boomed and prices rose, with the expectation that prices would continue to rise.

Regulatory pressure began to change the property market outlook. In August 2020, new regulations – the “Three Red Lines” – required property developers to keep their liabilities at less than 70% of their assets, maintain a debt‐to‐equity ratio of less than 100%, and a ratio of cash to short‐term debt of at least 100%. Banks were also constrained in making loans to developers. While some real estate developers improved their positions short-term, the new regulations had significant downsides, especially on the revenue generating side. According to CRIC, of the 69 major listed real-estate development companies, 35% fell into the “red” category in 2023, up from 20% at the end of 2021.

China’s slowing economic growth, the impact of COVID-19’s strict restrictions, and low consumer confidence present challenges for the real estate sector’s high-risk pre-sale model. Total residential area sold has dropped year-on-year since 2021, down 26.8% in 2022 and 15.1% in the first nine months of 2023. Home sale value is also dropping, with new home prices in March dropping 2.2% from a year earlier (the biggest decline since August 2015). The sluggish real estate market can no longer supply the necessary cash flows for developers and will lead to increased default on corporate bonds. Two of China’s largest real estate developers face liquidation; Evergrande has liabilities of nearly $330 billion, while Country Garden holds $200 billion. In December 2023, Moody’s downgraded the debt of another large developer, Vanke, to Baa3(16) – one step short of a “junk” rating.

The Chinese government implemented several measures to alleviate the property market downturn, including lowering restrictions on down payments and mortgage for second-time homebuyers and instructing state-owned banks to provide debt-payment loans and restructuring. In some provinces, the central government let local governments lift restrictions on housing purchases, even allowing non-residents to purchase housing and then apply for residency in the province.

The property market downturn will likely take years to resolve and has turned off potential buyers from the pre-sale payment model of the 2010s. China's banking sector has made interest rate adjustments for at-risk developers, but housing and commercial real estate prices remain underwater.

Stress on banking sector

China’s slowing property market has adversely affected the banking sector as well. Bank lending to the property market (loans, bonds, and shadow credit) accounts for roughly ⅓ of all lending. Banks began extending and lowering interest rates for loans to at-risk developers in November 2022. Mortgages account for a significant portion of bank liabilities, though high down payment requirements and low default rates among Chinese citizens acts as some level of protection. Given the pre-sale nature of China’s property market, however, default rates may increase if homeowners believe developers will fail to complete the builds.

Property market impacts on LGFVs and local governments

Local government revenue is heavily reliant on land sales to finance investment and development. Land sales to commercial property developers supplement high-cost infrastructure investment by LGFVs, protecting low-revenue projects from straining local budgets. Yet land revenue has been falling, sales revenue dropped by more than 20% in 2022, and about 15% in 2023 to 5.45 trillion RMB. Comparatively, in 2021, China sold 8.7 trillion RMB in land. As land value continues to fall, questions on whether LGFVs can cover their monthly debt payments without external support.

LGFVs borrow money in a murky area between government and corporate debt. While local governments claim LGFV debts are off-balance sheet, many observers see them as de facto government borrowing, with the implication that ultimately the central government will make good on defaults. The concern over LGFV borrowing stems from the intense increase in LGFV bond issuance since 2008 and the imminent pressure of upcoming debt repayments. A May 2023 UBS analysis of LGFV income statements shows that 65% of LGFVs can service the interest on their debts outright, while another 23% can with help from a subsidy from the local or central government. Their high reliance on land revenue presents a significant challenge as the property market continues to decline. Local governments are also under pressure following COVID-19 spending and revenue contractions from their own reliance on land revenue.

Does LGFV debt present a critical concern to the Chinese economy?

Historically, no LGFV has defaulted on public bonds, and a total collapse of the LGFV system would only come about through systemic abandonment from local and central governments. In the past, local governments performed a debt-swap, like the 2015-2018 swap that amounted to 12 trillion RMB. Banks have also provided refinancing or restructuring to struggling LGFVs. While total collapse is avoidable, reassessing the LGFV system is critically needed, and it would be a tedious and painful policy process that needs to stem from Beijing.

Beijing’s future policy options

• The central government tightened LGFV oversight to mitigate risks, targeting offshore debt and signaling further structural interventions.

• Expect debt relief strategies like swaps, refinancing, or restructuring to aid LGFV debt repayment. The central government, which has historically been seen as making good on local government debts, could mandate limited debt forgiveness as one way out of the financial morass.

• Bank Relief: Much like for property developers, banks are extending and lowering interest on LGFV loans.

• Local government bailout: Local governments, with central government assistance, likely will also protect LGFVs from serious debt default concerns, to maintain broader economic and investor confidence stability. This may include swapping LGFV debt for government bonds, providing subsidies, etc.

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