Before Trump’s first term of office, Obama had presided over the Libya war (including Benghazi), the Arab Spring (including the onset of Syria’s civil war), Putin’s Crimea grab, the rise of ISIS, the rise of China, and the catastrophic Iran Deal (i.e. the JCPOA). 

Then Trump defeated ISIS, strengthened NATO, started to arm Ukraine, turned the screws back on Iran, put Israel and the Arabs on track to peace (the Abraham Accords), and reoriented US power – as well as allies – towards confronting China seriously, for the first time. 

After that, on Biden’s watch, things went badly wrong again. America got humiliated in Afghanistan, Ukraine was invaded by Russia, Israel was attacked by Hamas and Iran, the Houthi rebels brazenly blocked most shipping in the Red Sea, Sub-Saharan Africa was lost to the Russians and the Chinese, an Al-Qaeda graduate warlord took over Syria with Turkish help, and China grew stronger and more aggressive around Taiwan and beyond. 

Now, a second time, Trump must come in and clean up a failed Democratic president’s mess. The problem-set is clear enough, from the specific and immediate security challenges in Europe, Middle East and the Western Pacific, to the broader geo-economic and geo-political trends pressing on the creaking old world order. But what are Trump’s options and what might be his grand strategy agenda over the next four years? With everyone’s attention riveted on the ongoing crises in different areas of the globe, the truly big picture often slips from view.

In short, America’s new imperator has four types of choices in foreign affairs: détente, rollback, restraint, or dominion. The first two broadly correspond to the paths pursued by Nixon and Reagan; the third would conform to the “multipolarist” vision of so-called post-liberal “realists”; and the fourth would be a new departure. As always, none of these options are clear-cut, and in practice things always mix and cross over category definitions. But any effective policy must have a distinct and deliberate underlying strategic intent.

The context

The global strategic conditions of today are very different from those at the start of Trump’s first term. His 2017 National Security Strategy, expertly led by Nadia Schadlow, was a landmark document in that it recognised the return of great power competition in world affairs and the definitive end of the Fukuyama paradigm and America’s unipolar moment. 

The task for the 45th president’s national security team, from 2017 onwards, was to dust off the hard power playbook from the Cold War era and gear America up for long-term competition, particularly against China. This was largely achieved, but the environment was more permissive in 2017-2020, the threat less acute. 

Now, Trump 47 finds Russia transformed into an armed camp, with a much bigger and by now extremely experienced military machine; a China whose navy has since surpassed America’s in size, and which has made vast progress in military technology; an Iran even closer to nuclear break-out; and, beyond all this, a BRICS bloc that has grown from the original five members in January 2021, to ten at present – with Saudi Arabia also looking to join. Meanwhile, the Europeans have used the past four years to further de-industrialise their economies, stifle innovation, weaken their defences through transfers to Ukraine, and accelerate their socio-political disintegration through “progressive” policies like immigration and anti-free speech regulation.

The détente option

In these conditions, Donald Trump’s first grand-strategic option, as he resumes his duties as Commander in Chief, could be to reach for a détente process. As explained previously in these pages, the real purpose of détente – rather than the “appeasement” caricature drawn up by its critics, even back to Kissinger’s days – is “managed peaceful coexistence, not friendship”. The idea is to negotiate a reduction in tensions, from a position of strength, with a view to stabilising relations with adversaries and reducing the risk of war. 

Nixon and Kissinger engaged in détente with the Soviets upon taking office, at a time when America was in a very difficult situation: pressed between the cultural and political domestic upheaval driven by the “1968 Generation”, an unpopular and failing war in Vietnam, and a difficult economic position – all while the USSR was riding high economically and geopolitically. Détente offered the US a respite and, in the longer run, allowed it to regain momentum against the Soviets during Reagan’s time.

The specific issues at play today, and the nature of some of the challenges, may be different than in the 1970s, but the general picture is rather similar: the United States and its alliance system is under heavy military-economic pressure from its adversaries led by China, while the risk of catastrophic great power war – especially over Ukraine, but over Taiwan as well – is already at critical or near-critical levels. A strategy of reducing tensions (literally, détente) could be seen to fit the present situation, particularly in view of the need to bring the Ukraine war to an end.

Rollback

Instead of détente, many in Trump’s team – especially his more “traditional” picks for key foreign policy and national security roles – would likely be inclined to advise the opposite course of action: an uncompromising, Reagan-style strategy of aggressively confronting and rolling back Russian and Chinese power from all key regions where they’ve been making inroads. 

One inspiration could be Reagan’s 1983 National Security Decision Directive 75 which unambiguously tasked the US Government “to contain and over time reverse Soviet expansionism by competing effectively on a sustained basis with the Soviet Union in all international arenas—particularly in the overall military balance and in geographical regions of priority concern to the United States.” 

This was one of the most successful applications of strategy in history – from the formulation of the strategic concept to its complex implementation, including politically – as it did effectively lead to the collapse of the Soviet Union. 

The most obvious practical problem with attempting to replicate this approach today, however, is the sheer cost differential: the relative military-economic advantage the US holds over China today (leaving aside the problems of Russia and Iran, and other aspects related to the global balance) is significantly less than it was the case with respect to the USSR in the 1980s. Reagan’s strategy was based on a major military build-up – including the space-based Strategic Defence Initiative for missile defence – combined with much better technology, which the Soviets could not match.

An arms race on this scale is not feasible today – or not in the next few years at any rate – both for economic reasons but also for technological and political reasons. A military buildup under Trump is certainly to be expected, and the well-performing US economy will likely afford it. But the scale required for this to parallel what Reagan achieved, and the political difficulties of switching to aggressive deployments – and navigating the crises that would certainly ensue as adversaries react – might put all this out of reach. The ideological element of Reagan’s struggle against the “evil communist empire”, which was central to his strategy, is likewise largely missing from the current environment which more likely resembles the world of 19th century balance of power politics.

Restraint

A grand strategy of restraint would be Trump’s third option at this point. The term is somewhat imprecise and it can be encountered under different meanings in defence and foreign policy debates. Here, it is used to capture what in recent years has been variously been described as the “isolationist” or Mearsheimer-style “realist” tendency on some of the new Right in US politics, and of many others elsewhere (including figures in allied countries) who embrace the “post-liberal” critique of the “American hegemony” in international affairs and its supposed ills. 

These are often enthusiasts for a “multipolar” world order, who essentially believe that US power has been misused – certainly in practice, but also from a moral standpoint – and who would therefore welcome the end of American primacy, partly as a way to save the US from the costly mistakes of its own actions and interventions abroad. 

Opinion among “restrainers” sits on a spectrum. Some prescribe a rather radical form of isolationism, complete with a withdrawal from alliances, or at least “mothballing” them – for example, the idea of a “dormant NATO”. Others accept the need for the US to be able to intervene militarily when its vital interests demand it, but reject the notion of any ideological or moral interference in such decisions. Their prescriptions centre on reducing America’s global military deployments and shifting a large part of the global security burden on to allies.

Implicit in almost all variations of the restraint argument is a readiness to accept the end of US primacy and the relative decline of US power – and thus a multipolar world – as a foregone conclusion. On this basis alone we may safely expect this view to have little traction with Trump, who has a strong, instinctive belief in America’s potential and indeed destiny. 

The problem of the restrainers, multipolarists and of all those who think that American primacy is over and that China – or a China-led system – is the future, is their short-term perspective. The fact is that the power of great nations experiences fluctuations over time. China’s “rise” is a phenomenon less than two decades old, in its more substantial form – and the coming years and decades will bring plenty of opportunities for it to go by the way of the Soviet Union. Not more than 15 years ago the EU and the US economies were roughly equal in size, and one could have foretold – many did – a great future for the European bloc. Today, America’s GDP is now around 50% higher than Europe’s, and the EU is in the process of disappearing in the rearview mirror of history. 

The fundamentals of the United States – economically, technologically, militarily and even demographically – are much stronger than those of any other major country. Trump knows this too, which is why his actual foreign policy vision is far removed from the “restraint” fallacy. If anything, the best bet is that, from a historical standpoint, the age of American power has barely begun.

Dominion

The path that Donald Trump is most likely to pursue in US grand strategy – perhaps in conjunction with elements of détente – can be provisionally called dominion. He is returning to the White House not only backed by strong political power and legitimacy – confirmed at the ballot box, by his landslide win – and with a fully-prepared large-scale governing team ready to take full control of the American state after 20 January, but also benefiting from significant geopolitical advantages, over both allies and foes. 

Despite its defiant tone and recalcitrant attitude, Europe is completely exposed and prostrate before American power. Under the Democrats, this mattered little because Biden, as a Trans-Atlanticist of the classic sort, held to the old post-WWII “allied spirit” that – despite the occasional rows – has guided America’s relationship with Europe for 80 years. But, technically, it doesn’t have to be like this, certainly not when European power has completely collapsed. A more irreverent and purely transactional president – say, one like Trump – will now be in a position to exact a heavy price for continued cooperation with Europe, and to push the “Old Lady” to the limit. Considering the insults he has had to endure from the across the “cradle of Western civilisation”, who can blame him.

Other allies are equally on or almost on their knees, and in the position of supplicants for US protection and help – including over economics and trade. These range from Canada; to the UK, with its economy now ruined by a combination of atrocious Tory and Labour policies; to Israel, which, its superb military accomplishments and bravery aside, depends heavily on US support and aid; and on to places like Australia, for whom AUKUS is now essential but, again, depends on US policy especially on tech cooperation and submarine deliveries; and, of course, the greatest dependent on US help – Ukraine. 

Foes, too, now hang on what Trump might do next. Russia, economically vulnerable after three years of full-scale war, needs Trump’s cooperation to get some kind of deal done over Ukraine, and likely fears American economic pressure especially on the oil front. Certainly, Moscow is ready for the worst case scenario as well, and is likely able to push on with the war even under the harshest conditions, but that would carry much higher costs and would change the nature of the conflict. 

In its turn, Iran, reeling from its multi-level defeats at Israel’s hands, must now be truly concerned about the real possibility of a US-Israeli strike on its nuclear programme. This would have been out of the question under the pro-Iran Democrats; but Trump’s arrival spells potential disaster for the ayatollahs. 

As Trump takes office, then, it is only China that stands as an implacable and difficult strategic adversary. But even China is experiencing economic difficulties, and its interest, in the short term at least, is to avoid a mutually-destructive trade war.

In this context, Trump is now in an unparalleled position of strength towards allies, which would allow him to dictate new terms of business – but also towards opponents, which likewise present him with opportunities for advancing his America First foreign policy chiefly through diplomacy and trade. 

Such a confluence of factors – leverage abroad, strength at home, despite all the domestic challenges and troubles – does not happen often, and certainly not in conjunction with a pattern- (and rule-)breaking character like Trump, and with a moment of such flux in international relations. 

The net result of all this is a great opportunity for Trump to assert his will – backed by the full power of the United States – in the world, and to start to imagine, and indeed to try, completely new possibilities in world affairs. We have already had a preview of this recently in his extraordinary proposals for Canada and Greenland to join the US. These are not just more “evidence” of Trump’s “crazy” mindset, as has been widely commented in the media. 

What these Trump suggestions really indicate is an instinctive sense of geopolitical opportunity on a grand scale, linked to the ongoing collapse in the global system of norms that has shaped world order as we’ve known it. From his vantage point as the planet’s most powerful man, Trump may well question exactly why should his and America’s options be limited by “international rules”. 

Who says that the current configuration of the USA is immutable? And if it is not, then how can it be amended? Might America even evolve beyond its republican form? After all, empire has provided history’s most enduring framework for organising human societies on a large scale; modern “liberal democracies” or even older republics, kingdoms and other forms of government are often mere blips on the timeline, by comparison. If anyone is willing and also able to break with the current order and open new paths in foreign policy behaviour – ignoring any and all gasps of shock from the “elite opinion” – it is Trump. Indeed, he has already done so with Greenland.

The notion that borders are now again open to revision (including by force), that countries may disappear and new ones arise, or indeed that countries could come together into new (or restored) “unions”, is entering the mainstream of contemporary political thinking. Just in recent decades we have seen the creation of South Sudan and Kosovo, not to mention the plethora of unrecognised post-conflict states ranging from Transnistria to Somaliland. Even the UK government is negotiating the surrender of its sovereignty over the Chagos Islands to Mauritius.

Trump’s America may not be about to embark on a spree of imperial conquest, but the serious point here is that we have arrived at a juncture in world history when profound changes are becoming possible. We are used to debates about how to reform “world order”, what tweaks should be applied to “global governance”, and how alliance systems might evolve. 

But perhaps we are not thinking big enough. Perhaps the world is reverting to older patterns of statecraft where expansion is once again becoming a legitimate objective of state action – in the classic sense of direct territorial acquisition, or in the form of protectorates and other kinds of dependencies, or indeed, most certainly, in the form of classic spheres of interests. 

As regions continue to convulse under the geopolitical pressures and political associations like the EU head towards fragmentation, the great imperial-like powers like the US may well be in a position to offer hard-pressed polities a suzerainty deal they could not refuse. Rather than “great power competition”, a more appropriate framework for long-term US grand strategy, then, should be dominion. After all, the end of the Republic was only the beginning of half a millennium of imperial rule at Rome.

To read the full comment as posted on the Brussels Signal, click here.

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No longer.

Business leaders today view geopolitical tensions as the biggest risk to economic growth, according to the latest McKinsey Global Survey on economic conditions. Regional conflicts and international trade divergences have intensified in recent years, testing the resilience and strategies of multinational corporations. For instance, tariffs on goods exchanged between the United States and China have increased up to six times since 2017, and globally, trade interventions have surged 12-fold since 2010.

CEOs and boards understand that a shift in the global order is under way. However, many have yet to grapple with an important implication: these geopolitical shifts present not only risks to mitigate but also opportunities to seize.

Given their fiduciary responsibilities, business leaders understandably tend to focus primarily on the downsides of such shifts, asking questions such as: Which of my products and operations are geopolitically sensitive and how does this sensitivity differ by region? At what point do I need to switch suppliers? How much of my workforce requires visas and how might visa approval challenges affect our productivity in certain parts of the world?

It is important to craft risk and response plans to address those and other potential downsides. But even as they improve their resilience to shocks, business leaders should focus on opportunities for risk-adjusted value creation. They should consider tailoring their growth strategies, core business operations, technology stacks, talent footprints, capital asset portfolios, and organizational capabilities with an eye toward thriving and not just surviving.

Business leaders should be asking themselves questions such as, will our competitors’ products be more or less expensive than ours because of new tariffs and taxes? When and how can we align our business with trade flows into new corridors? What new economic and security alliances could also create opportunities for us to grow or to change our cost structure? What industrial policy incentives might present significant growth potential for us? How is our risk-adjusted cost of capital changing across geographies and how might we optimize our capital deployment?

When organizations view geopolitics through a value-creation lens, they can realize outsize benefits. Consider these examples:

• A North American medical-devices company that shifts its manufacturing operations and supply chain to Mexico from another country to take advantage of trade agreements could save 15 to 25 percent on operating costs while increasing its operating resilience.
• A payments company that moves into the Asia–Pacific region by 2027 could access an additional $1.5 trillion in revenues.
• A semiconductor company that changes its sales and marketing strategy to include targets in the Taiwan-to-Singapore corridor could gain an additional $47 billion in market share.

By contrast, business leaders who disproportionately focus on the downsides can find themselves paralyzed, perpetually on guard for the occurrence of high-severity but low-probability geopolitical events. Instead, they should be systematically and continually assessing the full complement of value drivers across trade, economic, and industrial policies and in the areas of defense and security. These include tariffs, the provision of subsidies in support of national industrial policies, and governments’ bias toward investing in geopolitical allies across supply chains, talent, technology and data, capital deployment, and other business domains.

In this article, we explore these value drivers and explain how a proactive approach to geopolitics can help companies both safeguard existing operations and capture emerging opportunities in various geographical and industry segments.

How a proactive approach to geopolitics can generate value
Many management teams and boards have made a point of aligning their corporate strategies and capabilities with realities on the ground. They have appointed a chief geopolitical officer, set up geopolitical intelligence units to provide early warning of emerging events, developed response plans to empower CEOs in times of crisis, and protected their supply chains from external shocks.

A few advanced leadership teams are taking the next step, however, and exploring ways to create value amid geopolitical disruption. They are finding opportunities in three areas in particular—accelerating growth, optimizing business operations, and developing capabilities and strategies to address global disruption.

Accelerating growth
To make better investment decisions and seize commercial opportunities amid shifting global tensions, business leaders should assess what growth looks like for them, their customers, and their competitors. They should analyze a range of growth scenarios that reflect the implementation of any of the ten value drivers outlined. Through this exercise, business leaders may find opportunities for commercial acceleration or for rebalancing portfolios.

Commercial acceleration. As geopolitical conditions change, companies may be able to attract new customers and capture more market share. Opportunities may emerge when new tariffs disproportionately increase the cost of a competitor’s product, for instance, or when new trade agreements make it possible for a company to market to customers who have historically been out of reach. For instance, the construction equipment company Caterpillar was well positioned to increase sales in Australia and Chile because of free trade agreements among those two countries and the United States.

Current shifts in trade corridors are already reshaping industries. Data from the International Monetary Fund, for instance, show substantial changes across the top trade routes between 2021 and 2023, mostly between China and the United States.

Other research shows that net foreign direct investment (FDI) inflows to China decreased from $344 billion in 2021 to $42.7 billion in 2023, the lowest FDI inflows in three decades. Analysts predict that this redirection of investment will likely accelerate over the next decade. It will be critical for business leaders to monitor where this funding lands.

Portfolio rebalancing. As geopolitical shocks occur, once-stable, high-growth business segments may falter, while previously overlooked segments may represent new potential. Business leaders are already hardwired to continuously assess and react to shifting competitive dynamics in their industries. They must navigate geopolitical disruptions in the same way, continually evaluating and reallocating capital to higher-growth, lower-risk segments—through mergers, acquisitions, or partnerships—and divesting from underperforming, high-risk areas.

One private equity fund, for instance, identified portfolio companies in regions where profits were likely to shrink because of regional conflicts and redirected them to more stable geographies. Additionally, fund executives identified products that could be considered “dual use”—that is, products that could have both commercial and military applications—and would be especially vulnerable to cross-border trade scrutiny. They relocated the manufacturing of these products to areas that would be less exposed to dual-use regulations if those regulations were to increase in scope.

Similarly, a global dairy organization built out several geopolitical scenarios that were likely to develop over the next ten years based on global trends. The company’s leaders considered those scenarios against each of its products and the locations in which the products were manufactured and sold. Based on that analysis, the executive team decided to sell off one of its business units and used the proceeds to double down on investments in a different region that showed growth in most of the scenarios generated. As a result, the global dairy’s share price grew more than 10 percent in the next fiscal year.

Sometimes portfolio balancing incorporates hedging, adjusting capital intensity, increasing liquidity buffers, or adopting localization strategies. These moves can all be part of a standard risk-reduction strategy, but they can also help improve the bottom line. For example, a global automaker implemented a hedging strategy that maintained its risk profile while saving $15 million annually. It reduced its balance sheet hedging by 50 percent and switched to out-of-the-money options—and in doing so improved its management of resources. Additionally, when this process revealed that the company’s liquidity buffer was too high, the company repurposed that excess—nearly a billion dollars—to repay debt, lower hedging costs, and increase floating debt. This all started with business leaders assessing the company’s geopolitical exposure.

Optimizing core business operations
Business leaders can boost organizational resilience when they assess the degree to which geopolitical shifts can affect the cost-effectiveness of their operations, including their relationships with suppliers, their global talent strategies and capabilities, and their technology infrastructure.

Operating footprint. One of the most important decisions for any business leader is where the company will invest in its manufacturing, storage, and customer engagement activities. These commitments can shape the company’s trajectory—and geopolitics can play a big role in unlocking new sources of value. The global electronics company Samsung factored in favorable trade agreements, competitive labor costs, and the strategic advantages of location (in this case, Vietnam) when considering where to invest $2 billion in additional manufacturing capacity. Meanwhile, technology giant Apple, which had traditionally based its manufacturing capabilities in China, has diversified its manufacturing footprint. It recently expanded to India, for instance, to increase manufacturing resilience, take advantage of competitive costs, and engage in growing markets.

Supply chain. Recent geopolitical events have caused notable disruptions in the supply chain and have led to facility closures, prompting many supply chain leaders to source from multiple vendors, move away from just-in-time ordering and delivery, and even stockpile critical inputs. Some are using advanced technologies to anticipate and prepare for future geopolitical disruptions.

For instance, one consumer-packaged-goods (CPG) company was facing substantial changes to its underlying supply network, so it constructed a digital twin of its supply chain to understand all the potential effects of these geopolitical shifts. The analyses conducted in the digital-twin environment prompted the CPG company to change certain elements of its supply chain. In doing so, it was able to reduce its reliance on third-party manufacturing sites, improve its yard management, optimize its labor development, and establish a stronger carrier mix. These moves helped the CPG company reduce overall operating expenses and increase projected growth for the following fiscal year.

Other companies are taking advantage of industrial policies that offer incentives for domestic production or supply chain localization. The electric-car company Tesla, for instance, leveraged the tax credits presented by the US Inflation Reduction Act of 2022 to strengthen its supply chain. It sourced materials domestically and shifted its manufacturing capabilities from Germany to the United States. More recently, Mexico has proposed tax credits to attract foreign companies that source inputs from that country.

Talent footprint. Geopolitical tensions can complicate talent management and undermine workforce cohesion across cultures and nationalities. But there are steps that companies can take to account for such disruptions, including reviewing talent concentration patterns, rebalancing workforce allocations, and localizing important functions, such as human resources or IT support.

The engineering, construction, and urban development company Egis, which has operated in Ukraine since 1993, was able to maintain its operations in the country and maintain productivity throughout the recent conflict by quickly pivoting to remote work.

One global bank, with back-office services and call centers in multiple geographies, performed a geopolitical scan and realized that it would have a hard time finding and hiring talent in certain countries. The bank’s executive team also projected that the cost of conducting business in those countries would likely increase because of impending changes in cross-border trade agreements. Given these data, the team decided to relocate employees from regions where visa and trade restrictions were most onerous and refocus its hiring efforts in new regions with less exposure to geopolitical risk.

Digital talent is perennially in short supply; some companies have reached out to expatriate workers to help fill the gap, which in turn has increased these businesses’ exposure to risk from changes to visa or immigration law. One way to avoid or mitigate this risk is to establish delivery centers in those locations that are rife with digital talent—for instance, India, Mexico, the Philippines, and Poland—and where governments offer incentives for companies that are willing to relocate talent.

Technology and data. Today’s multinational organizations have built technology functions in which the talent, infrastructure, and data footprints extend across borders, which leaves their technology stacks and other resources exposed to geopolitical headwinds. Potential threats include cyberattacks, intellectual property theft, data localization requirements, potential disruptions from trade conflicts, and fragmented IT and data regulations across the globe.

Global IT leaders need to continually assess their technology and data footprints (and those of their third-party providers) to hedge against shocks and remain resilient and agile as policies evolve. Online giant Google chose to build data centers in Finland to harness the country’s abundant renewable-energy resources and to move the company closer to achieving its stated sustainability and carbon-neutrality goals. Meanwhile, Malaysia has offered tax incentives and established the Digital Ecosystem Acceleration initiative to attract companies looking for new sites for their data centers—Google and Microsoft are among those investing.

The capabilities and strategies required to respond to geopolitical disruption
It’s one thing for a business executive to be informed about the potential upsides and downsides of geopolitics. It’s another thing entirely for the organization to have the capabilities required to respond to them—including corporate strategies that take geopolitics into account and capital structures that are sensitive to geopolitical realities.

Broadening the view of corporate strategy. Companies routinely monitor regulatory, tax, and other local policies that directly affect their business strategies. They must similarly monitor geopolitical risks and economic policies in the countries in which they operate—recognizing, of course, that geopolitical influences are often uncertain and intertwined, as actions from one country beget reactions from another. In such environments, leaders must fold geopolitical considerations into their regular strategy- and business-planning exercises and engage their boards on these topics.

Leaders should start by identifying which potential geopolitical and global economic shifts could have the largest effect on their corporate interests. What vulnerabilities, capability gaps, and growth opportunities are revealed through this assessment? Which, if any, strategic decisions would leaders need to adjust if policy or other changes occur? What value could be created under various scenarios? It’s worth remembering that certain capital investments (for instance, in oil or natural gas pipelines, semiconductor fabrication plants, power plants, or mines) can take decades to build, running through multiple administrations and election cycles.

The question of whether current shifts in policy could affect a company’s strategic decisions depends on the company’s appetite for risk. What investments would it be willing to make so the company could take advantage of uncertain but potentially large growth opportunities? What insurance policies should it purchase to mitigate the largest potential downside risks? To explore these questions further, business leaders should engage in scenario planning and tabletop exercises. In these exercises, participants play different roles and discuss potential responses to a range of potential disruptions—for instance, to the outbreak of local conflicts, emerging security threats, or changes in tariffs or industrial policies. Such exercises can help business leaders and board members focus on the decisions they can control rather than trying to predict what may or may not come to pass.

Future-proofing multinational organizations. The recent rise in trade and nontrade barriers has disproportionately affected global businesses—which makes it even more important for future multinational corporations to anticipate the impact of potential laws, policies, and regulations. Without this foresight, multinationals may be subject to forced market exits, which come with their own financial and reputational costs. For example, BP exited Russia three days after the war in Ukraine began, leaving behind its holdings in Russian oil and gas company Rosneft. As a result, BP had to take a charge of more than $24 billion in its accounts and its earnings were reduced by $2 billion a year. Some companies are relying more on structural segmentation to ensure that production, talent sourcing and management, supply chain, R&D, and other operating activities can go on even if one division or region is cut off. These businesses have also empowered their leaders and teams to make decisions locally and create stable growth pathways. For example, HSBC recently reorganized its Eastern and Western businesses to simplify its governance structure and reduce risk.

Other companies are refocusing on resolution planning, which first emerged in the wake of the 2008 financial crisis but has been gaining steam with the rise of various geopolitical disruptions. It requires large financial institutions and certain other firms to describe their strategy for a rapid and orderly resolution in the event of material financial distress or failure. As they consider such planning in the context of geopolitics, business leaders should take care to engage boards and risk committees in these discussions. Such entities can help ensure robust oversight of both growth and risk-mitigation agendas.

Building a dedicated geopolitical functional group. The companies that react most swiftly to geopolitical disruption are typically those that make it a core part of their investment and operating decisions. Many of these companies have constructed functional groups whose primary focus is to monitor the geopolitical landscape, help build forecasts, plan against various scenarios, and keep senior leaders and the board informed so they can respond quickly. Having such a functional group in-house, led by a geopolitics officer and staffed by a specialized team, can ensure that the company is positioned to take advantage of both current global shifts and the ones that will inevitably emerge. The structure provides regular opportunities for boards and senior leaders to discuss geopolitical risk and opportunities in a detailed, nuanced way, allowing them to react quickly and, in the longer term, establish a culture of geopolitical resilience in their organizations.

Establishing a crisis response playbook. Geopolitical events can throw organizations into crisis—but, in our experience, the organizations that bounce forward more quickly tend to be those that have codified the results of their scenario-planning and tabletop exercises and collated them into crisis response playbooks. Such playbooks provide a starting point for assessing the potential impact of local conflicts, unexpected tariffs, policy changes, or other shifts. The outcomes may still be uncertain, but in the meantime, leaders and teams have a guide for working through volatility. One semiconductor company, in its playbook, delegated certain responsibilities to the CEO in the case of disruption to the supply chain but tapped others to manage other aspects of the crisis, thus ensuring that all were focused and able to remain productive as the company substantially altered its supply base.

As our overview makes clear, a proactive approach to geopolitics is essential but also a major undertaking. Organizations must have insight, foresight, oversight, and the right capabilities—but most of all, they must have the fortitude to seize opportunities amid volatility, complexity, and uncertainty. The effort is worth it, however: the executives who think deeply and act on the shifting world order today will be the market leaders of tomorrow.

To read the article as it was published on the McKinsey & Company webpage, click here.

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Introduction: A Global Emergency

The post-war trading system, which is at the foundation of our prosperity and orderly international relations, may be ending. Instead, ahead of us may lie an indefinite period of fragmentation of world trade and a more fractious and unstable world order. As trade rules embodied in the World Trade Organization (WTO)—which are imperfect and outdated but still constitute the bedrock on which the world trade edifice stands (Wolff, 2023)—become increasingly eroded, trade will be reconfigured inefficiently along regional and “friendship” lines. The global economy will slow, expectations of higher living standards will remain unmet, the poverty reduction of decades past may be reversed, and climate action will be impeded (Georgieva, 2023).

This book seeks to address the questions—uppermost in the minds of policymakers and analysts around the world—why fragmentation is happening, how it might evolve, and what can be done to prevent, or at least mitigate, the economic and political disruption that it will bring. I do not claim to provide a definitive answer, nor—frankly—would I expect anyone to do so. Indeed, uncertainty about what fragmentation will bring is the essence of the challenge it poses for policymakers and firms. I aim, however, to advance our understanding of fragmentation by considering both the politics and economic thinking that drive it, and the economic and security context within which it is occurring. I try to sketch possible outcomes of the fragmentation process and suggest policies that respond robustly to the uncertainty the erosion of trade rules is generating.

Along with a succession of crises—the Global Financial Crisis (GFC), China–U.S. tensions, the pandemic, the war in Ukraine—the prevailing narrative on globalization and trade changed. In many quarters trade is no longer viewed as a source of efficiency, growth, and peaceful relations but as a source of unfair competition, inequality, and a threat to national security. What did not change, however, is a compelling body of theoretical and empirical evidence dating back 250 years which shows that nations gain from international trade. If anything, the evidence continues to accumulate. Countries could not have fought the pandemic without trade in vaccines and medical equipment, and without foreign supply of everything when whole nations went into lockdown at various times. As the effects of climate change became more visible in prolonged droughts and other disasters, so did the need for trade in food, solar panels, and critical materials for batteries. As the world’s climate continues to deteriorate, nations will have to choose between agricultural trade and mass migration, and to choose between trade in environmental goods and use of fossil fuels.

Why did the narrative on globalization become so negative and why is the resurgence of protectionism threatening? One reason is as old as the annals of commerce yet remains fundamental. Nations gain from trade but, in sectors where they do not have comparative advantage, workers and capital invested lose, creating a coalition to resist trade. A sequence of crises which undermined confidence in globalization and discredited the prevailing policy paradigm bolstered the political resistance to free trade by those who lose from it. The “Washington Consensus” became the Washington dissensus.

The resistance to trade found new life in three developments. The first is the intensifying rivalry between China and the United States, the world’s superpowers, and largest economies. The second—and connected—development is a revolution and inward turn in the trade policy of the United States, the architect of the post-war system, which has its roots in its increasingly fractious social and political divisions, and to the rising inequality and macroeconomic instability of recent decades. The third development is the mounting concern that WTO rules are outdated and increasingly getting in the way of sovereign preferences in many areas. While traditional agendas such as differences in labor standards and in industrial policy (e.g., support to infant and declining industries) remain insufficiently addressed, even more pressing and divisive issues, namely climate change and national security took center stage.

Economic efficiency mandates that the right policy response to the mounting tensions is not to close trade but to address the problems at the core—to find a strategic accommodation with China, to mitigate the losses of some workers from trade with adequate social support, and to coordinate decarbonization policies. For all its shortcomings, there is enough flexibility in WTO trade rules to accommodate national preferences and where there is not, the WTO offers a means to achieve better coordination without unduly restricting trade. But however valid these arguments are, trade policy is a balancing act between conflicting interests and views, and the balance is rapidly and decisively shifting toward allowing countries more “policy space.”

It takes time for the world economy to change direction and this book shows that the fragmentation of world trade has barely started: it is not too late to prevent fragmentation. Protectionism and rule-breaking in many quarters have been offset by trade liberalization in others, especially under the growing number and increased depth of regional and mega-regional trade agreements. Global value chains continue to show remarkable resilience. Many companies that once called for protection have either become defunct or are adapting, reorienting toward world markets, importing cheaper inputs, drawing on foreign technology, investing overseas, and calling on equity and debt capital from abroad. Trade continues to grow, technology advances, enormous gaps in wages and productivity across the world persist, and the gains from globalization are far from spent.

Yet, the signs that the trading system is on the cusp—that an avalanche of protectionist measures has begun to roll and is building—are unmistakable. These signs now go well beyond the trade war between China and the United States and the sanctions on Russia and Iran. They include, for example, over thirty WTO trade disputes that remain in limbo after its Appellate Body became disabled, a vast increase in trade concerns expressed in WTO committees, large trade-distorting subsidies in the United States which has newly embarked on import-substituting industrial policy, and a widespread expectation that decarbonization measures will cause a new wave of trade disputes. Donald Trump is the Republican candidate in the 2024 Presidential election and has promised to escalate the trade war with China and impose an additional 10 percent MFN tariff on U.S. imports, which would amount to the United States tearing up the WTO and is bound to prompt retaliation by partners that account for most U.S. exports.

Avoiding fragmentation or, at least mitigating the damage it will cause, is possible. An essential condition is for China and the United States to reach an accommodation on trade. The tension in China–U.S. relations is no longer mainly about trade if it ever was, and nor is reduced trade the most worrying consequence of their rift. The rivalry between a rising China and the incumbent United States has preoccupied eminent American scholars such as Graham Allison (2017), John Ikenberry (2014), Henry Kissinger (2011, 2012), and Joseph Nye (2023). The perspectives they offer are diverse, but they build on the same assumption: the nuclear-armed giants have the means to destroy the other without realistic prospect of defense, and so they will coexist or not exist, and must be constantly wary of the risk of escalation. Others of the self-denominated realist school see a military conflict between the superpowers over supremacy in Asia as highly likely (Mearsheimer, 2006)….”

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American economic strength and dynamism allow the United States to extend its global influence through non-kinetic means, while also accruing additive benefits. The United States, despite its debt and political turmoil, remains attractive for foreign direct investment, immigration, and as a business partner. The United States has a well-earned reputation for a laissez-faire approach to private capital that has made it a global financial hub, sometimes to the chagrin of Congress as it seeks to ban some Chinese companies from listing in US markets.

In the current world order, capital moves across borders with few limitations. Steps taken to slow the flow of capital starve countries of investment and inflict costs on economic growth, employment, tourism, tech transfer, and global opportunities. The same would be true for the United States unless policymakers take economic statecraft seriously. The dollar provides America with a unique competitive advantage that the euro, yen, and yuan have yet to displace. That status is not a given though as domestic polarization (playing on fear) and financial and corporate interests (playing on greed) have the potential to erode USD status.

Policymakers are taking notice.

National Security Advisor Jake Sullivan’s April 27, 2023 speech provided a broad framework for economic statecraft as the avenue for renewal of America’s economic leadership. Unfortunately, it also led to concerns that poorly crafted or blunt-tool economic statecraft are likely to lead to bad policy, which ultimately serve to undermine the greenback and lead to further acceleration of de-dollarization. Concerns about de-dollarization in the near term are overblown, but that does not mean that those concerns shouldn’t be heeded. There are significant dollar shortages in African, South Asian, and South American emerging markets, leading them to trade in non-USD currencies.

Treasury has, at times, taken the lead, but efforts have been scattered across State, Commerce, US trade representatives, and other agencies. Congress and current and future administrations need a strategic perspective when they’re at the trade negotiating table. State is uniquely qualified for this role, but gets overshadowed by traditional conflicts unfolding in Europe, the Middle East, and Asia. Protecting the dollar should be at the center of US foreign policy since it sustains American prosperity and is a key aspect of the US-dominated rules-based order.

The risks to currency dominance are many: shifting balance of power among countries, reshaping the global economy and markets; reduced corporate, institutional, and investor demand for USD over time; heightened exchange rate volatility, especially as over sixty currencies are pegged to the USD; and rewriting the rules of the global financial system, which, under the leadership of the dollar, is guided by US values. If the USD were to lose reserve status, the United States would feel serious negative economic and political repercussions—losing capacity to borrow quickly and cheaply and damaging its ability to fund industrial policy, social welfare programs, and defense.

The US government has at its disposal an array of economic policies to incentivize or punish other countries through tariffs, sanctions, import and export controls, and investment restrictions, among other tools. The biggest threats to the dollar include sanctions and tariffs. Because of USD global dominance and US control over the Society for Worldwide Interbank Financial Telecommunications, sanctions are particularly low-hanging fruit for economic statecraft. They are an extremely important tool, particularly when used by the United States and its allies in multilateral coalitions acting together. But frequent unilateral usage of sanctions and overuse has led to more countries desiring an alternative currency, as countries become wary about being too dependent on the USD. The alliance of the aggrieved seek alternatives to sanctions including positive assistance to the injured party, as compared with reprisals against the aggressor or organizing logistical and financial aid to countries in distress.

Geoeconomic fragmentation and policy-driven reversal of global integration carry potential adverse economic ramifications that could hamper international cooperation and strain the international monetary system and financial safety nets. Unraveling trade links would most adversely impact low-income countries and less well-off consumers in advanced economies, and US sanctions and tariffs can accelerate fragmentation as countries perceive economic interdependence, particularly with the United States, a vulnerability as interdependence is weaponized.

Economic security is national security. Recent commentary on economic statecraft correctly identifies weaknesses in US national economic security priorities, lack of resources, staffing, and organizational design. Deputy National Security Adviser for International Economics, Daleep Singh, one of the primary architects of the Russian sanctions, highlights the necessity for economic statecraft to be grounded in doctrine that enhances global prosperity while safeguarding US national security. Employing economic coercion can be effective, but should be brought to the table with well-defined end goals and long-term ramifications in mind. Currently, there is no whole-of-government effort to counter Chinese and Russian de-dollarization schemes.

Janine Stouse has over twenty-five years of experience in the financial services sector and a Master’s in International Relations with a focus on National Security issues.

To read the analysis as it was published on the Foreign Policy Research Institute webpage, click here.

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The restructuring of global supply chain has multifaceted and complex origins. The COVID-19 pandemic, climate change, automation and geopolitical tensions have all contributed to reshaping companies’ international distribution and trading patterns. Each of these issues alone would make the prospect of improving supply chain resilience daunting. No country alone can easily fix all of them.

Making matters even more complex are the underlying political factors that shape supply chain restructuring. Governments say they want to make supply chains more resilient and sustainable. But they are less clear about whether this means addressing environmental shortcomings and labour abuses, ensuring supplies of critical materials and components are not controlled by adversaries or whether it reveals a desire to shift jobs onshore. Often, it means all of them. 

What is clear is that trading patterns — the best indicator of supply networks — are changing substantially. In a 2023 survey, 67 per cent of global retailers and manufacturers said they had shifted to other suppliers, while two-thirds said that further shifts were likely. This often means sourcing from a different country or shifting to domestic suppliers. According to the Kearney 2024 reshoring index report, North American companies are moving rapidly to reshore operations away from lower-cost Asian countries. US imports from 14 Asian countries fell by US$143 billion in 2023 to US$878 billion.

Global COVID-19 lockdowns severed entrenched channels of product sourcing and laid bare weaknesses in the once-hallowed just-in-time supply chain approach. In 2021 the European Central Bank estimated that from November 2020 to September 2021, world trade would have been 2.7 per cent higher and global manufacturing output 1.4 per cent greater had global supply chains not been derailed by the pandemic.

Crises often induce panic and the initial response to COVID-19 was a classic case of what not to do in such circumstances. Governments’ border closures —made it more difficult to obtain the vital medicines, medical products and care needed to fight the pandemic.

Russia’s 2022 invasion of Ukraine and the subsequent response from NATO and its allies further ignited a desperate search for new sources of oil and gas, grains, fertilisers, iron, steel and critical minerals. With traditional markets slammed shut due to sanctions, Russian producers redirected exports to China, India, Brazil and other emerging countries where their commodities were snapped up quickly.

These shifts largely centred on commodities that are relatively easy to find elsewhere. When Europe turned off the tap on Russian gas, it swiftly turned to liquefied natural gas imports from the United States and elsewhere. But as countries climb the technology ladder, onshoring and friendshoring become more complicated. Vast, US taxpayer-financed measures like the Inflation Reduction Act and the CHIPS and Science Act were designed in no small part to address what US President Joe Biden’s administration sees as supply chain vulnerabilities.

At the heart of the Biden administration’s anxiety is the world’s dependence on TSMC, which supplies 61.2 per cent of the market for high-end semiconductors. Other examples abound. The drive towards electric vehicles (EVs) has been complicated by the fact that supply chains producing EVs—and especially the batteries that power them—are firmly rooted in China.

Of all the factors pushing companies to shift production and supply, growing geopolitical tensions top the list. Writing for the World Economic Forum, Simon Evenett points out that 2023 filings to the US Securities and Exchange Commission, indicate that 75 per cent of internationally active companies believe geopolitical tensions are the most pressing consideration when making business decisions or assessing risk.

These bilateral tensions between the United States and China are particularly vexing for businesses because the economies of the two countries are intertwined, and anticipating the next wave of economic sanctions is challenging. The United States’ disregard of WTO rules also deprives entrepreneurs of the transparency and predictability those rules were designed to provide. The United States has slapped restrictions on exports to China of artificial intelligence, high-end chips and quantum computers while applying import curbs on China’s exports of steel, EVs and solar panels. Washington is also leaning on its allies to follow suit, badgering EU countries to buy less from China and the Netherlands and Japan to cease shipments to China of high-end lithography equipment.

Unsurprisingly, China’s trade with the United States has taken a tumble. US exports to China fell to US$148 billion in 2023 from US$154 billion in 2022. Chinese exports to the United States shrank even more, plunging to US$427 billion from US$536 billion in 2022. But many of the goods previously shipped from China now come from Mexico, Thailand or Vietnam.

The commercial partnership between China and Russia, meanwhile, is burgeoning. Since 2020, Russia has risen from China’s ninth largest trading partner to its fifth largest. In 2023, trade between the two was up 26 per cent to US$240 billion.

Underpinning the drive for the reconfiguration of supply chains is the ill-defined notion of national security. As the global economy fragments, resorting to the national security rationale provides governments with a relatively straightforward explanation for contravening international obligations. But lumping government responses under one umbrella does little to address the underlying problems that require changes to supply chains. Each factor warrants a tailored policy response. Unfortunately, what we have seen is a myriad of ad hoc policies driven by nationalist politics. 

The OECD has proposed sound advice to its 38 member countries—keep markets open and enhance the tools, like e-commerce, that can facilitate more efficient movement of goods and services. But striking multilateral trade agreements has never been more difficult. The WTO failed to dissuade big players like the United States, India and the European Union from hoarding vaccines during the pandemic. Then in March 2023, India and Indonesia forced the near-term termination of a 25-year-old WTO prohibition on duties on e-commerce transmissions. 

International organizations have likewise proven ill-equipped at addressing the question of national security. The handshake agreement at the WTO not to invoke national security when creating barriers to trade, nor to challenge such measures when they were invoked, is in tatters. The UN Security Council is frequently paralyzed by its permanent members’ vetoes. 

In an era when international cooperation is viewed with deep suspicion, uneasiness about global supply chains is understandable.

Improving and strengthening supply chains depends first and foremost on identifying and explaining why restructuring is required. If the motivation is greater environmental protection, then many developing countries providing raw materials that have woeful environmental and labour standards would be unlikely partners. If the issue is geopolitics, then heavy reliance on China is problematic. If the real objective is to bring production and supply inside a country to generate jobs, governments must ensure that the domestic workforce is sufficiently trained and the infrastructure adequate for these new demands.

Some countries, notably the United States, say they want all of these things. What is undeniable is that the only way these diverse and sometimes conflicting objectives can be met is through a cooperative approach. Organizations like the World Bank, the WTO and the OECD can provide such frameworks. But a broader policy alignment is not yet evident. No single nation—no matter how powerful—can prevent the next pandemic, combat climate change or ease rising geopolitical tensions. Restructuring supply chains in isolation is a fool’s errand.

Keith Rockwell is a Senior Research Fellow at the Hinrich Foundation and a Global Fellow at the Wilson Center. 

To read the full analysis as it was published on East Asia Forum, click here.

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All the talk of imposing new trade and investment restrictions—often in the name of promoting economic security—may have led officials and analysts to overlook one constructive unilateral option. Namely, strengthening the national and regional business environment so as to enable local firms to adapt to adverse circumstances and opportunities that geopolitical events create.

Here the case is made for Intelligent Unilateralism as a (partial) insurance policy against geopolitics.

As geopolitical rivalry intensifies, the siren song of insular, zero-sum thinking gains in prominence. This flies in the face of decades of experience where our standards of living have been enhanced by doing business with foreign buyers and sellers. Exports augment national sales and make jobs more secure. Import competition keeps local firms on their toes—complacent local oligopolists tend to rip off citizens.

No country in the past half a millennium has become an economic superpower by its economy being hermetically sealed to outsiders. Yet, even for economies as large as Japan, there is still the question: How best to react as China and the United States vie for primacy?

For better or for worse, at least since the global financial crisis, the world is in an era of trade policy unilateralism. The painstaking monitoring of commercial policy by the Global Trade Alert has shown this. Sadly, there remains no appetite for path breaking multilateral opening of markets.

At best, as demonstrated by the outcome of the recent WTO Ministerial Conference, sushi-sized reform is what the WTO has on the menu. Likewise, regional trading agreements. Recently, World Bank analysts reported that the number of newly signed regional accords has been falling as this century unfolds. Reciprocal approaches to trade reform are out of favour, alas. Unilateralism is in.

But, like cholesterol, there are two types of unilateralism. Stupid unilateralism involves erecting trade barriers to imports and other ruses that seek to tilt the commercial playing field in favour of local firms. That the idea for these ruses often come from local firms says a lot about their competitiveness. Successful managers think of new ways to create more value for customers, they don’t go running off for help from officials who are largely clueless in the ways of commerce.

What every government can influence constructively is their national business environment. Unlike trade accords, which take years to negotiate, governments can assess and benchmark their national business environment right away.

Fortunately, there are well-regarded measures and rankings of national competitiveness, such as this one produced by the IMD Business School in Lausanne, Switzerland. Economists can fight like cats and dogs about the best short-term macroeconomic policy, but when it comes to the drivers of long-term economic growth, there is a remarkable degree of agreement. Smart governments should capitalise on this consensus.

To fix ideas consider Switzerland, a country with one of the highest standards of living. Switzerland’s population is too small to support its many successful firms. Switzerland has to export. Therefore, everyone there understands that Switzerland must be competitive no matter what.

If Germany offers huge subsidies to its energy-intensive firms (as it did after Russia’s invasion of Ukraine), Switzerland must react differently because the state doesn’t have as deep pockets as Germany. That involves making sure the transport and digital infrastructure is first rate, that the corporate tax and regulatory burden is fit for purpose, and that Switzerland has the best possible access to the markets of the future as well as to the behemoths of today. Of course, such access does not come for free—in turn Switzerland has to be open to imports as well.

For sure, Switzerland’s current favourable business climate didn’t arise overnight—but bear in mind that these days trade talks take forever (a comment made in the spirit of making a fair comparison.) The intensification of geopolitical rivalry in recent years has strengthened the longstanding case for improving the supply side of national economies. Doing so involves taking on vested interests that cling to privileges that deliver either a quiet life or a very lucrative one. For this reason, supply side reform is like getting children to eat enough fresh vegetables—evidently the right thing to do but an uphill battle all the same.

Governments should focus in particular on those aspects of the business climate that enable firms to adapt to new circumstances. Suppose “economic coercion” by a trading power—or worse, conflict that cuts off supply chains—results in some existing sales markets or sourcing locations being blocked. Then national firms need to have the capabilities and the resources to spot alternative options and to act on them. These firms need to know where foreign markets are being liberalised and the regulations they must comply with to take advantage of any opportunities. This calls for granular monitoring of policy developments abroad as well as beefed up capabilities at home.

Critically, executives and officials need to be comfortable with geopolitical chaos and have gamed out in advance how they might respond. When faced with what many deem “economic coercion,” Australia and Lithuania have shown that small and mid-sized economies can effectively pivot, finding new markets for the valuable goods their firms produce. For sure, at the beginning of these episodes, there were reasons to be fearful. But firms and governments there knew they had alternatives (created in part by WTO and regional trade deals) and pursued them with vigour.

With greater geopolitical rivalry the political calculus of supply side reform has changed. Holdouts against reform must now explain why their interests matter more at a time when adaptability is at a premium. Economic security arguments should push the scales against reform holdouts. The media and public will be at a loss to understand why economic coercion abroad results in higher jobs losses on account of some vested local interest frustrating improvements in national exporters’ adaptability and productivity. Whose side are those vested interests on?

Of course, cushioning those interests that lose from reforms is typically smart politics—but letting them frustrate reform provides geopolitical foes with a greater incentive to strike. In open societies where debates over reform can be followed from autocracies, the opposition of vested interests to reform will be noted—and factored in by foreign governments. As local firms and sectors become more adaptable, the downside from economic coercion shrinks. Supply side reform is one way governments better protect their societies against economic coercion.

Intensified geopolitical rivalry is back—it won’t recede anytime soon. This puts a premium on having nimble firms that can adapt to whatever insanity transpires. In turn, this should shift the political calculus—putting the defenders of status quo bottlenecks on the back foot.

Firms and governments have agency—the times call for the courage to use it.

Simon J. Evenett is the Founder of the St. Gallen Endowment for Prosperity Through Trade and an economics professor. He is also Co-Chair of the World Economic Forum’s Council on Trade & Investment.

To read the full piece posted on LinkedIn by Global Trade Alert, click here.

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• Despite the warm atmosphere and strong personal ties between President Biden and EU leaders, the EU-U.S. summit delivered few noteworthy deliverables on tricky trade and economic issues. Talks on an agreement on sustainable steel and aluminum and separately on critical minerals were punted, leaving little new to announce. Consequently, the main point of the summit was the summit itself – to affirm transatlantic unity amid unprecedented global challenges.  
• Unsurprisingly, leaders’ discussions were completely overshadowed by the ongoing conflicts in Ukraine and Middle East. The summit reaffirmed shared commitment to continue support for Ukraine while holding Russia accountable for the war. In the Middle East, they reaffirmed support for Israel but also the need to protect Palestinian civilians and ensure humanitarian access in Gaza. For the EU, which has struggled to maintain a unified message on the conflict in the Middle East, the summit was a test that it passed.
• While the summit was very high on the EU’s wish-list, it also illustrates the Biden administration’s perception of the EU as a key global partner on a range of foreign policy, economic, and technology issues. However, the window for making progress on transatlantic cooperation is shrinking. Thus far, it does not appear that the specter of a post-election return to less productive transatlantic ties in 2025 is jolting the two sides to lock in deals to demonstrate progress and provide guardrails against future political disruption. 

Background

Much has changed in the external environment since the last EU-U.S. summit was held in mid-2021 in Brussels. Back then, a newly elected President Biden promised to revitalize ties with the EU establishing the much-heralded and ambitious Trade and Technology Council (TTC). While relations have remained strong since, several developments—including European reluctance to be too hawkish on China and the “snafus” of limited consultation on Afghanistan and AUKUS agreement—dampened enthusiasm for the transatlantic reset. However, Russia’s invasion of Ukraine brought the U.S. and the EU closer together, with close coordination between Washington and Brussels on sanctions, assistance to Kyiv, and diplomatic outreach to the Global South.

Despite the warm rhetoric, gradual progress on technical alignment in the TTC, and stronger coordination on security and foreign policy, the current irritant in the U.S.-EU relationship is the same as it has been for a long time: trade. The passage of the U.S. Inflation Reduction Act (IRA) in mid-2022 only exacerbated the irritation. The initial shock of the IRA has led to a gradual European embrace of its own industrial policy approach (albeit with limits) and the EU has relaxed its concerns about the threat posed by the bill’s more protectionist measures, particularly on electric vehicle (EV) tax credits. Ongoing discussions between the EU and the U.S. around an IRA-compliant critical minerals agreement would, if successful, further help ease of the pressure. In fact, the greatest concern for EU officials is sprawling Chinese green subsidies, which pose a larger threat to European competitiveness than the U.S. Hence, the recent EU announcement it is launching investigations into Chinese EV and windmill subsidies (with possible solar and steel ones to follow).

Another longstanding, unresolved dispute is the Trump-era Section 232 tariffs on steel and aluminum. Transatlantic cooperation managed to temporarily suspend the tariffs in 2021, but a permanent solution has remained elusive, despite intention from both sides. Cooperation on steel and aluminum is a test-case for transatlantic cooperation on several fronts: boosting manufacturing at home, pushing out heavily subsidized Chinese metals, and promoting the green transition. The talks have manifested into a push for a green-steel club with likeminded partners, dubbed the Global Arrangement on Steel and Aluminum, which would place tariffs on “non-market” producers like China while ensuring that U.S.-produced steel and aluminum would not be subject to new import tariffs under the EU’s new flagship Carbon Border Adjustment Mechanism (CBAM).

On foreign policy, Russia’s 600+ day war in Ukraine continues to dominate transatlantic discussions. The Biden administration has found a partner in the EU on financial and humanitarian aid as well as sanctions; while the EU has a more limited military role, it has found a newfound role providing direct military assistance to Ukraine. Given turmoil on Capitol Hill, European officials have grown more concerned about continued U.S. support for Ukraine and what it means for Europe’s own support for Ukraine in the medium to long term.

Meanwhile, the conflict between Israel and Hamas has taken over much of the foreign policy agenda. Both the EU and the U.S. have sought to balance their unwavering support to Israel with expressing concern for Palestinian civilians and the need to ensure humanitarian access in Gaza – though the EU initially struggled to maintain a coherent position. Both EU and U.S. officials are concerned about the Israel-Hamas conflict escalating into a wider regional confrontation in the Middle East and are coordinating closely on the diplomatic response.

Lastly, on China, Washington increasingly sees the EU as a key partner for dealing on trade and technology issues, even adopting the European Commission’s language on “de-risking” from China rather than “decoupling.” However, the Commission’s proposed economic security strategy—that includes beefed-up FDI screening measures, new outbound FDI restrictions, and new export controls on sensitive technologies—has been met with skepticism from member states such as Germany who are uncomfortable being too confrontational and are hesitant of aligning too closely with Washington for fear of triggering Chinese retaliation.

A foreign policy-dominated summit

In a first sign of a less-than straightforward summit, the EU’s delegation sprawled in the weeks leading up to include both President von der Leyen and Council President Charles Michel as well as three commissioners. Illustrating the awkward dynamics between the EU’s two leaders, von der Leyen and Michel each held their own separate private meetings with Biden before joining together with Biden for a joint meeting. Von der Leyen is seen by Biden and his advisors as a strong interlocutor, staunch trans-Atlanticist, and partner on confronting China, with Biden keen to see her reappointed next year.

As expected, leaders’ discussions centered mainly around foreign policy issues in Ukraine and the Middle East, leading to limited attention to trade issues at the dismay of working level officials. Notably, the carefully crafted communique covered foreign policy issues first—aiming to minimize U.S.-EU differences on Israel by condemning Hamas, stressing the dire humanitarian crisis in Gaza, and working to prevent regional escalation—symbolizing the summit’s overall tenor of addressing ongoing crisis over long-term problems. In her public speech in Washington, von der Leyen echoed Biden’s comparison between Russia and Hamas and pledged continued strong support to Ukraine and Israel.

Expectations that the summit would deliver some wins on key trade issues fell flat. No new deal or agreements were announced on steel and aluminum or critical minerals. The joint communique simply stated that “we look forward to continuing to make progress on these important objectives in the next two months”, meaning that talks will continue but have yet to reach the goal line.

Key Summit Outcomes

Ukraine: The two sides pledged continued “unwavering” support for Ukraine “for as long as it takes” against the backdrop of a shared assessment by Western security officials that Russia’s war is likely to drag into 2025 and possibly beyond. Given uncertainty about continued U.S. funding for Ukraine, Biden administration officials hoped to use the summit to reassure EU counterparts that Washington’s support is not on the line. The night before the summit, Biden gave a rare, live Oval Office address pledging $60 billion in support for Ukraine (as part of a larger $105 billion package) that would seek to lock in U.S. assistance into 2025. Speaking at a think-tank in Washington during her visit, von der Leyen pledged to “double down” on financial and military support for Ukraine in what was clearly a message aimed at Congressional Republicans.

The communique also noted that the EU and U.S. will continue to “explore” how to make use of seized Russian sovereign assets to fund Ukraine reconstruction projects, something that U.S. officials have become gradually more open to in recent months while the European Central Bank remains more cautious for fear of causing financial instability. No new Russia sanctions were announced as the EU is still working to find internal agreement for its 12th EU sanctions package. The statement did pledge further work on sanctions enforcement of third parties who help Russia evade the sanctions, a timely topic in light of the recent discussions in Beijing between Presidents Vladimir Putin and Xi Jinping about “deepening China-Russia relations”.

China: The two sides clarified they are not “decoupling or turning inwards” but rather seek “de-risking and diversifying” in order to promote economic resilience. But the EU side walked back some of the language on technology restrictions it has previously signed up to at the G7 summit in May. Highlighting different priorities between U.S. and EU officials, the statement referred to the Biden administration’s new outbound investment measures as “necessary to complement its existing economic security toolkit”, while it only made a reference to the EU “exploring” whether such measures “could” serve the same role. Despite a push by Biden officials, this gap reflects pushback from certain member states over von der Leyen’s economic security agenda and a prevailing skepticism about aligning too closely with Washington on China.

Steel and aluminum: Despite last minute efforts by negotiators, the Biden administration resisted EU calls to permanently lift all tariffs, likely for fear of alienating labor unions in crucial Midwestern swing states ahead of next year’s election. Instead, Biden officials suggested a snap-back option that the EU duly rejected. The goal is still to try and reach agreement by the end of the year to single out China as part of a new green steel club, but more work is clearly needed to get there. The EU is concerned that a failure could result in the U.S. reimposing tariffs, something U.S. officials deny. While EU officials have privately criticized the Biden team for digging in their heels, it is equally true that the EU did not have much to bring that could have helped to forge a deal. Since the issue is unlikely to get any easier to resolve, the most likely outcome is another punt, as neither side is interested in a tit-for-tat tariff war in an election year.

Critical Minerals: Similarly, no agreement was reached on critical minerals, despite cited negotiation progress on allowing tax credits for EVs that uses EU-produced minerals like cobalt, graphite, lithium, manganese, and nickel. U.S. insistence on a rapid inspection system of mines and processing of critical minerals in Europe was too difficult for the EU to swallow and would likely require approval by the 27 member states, a process that can be long and tedious. However, since the EU also needs critical minerals for its own EVs, talks between the EU and U.S. also center on how to work jointly to reduce dependence on China in the EV battery supply chain and increase investments in new minerals projects in resource rich countries such as in Africa and Latin America. But no progress on such talks was reported though officials are privately more upbeat that a deal can be reached in the near future.

Technology: Earlier speculations that the TTC would be folded into the summit were abandoned, with the next TTC is now scheduled for December in the U.S. While this deprived the summit of meaningful discussions on digital and technology issues, it also relieved officials from having to develop a series of new deliverables for the flailing TTC format. The communique mentioned AI risk and trustworthiness and pledged to endorse the G7 code of conduct for AI.

What to watch

While the EU and U.S. have managed to stay remarkably united over the past three years against the backdrop of Russia’s war in Ukraine and other geopolitical challenges, it is less clear what meaningful changes they have actually achieved to help protect the transatlantic partnership from disruption should a populist leader emerge on either side of the Atlantic in 2025. A return of President Trump in the White House would almost certainly give rise to renewed calls in Europe for doubling down on strategic autonomy and reducing foreign policy reliance on the U.S. In a sign that the EU is aware of the political dynamics in the U.S., EU leaders also spent time in bipartisan meetings on Capitol Hill and von der Leyen choose to deliver an address at a conservative-leaning think-tank while in Washington.

It is certainly possible that a reelected President Biden could have more flexibility on trade, though the protectionist U.S. approach to trade is likely to be a bipartisan fixture that outlives both President Trump and Biden. This observation likely feeds into the EU’s own decision making – why agree on a deal with Biden on steel that could undermine the EU’s commitment to the World Trade Organization (WTO) if a new U.S. president in 2025 would just rip up such a deal.

The next meeting of the TTC will take place in the U.S. in December (location still to be determined), with a final sixth meeting occurring during the Belgian EU Presidency in March before the EU legislative cycle grinds to a halt in the lead up to the European Parliament elections in June. After that, the format’s future will be up in the air, either fizzling out or reviving as a tool for incremental progress. The TTC remains the premier trans-Atlantic talk shop, moving slowly but steadily on technical standards, supply chain security, and green tech. While the format has exasperated industry stakeholders with its glacial pace and limited avenues for feedback, it has delivered consistently: its landmark voluntary AI code of conduct has been elevated to a G7-level discussion, showing a model for future TTC-G7 synergies. However, as always with TTC, the format is less geared toward summit-style major announcements but rather incremental progress in the various working groups on existing files.

To read the full summary as it was published by Albright Stonebridge Group, click here.

To read the full analysis, click here.

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There are six major drivers of global commodity markets covering energy, metals and agriculture. These are: economic growth; geopolitics; monetary policy; currency; weather; and financial investment/funds.

To the above, we can now add two more drivers. Logistics as the 7th driver and technology as the 8th.

While the first six are self-explanatory, challenges of logistics came to the fore during the last three years when the Covid pandemic struck, soon followed by the Russia-Ukraine war. The world witnessed shipping dislocations and supply chain disruptions, while sanctions forced countries to look for new suppliers and new markets.

Russia and Ukraine are important exporters of oil, gas and coal; metals like palladium, platinum, nickel, enriched uranium, iron ore as well as grains (wheat, barley, maize), vegetable oil and fertilisers.

Logistics challenges

Logistics challenges immediately impact on the world commodity markets because of their disruptive effect. Technology too has emerged as a driver. Energy transition and decarbonization mean embracing green technologies that will have a significant impact on world commodity market covering fossil fuels and industrial metals.

But technology is a slow driver with its impact felt over time. Movement towards Electric Vehicles (EVs), solar power and so on means that energy transition would be metals intensive while demand for fossil fuels (crude oil, coal) may reduce over time.

We have seen how geopolitical developments have resulted in imposition of sanctions, protectionism, resource nationalism and occasionally, weaponisation of commodities. These developments are changing the global commodity trade landscape.

There is interdependence among nations for sourcing and marketing of goods either as raw material or as finished products. This has fostered substantially liberal trade flows resulting in formation of global value chains. Now, geopolitical events (political instability, war-like situation, strife) have resulted in dislocation of the established value chains. Sanctions have polarized nations, adversely affected settled trade flows and even led to trade controls.

So, countries are forced to diversify their supply sources and destination markets to de-risk trade and ensure continuity. We find redirection of merchandise trade with new origins and new destination markets. We also find countries are forced to compromise. For instance, the rift between China and Australia is settled because neither can afford a stand-off.

Growing cartelisation

Geopolitics has also strengthened cartelisation. We have OPEC + that includes Russia. China has brokered peace between Saudi Arabia and Iran which is a major development, the impact of which may be felt over time.

The adverse effects of geopolitical instabilities have been exacerbated by the recent banking crisis and US debt ceiling issue. After several rate hikes by the US Federal Reserve and other central bankers to tame inflation recession fears have come to the fore.

Clearly, the global policy context is becoming increasingly complex. Countries are forced to take sides. There is a possibility that the world may be fracturing into a US-led bloc and a China-led bloc.

The IMF has flagged the issue of forced polarisation among nations calling it ‘geo-economic fragmentation’.

In all of these, there is one common global challenge that’s climate change. Climate mitigation has to be a global effort. The moot question is: ‘Are we all in it together?’

For green transition, critical raw materials are concentrated in a few countries like China. Resource crunch may impact the pace of transition in India. For instance, India has turned from a net exporter of refined copper until 2018 to the position of a net importer of copper in the last five years. Copper is a critical metal for energy transition and electrification.

Finally, we have to accept that we live in a VUCA world (Volatility, Uncertainty, Complexity and Ambiguity), which will linger for longer. Geopolitical stresses can escalate. But it is for all of us to ensure that such stresses do not derail global cooperation on climate efforts.

If we don’t sail together smartly, we will sink together!!

The writer is a policy commentator and commodities market specialist. The article is based a keynote speech the author recently delivered at an international conference in Dubai . Views expressed are personal

To read the full blog post, please click here.

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