Strategic competition prevailing over economics
Political tensions and geostrategic rivalry now influence trade decisions more than economic reasoning or market efficiency.
In a nutshell
- Great power conflict now overshadows economic logic in global strategies
- Trade barriers serve political goals, not just traditional economic interests
- Leaders’ personalities increasingly dictate unpredictable shifts in alliances
- For comprehensive insights, tune into our AI-powered podcast here
Uncertainty is currently a hot-button word, especially in the vocabulary of financial markets and economic analysts. However, overall global trends are quite certain and point in one direction: a great power struggle.
The minutia of tariff changes, bond-market volatility or reallocation of supply chains creates a smoke screen for businesspeople who depend on stability and predictability to make decisions and deals on a daily basis. Sudden changes can swiftly undo progress.
In geopolitics, wars and clashes also seem to quickly flare up and finish just as suddenly, as evidenced by the United States’ intervention in the Israel-Iran rocket strikes in June. The frequent doses of upheaval in recent months are described by many as “uncertainty.”
Geopolitical observers, however, are aware of a continually changing landscape, characterized by four features.
Pre-war not Cold War dynamics
First, the current state of the world resembles a pre-World War II or even a pre-World War I context, rather than the Cold War and its “strategic stability,” namely the struggle for ideological supremacy tempered by the threat of mutually assured nuclear destruction. Today, China and Russia seek to counterbalance the U.S., which itself is striving to reassert its dominance. Meanwhile, the rest of the world is striking out on its own. This makes the situation more volatile and dangerous than during the Cold War. Heightened insecurity then feeds into muscular militarization and an armament race.
As the U.S. and China − the leading actors in globalization and each increasing its share of mutual prosperity − began to find themselves as rivals and adversaries countering each other’s power and influence, de-risking and de-coupling became the norm. Strategic enemies can hardly be dependent on each other’s supply chains.
Former U.S. President Barack Obama’s Asia-Pacific pivot, President Donald Trump’s first administration’s focus on Indo-Pacific alliances and the Biden administration’s maintenance of Mr. Trump’s hardening tariff policy on China were key signs of this strategic shift.
The Trump administration’s tariffs on China are more a reflection of a geopolitical standoff rather than just mercantilist economic policies aimed at encouraging domestic production.
Regardless of the negotiated outcome of the current spate of tariff brinksmanship, the trend of de-risking supply chains to ensure that products critical for society (not necessarily even military in nature) cannot be held hostage will continue. In the same manner, technology exchanges that could advance the adversary’s potential will be under increased export controls.
Hence, the second Trump administration’s tariffs on China are more a reflection and tool of a geopolitical standoff rather than just mercantilist economic policies aimed at encouraging domestic production, as they are very often portrayed and understood.
This is the essence of the misperception among many economic analysts when discussing the events of recent months. They tend to assess the economic rationale and impact, discounting the driving force of recent events: geopolitics and domestic politics.
A pattern akin to Japan’s rise and subsequent stagnation
Second, current events seem to mirror the era of Japan’s rise to become the largest exporter to the U.S. in the 1960-1980s, and its “lost decade” of economic stagnation that struck in the early 1990s. American policies were created to counter the “unfair” devaluation of the Japanese yen, which supported cheaper Japanese exports. Voluntary export restrictions were initially agreed upon by Japan and the U.S. to provide the American auto industry time to restructure and increase competitiveness. At the same time, Japanese automakers began to invest in U.S. production, and Japan itself decreased non-tariff trade barriers to ease the access of U.S. imports. All of these elements echo the current rhetoric in Washington on U.S. trade relations with China, the European Union, Japan and others.
It is no coincidence that President Trump and his officials highlight car and steel imports and their impact on local production and employment. Whether it is economically justifiable or not, the logic remains the same as four decades ago: Workers in these industries are impacted by cheaper imports, which translates into political pressure in such electorally consequential U.S. states as Michigan, Pennsylvania or North Carolina. This also explains why American political opposition to and criticism of tariff hikes is rather meek and primarily focuses on the increase in domestic prices, rather than blaming the overall strategy, or lack thereof, for these actions.
As the origin of Mr. Trump’s tariff policy is political rather than economic, any discourse on the welfare effects of these actions is likely to have little impact on the calculations of those devising them. Shrimp will not be less expensive in the Southern Atlantic coastline of the U.S. as a result of any trade deal with Vietnam, cars from Detroit which sell well in Texas will not sell better in Japan or Germany. Instead, the policies fulfill a political objective targeting those specific constituents who demanded such actions to protect their local markets.
Looking back at the 1980s, voluntary export restrictions on Japanese cars were intended for three years, but lasted 13 and ended only with the conclusion of Uruguay Round negotiations on the General Agreement on Tariffs and Trade (GATT) in 1994. The negotiations themselves lasted for eight years, despite being undertaken among allies such as the U.S., Japan and the EU, with minor interjections from developing countries.
The end of the voluntary restrictions came right around the time when Japanese car producers finished setting up their production in the U.S. In the meantime, the North American Free Trade Agreement was signed in 1992 and came into effect in 1994. Also, the European single market that was initially created in 1986 became the European Union in 1993. These parallel developments give a taste of coalescing globalizing forces that finally brought about the demise of protectionism. They also give clues as to how long the current trend of erecting trade barriers could last.
The outcome of trade negotiations in the Trump era is likely to be defined by geopolitical rivalry. As mentioned above, the largest trade deal in history thus far, the Uruguay Round of GATT, was concluded among like-minded allies mostly during the U.S.-dominated unipolar moment. In contrast, the driver of today’s economic policies is geopolitical rivalry aided by domestic expediency, and this, rather than the pursuit of efficiency and profit, will dictate the direction of policy in the foreseeable future.
China is vulnerable and at risk
Third, China is already feeling the downward spiral of property prices and bond yields. Any sign of attempting to force certain restrictions upon Beijing could be interpreted by Chinese leaders as an effort to stall the country’s growth and push it down the path of a deflationary spiral, resembling the “lost decade” in Japan. Negotiations with the U.S. and its allies will be complicated by this geopolitical undercurrent.
Read more by Zorigt Dashdorj
- Mongolia strives for a more inclusive democracy
- The global ramifications of the Russia-North Korea pact
- A new railway highlights regional dynamics in Central Asia
A lot depends on the EU’s reaction to American tariffs, since Brussels can be an initiator and a medium for multilateral negotiations. The very origin of the EU was to promote peace through greater trade, so the organization might be suited both in terms of capacity and ideology to undertake such a task, especially reforming the World Trade Organization.
Leaders’ personalities, not just their policies, are consequential
Fourth, it is interesting how traditional analysis of the current trade and geopolitical environment tends to overestimate the impact of existing institutions while overlooking the impact of the personality of the leaders themselves.
This shift from party- and institution- to person-centered leadership is usually is discussed in reference to President Trump. However, Russian President Vladimir Putin and Chinese President Xi Jinping were initially perceived as business-as-usual leaders, even “liberal reformers” of sorts, but were later seen as dramatic departures from the past. In this current state of affairs, close attention should be paid to the leaders, not only institutions.
As evidenced recently, such leaders, even in the most stable institutional settings, can bring radical change to alliances and fundamentally alter the direction of economic policies. Their rhetoric, past experiences and changing world views are of oversized impact in this world of shifting geopolitical alliances. The analysis of the personalized, historical and cultural contexts of the decision-making of great powers − usually the purview of international relations and country-specific researchers, and considered “unscientific” by economic analysis − escapes analytics based on institutional tools. In contemporary political debate and in business, much more emphasis should be placed on this “unscientific” reality.
Scenarios
Likely: Geopolitical rivalry will outweigh economics
Going forward, the business world will need to give much more weight to geopolitical risks than it did in the previous era. Forecasting of future developments at the moment mostly lacks this component and takes it not as a dominant, long-term trend, but merely as an interesting additional consideration.
Overall, while uncertainty seems to be the defining word of today, the overarching trends are clear. The great powers will continue to de-risk their supply chains and station them in safer, rather than more efficient, destinations. This will impact everything from sensitive technologies to food items. Given this, any tariff negotiations and policies that can have a meaningful impact will take time and last longer than many may expect.
Geopolitical and domestic political risks will increasingly trump economic efficiency, and economic policy – particularly tariffs and trade barriers – will be used even more for political ends. Sanctions, counter-sanctions or laws directed only to investors from competing nations will be used more frequently and more broadly than ever before.
Unlikely: Complete divorce
However, this does not mean that the walls of separation will be overwhelming nor that barriers will become so insurmountable as to create hard-and-fast economic and societal blocs.
The informed baseline assumption is that globalization is being replaced by nationalism as a dominant trend. This shift is perceived to be bolstered by growing social divides and fueled by social network platforms. Global institutions such as the World Trade Organization, the World Health Organization and UNESCO are becoming obsolete, while others are being undermined by their very founders. Those who follow this logic believe that even NATO and the EU need to redefine their missions.
The generational gap in terms of life experiences and world views is underrepresented in the analysis of current affairs. Today’s world leaders and their electorates are representative of the generations and experiences molded in times of Cold War conflicts. However, today’s younger generation (tomorrow’s leaders) will soon define global politics in their own vision.
The generation that grew up post-Cold War and has seen the benefits and downsides of the globalized world in a more balanced manner will take over. They are more likely to opt for a “globalization light” formula: one with less movement of labor, trade and finances but that still offers stable social transitions. This will definitely not be an era of ideological camps separated by iron walls – rather, it will likely be a world less globalized but also less violent than it might look at this moment.
Contact us today for tailored geopolitical insights and industry-specific advisory services.
Sign up for our newsletter
Receive insights from our experts every week in your inbox.
