Geopolitical Concerns

What Happened to International Law? by Eric Posner

Eric Posner, Project Syndicate

China and the US: From mutual dependence to head-on competition 

Harold Thibault, Le Monde

The Cold War Putin Wants 

Andrei Kolesnikov, Foreign Affairs

Gazans return home . . . to nothing

Malaika Kanaaneh Tapper and Mai Khaled, Financial Times

The current geopolitical landscape is marked by a growing disregard for international law, a trend exemplified by several key events. Israel’s repeated attacks on Syria, in clear violation of the UN Charter, have been met with muted criticism from the US and other nations. Similarly, Russia’s invasion of Ukraine in 2014 and again in 2022, along with the illegal annexation of Ukrainian territory, underscore a blatant disregard for international norms. China’s use of force in the South China Sea and its potential invasion of Taiwan further highlights the weakening of international law. The US itself has a history of military interventions based on dubious legal grounds. The World Trade Organization, once a symbol of global cooperation, is now struggling due to its appellate body being unable to function as protectionism rises. Furthermore, the International Court of Justice and the International Criminal Court, intended to prevent war and ensure justice for war crimes respectively, are proving largely ineffective. Even international investment laws intended to promote development are facing backlash for benefiting corporations more than the countries they were supposed to help. This decline in international law is largely attributed to an anti-globalization backlash, where the benefits of globalization have failed to outweigh the perceived harms.

Meanwhile, the relationship between the US and China has evolved from a state of mutual dependence to head-on competition, fueled by concerns in Washington that engagement with China has inadvertently propelled its rise to power. As of January 2025, figures like Marco Rubio, the new secretary of state, openly criticize China’s actions, accusing the Chinese Communist Party (CCP) of exploiting the global order. This hardline stance contrasts with the earlier era of engagement, exemplified by Henry Kissinger’s efforts and President Richard Nixon’s visit in 1979, which established diplomatic relations. China’s entry into the World Trade Organization in 2001 was supposed to lead to liberalization, however, it solidified the CCP’s power. In response to China’s growing assertiveness, the US has shifted its policies, as shown by Barack Obama’s “pivot to Asia”, Trump’s trade war and actions against companies like Huawei, and Joe Biden’s “small yard, high fence” policy, aimed at restricting China in key areas like semiconductors. Russia’s leader Vladimir Putin, also has a vision of global power, seeking to exert influence over a “Russian world,” by resurrecting the concept of a “Third Rome”. However, Russia has lost soft power by using hard power. Its intervention in Syria has not succeeded, and former strategic partners like Armenia are turning away. Despite some public support, the Russian population is showing signs of war fatigue due to the conflict in Ukraine. Putin’s goals are to maintain a permanent war against the West by cold means rather than hot to maintain power. Lastly, Gazans are returning to their homes after a 15-month war between Israel and Hamas and are facing devastation on an unprecedented scale, with 92 percent of homes damaged or destroyed. Despite a ceasefire, many areas are wastelands. Reconstruction depends on the longevity of the ceasefire, with over 50 million tons of rubble to clear. Many cannot even begin the process due to no-go zones established by Israel.

Geoeconomics

Animal spirits in markets risk running too far 

Katie Martin, Financial Times

The World Risks a ‘Financial Heart Attack.’ Bridgewater’s Ray Dalio Has the Medicine. 

Reshma Kapadia, Barron’s

Will America’s crypto frenzy end in disaster? 

The Economist

The current economic environment is characterized by a surge of “animal spirits” among business executives, particularly following the re-inauguration of Donald Trump as US president. This optimism has fueled a strong start for US stocks, with a roughly 4% increase in the first month of the year, marking one of the most robust opening months in the past decade. Veteran investor Stan Druckenmiller noted that chief executives are “somewhere between relieved and giddy,” while a senior JPMorgan executive described US banks as being in “go-mode”. However, this exuberance is contrasted by concerns about the global government bond market, which has experienced a shaky start to the year. Despite strong growth, there are expectations that inflation will persist, potentially hindering the Federal Reserve’s ability to lower interest rates. This has led to a rise in bond yields, with the US 10-year yield sitting well above 4.5%, which could undermine the case for continued investment in stocks. Market watchers are particularly wary of US yields hitting 5%, which could trigger a market correction. Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, suggests that a combination of slightly slower growth and slightly higher rates could be detrimental to the markets.

Meanwhile, Ray Dalio, founder of Bridgewater Associates, has expressed deep concerns about global debt levels, which reached an estimated $102 trillion last year, with the US and China being the biggest contributors. Dalio warns that heavily indebted countries risk a debt crisis, potentially leading to sharply higher interest rates that would negatively impact stocks, real estate, and the economy. He emphasizes the importance of addressing the “big debt cycle,” which culminates in a debt crisis with nine stages. Dalio highlights red flags such as governments selling more debt than they can buy back and central banks printing money to service liabilities. To avert such crises, he suggests policymakers should aim to reduce the deficit to 3% of GDP through spending cuts, tax increases, and lower interest rates, also suggesting that the Fed can assist by lowering interest rates if the economy weakens. In other economic developments, the new Trump administration, the crypto industry is poised for significant changes as it is brought into the mainstream, with a new government department even being named after a meme coin. The administration’s embrace of digital assets, as stated in an executive order on January 23rd, is expected to foster innovation and economic development. As a result, banks and the crypto industry are increasingly aligned, with the Securities and Exchange Commission altering its guidance so that financial institutions no longer have to account, on their own balance sheets, for crypto assets held on behalf of customers. This has the potential to lead to new forms of risk-taking and greater overlap between the crypto and traditional finance industries.

Global Junctions

Silicon Valley Is Raving About DeepSeek, a Made-in-China AI Model

Raffaele Huang, Wall Street Journal

US export controls have forced Chinese tech companies to be more innovative

Angela Zhang, Financial Times

Judgment Day for the AI rally 

Alexandra Scaggs, Financial Times

China’s financial system is under brutal pressure 

The Economist

The emergence of DeepSeek, a Chinese AI startup, has sent ripples through the global tech community, demonstrating China’s rapid advancements in artificial intelligence. DeepSeek’s AI models, such as DeepSeek-V3 and R1, have achieved performance levels comparable to those of well-funded US rivals like OpenAI, despite utilizing less-advanced chips. This has been made possible by innovative approaches in algorithms, architecture, and training strategies, such as the “mixture-of-experts” approach which focuses on smaller AI models trained on specific data. DeepSeek-V3 was trained in two months at a cost of $5.5 million, using Nvidia H800 GPUs, which is substantially less than what US companies like OpenAI have spent. DeepSeek has also reduced inference costs, earning it the moniker “Pinduoduo of AI,” referencing a Chinese e-commerce company known for its cost-cutting business model. The open-source nature of DeepSeek’s models has also fueled interest and collaboration within the global tech community, with some users finding that DeepSeek refuses to answer sensitive political questions about China. The company was founded by Liang Wenfeng, a Chinese hedge-fund manager, and grew out of the AI research unit of High-Flyer, his hedge fund with $8 billion in assets. This accomplishment challenges the idea that cutting-edge AI requires vast amounts of computational power and extensive financial resources, highlighting how software ingenuity can offset hardware constraints. It also highlights the limits of US export controls designed to slow China’s AI progress, as they have inadvertently spurred Chinese companies to become more self-reliant and innovative.

The rapid advancement of Chinese AI companies like DeepSeek has contributed to a sense of unease in the US stock market, leading to what some are calling a “judgment day” for the AI rally. The intense focus on developing “Machine Gods” or Artificial General Intelligence in the US, at whatever cost, is contrasted with DeepSeek’s development of a “Lesser Deity” which is a more cost-efficient AI model, which has prompted some investors to question the huge investments in US AI companies. A major sell-off in big tech stocks was sparked by DeepSeek’s advances, with Nvidia experiencing a significant single-day market cap loss. This selloff is partly due to a reassessment of the necessity of massive spending on leading-edge semiconductors, and the tech-focused Nasdaq fell 3% and Nvidia slid more than 10%. Meanwhile, China’s financial system is facing intense pressure, with its bond market experiencing record low yields and the housing market in a slump, due to a government plan to buy up a large quantity of unsold homes. China’s closed financial system exacerbates the situation, trapping investors with falling valuations. Banks, which are significant holders of government bonds, are feeling the strain due to falling prices of homes used as collateral for loans, which is forcing them to reassess the quality of loans and set aside money to buffer losses. Despite efforts by the central bank to cut deposit rates, bank margins have fallen to dangerously low levels. This is leading to a dangerous cycle where investors are forced into government bonds, further driving down yields. China’s central bank is unlikely to relax capital controls, which will keep yields low.

Global Trajectories

Faced with the risk of a trade war with the US, how will European countries respond?

Eric Albert, Le Monde

What Trump’s Threatened Tariffs May Mean for the World 

Edwina Otira, Bloomberg

The Trade Shifts Redefining Economic Development

Pinelopi Koujianou Goldberg and Michele Ruta, Project Syndicate

Trump’s First Test Will Be the Bond Market by Jim O’Neill

Jim O’Neill, Project Syndicate

The European Union is facing a significant dilemma as Donald Trump threatens to impose new tariffs, creating a risk of a trade war. Trump has stated that he intends to tax imports from Mexico and Canada at 25% beginning February 1, 2025,  and has also suggested a 10% tariff on European imports, or that they buy more American oil and gas. These actions follow Trump’s withdrawal of the US from an international agreement on taxing multinational companies, which aimed to impose a 15% minimum tax rate. While some European leaders advocate for a measured response, others urge retaliatory measures, risking escalation. Agnès Benassy-Quéré, second vice-governor of the French central bank, emphasized the need for Europe to respond to maintain “credibility,” even at the risk of escalation. Others, such as Irish Finance Minister Jack Chambers and German counterpart, Jörg Kukies, suggest a more pragmatic approach of constructive engagement and partnership with the US. EU Commission President Ursula von der Leyen has also proposed that Europe could buy more gas from the Americans to avoid tariffs. Europe’s hesitation is partly due to the fact that in 2022, the EU had a net trade surplus with the US of €157 billion in goods, while having a trade deficit of €1.5 billion in services. Given the difficulty of imposing customs duties on services, Europe would be more exposed to tariffs in the event of a trade war. In the past, the EU has targeted symbolic goods such as Harley-Davidson motorcycles and bourbon in response to US tariffs. Aurore Lalucq, MEP, has suggested that the EU could tax GAFAMs (Google, Apple, Facebook, Amazon, Microsoft) as a way of targeting American service exports. The EU also has new trade tools, such as rules for monitoring foreign investments and an “anti-coercion” instrument, which could be used to counter pressure from the US, although there is debate about how willing the EU will be to use them.

Trump’s tariff threats have global implications, and while his campaign pledge to immediately impose draconian tariffs has not been met, he has issued fresh tariff threats against China, as well as Mexico and Canada. These actions have prompted companies and businesses around the world to brace for potential consequences, with many economists warning of a return of US inflation and disruptions to global supply chains. Global trade is undergoing a profound transformation due to technological advances, activist trade and industrial policies, and escalating geopolitical tensions, which threaten to fragment the global economy. Over the past three decades, many developing economies have pursued an export-led growth model, and while automation and new technologies could change the landscape of trade, geopolitical tensions are already reshaping trade flows. Since the start of the Sino-American trade tensions in 2018, several developing countries, such as Malaysia, Mexico, and Vietnam, have emerged as key suppliers to the US market. Furthermore, a simulation has shown that the fragmentation of the world into competing blocs would hit low-income countries the hardest. In addition to these challenges, the bond market is also reacting to Trump’s return to the White House with some alarm. The market’s initial optimism was short-lived, with bond yields rising and weighing on equities. The rise in bond yields, along with the University of Michigan’s five-year inflation expectations survey rising to 3.3% this month from 2.8% in December, is an indication that Americans have serious concerns about some aspects of the new administration’s economic program. The bond markets are watching and there is a sense that Trump must consider their concerns as many economists would consider his proposals to be inflationary.