Geopolitical Concerns

The uncertain outlook for European security 

The Economist

Fear of a Great Power War Could Be Making One More Likely 

Daniel W. Drezner, World Politics Review

Great Powers, Geopolitics, and Global Trade | BCG 

Priscille Arbour, Aparna Bharadwaj, Tim Figures, Marc Gilbert, Nikolaus Lang, Georgia Mavropoulos, Michael McAdoo, and Cristián Rodríguez-Chiffelle, Boston Consulting Group

A second Trump presidency poses a significant challenge to European security, potentially undermining the transatlantic alliance and emboldening Russia in the ongoing conflict in Ukraine. European nations are faced with a difficult choice: either seek an accommodation with Russia or dramatically increase their defense spending. In the immediate aftermath of Trump’s inauguration on January 20th, European governments will attempt to persuade him to uphold America’s NATO commitments and continue aid to Ukraine. However, there is a considerable risk that Trump might weaken NATO’s mutual defense clause and pursue a Ukraine policy that freezes the front lines and forces Ukraine to become neutral, as outlined in Vice President Vance’s previous proposal. Europe’s reaction could range from hoping for the best to acknowledging a permanent shift in American politics and taking decisive action. Currently, about two thirds of European NATO members fall short of the 2% of GDP defense spending target. Without US support, they might need to double their spending and restructure their collective defense strategy. The roles of Britain, France, and Germany are crucial, with Britain potentially facing the greatest loss from a break with the US, France advocating for more unified EU defense measures, and Germany possibly viewing the situation as an emergency requiring increased defense spending. The response to any Trump-led peace proposal remains unclear, leaving Europe with the prospect of either escalating defense spending or accepting a Russian victory.

Amid Europe’s escalating security dilemma, the risk of great power conflict is rising as the post-1945 international order weakens. Although direct conflicts have been avoided, growing tensions and fears of resource scarcity are shifting dynamics. Economic sanctions and embargoes are driving great powers to secure critical resources, fueling conflict. The US has intensified economic warfare through sanctions on Russia and export controls on China, prompting retaliatory measures, cyberattacks, and infrastructure disruptions. Recently, China imposed extraterritorial sanctions to block re-exports of critical minerals to the US. Simultaneously, the Trump administration’s interest in controlling territories of allies partly stems from resource concerns, reflecting a broader trend of prioritizing economic security. This shift has triggered a security dilemma, with declining US hegemony and great powers rejecting interdependence unless asymmetrically advantageous. Both US and Chinese elites increasingly view war as a possibility, driving geopolitics and economic security to dominate global trade priorities. Although global trade is projected to grow 2.9% annually over the next decade, trade routes are transforming. North America is forming a resilient trade bloc, reducing reliance on Asia, particularly China, while China deepens ties with other regions as Western trade diminishes. The Global South, including India and Southeast Asia, is rising in importance. The EU is expected to rely more on the US, Japan, and emerging markets, with stagnating trade with China. By 2033, US-EU trade is forecast to grow by $303 billion, China’s trade with the Global South by $1.25 trillion, and India’s total trade to $1.8 trillion with a 6.4% CAGR. Trade among Global South nations is also set to expand by $673 billion.

Geoeconomics

Global Bond Tantrum Is a Wrenching and Worrisome Start to New Year 

Michael Mackenzie and Ye Xie, Bloomberg

An initiative so feared that China has stopped saying its name

The Economist

What Happened to the Asian Century?

John West, The Globalist

The global bond market is facing significant volatility, with US Treasury yields surging despite the Federal Reserve’s efforts to lower interest rates. Borrowing costs are climbing, with US mortgage rates near 7%, and the 10-year Treasury yield has jumped over a percentage point in four months, nearing 5%—levels not consistently seen since before the 2008 financial crisis. Donald Trump’s return to the White House adds to the uncertainty, as his pro-growth economic policies are expected to prioritize deficits over fiscal discipline, potentially driving inflation higher. The US budget deficit is projected to exceed 6% of GDP by 2025, and Trump’s economic plan could add $7.75 trillion to the national debt by 2035, according to the Committee for a Responsible Federal Budget. Some analysts view this as a structural shift rather than a return to pre-2008 norms, driven by de-globalization, aging populations, and climate change spending. Long-term yields on 10-year notes are expected to stay above 4.5%, while the US debt-to-GDP ratio could reach 132% by 2034, raising concerns about fiscal sustainability. Investors are increasingly focused on fiscal policy, with some suggesting the bond market could act as a check on government spending.

Meanwhile, China’s “Made in China 2025” initiative, while not explicitly referenced by Chinese officials in public discourse due to international scrutiny, has largely met its objectives, leading to substantial growth in domestic industries and technological advancement. Launched a decade ago, the plan aimed to make China a manufacturing leader, less dependent on foreign labor and Western supply chains. Chinese firms now dominate markets such as electric vehicles and drones, selling over 10 million EVs in the past year and capturing over 90% of the global drone market. Chinese companies have also increased their investment in research and development, surpassing their target of 1.68% of revenue by 2023. However, progress has been slower in areas like commercial aircraft and advanced semiconductors, with the latter facing challenges due to US export controls. The economic cost of the initiative is substantial, estimated at over $3 trillion in the past decade, and has required extensive labor and capital. The resulting emphasis on manufacturing has led to a record trade surplus of nearly $1 trillion in 2024, causing tensions with trade partners who accuse China of flooding global markets with cheap goods. The initiative has also caused an economy-wide reduction in total factor productivity, leading President Xi to emphasize “new productive forces”. Staying in Asia, the Asian Century, which once seemed inevitable, is now facing serious obstacles. While Asia’s economies benefited from sound domestic policies and Western support, that growth has slowed. Many of Asia’s once-dynamic economies are struggling with aging populations, and China itself is facing demographic challenges, as well as a tightening of government control over the private sector and declining foreign investment. Despite having a large population, India has been unable to generate enough jobs to benefit from a demographic dividend. The perception of the US and the West as beacons for emerging economies has diminished due to events like the post-9/11 wars and the 2008 financial crisis. The hope for Asian economies to partner with the West on global issues such as climate change and cyber-security has also failed to materialize.

Global Junctions

US to Push TSMC and Samsung to Tighten Flow of Chips to China

Mackenzie Hawkins, Jenny Leonard, and Jane Lanhee Lee, Bloomberg

Biden expands chip controls to curb China’s global access to AI 

Pak Yiu and Ken Moriyasu, Nikkei

Scientists and Doctors Reveal How Genes are Mapping Cures for Cancer 

Newsweek

The United States is implementing new regulations to restrict the flow of advanced semiconductor chips to China, aiming to prevent China from accessing cutting-edge technology. These measures are a response to concerns that Chinese companies, such as Huawei, are circumventing existing export controls. The new rules target major chip manufacturers like Taiwan Semiconductor Manufacturing Co. (TSMC), Samsung, and Intel, requiring them to conduct greater due diligence on their customers. Chips at or below the 14 to 16-nanometer threshold are now presumed restricted and require a government license for sale to China, a rule which is more expansive than previous restrictions. However, there are ways to overcome the presumption, including a list of authorized customers from the US and allied countries, as well as for chips with fewer than 30 billion transistors packaged by trusted companies, a measure intended to target more sophisticated processors, particularly AI accelerators, designed by Chinese companies. These rules build upon previous restrictions on the sale of AI chips to data centers in most countries, with the aim of preventing China, Russia, North Korea, and Iran from accessing AI chips in data centers outside the US, including in Southeast Asia and the Middle East. The US Commerce Department has also set limits on the amount of AI computational capacity that can be placed in third-party countries. The rules will be enforced after a 120-day comment period. These actions are part of the Biden administration’s broader effort to slow China’s progress in advanced technologies and have drawn criticism from the semiconductor industry. Companies like Nvidia have expressed concerns that the new rules will undermine global progress in AI and harm America’s competitive edge. The US government has also introduced controls on the “model weights” of advanced AI models, limiting the transfer of such technologies to countries of concern.

In healthcare, whole genome sequencing (WGS) is transforming cancer treatment by enabling precise and personalized therapies. WGS identifies specific genetic mutations driving cancer, guiding targeted treatments. For instance, a patient with a rare blood cancer was successfully treated with a melanoma drug after WGS uncovered a relevant mutation—a case highlighted in the New England Journal of Medicine. While standard next-generation sequencing (NGS) provides limited insights, WGS generates thousands of data points, offering a comprehensive view of a tumor. Advances have dramatically reduced genome sequencing time from 13 years to just days. However, WGS remains costly ($7,000–$10,000 per test) and faces regulatory and reimbursement challenges. Many health systems bypass FDA approval by enrolling patients in clinical trials. Despite hurdles, WGS shows significant promise, particularly for rare and advanced cancers. Studies indicate it can alter treatment in one-third of cases. It is also increasingly used for pediatric cancers, where mutations differ from adults. St. Jude Children’s Hospital sequences 400–500 genomes annually, while MSK aims to build the largest publicly available pediatric cancer WGS dataset, advancing our understanding of cancer as a genomic disease treatable through comprehensive DNA analysis.

Global Trajectories

Why the Rich World is Going to Need AI and Africa 

Bloomberg

Does the Madman Theory Actually Work? 

Daniel W. Drezner, Foreign Policy

The developed world faces declining birth rates, which will lead to smaller workforces and increased strain on social support systems. To maintain economic growth, countries in the developed world will need to increase productivity through technological advancements, such as AI, while also encouraging people to work longer and retire later. The McKinsey Global Institute has issued a report highlighting this challenge. The report notes that the number of working-age individuals in the developed world is decreasing, which presents a problem because there will be fewer people supporting children and the elderly. To compensate, some countries would need their populations to work substantially more hours per week to maintain current rates of economic growth. For example, South Koreans under 50 would need to work an additional 24 hours per week and Spaniards almost 30 hours per week. It is unlikely that such increases are feasible, and thus, many countries will need to dramatically improve their productivity through advances in technology, like AI. Sub-Saharan Africa is projected to see its share of the global population double by the end of the century, reaching 34% of the world’s population, which presents a potential opportunity for developed nations to fill labor shortages through immigration from the region. This could also help with poverty reduction and the building of a middle class in the region.

The “madman theory,” which suggests that a leader who appears unpredictable and willing to take extreme actions can extract concessions from adversaries, is a concept that has been embraced by some leaders including Donald Trump. In his 2016 presidential campaign, Trump openly embraced anger and unpredictability as assets, drawing comparisons to Richard Nixon, who also employed similar tactics, famously coining the term to describe his strategy during the Vietnam War. Nixon aimed to convince the North Vietnamese that he was capable of anything, including using nuclear weapons, to end the war. The efficacy of the madman theory is debatable, but Trump’s adoption of it as a method of dealing with adversaries is clear.