2025 has ushered in an era, where geopolitical manoeuvring and economic statecraft have become deeply intertwined. The Chinese Year of the Snake welcomes in a new world of volatility.
The global landscape has grown increasingly unpredictable. Within hours of taking office, President Donald Trump threatened to impose 25% tariffs on Canada and Mexico, with additional comments about 100% tariffs on BRICS countries if they take certain actions.
How will China react? Could a potential response to aggressive tariffs be to let the renminbi depreciate, sending the U.S. dollar soaring, so sparking off a tide of competitive devaluations, creating shockwaves far beyond trade? A reduction in US foreign trade volumes could result in a shortage of US$ held outside the US. A scramble to buy sufficient greenbacks to service the $13 trillion of debt from foreign issuers could further fuel US$ strength.
A move like this would not be classed as economic policy but, to coin a phrase used by Rabobank’s Michael Every, "Economic Statecraft".
Economic policy is straightforward. It uses tools like interest rates and fiscal spending to meet domestic economic targets. Economic statecraft uses those same tools for geopolitical and national security goals. Monetary policy could be weaponized to damage another country's currency, causing inflation and economic disruption.
Tariffs are not just about trade, they are tools of influence, as Trump demonstrated by linking tariffs on Mexico and Canada to issues like border security and fentanyl trafficking.
The Panama Canal and Greenland were also in the crosshairs. The canal is not just a shipping route but a strategic chokepoint. It was sold to Panama for $1 in 1977 on the proviso that US got most favoured status. Presently two Hong Kong-based companies control operations at either end of the canal, which could be seen as a threat. Greenland is also of strategic importance, offering both mineral wealth and control over Arctic shipping routes. The U.S. considered purchasing Greenland as early as Truman’s presidency, and recent geopolitical shifts have reignited this interest. The spectre of US involvement has had results. Denmark agreed on Friday to discuss the Arctic region with Washington and the Danish PM has said that it is up to Greenland to decide on any independence.
Threats and bluster, rather than the deployment of troops or US dollars, has already reaped concessions and change.
Trump’s presidency marks a return to a pre-World War II mindset, where tariffs and economic protectionism were central to U.S. dominance. The 20th century was characterised by the trend towards globalisation; the 21st century has seen a swing back to protectionism.
Industrialisation and the need to protect nascent industries resulted in the US imposition of the McKinley Tariff of 1890 and the Dingley Tariff of 1897, with duties reaching up to 40% on imported goods. Germany and France pursued similar strategies, with tariffs agricultural products and on German steel.
After World War I nations turned inward. Economic instability and the Great Depression in 1929 pushed protectionism to new extremes. The U.S. implemented the Smoot Hawley Tariff Act of 1931, raising tariffs on over 20,000 goods to protect American farmers and manufacturers. This sparked retaliatory tariffs worldwide, leading to a collapse in global trade—by 1934, trade volumes had dropped by over 60%.
The British Commonwealth of Nations had been formed in 1926. Britain protected itself by focusing on this new trading block, excluding non-members. France and Germany used subsidies for both industries and agriculture, erecting high barriers to trade.
At the end of WWII nations reconsidered this approach. Cooperation replaced competition as the guiding principle for economic recovery. The General Agreement on Tariffs and Trade (GATT), established in 1947, began reducing tariffs and creating a framework for global trade.
In Europe, the Marshall Plan provided $13 billion in U.S. aid to rebuild economies, with trade liberalization as a cornerstone. Institutions like the European on Coal and Steel Community (CECA), formed in 1951 and the European Economic Community in 1957, both helped foster regional integration and trade and economic cooperation.
The oil shocks of the 1970s and the resulting stagflation brought protectionism back into the spotlight. Nations sought to shield domestic industries from foreign competition during economic uncertainty.
The US initiated Voluntary Export Restraints, limiting Japanese car imports, while Europe expanded its Common Agricultural Policy. Emerging markets like India and Brazil pursued import substitution industrialisation (ISI), an industrial development program based on the protection of local infant industries through protective tariffs, import quotas, exchange rate controls, special preferential licensing for capital goods imports, subsidized loans to local infant industries
The end of the Cold War was a catalyst for a return to globalization. NAFTA was signed in 1994 and the World Trade Organisation formed in 1995. China’s accession to the WTO in 2001 changed the world, crushing industrialisation in the West.
By 2010 China overtook the US to become the world’s largest manufacturer. Its output skyrocketed from $1.2 trillion in 2001 to $4 trillion in 2020, accounting for almost 30% of manufacturing output. Exports surged from $266 bn in 2001 to more than $2.5 trillion in 2019. This grown was fuelled by Foreign Direct Investment, which grew from $46bn in 2001 to $163bn in 2020.
Meanwhile the US lost almost 6 million jobs in the first decade to 2010, from 17 million to 11.5 million, with textiles, furniture and electronics hit hardest. Between 2001 and 2013 approximately 70,000 factories closed. Europe faced similar declines.
The global financial crisis exposed the vulnerabilities of globalization. As unemployment soared, nations turned to protectionism once more, with the inclusion of Buy America provisions in the 2009 US Recovery Act. President Obama filed over 20 enforcement complaints against the WTO and won every one. Trump’s first term saw the withdrawal from the Trans-Pacific Partnership and the imposition of tariffs on a wide swathe of goods. There was disruption global supply chains which was then exacerbated by the pandemic. A rush to reshore industries like semiconductors and pharmaceuticals ensued, prioritizing resilience over efficiency. President Biden's term continued in the same vein.
President Trump has returned and we have entered a period of strategic ambiguity. A game of “Call My Bluff” has begun and the global community is on tenterhooks, unsure of when or how to react.
What do you think the year holds?
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