Recommended Weekend Reads

Looking at the Effects of Mexico’s Judicial Reform on FDI and USMCA, The Strait of Malacca Emerges as China’s Achilles Heel, Looking at Africa’s Financial Flows, and the Growth of Export Controls as a Strategic Weapon

July 11 - 13, 2025

Below are the reports and studies we found of particular interest this past week.  We wanted to share them with you in the hope they will be useful to you.  Please let us know if you have any questions.  We hope you have a wonderful weekend.

America

• No Checks on Power?  The Effects of Mexico’s Judicial Reform on Foreign Investment and the USMCA   Center for Strategic and International Studies

  On September 11, 2024, Mexico’s senate approved a sweeping constitutional reform meant to fundamentally reshape the country’s judicial system, principally by having all judges in the country be popularly elected to their positions. Its architect, former President Andrés Manuel López Obrador (AMLO), had spent his six-year term railing against the Mexican judiciary, asserting that the rot of corruption, nepotism, and abuse of power had spread to judges at all levels—federal, state, and local. The genesis of the reform is AMLO’s clashes with the judicial branch. Frustrated by the Supreme Court repeatedly striking down important aspects of his legislative agenda, AMLO came to believe that the Fourth Transformation, his ambitious project to end the “neoliberal era” in Mexico, would require far-reaching constitutional changes to be truly consolidated. During a recent CSIS Americas Program event on the immediate and long-term effects of the reform, panelists and legal experts noted that the constitutional amendment was a key piece in a larger political chessboard aimed at transforming Mexico into a more consolidated state under one-party rule, with potentially disastrous consequences for Mexico’s legal and economic future.

• Colombia Wages War on Cash With New Central Bank Payment Network   Bloomberg

  Colombia’s central bank needs to win over skeptics as it tries to modernize the financial system and reduce the nation’s heavy reliance on cash. While most Colombians now have access to financial products, adoption of digital payments lags emerging market peers such as Brazil due to high transaction costs and a lack of trust. The bank thinks it can fix these problems with the upcoming launch of Bre-B, its new payment infrastructure. Colombians are signing up for digital wallets and low-value deposit accounts at a rapid pace, but they’re still not using them much. As of 2024, about 70% of Colombian adults had at least one such account, and yet nearly 8 out of 10 transactions still take place in cash.

• What Passage of the “One Big Beautiful Bill” Means for US Energy and the Economy   The Rhodium Group

  The fiscal year 2025 budget reconciliation legislation, commonly called the “One Big Beautiful Bill” (OBBB) and signed into law by President Trump last week, will have meaningful reverberations across the US energy sector and economy. We estimate the law will increase national average household energy bills by $78-192 and increase total industrial energy expenditures by $7-11 billion in 2035. The OBBB will cut the build-out of new clean power generating capacity by 53-59% from 2025 through 2035. All told, the law puts more than half a trillion dollars of clean energy and transportation investment at risk of cancellation. It also puts new economic pressure on operating facilities that manufacture clean energy technology—tied to nearly $150 billion of investment—given greatly reduced domestic demand for these products. Though these figures represent substantial changes from the baseline, the impacts could be even more substantial depending on how executive actions shape the law’s implementation.

• ‘The president is pissed’: Trump's Brazil tariff threat is part of a bigger geopolitical dispute  Politico

• President Donald Trump is framing his threat to slap a bruising 50 percent tariff on Brazil as a quest for justice for his friend and ally, far-right former President Jair Bolsonaro. But it was his displeasure at a gathering of emerging market nations in Rio de Janeiro over the weekend that tipped the president over the edge, convincing him to send a letter laying out the new levies, according to four people familiar with the situation, granted anonymity to share details. The White House concluded that other methods of punishing Brazil for its perceived mistreatment of Bolsonaro and its alleged censorship on social media, like sanctions, would take too long or were too complex, according to two of the people.  But “BRICS tipped the scale,” said Mauricio Claver-Carone, a close ally of Secretary of State Marco Rubio and Trump’s former special envoy to Latin America.
  
  

  China

• The Malacca Dilemma: China’s Achilles’ Heel    Modern Diplomacy

  President Trump’s recent claims on the Panama Canal and the annexation of Greenland in the Arctic Circle have brought to the fore one of the most paramount notions of geopolitics: command of the sea. “Who rules the waves rules the world.”  For China, there is growing concern over a major maritime chokepoint of the Strait of Malacca. All of China’s energy sea lines of communication (SLOCs) converge through this strait. Each year, $3.5 trillion worth of trade—equivalent to one-third of global GDP—passes through the Strait of Malacca, including two-thirds of China’s total trade volume, over 83% of its oil imports, and approximately 16 mb/d of oil and 3.2 mb/d of LNG. Roughly 6.4 billion deadweight tons (dwt) of cargo pass through the strait annually, with about 10 vessels entering or exiting every hour. Most of these shipments consist of fossil fuels from the Middle East and Africa.

• Quest for Strategic Autonomy?  Europe Grapples with the US - China Rivalry    Mario Esteban, Miguel Otero-Iglesias, Cristina de Esperanza, eds., European Think Tank Network on China

  The intensifying rivalry between the US and China has reshaped Europe’s strategic calculations. Building on the 2020 European Think Tank Network on China (ETNC) report, which assessed Europe’s positioning in this context, this edition re-examines the geopolitical landscape in light of the Covid-19 pandemic, Russia’s war in Ukraine, and Donald Trump’s return to the White House. This report features 22 national chapters and one dedicated to the EU, analysing the evolution of Europe’s relations with Washington and Beijing, the range of approaches to dealing with the US-China rivalry, and how these are expected to evolve.

• China Wants 115,000 Nvidia Chips to Power Data Centers in the Desert   Bloomberg Technology

  A Bloomberg News analysis of investment approvals, tender documents and company filings shows that Chinese firms aim to install more than 115,000 Nvidia Corp. AI chips in some three dozen data centers across the country’s western deserts. Operators in Xinjiang intend to house the lion’s share of those processors in a single compound — which, if they can pull it off, could be used to train foundational large-language models like those of Chinese AI startup DeepSeek. The complex as envisioned would still be dwarfed by the scale of AI infrastructure in the US, but it would significantly boost China’s computing prowess as President Xi Jinping pushes for technological breakthroughs. Such a project also would raise serious concerns for officials in Washington, who restricted leading-edge Nvidia chip sales to China in 2022 over worries that advanced AI could give Beijing a military edge.
  
  

  Africa

• Financial Flows: Thematic Future    Institute for Security Studies (South Africa)/African Futures

  This theme on Africa’s financial flows explores the key inward monetary flows shaping Africa’s development, namely official development assistance (aid), foreign direct investment (FDI) and remittances, while also assessing the scale and impact of illicit financial flows. The analysis considers the size and impact of these flows at the regional and country levels. A Financial Flows scenario is modeled subsequently to assess the potential impact of ambitious increases in aid, FDI, remittances, and portfolio investments to Africa and a reduction in illicit financial flows.

Geoeconomics & Trade

• Modern Globalization and the Nation State – The Evolving International Political Economy   European Centre for International Political Economy

  Unresolved political economy contradictions are becoming more evident – between a national manufacturing narrative versus actual technology-led globalization, balancing open trade versus protection, old industries like steel against the new like AI, and whether governments or major corporates are primarily driving these developments. Leaders face the huge challenges to acknowledge today’s complex interdependent world, define essential national interests against special interest pleading, and work with others to deliver their objectives. Not doing so will only exacerbate uncertainty prevalent across countries.
  

• From National Security to Strategic Leverage   International Institute for Strategic Studies

  As export controls evolve from national security tools to instruments of strategic leverage, the US–China strategic competition is entering a new, more transactional phase. The recent tit-for-tat over chip-design software and rare earths reveals a shifting geopolitical battleground defined by chokepoints, coalition-building, and the race to reduce dependencies.

• Soft Landing or Stagnation? A Framework for Estimating the Probabilities of Macro Scenarios   Federal Reserve Board Economic Research

  Abstract: Amid ongoing trade policy shifts and geopolitical uncertainty, concerns about stagflation have reemerged as a key macroeconomic risk. This paper develops a probabilistic framework to estimate the likelihood of stagflation versus soft landing scenarios over a four-quarter horizon. Building on Bekaert, Engstrom, and Ermolov (2025), the model integrates survey forecasts, structural shock decomposition, and a non-Gaussian BEGE-GARCH approach to capture time-varying volatility and skewness. Results suggest that the probability of stagflation was elevated at around 30 percent in late 2022, while the chance of a soft landing was below 5 percent. As inflation moderated and growth remained strong through 2024, these probabilities reversed. However, by mid-2025, renewed tariff concerns drove stagflation risk back up and the probability of a soft landing lower. These shifts highlight the potential value of distributional forecasting for policymakers and market participants navigating uncertain macroeconomic conditions.

Recommended Weekend Reading

Europe’s Seismic Defense and Economic Shifts, Looking at China’s Lock on Latin America’s Ports, the Struggle to Meet the Skyrocketing Energy Demands of US Data Centers, and the Geopolitics of AI

June 27 - 29, 2025

This past week, we found these reports and studies particularly interesting and useful and wanted to share them with you. Hopefully, you will find them useful as well.  Please let us know if you have any questions or if you or a colleague wish to be added to our email list.

The Rapidly Changing Defense and Economic Future of Europe 

• Is Germany Without Its Debt Brake on the Right Track?    International Economy Magazine

  Long before Germany’s decision to initiate an aggressive military buildup in response to the Trump administration’s new isolationist policies, a powerful chorus in Germany was heavily campaigning to loosen or reform the country’s debt brake, the so-called Schuldenbremse enshrined in the German constitution. Many policymakers envisioned an aggressive infrastructure buildup paid for with public spending financed by much higher public debt. Such a constitutional change had long been thought undoable. What will be the end result of a huge European debt expansion led by a Germany that now admits its military spending and spending on high-tech–related public infrastructure have been inadequate? What kind of pressure will the European Central Bank face? To answer these and many other questions, International Economy Magazine asked a group of experts (including yours’s truly) to offer their views.

• Trump’s European revolution        European Council on Foreign Relations

  New ECFR polling suggests that Donald Trump is transforming political and geopolitical identities not only in the US, but also in Europe.  Trump’s second presidency is recasting the European far-right as the continental vanguard of a transnational revolutionary project, and mainstream parties as the new European sovereigntists.  It is also transforming geopolitical attitudes and accelerating the shift from a European peace project to a war project.  Many Europeans support increased military spending, conscription, independent nuclear deterrents, and defending Ukraine even if the US abandons it.  However, they also doubt that Europe can achieve strategic autonomy fast enough and are therefore inclined to hedge. Conscription is less popular among the young; support for Ukraine may reflect reluctance to confront Russia directly; many hope America will return after Trump.

China

• No Safe Harbor: Evaluating the Risk of China’s Port Projects in Latin America and the Caribbean     Center for Strategic and International Studies

  In this groundbreaking interactive report, CSIS reports on how China is rapidly expanding its influence over maritime ports across Latin America and the Caribbean (LAC) – 37 in all.  By building, financing, and buying up key ports, Chinese firms have become deeply embedded in the physical infrastructure connecting the region’s dynamic maritime economy. While these investments bring commercial opportunity, they also open the door for Beijing to gain strategic leverage, collect sensitive data, and expand its geopolitical influence closer to U.S. shores. 

• How China Wins – Beijing’s Advantages in a Revisionist Order   Julian Gewirtz/Foreign Affairs

  In recent years, many analysts have hotly debated the scope and scale of the challenge that Beijing poses to the international order. This debate now finds itself in a peculiar moment, as Trump has made the United States appear as the more explicitly revisionist power, openly upending the international order it once championed. By withdrawing from UN bodies; placing tariffs on the entire world, including on U.S. allies; threatening to seize Canada and Greenland; and undermining collective principles of law and pluralism, the second Trump administration has given China unprecedented space to present itself as both a defender and a reformer of the existing order. That is allowing China to gain greater influence in existing institutions, exploit fear and uncertainty to pull long-standing U.S. partners closer to Beijing, and build its own alternative institutions and relationships even as it continues to flout international rules and norms. Trump and Xi are turning U.S.-Chinese competition into a story of two self-interested, domineering superpowers looking to squeeze countries around the world—and each other—for whatever they can get. This dramatic shift plays into China’s hands and undermines core U.S. strengths in the long-term competition over the future international order.

Challenges to the Global Energy Markets

• U.S. Power Struggle: How Data Centre Demand is Challenging the Electricity Market Model     Wood Mackenzie

  US utilities have been caught flat-footed as a surge in the development of power-hungry data centers and manufacturing facilities has packed load interconnection queues.  This has left the power sector with a demand growth dilemma. And the challenge has only intensified. There are substantial hurdles to meeting such gargantuan demand growth: procurement bottlenecks for critical supply-side equipment, the retirement of substantial amounts of coal-fired generation, tariff and energy policy changes that make renewables development more challenging, long lead times on new projects and the need for transmission upgrades.  In some cases, just a few major customers will soon account for as much utility infrastructure investment as all other customers put together, reshaping utilities’ risk profile. In a competitive power market, if data centers are added faster than new power plants can be brought online, it could threaten grid reliability and lead to power outages.  

• Assessing Emissions from LNG Supply and Abatement Options    International Energy Agency

  Around 550 billion cubic meters (bcm) of natural gas were exported as liquefied natural gas (LNG) in 2024, just under 15% of global natural gas consumption. A further 500 bcm of natural gas were transported through pipelines. Global LNG supply has grown faster than overall natural gas demand in recent years. This trend is set to continue with the arrival of nearly 300 bcm of new annual LNG supply capacity between 2025 and 2030.  The bottom line: LNG brings fewer Earth-warming emissions than coal, but that oft-debated comparison sets the bar way too low, the IEA argues. 

Geoeconomics

• How Do Central Banks Control Inflation?  A Guide for the Perplexed   Journal of Economic Literature

  Abstract: Central banks have a primary goal of price stability. They pursue it using tools that include the interest they pay on reserves, the size and the composition of their balance sheet, and the dividends they distribute to the fiscal authority. We describe the economic theories that justify the central bank’s ability to control inflation and discuss their relative effectiveness in light of the historical record. We present alternative approaches as consistent with each other, as opposed to conflicting ideological camps. While interest-rate setting may often be superior, having both a monetarist pillar and fiscal support is essential, and at times pegging the exchange rate or monetizing the debt is inevitable.

• The Sacrifice Trap of War       John Temming/Christopher Coyne – George Mason University/SSRN

  Abstract: This paper explores the political economy of the sacrifice trap of war--the conflict-related version of the sunk cost fallacy, where policymakers invest additional resources in failing wars because of prior sacrifices already made. Once the initial decision to engage in war is made, democratic leaders face strong incentives to signal success to citizens. These incentives stem from the need to maintain public support, preserve their reputation as effective leaders, and establish a positive legacy. However, policymakers do not bear war's full costs, instead shifting significant burdens onto others. This cost-shifting allows them to ignore sunk costs with minimal personal consequence, creating a negative political externality--the overproduction of war compared to situations where policymakers internalize the full costs of their actions. These dynamics, combined with policymakers' desire to maintain their identity as a strong and effective leader, explain how societies become mired in war's sacrifice trap. After exploring the sacrifice trap's theoretical foundations, we examine two historical cases--U.S. involvement in the Vietnam War (1955-1975) and in the Iraq War (2003-2011).

Artificial Intelligence, National Security & Geopolitics 

• On the Geopolitics of AGI        Geopolitics of AGI/Rand Corporation

  A decade ago, few believed that artificial general intelligence (AGI)—human-level or superhuman-level cognition across a wide variety of tasks—would emerge in our lifetime. Today, policymakers and executives worldwide are confronting the possibility that AI systems could soon match or exceed human performance in nearly all economically and militarily significant domains. Whether leading AI companies cross the unknown, potentially unknowable threshold to AGI today or tomorrow, we will live for the foreseeable future in a world where increasingly advanced AI underpins transformational changes to economies, militaries, and societies. Moreover, this prospect of technological change coincides with a period of profound shifts in geopolitics and global security, as the postwar consensus erodes and the international system is once again characterized by explicit great-power competition.

• Five Questions: Jim Mitre on Artificial General Intelligence and National Security   Rand Corporation

  A computer with human—or even superhuman—levels of intelligence remains, for now, a what-if. But AI labs around the world are racing to get there. U.S. leaders need to anticipate the day when that what-if becomes “What now?” A recent RAND paper lays out five hard national security problems that will become very real the moment an artificial general intelligence comes online. Researchers did not try to guess whether that might happen in a few years, in a few decades, or never. They made only one prediction: If we ever get to that point, the consequences will be so profound that the U.S. government needs to take steps now to be ready for them. RAND vice president and national security expert Jim Mitre wrote the paper with senior engineer Joel Predd.

Recommended Weekend Reads

June 20 - 22, 2025

Assessing Israel’s Attack and the Limits of Iran’s Missile Strategy, A Hitchhiker’s Guide to the Fed’s Role in the Fixed Income Market, and Analyzing the Pentagon Pizza Index

Below are the studies and reports we found of particular interest this past week.  We hope you find them of interest, too.  Please let us know if you have any questions or if you or a colleague wants to be added to our distribution list.

The Israel-Iran Crisis

• How Iran Lost – Tehran’s Hard-Liners Squandered Decades of Strategic Capital and Undermined Deterrence    Afshon Ostovar/Foreign Affairs

  Iran’s hard-liners overplayed their hand. After Hamas attacked Israel on October 7, 2023, the regime’s leaders opted for a campaign of maximum aggression. Rather than letting Hamas and Israel fight it out, they unleashed their proxies at Israeli targets. Israel, in turn, was compelled to expand its offensive beyond Gaza. It succeeded in severely degrading Hezbollah, the most powerful of Tehran’s proxy groups, and eviscerating Iranian positions in Syria, indirectly contributing to the collapse of the Assad regime. Iran responded to this aggression by unleashing the two largest ballistic missile attacks ever launched against Israel. But Israel, backed by the U.S. military and other partners, repelled those attacks and incurred little damage. It then struck back. With that, the foundation of Iran’s deterrence strategy crumbled. Its ruling regime became more vulnerable and exposed than at any point since the Iran-Iraq War of the 1980s. And Israel, which has dreamed of striking Iran for decades, had an opportunity it decided it could not pass up.

• Israel’s attack and the limits of Iran’s missile strategy   International Institute for Strategic Studies

  Israel’s attack on Iran has exposed critical weaknesses in Tehran’s broader military strategy. While Iran still has untapped shorter-range capabilities it could deploy in its immediate neighborhood, its depleted medium-range missile arsenal and weakened regional allies leave it with limited options for retaliation against Israel.

• Options for Targeting Iran’s Fordow Nuclear Facility    Center for Strategic and International Studies

  In order to achieve its stated objective of dismantling Iran’s nuclear program, Israel will need to take out a key Iranian facility, the Fordow Fuel Enrichment Plant. Fordow is buried deep under a mountain near Qom and is believed to be one of the key sites of Iran’s nuclear enrichment activities, about 54,000 square feet in size, with 3,000 centrifuges. Due to its hardening and depth, Israel lacks the ordnance to take out Fordow on its own in the short term; however, multiple strikes from the U.S. GBU-57, carried out by U.S. B-2 bombers, could destroy the facility. There are at least five options for destroying Fordow. All of them will have varying degrees of impact on Iran’s nuclear program, along with unique risks of escalation and international response. Below is an analysis of all five options; however, to avoid escalation while still achieving nonproliferation objectives, Israeli sabotage appears to be an underappreciated option.

Geoeconomics

• Black Swans and Financial Stability: A Framework for Building Resilience    Daniel Barth/Stacey Schreft – Federal Reserve Board of Governors Finance and Economics Discussion Series (FEDS)

  Abstract: This article refines the concept of black swans, typically described as highly unlikely and catastrophic events, by clearly distinguishing between knowable and unknowable events. By emphasizing that black swans are “unknown unknowns,” the article highlights that the realization of new black swans cannot be prevented and motivates a need for policies that build the financial system's resilience to unforeseeable crises. The article introduces a "resilience principle" that calls for policies that are adaptable, universal, and systemic. Examples are provided of policies with these features, none of which relies on the official sector being better positioned than the private sector to anticipate the unknown.

• Bank Financing of Global Supply Chain     Federal Reserve Bank of Atlanta Working Paper Series

  Abstract: Finding new international suppliers is costly, so most importers source inputs from a single country. We examine the role of banks in mitigating trade search costs during the 2018–19 US-China trade tensions. We match data on shipments to US ports with the US credit register to analyze trade and bank credit relationships at the bank-firm level. We show that importers of tariff-hit products from China were more likely to exit relationships with Chinese suppliers and find new suppliers in other Asian countries. To finance their geographic diversification, tariff-hit firms increased credit demand, drawing on bank credit lines and taking out loans at higher rates. Banks offering specialized trade finance services to Asian markets eased both financial and information frictions. Tariff-hit firms with specialized banks borrowed at lower rates and were 15 percentage points more likely and three months faster to establish new supplier relationships than firms with other banks. We estimate the cost of searching for suppliers at $1.9 million (or 5 percent of annual sales revenue) for the average US importer.

• A Hitchhikers Guide to Federal Reserve Participation in Fixed Income Markets    Journal of Economic Perspectives

  The Federal Reserve has historically relied on banks and primary dealers, [but] the landscape for fixed income ownership shifted after the 2007–2009 financial crisis, and again after the March 2020 crisis. As of the end of 2024, [non-bank financial institutions] are more than three times larger than the US banking system. Participation of investment funds—including mutual funds, money market funds, hedge funds, money managers, and investment advisors—in auctions of Treasury securities increased from 1.7% in January 2008 to 67.8% in October 2023, whereas the share attributable to dealers and brokers’ share decreased from 79% to 19.4% during the same period.

• Investment in an increasingly global landscape      Bank for International Settlements (BIS)

  Private business fixed investment has fallen or remained flat in advanced economies for decades, with a recent levelling-off also observed in several emerging market economies.  The recent increase in uncertainty due to trade tensions will dampen investment while also reducing the effectiveness of monetary policy. In the long run, the outlook for private business investment depends on the potential need to reconfigure supply chains disrupted by higher trade tariffs as well as governments’ efforts to boost public investment and implement structural reforms.

Africa

• Africa’s Complicated Democratic Landscape     Center for Strategic and International Studies

  In 2024, the global trend of voters rejecting incumbents was reflected in Africa, where opposition parties made significant gains in countries with relatively strong democratic institutions. These results stemmed from economic frustration, widespread dissatisfaction with poor governance, and changing demographics.  The most critical elections of 2025 will be in countries where incumbents have used constitutional changes and institutional control to stay in power. As elections unfold, how voters engage with the process will be key to shaping the political future of their countries and the continent as a whole. There are several African elections worth watching in late 2025 to help make this determination: Cameroon, Tanzania, Côte d’Ivoire, and Guinea. Uganda's election in January 2026 is also one to watch.

• 21st-Century Africa: Governance and Growth    The World Bank

  When compared with the average living standards of the rest of the world, GDP per capita in Sub-Saharan Africa has declined over the past three decades. During the period 1990–2022, three distinct periods can be identified in the evolution of Sub-Saharan Africa’s real GDP per capita: a declining trend during 1990–2000 (from 30% to 25% of the world average), stagnant GDP per capita relative to the world during 2000-14 (fluctuating around 25%), and a declining trend from 2014 to 2022 (from 25% to 22% of the world average). The region’s lack of convergence in living standards with the rest of the world largely results from its inability to sustain growth over time. If Sub-Saharan Africa had grown (in per capita terms) at the same pace as the global economy since 1990, its level of income per capita in 2022 would have been more than 40% higher than its actual level. If it had grown at the same pace as emerging East Asia, the region’s income per capita would have been nearly three times its 2022 level. Currently home to 14% of the world’s working-age population, by 2100, Africa is projected to have 39%, representing more than a third of the workforce of the entire world.

• Africa has a new space agency — here’s what it will do    Nature Magazine

  Africa’s first continent-wide space agency, the African Space Agency (AfSA), which was inaugurated in April, is looking to secure funding as its first projects get underway.  AfSA is an initiative of the 55-member African Union (AU) and is headquartered in Cairo. It was established to coordinate the work of Africa’s existing efforts in space — more than 20 African countries have space programs. Priorities will include improving satellite communication, which provides crucial connectivity for rural populations. It also aims to generate and access data from space to track the effects of climate change, provide disaster relief, and aid agriculture, water, and food security.   

China 

• Is China Really Growing at 5 percent?      Federal Reserve Board of Governors FEDS Notes

  Chinese authorities recently announced a growth target of "around 5 percent" for 2025, the same as their 2024 target. Five percent is about half the pace of growth that China sustained from the 1980s to the early 2010s, but it is nonetheless quite high for an economy flirting with deflation and mired in a years-long property bust. The ambitious growth target, given the circumstances, has led many observers of the Chinese economy to once again treat the official GDP data with skepticism. All told, assessing the accuracy of China's GDP growth remains a challenge, and no statistical model can provide a definitive alternative measure. But our analysis suggests that official figures have not recently been overstating GDP growth for three reasons. First, the excess smoothness of official GDP has significantly diminished since the pandemic. Second, our alternative indicator, which relies on a broad set of data series informative about the Chinese business cycle, including consumption and the property sector, closely tracks official GDP. Finally, the supply side of China's economy has performed remarkably well in the context of robust demand for Chinese goods and industrial policies promoting self-reliance.
  

• China’s Car Industry Runs on Empty as Supply Chain Bills Go Unpaid    Financial Times

  In an effort to shore up automotive supply chains, the Chinese government mandated a 60-day supplier payment rule. Most carmakers suffer from negative working capital; only a handful of Chinese EV makers have sufficient net cash to comply with the new rule.

Assessing Geopolitical Risk

• Pentagon Pizza Index: The theory that surging pizza orders signal a global crisis Fast Company

  A different kind of pie chart is being used to predict global crises.  A surge in takeout deliveries to the Pentagon—now dubbed the “Pentagon Pizza Index”—has emerged as an unexpectedly accurate predictor of major geopolitical events. Tracking activity at local pizza joints in Arlington County, the X account Pentagon Pizza Report noted an uptick in Google Maps activity from four pizza places near the Pentagon on June 12. We, The Pizza, District Pizza Palace, Domino’s, and Extreme Pizza all reportedly saw higher-than-usual order volumes around 7 p.m. ET. “As of 6:59 p.m. ET nearly all pizza establishments nearby the Pentagon have experienced a HUGE surge in activity,” the X account posted. The timing? Just hours before news broke of Israel’s major attack on Iran. 

•  Geopolitical Shift: Corporate America’s Growing Focus on Global Risk    U.S. Chamber of Commerce

  Geopolitical risks are no longer a distant concern for businesses—they are a top-tier strategic and financial challenge. From supply chain disruptions to shifting regulations and market volatility, global instability now shapes investment decisions, corporate strategy, and economic security.  As a result, companies across all sectors are reporting more geopolitical concerns in their investor communications since 2009. This trend has accelerated sharply since 2019.  And technology companies show the highest levels of concern, though the increase spans all industries.

Recommended Weekend Reads

China’s Space Station “Guard Dogs,”  How China Gets Around US Tariffs, Why Canada May Be the Best Hope for Mineral Security, and How Smuggled US Fuel Funds Mexican Cartels

June 13 - 15, 2025

Below are some of the more intriguing analyses and insights we read this past week. We hope you find them useful.  Please let us know if you or someone you know wants to be added to our distribution list. 

China

• China is arming its space station with ‘guard dogs.’ They have good reason for it   Fast Company

  China is developing robotic guards for its Tiangong space station. Equipped with small thrusters, these AI-powered robotic beasts are being developed to intercept and physically shove suspicious objects away from their orbital outpost. It’s a deceptively simple but ingenious step towards active space defense in an increasingly militarized domain. Rather than firing directed energy weapons like lasers or projectiles, which will turn the potential invader into a cloud of deadly shrapnel flying at 21 times the speed of sound, the Chinese have thought of a very Zen “reed that bends in the wind” kind of approach. The bots will grapple a threatening object and lightly push it out of harm’s way. Elegant space jiu-jitsu rather than brute kickboxing.
  

• Axis, Rivalry, or Chaos?  The US-China-Russia Equation with Michael McFaul    China Considered Podcast

  China expert Dr. Elizabeth Economy and Michael McFaul, the former US Ambassador to Russia and currently a Stanford Univeristy professor,  sit down to discuss the relationship between the United States, China, and Russia, the history of US engagement with Russia, his experience as the United States Ambassador to Russia under President Barack Obama, and the increasing cooperation between China and Russia. McFaul begins by discussing early engagement with Russian President Dmitry Medvedev during the early Obama years, namely the signing of comprehensive multilateral sanctions with Iran, along with his role in crafting the Obama administration’s Russia policy. The two scholars then shift to a conversation about how Russia and China, namely Vladimir Putin and Xi Jinping, are attempting to reshape the international order, how the war in Ukraine has already changed this relationship, and whether a “reverse Kissinger” is possible from the perspective of the United States.
  

• Will China Force a Rethink of Biological Warfare?    War on the Rocks

  Is the Defense Department still preparing to fight biological warfare as if it’s 1970? When preparing for biological warfare, most nations picture scenarios in which an enemy openly sprays traditional agents over wide areas to kill their adversaries.  However, revolutionary capabilities in the life sciences and biotechnology have transformed the threat. China’s approach to warfare, combined with these emerging technologies, reveals new vulnerabilities among Western forces that, to date, have not been fully acknowledged.   Although Western attention has focused on the rapid expansion of China’s nuclear and conventional warfighting capabilities, one ought to expect equal analysis of China’s biological warfare potential. By examining China’s most recent efforts at biological research, this report puts forward that it has bypassed 20th-century Western concepts of biological warfare and has new capabilities that could be effective across the entire conflict spectrum. New approaches and new concepts will be necessary if the United States is to prepare itself for potentially new forms of biological warfare in the 21st century.
  

• How China Gets Around US Tariffs     Robin Brooks Substack

  Brooks, a Senior Fellow at the Brookings Institution in Washington and former Chief Economist at the Institute of International Finance, as well as former Chief FX Strategist at Goldman Sachs, details how China has circumvented US tariffs by transshipping goods to the US through various third countries. The charts below show China’s exports (black) and imports (blue) to and from various countries in Asia: Indonesia (top left), Malaysia (top right), Thailand (bottom left), and Vietnam (bottom right). In all cases, China’s exports in April 2025 - the month in which US tariffs on China briefly went to 150 percent - reached new all-time highs, while imports remained subdued. Much as in the case of Kyrgyzstan or Kazakhstan, it’s not like domestic demand in these places started to boom with the escalation of the US-China trade war. The opposite is the case. This is - in all likelihood - evidence of big transshipments that are seeking to circumvent US tariffs.

 The Americas

• ·Canada May Be the United States’ Best Hope for Minerals Security   Center for Strategic and International Studies

  China’s recent export controls, especially of rare earth elements (REEs), have left Western companies reeling, with some firms allegedly considering shifting elements of production back to China just for access to the minerals. Indeed, the need for these minerals is so urgent that they took center stage in the recent U.S.-China negotiations in London, held in an effort to ease the trade war between the two countries. While the preliminary agreement to come out of these talks offers some respite, the United States needs to find reliable sources of REEs, and Canada could emerge as an alternative supplier to complement U.S. efforts to get domestic REE production back on its feet. However, this will require both countries to admit they still need each other, amidst the tension generated by President Donald Trump’ tariffs and talk of annexing Canada.

• The Hole in Mexico’s Security Strategy    Will Freeman/Foreign Affairs

  The defining dilemma of Claudia Sheinbaum’s presidency may be whether she is willing to alter the status quo with the cartels, raise the costs of collusion, and protect those who stand up to the cartels, instead. Since taking office in October 2024, Sheinbaum has taken a harder line on organized crime, increasing seizures of drugs and guns and arrests of suspected cartel operators. In February, when the Trump administration threatened tariffs on Mexico if it didn’t stop the flow of fentanyl across the border, Sheinbaum doubled down on her efforts, and the number of seizures and arrests has since grown substantially. But with their political and judicial protection networks still intact, any criminal groups that are weakened by the president’s current strategy may simply be replaced by new ones. Criminal-political networks will continue dividing the country into private fiefdoms, with politics, justice, and the legal economy reduced to arenas of lawless competition. Deadly drugs and insecurity will continue flowing north.

• How smuggled US fuel funds Mexico’s cartels    Financial Times

  In this interactive report by the Financial Times, reporters and researchers have uncovered dozens of suspicious shipments to Mexico, with millions of barrels of fuel falsely declared as industrial lubricant and unloaded by hose to trucks.  It reflects the massive and sophisticated smuggling operations funding Mexico’s cartels. As many as one in four vehicles in the country could be running on contraband fuel.

• Mexico’s Historic 2025 Judicial Elections: Winners, Controversies, and Political Implications    Moments in Mexico Substack

  On June 1, Mexicans went to the polls to vote in the country’s first-ever judicial elections.  881 federal positions were up for election and nearly 3,400 candidates ran.  Turnout was a record low – just 13% - but for President Claudia Sheinbaum’s ruling left-wing Morena Party, it secured significant control over the Supreme Court, further consolidating its political power. This excellent SubStack breaks down the elections and likely implications.

• Once the World’s ‘Most Popular Politician,’ Lula Is Losing His Way in Brazil    Bloomberg

  Six months after emergency brain surgery and in his second stint as president, the 79-year-old Brazilian remains as energetic and ambitious as ever on the world stage. He met Emmanuel Macron in Paris last week, will host the BRICS summit of emerging market countries in July, and is putting on the United Nations’ annual climate conference in the Amazon rainforest later this year.   But if that bravado once helped make him a global superstar — “the most popular politician on Earth,” Barack Obama called him in 2009 — it is now masking an ugly truth: Back home in Brazil, Lula is falling apart.  Polls show his popularity is at the lowest level of his presidency and suggest he will lose to a right-wing challenger.

The Growing Marketplace for Critical Minerals

• Building a New Market to Counter Chinese Mineral Market Manipulation   Center for Strategic and International Studies

  With China recently imposing export restrictions on rare earth elements—leading to U.S. automakers to halt production due to supply shortages—one of the most urgent issues is how to establish reliable Western supplies of essential critical minerals. A major challenge to achieving mineral security is China’s manipulation of global markets, whereby Chinese companies flood the market with excess supply, driving prices down to levels that force mining operations in countries like the United States and Australia to shut down. The United States and its allies cannot afford to act in isolation. Unilateral efforts—whether through tariffs, subsidies, or investment restrictions—will remain insufficient given the relatively small market share of individual countries. Instead, building a unified anchor market that aligns the policies of like-minded nations is the only realistic path to confronting China’s dominance. By harmonizing tariffs, establishing collective quotas, and coordinating investment protections, the anchor market can shift leverage away from Beijing and toward a more resilient, rules-based minerals ecosystem.

• Much More Than Minerals: The US-Ukraine Minerals Agreement and its Geopolitical Implications    CEPS

  After months of tense negotiations, the US and Ukraine signed a minerals agreement in Washington D.C. on 30 April 2025. While centered on natural resources, it’s much more than a business deal on mining natural resources. The Agreement enshrines US support for peace, resilience, sovereignty and reconstruction in Ukraine.  This CEPS Explainer breaks down the Agreement’s core provisions, its implications for all the parties involved and the necessary conditions needed for it to succeed.

• From Extraction to Innovation: The EU and Taiwan in the Critical Minerals Value Chain   ChinaObservers

  As the European Union’s green transition gains momentum, ensuring the safe and sustainable supply of critical raw materials (CRMs) has become a strategic priority. Renewable energy and decarbonization technologies – such as electric vehicles, wind turbines, solar panels, and batteries – depend on critical minerals including lithium, cobalt, nickel, and different rare earth elements (REEs). The EU’s agenda, as outlined in the European Green Deal and the accompanying industrial policy, cannot be achieved without robust, dependable, and diversified mineral value chains.

Recommended Weekend Reads

What To Do When The START Treaty Expires, China’s Strategy for Countering the US’s New Focus on Latin America, the Economic and Geopolitical Implications of Apple’s Supply Chain, and Why Denmark Raised the Retirement Age to 70

June 6 - 8, 2025

Below is a collection of studies and articles we found particularly interesting and of likely impact on markets and public policy.  We hope you find them helpful and that you have a great weekend.

The Future of Nuclear Weapons and Arms Control 

• No New START     Franklin Miller/Eric Edelman, Foreign Affairs

  The looming expiration of the New START Treaty, the only remaining bilateral nuclear arms control agreement between the United States and Russia, has focused national security experts on what comes next. At the time it was signed in 2010, New START had some advantages. But New START was written for a geopolitical landscape that no longer exists.  Fifteen years later, the world has changed dramatically. Putin and Chinese leader Xi Jinping have emerged as aggressive and expansionist leaders, both dedicated to building a much more modernized and lethal nuclear weapons system.

• Everything Changes but Nothing Changes: Can France Overcome Its Own Nuclear Doctrine?   War on the Rocks

  In a recent interview broadcast live on French television, President Emmanuel Macron said, “Ever since there has been a nuclear doctrine, Charles de Gaulle, there has been a European dimension of France’s vital interests.  I have remained ambiguous on what those vital interests are…” Does France consider defending European allies part of their vital interests?  Does France believe in extending a nuclear umbrella that covers Europe? These questions have been debated in France for decades, and with Russia’s aggression toward Ukraine, they have risen to a new level of focus and discussion.

Latin America 

• What Will China Do Next in Latin America?   Ryan Berg/Foreign Policy

  The second Trump administration has begun with a flurry of activity in Latin America. In the first 100 days, Secretary of State Marco Rubio visited both Central America and the Caribbean, Secretary of Defense Pete Hegseth made a visit to Panama, and Secretary of Homeland Security Kristi Noem visited both South America and Central America and Mexico. Another visit to the region by Rubio and a trip by Secretary of Agriculture Brooke Rollins are in the works. Some administration officials have characterized their approach as an “Americas First” foreign policy. The reprioritization of Latin America in the United States’ foreign policy, coupled with the high-level visits by cabinet officials, has placed China on the back foot in the region—at least temporarily. In many ways, Beijing was unprepared for the Trump administration’s considerable focus on the Western Hemisphere and its scrutinizing of countries’ relationships with China.  Curiously, though, despite a revamped U.S. posture in Latin America, China appears to be sticking to a familiar bag of tricks—even as domestic challenges pare back the robustness of its offer.

• Momentum for Red Tape Reform in Chile Picks Up    Americas Quarterly

  The decision by Chile’s government to scrap the massive Dominga copper and iron mining project in January, and the resulting court battles, have roiled debates over red tape and regulation in the country, where natural resources make up 77.6% of exports. These debates—which go far beyond the mining sector—have become a campaign issue ahead of the November general election as the business community demands lighter regulation and President Gabriel Boric defends his record and tries to forge compromises with his critics.

• The War on Trees – How Illegal Logging Funds Cartels, Terrorists, and Rogue Regimes   Foreign Affairs

  Around the world, nefarious state and nonstate actors are extracting enormous value from forests to fund their operations. The unlawful clearing of land and the harvest, transport, purchase, and sale of timber and related commodities have long been dismissed as a niche concern of environmental activists. But this is a mistake. Although unsustainable deforestation imperils the environment, illegal logging also poses an outsize—and underacknowledged—geopolitical threat. Environmental crime constitutes a growing economic and national security threat to the United States and countries around the world. Yet Washington has largely ignored illegal logging’s role in its fight against transnational criminal organizations, drug cartels, terrorists, and rogue regimes, as well as China’s part in this illicit trade.

Geoeconomics

• Why Emerging Markets Weathered Federal Reserve Tightening So Well    Steven Kamin/AEI Economic Policy Working Paper Series

  The steep rise in US interest rates that started in 2022 led many observers to anticipate severe difficulties for emerging market economies (EMEs). Unlike after the Volcker disinflation of the early 1980s or the bond market turmoil of 1994, however, most EMEs weathered the Fed’s monetary tightening in 2022-23 relatively well. In particular, EME dollar credit spreads, an indicator of potential financial distress, rose only moderately in those years before dropping to historically low levels in 2024. One reason that the EMEs weathered Fed tightening so well is that, simply put, Fed tightening is no longer as injurious to them as commonly believed; this likely reflects improvements in EME policies since the 1980s and 1990s that have bolstered their resilience. A second reason why EME spreads remained relatively contained in the face of rising interest rates is that US corporate credit markets remained buoyant, and their confidence spilled over to EMEs. We show that US high-yield spreads accounted for the lion’s share of the fluctuations in EME spreads over the past couple of decades, dominating not only the effects of monetary shocks but also changes in the VIX and the dollar.

• Connectivity Policy – A Strategic Tool for the EU in its Eastern Neighborhood German Council on Foreign Relations

  Given the shifts in the geopolitical landscape, connectivity is no longer just an economic tool – it has become a strategic instrument used for influence, resilience, and security, as China has demonstrated with its Belt and Road Initiative. The EU must understand that connectivity is central to its engagement with the Eastern Partnership (EaP) countries, where the EU faces growing competition not only from China’s BRI but also from Russia’s infrastructure dominance and Turkey’s regional ambitions. This memo explores the new momentum that connectivity has gained as a part of the EU foreign policy in the EaP and examines its significance in the emerging new regional order. It assesses whether and how connectivity can be reframed as a strategic instrument for the EU’s engagement.

• Apple’s Supply Chain: Economic and Geopolitical Implications    Chris Miller/Vishnu Venugopalan – American Enterprise Institute

  Over the past decade, many electronics firms have talked about diversifying their supply chains. An analysis of Apple—America’s biggest consumer electronics firm—illustrates that most of its manufacturing supply chain remains in China, though there have been limited increases in Southeast Asia and India. China’s role for Apple has grown substantially. Ten years ago, Apple relied on China primarily for final assembly, while today Apple not only assembles devices in China, it also sources many components from the country.  However, Chinese-owned firms generally only play a role in lower-value segments of the supply chain. Many of the higher-value components—even those made in China—are produced in factories owned by Japanese, Taiwanese, or US firms.  

Immigration and Demographics

• America’s Immigration Mess: An Illustrated Guide   Nicholas Eberstadt/American Enterprise Institute

  Immigration was a flashpoint in American politics long before President Biden’s election, but it became a major political fiasco with the Biden Administration’s mismanagement of illegal immigration. Immigration ended up being one of the top issues in the 2024 election and is widely recognized as one of the key factors contributing to the re-election of President Trump. America is poised for a very different set of immigration policies today. But wherever America aims to head with immigration policy, it is essential to guide that policy with accurate information. This illustrated guide is intended to offer a summary snapshot of America’s immigration situation today, and some of the dilemmas attending it. In this illustrated guide we collect what we take to be the most accurate data and information on a number of hotly debated questions: trends in total and illegal immigration; the Biden era migration surge and its components; immigrants’ contributions to the national economy, dependence of US social welfare benefits, and impact on the budget deficit and national debt.

• Why Denmark is raising its retirement age to 70, Europe’s highest  Rangvid’s Blog

  The Danish parliament recently decided to raise the retirement age in Denmark to 70, effective from 2040. This decision attracted significant international attention. In this post, I will explain why the decision was made, the benefits it offers, and why, overall, the Danish pension system is strong, arguably among the best in the world. That said, it is not without its challenges.

Recommended Weekend Reads

Drilling Into The Macroeconomics of Tariff Shocks, The Potential of Seabed Mining, Iran’s Rapidly Shrinking Population, and Why Does Switzerland Have More Nuclear Bunkers Than Any Other Country?  

May 30 - June 1, 2025

Below is a collection of studies and articles that we found particularly interesting and likely to have an impact on markets and public policy.  We hope you find them useful and have a great weekend.

More Studies on the Economic Impact of Tariffs

• ·The Macroeconomics of Tariff Shocks    Adrien Auclert/Matthew Rognlie/Ludwig Straub  National Bureau of Economic Research

  Abstract: We study the short-run effects of import tariffs on GDP and the trade balance in an open-economy New Keynesian model with intermediate input trade. We find that temporary tariffs cause a recession whenever the import elasticity is below an openness-weighted average of the export elasticity and the intertemporal substitution elasticity. We argue this condition is likely satisfied in practice because durable goods generate great scope for intertemporal substitution, and because it is easier to lose competitiveness on the global market than to substitute between home and foreign goods. Unilateral tariffs do tend to improve the trade balance, but when other countries retaliate the trade balance worsens and the recession deepens. Considering the recessionary effect of tariffs dramatically brings down the optimal unilateral tariff level derived in standard trade theory.

• Trading Cases: Tariff Scenarios for Taxing Times   Wood Mackenzie

  The Trump administration’s ‘Liberation Day’ tariff announcement on 2 April was arguably the most pivotal moment for the world economy since China’s 2001 entry into the World Trade Organization. The White House’s numerous tariff-policy adjustments since early April have made understanding the impact and implications of the levies harder still. The potential for trade deals with major trading partners, further policy changes, and even a full U-turn in the US position add to the uncertainty.  The scale of the tariffs – be they already implemented or merely threatened – has far-reaching implications for the energy and natural resources sectors. The lower economic growth they entail will curb commodity demand, prices, and investment, while higher import prices will raise costs in sectors from battery storage to liquefied natural gas (LNG). Such uncertain times require planning for divergent outcomes. Wood Mackenzie has developed three distinct scenarios that consider the potential impacts on global GDP, industrial production, and supply, demand, and prices out to 2030 in four sectors: oil, gas and LNG, renewable power, and metals and mining.

• A Detailed Look at Trump’s Car Tariffs     Apricitas Economics Substack

  In any other administration, the announcement of 25% tariffs on cars & parts would be the single-largest economic story of the year—they currently hit more than $353B in US imports, having a larger economic effect than all of the tariffs implemented during Trump’s first term combined. These tariffs primarily affect imports from close American allies like the EU, Japan, & South Korea, who supply the majority of foreign-made cars to the United States. Yet the President won’t even spare the highly integrated North American supply chain, as tariffs currently apply to the non-US content in Mexican and Canadian-made vehicles.

• State of U.S. Tariffs s of May 29, 2025    The Budget Lab/Yale University

  This study estimated the effects of all remaining US tariffs and foreign retaliation implemented in 2025 through May 28, assuming all tariffs previously introduced under IEEPA authority are invalidated per the May 28 U.S. Court of International Trade Ruling, which leaves only tariffs introduced under Section 232 authority in place: tariffs on steel and aluminum as well as autos and auto parts. Consumers face an overall average effective tariff rate of 6.9%, the highest since 1969. The price level from all 2025 tariffs rises by 0.6% in the short-run, the equivalent of an average per household consumer loss of $950 in 2024$. Annual pre-substitution losses for households at the bottom of the income distribution are $800. The post-substitution price increase settles at the same 0.6%. The 2025 tariffs affect metals inputs and automobile prices primarily. The latter sees a 5% long-run price increase, the equivalent of an extra $2,400 on the cost of an average 2024 new car. US real GDP growth is -0.2pp lower from all 2025 tariffs. All tariffs to date in 2025 raise $686 billion over 2026-35, with $101 billion in negative dynamic revenue effects.

U.S.-Iran Nuclear Talks and Iran’s Disappearing Population

• What Would Russia Like From a New Iran Nuclear Deal?   Carnegie Politika

  U.S. President Donald Trump may have torn up the previous nuclear deal between the United States and Iran during his first term in office, but he now seems serious about signing a new one. Washington has not only held several rounds of talks with the Iranians but also dropped many of its demands.  That confronts Russia—which, united by a shared conflict with the West, has grown closer to Iran—with a dilemma: sabotage the negotiations in order to keep its ally isolated by sanctions, or try to become an important mediator in the agreement, as it was in the previous deal.

• Iran’s Seemingly Unstoppable Birth Slump   Middle East Forum Observer

  Despite exhortations from ruling clerisy to be fruitful, and pro-natal policies intended to prop up birth rates, fertility in Iran is slumping once again.  Earlier this month, the Tehran Times reported that annual births in Iran fell below the million mark. According to the Civil Registration Organization in charge of Iran’s vital statistics, just under 980,000 births were recorded between the Iranian calendar year coinciding with 21 March 2024 through 20 March 2025.  It has been a very long time since, so few babies were born in Iran. By the reckoning of the United Nations Population Division, we have to go back seventy years—to 1955—to find a year when Iranian annual birth totals were lower than today. The current birth level is less than half as high as it was forty years ago, in 1985.

The Changing Commercial and Security Aspects of Our Oceans

• The Potential Impact of Seabed Mining on Critical Mining on Critical Mineral Supply Chains and Geopolitics   Rand

  The potential emergence of a seabed mining industry has important ramifications for the diversification of critical mineral supply chains, revenues for developing nations with substantial terrestrial mining sectors, and global geopolitics. In this report, the authors present the results of a multi-pronged examination of each of these issues, exploring the likelihood and magnitude of their impacts to better inform planning and policymaking.  The authors found that the emergence of a seabed mining industry would introduce a new source of supply for critical minerals that are key elements for energy transition and defense technologies, and this would present several opportunities and challenges for the United States in terms of diversifying critical mineral supply chains away from China, cooperating with allies and partners, working with developing nations, and addressing environmental, regulatory, and security concerns. They offer several recommendations for the U.S. government to address these issues.
  

• The Transarctic Alliance is Key to U.S. National Security    Michael Sfraga/High North News

  Seven Arctic states are NATO allies (Canada, Finland, Denmark— by virtue of Greenland— Iceland, Norway, Sweden, and the US— by virtue of Alaska), and Arctic nations make up five of the sixteen founding NATO members.  Despite the current U.S. administration’s skepticism of the Alliance, it is in America’s best interest to reinforce and strengthen this strategic alignment. The Alliance is a bulwark against nations that seek to advance ideologies antithetical to democratic values and institutions, to use tools of national power to dismiss sovereign borders, to destabilize and invade neighboring countries, and to disrupt the international rules-based order.

• The bear beneath the ice: Russia’s ambitions in the Arctic   European Council on Foreign Relations

  Over the past decade, the Arctic has emerged as a strategic priority for Russia, second only to relations with post-Soviet countries, including Ukraine. Russia’s policy agenda in the Arctic is shaped by insecurities over its economic and military position in the region. This agenda forms a “policy iceberg”. The Kremlin’s massive economic investment is the visible tip; its attempts to create a northern sea trade route buoy at the waterline with both visible economic and murkier military aims; while its militarization in the Arctic is submerged from view—and the most threatening to Western interests. On the world stage, Russia’s Arctic policy is fragmented and tactical. It cherry-picks from international law, clumsily balances relations with big powers, and flirts with alternative Arctic institutions.  Europeans need to situate Russia’s growing ambitions in the region within Moscow’s broader strategic aims, especially in Ukraine, and respond by rethinking their Arctic policy through closer international engagement.

 Switzerland’s Nuclear Bunkers

• Why does Switzerland Have More Nuclear Bunkers Than Any Other Country?   The Guardian

  To the alternating fascination, bewilderment, and envy of its European neighbors, Switzerland, with a population of nearly 9 million, has more bunkers per capita than anywhere else in the world – enough to guarantee shelter space to every single resident in the event of a crisis. (Sweden and Finland are a close second, covering all major cities.)  But the question is, why?

Recommended Weekend Reads

What Is President Trump’s Golden Dome and Will It Work?  China’s Investments in EU and UK Rebounded in 2024,  Latin America’s Baby Bust is Coming Early, and Understanding the Two Chinas

Summer is just about here and we are hoping you are having a relaxing Memorial Day Weekend.  Below are our latest recommended reads.  We hope you have a wonderful Easter and a relaxing weekend.  And please let us know if you or someone you know wants to be added to our distribution list. 

President Trump’s Golden Dome

• The Golden Dome and the New Missile Age    Center for Strategic and International Studies Podcast

  President Donald Trump has proposed to create a multilayered defense system capable of intercepting missiles even if they are launched from the other side of the world and even if they are launched from space.  The concept includes both ground and space-based capabilities that would defend the US from attack by detecting and destroying them ahead of launch, intercepting them early in flight, halting them midcourse and stopping them in the last few moments of approaching a target. CSIS’s podcast takes a closer look at the President’s proposal and how it would be implemented, how much it will cost, and how it cannot work unless Canada is a part of it.

• Golden Dome for America: Revolutionizing U.S. Homeland Missile Defense   Lockheed Martin

  Defense contractor Lockheed Martin hopes to be the primary builder of President Trump’s Golden Dome missile defense system.  IN a recent post on their website, they offer an in-depth presentation of the multiple ways the Golden Dome, as they envision it, would be deployed in space, land, sea, and air.

• Bad News for Trump’s Golden Dome: He Can’t Build it without Canada  Politico

  President Donald Trump left out a key detail this week when he outlined his plans for a massive missile and air defense shield over the continent: He can’t build it without Canada. And it’s not clear America’s northern neighbor wants in.

• Can China’s New Stealth Tech Challenge Trump’s Golden Dome?     South Morning Chian Post

  Chinese scientists have unveiled a new material that could undermine the effectiveness of the new US missile defense system – known as the Golden Dome – proposed by President Donald Trump.  The material may be used as a stealth material that is effective against both infrared and microwave detection and could prove suitable for high-speed aircraft and missiles.

Asian-Pacific Economics

• There are Two Chinas, and America Must Understand Both    New York Times

  Two Chinas inhabit the American imagination: One is a technology and manufacturing superpower poised to lead the world. The other is an economy that’s on the verge of collapse.  Each reflects a real aspect of China.  resident Trump, as he tries to negotiate a resolution of a trade war, must reckon with both versions of America’s arch geopolitical rival. The stakes have never been higher to understand China. It’s not enough to fear its successes or take solace in its economic hardships. To know America’s biggest rival requires seeing how the two Chinas are able to coexist.

• A Geo-Economic Conundrum for the Member States of ASEAN    International Institute of Strategic Studies

  When leaders from Southeast Asia meet at a regional summit on 26–27 May in Kuala Lumpur, the sense of imminent crisis will have lifted, given the agreement announced by Beijing and Washington on 12 May to pause for 90 days their ongoing trade dispute. Yet anxiety will still be high. Another 90-day pause – on the ‘reciprocal tariff’ schedule announced by United States President Donald Trump in April – will expire on 8 July. All ten member states of the Association of Southeast Asian Nations (ASEAN) would face significant new tariffs under the schedule, with Cambodia, Laos, Thailand, and Vietnam being the hardest hit. Vietnam, facing a 46% tariff unless it reaches a bilateral deal with the US, might have the most to lose given its increasingly prominent position in supply chains serving the US market.

• Chinese Investment Rebounds Despite Growing Frictions    Mecator Institute for China Studies/Rhodium Group

  Chinese foreign direct investment (FDI) in the EU and UK rebounded last year for the first time since 2016: it reached EUR 10 billion, rising 47 percent from 2023.  Europe remained the leading destination for Chinese investment in high-income economies, drawing 53.2 percent of all Chinese FDI in such markets. In 2024, the EU and UK’s share of total Chinese FDI also rose to 19.1 percent, the first significant increase since 2018.  The growth of Chinese FDI in the EU and UK was driven by a slight recovery in mergers and acquisitions (M&A) activity and continued appetite for greenfield investment.  Greenfield investment increased for the third consecutive year, rising by 21 percent year-on-year and hitting a record high of EUR 5.9 billion.  2024, five investors—CATL, Tencent, Geely, Envision, and Gotion—accounted for almost half of the Chinese FDI in Europe.

Latin America

• When Recession is Not Mexico’s Biggest Problem     Americas Quarterly

  The “R” word is becoming increasingly popular in Mexico. On the same day that the U.S. reported a surprising quarterly GDP contraction in the first trimester of the year, data released by Mexico’s statistics institute, INEGI, showed an unexpected 0.2% quarterly economic expansion for the same period. Since this initial and seasonally adjusted reading followed a 0.6% decline in economic output in the last quarter of 2024, it appears Mexico barely escaped the curse of a so-called “technical recession” (i.e., two consecutive quarters posting negative changes).  This result, however, is unlikely to settle the issue, particularly in Mexico’s polarized political climate. It can be easily argued, for instance, that the positive reading is explained by an unusually strong 8.1% growth rate posted by the volatile primary sector. This serves as a good reminder that business cycles are a more complex affair than a simple rule of thumb would suggest. More importantly, a discussion about this issue should not be Mexico’s main priority.

• Latin America’s Baby Bust is Arriving Early     Bloomberg

  Data published in the past few weeks confirm the quick decline in the region’s fertility levels, with the number of births in Brazil falling to the lowest in close to 50 years. In Argentina, the number of newborns has almost halved in just a decade, with kindergartens struggling to find pupils. In 2024, Uruguay had more deaths than births for the fourth consecutive year. Even Bolivia, a country of traditionally large families, is about to fall below the 2.1 children-per-woman threshold necessary to keep its population constant.

•  The Spy Factory – Russian Intelligence’s Use of Brazil for Deep Cover Operations    New York Times

  For years, a New York Times investigation found, Russia used Brazil as a launchpad for its most elite intelligence officers, known as illegals. In an audacious and far-reaching operation, the spies shed their Russian pasts. They started businesses, made friends and had love affairs — events that, over many years, became the building blocks of entirely new identities.  Major Russian spy operations have been uncovered in the past, including in the United States in 2010. This was different. The goal was not to spy on Brazil, but to become Brazilian. Once cloaked in credible back stories, they would set off for the United States, Europe or the Middle East and begin working in earnest.  The Russians essentially turned Brazil into an assembly line for deep-cover operatives.

Geoeconomics

• Unconventional Monetary Policies in Small Open Economies   Jesper Lindé/Marcin Kolasa/Stefan Laseen IMF Working Papers

  This paper provides a comprehensive assessment of the macroeconomic and fiscal impact of unconventional monetary tools in small open economies. Using a DSGE model, we show that the exchange rate plays a critical role to amplify the favorable impact of unconventional monetary policy while it attenuates the effectiveness of conventional fiscal policy to jointly boost output and inflation. We then use the model as a laboratory to do a case study of the Swedish Riksbank asset purchases and negative policy rates 2015-2019. We find that the Riksbank unconventional policy measures provided meaningful macroeconomic stimulus to economic activity and inflation, with the dual benefit of reducing overall government debt by about 5 percent of GDP. If conventional fiscal policy had been used to provide a commensurate output boost, inflation would have risen notably less, and the fiscal cost would have amounted to a deterioration of the government debt position with nearly 8 percent of GDP.

• What Have We Learned from the U.S. Tariff Increases of 2018-19?     Reserve Bank of St. Louis “On the Economy” Blog

  In the summer of 2018, the normal pace of global trade encountered an important disruption: The United States increased tariffs to a wide set of imported goods from China, which included such diverse products as electronics, furniture, manufacturing equipment and aerospace components. In this way, the imposed tariffs impacted final consumption goods, intermediate inputs and capital goods used by U.S. households and firms.  All told, these measures affected approximately $376 billion of Chinese exports to the U.S., or around 50% of all the country’s imports from China. The scale becomes even more remarkable when one considers that prior to this campaign, most of these goods faced tariffs of just 3% to 4% and that China was the largest trading partner of the U.S. in terms of imports.

Recommended Weekend Reads

The Fight Over Seabed Mining for Critical Minerals, China’s Vanishing Economic Numbers, What Happens When US Social Security Funds Run Out?  And The Remote Work Paradox

May 9 - 11, 2025

The Growing Fight Over Seabed Mining for Critical Minerals

• The Potential Impact of Seabed Mining on Critical Mineral Supply Chains and Global Geopolitics   Rand Corporation

  Seabed mining presents an opportunity for the United States and its allies to diversify critical mineral supply chains, bolstering critical mineral supply reliability and security; however, the U.S. government has yet to develop a clear vision for a potential role of the United States and its allies in an emerging seabed mining industry. The establishment of a seabed mining industry would have geopolitical implications, including shifts among relationships within the Indo-Pacific region, concerns related to regulatory monitoring and enforcement, new territorial disputes, increasing demand for maritime domain awareness and security, and new influences on commodity prices and security of supply.

• What to Know About the Signed U.S.–Ukraine Minerals Deal   Center for Strategic and International Studies

  On Wednesday, April 30, 2025, the United States and Ukraine signed a long-awaited deal to establish a joint investment fund for the reconstruction of Ukraine. The fund will be capitalized, in part, by revenues from future natural resource extraction. The newly signed agreement is a positive step in U.S.-Ukraine relations following contentious meetings between U.S. President Donald Trump and Ukrainian President Volodymyr Zelensky. While more favorable to Ukraine than earlier iterations, the deal’s effectiveness hinges on long-term peace and stable investment conditions. Key barriers include outdated geological surveys, degraded energy infrastructure, and unresolved security risks. The agreement reflects the Trump administration’s transactional approach to mineral diplomacy and may serve as a template for similar deals, such as the emerging U.S.–Democratic Republic of the Congo cooperation framework.

• Strategic Snapshot: Global Competition in Critical Minerals and Rare Earth Elements   Jamestown Foundation

  On May 1, Ukraine and the United States signed a long-anticipated minerals deal providing the United States with preferential rights to mineral extraction in Ukraine. The agreement creates a U.S.-controlled, jointly-managed investment fund that will receive revenues from new projects in critical minerals, oil, and natural gas.  The agreement comes as the global critical minerals market remains highly competitive, with the People’s Republic of China (PRC) and Russia currently leading in mineral processing infrastructure and capabilities. The International Energy Agency (IEA) projects that by 2030, nearly 50 percent of the market value from critical minerals refining will be concentrated in the PRC. IEA further assesses that by 2030, over 90 percent of battery-grade graphite and 77 percent of refined rare earths will originate from the PRC. In 2022, Russia was the source of 40 percent of global uranium enrichment. In 2024, approximately 35 percent of U.S. uranium imports (used for nuclear fuel) came from Russia.

• How to Advance U.S.-Africa Critical Minerals Partnerships in Mining and Geological Sciences    Carnegie Endowment for International Peace

  Critical minerals, such as nickel, graphite, manganese, cobalt, copper, and lithium, currently occupy a central role in global economic and geopolitical competition. Mineral-rich African countries arise as natural potential partners.  For the United States, both increasing the total volume of mineral supply and diversifying the sources of those minerals is imperative for economic and national security. Escalating export restrictions, including recently on gallium, germanium, and antimony, by China, which dominates the global supply of these commodities, only reinforce this imperative.  Correspondingly, the United States has framed the importance of augmenting its critical mineral supplies in terms of economic and security.  Much of the recent focus is aimed at increasing the U.S. domestic supply of these minerals, particularly through permitting reform, support for expanding domestic production, and developing refining and processing facilities. However, there is also a clear signal of interest in complementary international engagements to achieve mineral supply and energy security. These engagements flow in both directions. That is, the U.S. government views international partners not only as potential sources of mineral inputs but also as potential recipients of U.S. energy and related industries.

China

• How Bad Is China’s Economy? The Data Needed to Answer Is Vanishing   Wall Street Journal

  Not long ago, anyone could comb through a wide range of official data from China. Then it started to disappear.  Land sales measures, foreign investment data, and unemployment indicators have gone dark in recent years. Data on cremations and a business confidence index have been cut off. Even official soy sauce production reports are gone.  In all, Chinese officials have stopped publishing hundreds of data points once used by researchers and investors, according to a Wall Street Journal analysis. In most cases, Chinese authorities haven’t given any reason for ending or withholding data. But the missing numbers have come as the world’s second biggest economy has stumbled under the weight of excessive debt, a crumbling real-estate market, and other troubles, spurring heavy-handed efforts by authorities to control the narrative.

• Was Made in China 2025 Successful?     Camille Boullenois, Malcolm Black, and Daniel Rosen/Rhodium Group

  Chinese companies have made significant strides in closing the gap with foreign firms and advancing toward the technological frontier, with several sectors already demonstrating signs of parity or even leadership. China’s share of global patents has risen across most industries, with notable gains in electric vehicles, new materials, electronics, and robotics, where its share grew by more than 4 percentage points. In basic research, China’s output is equally remarkable, with its share of global top publications increasing by an average of 18 percentage points between 2015 and 2023. Despite this rapid progress, Chinese firms have yet to achieve parity in many MIC25 sectors, with 62% of foreign firms surveyed predicting that their Chinese competitors would catch up within 5 to 10 years. Key gaps remain in areas such as advanced semiconductors, where Chinese firms still lag significantly behind the global frontier.

• At the Doorstep: A Snapshot of New Activity at Cuban Spy Sites  Center for Strategic and International Studies

  In a new report from CSIS, commercially available satellite imagery shows new activity underway at a signals intelligence hub near Havana, Cuba.   The facilities – being built by China – include the construction of a large circularly disposed antenna array (CDAA) which can pinpoint the origin of incoming radio signals from as far as 8,000 miles away. This gives China significantly enhanced capacity to monitor and spy on air and maritime activity in and around the entire United States.

Geoeconomics

• Putting US Fiscal Policy on a Sustainable Patch   Karen Dynan & Douglas Elmendorf/National Bureau of Economic Research

  Abstract: Even allowing for substantial uncertainty regarding projections, current US fiscal policies are almost certainly unsustainable. Therefore, policymakers must decide when and in what ways to change policies. Changing policies sooner rather than later would put debt on a lower trajectory and thereby increase national savings and provide insurance against adverse developments by expanding fiscal space, protecting against a persistent shortfall in economic growth, and reducing the chance of a fiscal crisis. Yet, the probability of a near-term fiscal crisis is difficult to assess:  Yields on Treasury debt are within their range of the past few decades, which suggests that investors are not that worried about the fiscal outlook—but debt and deficits are at nearly unprecedented levels, and experience shows that investors’ confidence in a government’s fiscal management can deteriorate quickly.

• What Happens If Social Security Runs Out in 2035?   Tax Foundation Podcast

  What happens when the country’s most important retirement program runs out of money?  Social Security faces a funding crisis by 2035. We unpack how the system works, why it’s in trouble, and what fixes could keep it afloat.  Podcast host Kyle Hulehan and Tax Foundation Vice President of Federal Tax Policy Erica York are joined by Alex Durante, Senior Economist at the Tax Foundation. Together, they break down the trade-offs behind today’s biggest Social Security reform ideas.

• How Does the Federal Reserve Affect the Treasury Market?   Brookings Podcast on Economic Activity

  At around $900 billion in transactions daily, the market for U.S. Treasuries is massive, not only in terms of quantity but also in terms of importance to the U.S. and global economies. The Treasury market is tied to interest rates, the value of the dollar, and financial markets around the world. So when shocks hit the Treasury market, as they did during the COVID-19 crisis, the ripple effects can be global. In a new paper, “Treasury market dysfunction and the role of the central bank,” Anil K Kashyap, Jeremy C. Stein, Jonathan L. Wallen, and Joshua Younger explore how the Federal Reserve reacted to the 2020 Treasury disturbance and present a proposal for future action. On this episode of the Brookings Podcast on Economic Activity, Senior Fellow David Wessel is joined by Kashyap to discuss the findings as well as the relevance to recent Treasury market volatility. 

• The Remote Work Paradox: Higher Engagement, Lower Wellbeing    Gallup

  Globally, fully remote workers are the most likely to be engaged at work (31%), compared with hybrid (23%), on-site non-remote-capable (23%) and on-site remote-capable (19%). That’s according to the latest State of the Global Workplace report, which tracks how employees worldwide are doing in their work and lives.  However, they are less likely to be thriving in their lives overall (36%) than hybrid workers (42%) and on-site remote-capable workers (42%). Still, fully remote workers are more likely to be thriving than their fully on-site non-remote-capable counterparts (30%).  Fully remote employees are also more likely to report experiencing anger, sadness and loneliness than hybrid and on-site workers. They are more likely to report experiencing a lot of stress the previous day (45%) than on-site workers (39% for remote-capable, 38% for non-remote-capable), while having about the same stress level as hybrid workers (46%). These differences hold true even when accounting for income.

Recommended Weekend Reads

The Impact of Heightened US–China Tensions on the Treasury Market, How Do US Firms Deal With Foreign Industrial Policy?, and How Drug Cartels Took Over Social Media

Growing US-China Tensions

• How China is Quietly Diversifying from US Treasuries     Financial Times

  Earlier this year, a headline caught the eye of the senior officials at China’s foreign exchange regulator, who manage the country’s multitrillion-dollar reserves: the Trump administration had overhauled the boards of Fannie Mae and Freddie Mac. The officials responded swiftly, instructing a team at the State Administration of Foreign Exchange to kick off an evaluation of the potential investment implications of the shake-up. What intrigued the officials at Safe, according to people familiar with the matter, is that they saw mortgage-backed securities — which come with an implicit US government guarantee — or even equity stakes in Fannie and Freddie themselves, as possible alternatives to Treasuries… many [Chinese] advisers, scholars and academics are voicing concern. As “The safety of US Treasuries is no longer a given…”

• Will China Escalate?      Foreign Affairs

  In 2021, at the contentious first meeting between senior Chinese foreign policy officials and their counterparts in the Biden administration, Beijing’s top diplomat, Yang Jiechi, declared that the United States could no longer “speak with China from a position of strength.” In the four years since, Beijing has operated under the assumption that a profound shift in the balance of power between the two countries is underway. Chinese strategists perceive their country’s decades-long “strategic weakness” in its competition with the United States as coming to an end, driven by steady advances in China’s industrial, technological, and military capabilities and an increase in its international influence. This progress has ushered in what Beijing views as a “strategic stalemate” with the United States, in which both nations now wield comparable power. But despite the low immediate risk of conflict between the United States and China, the current stalemate may not prove durable. Over the next four years, the risk of a military crisis will likely rise as the two countries increasingly test each other’s resolve.
  

• Charting the End State for US Strategy Toward China   Collective Commentary/Foreign Policy Research Institute

  As trade tensions between the US and China grow and bring with them new levels of political and military tensions, a group of China experts at the FPRI offers perspectives on how Trump needs to formulate a China strategy and stop dealing with China tactically.

• China’s New Economic Weapons     Evan Medeiros & Andrew Polk/Washington Quarterly

  In the past decade, China’s use of economic coercion has become a common and well-studied feature of its economic statecraft.  For the most part, China has used conventional coercive tools such as stopping its purchasing of goods and services (e.g., commodities and tourism), withholding investments, restricting foreign companies’ operations in China, and “spontaneous” consumer boycotts, all as a means of imposing economic costs on others. China’s track record in altering other countries’ calculations has been decidedly mixed, and its actions have even generated some backlash by countries newly concerned about such predation.  However, since 2018, this pattern of behavior has been evolving. China’s economic statecraft—specifically its tools of coercion—has been expanding.

• DeepSeek’s release of an open-weight frontier AI model    International Institute for Strategic Studies

  The January 2025 release of a frontier reasoning large language model by the Chinese firm DeepSeek, nearly matching the performance of top American closed models at a fraction of the cost, has intensified the debate over the geopolitics of artificial intelligence. It appears that US export controls forced DeepSeek to seek optimizations regarding memory management and the use of synthetic data.

Americas

• After Canada’s Election:  An Energy Abundance Strategy for North America   Center for Strategic and International Studies

  One outcome from North America’s three recent elections is clear—a citizenry that is more “energy literate” when it comes to the importance of policymakers getting this critical issue right. Simply put, energy is the lifeblood of the North American economy.  While the North American relationship is certainly replete with challenges, there is an opportunity in the coming year to thread the needle and move towards an abundance strategy for the region’s energy sources. Notably, this could represent a rare moment of North American alignment on a critical issue for the region’s future.

• Argentina’s Realignment with the United States: Milei’s Reforms Gain Strategic Support   Center for Strategic and International Studies

  Argentina’s rapprochement to the United States under President Javier Milei is not just ideological—it is strategic. While pushing through painful economic reforms at home, Milei is aligning with Washington on multiple fronts: International Monetary Fund (IMF) negotiations, defense ties (NATO partnership bid and F-16 purchase), and personal diplomacy with U.S. President Donald Trump. U.S. Secretary of the Treasury Scott Bessent’s one-day stop in Buenos Aires—right as the new FX regime kicked in and amid Trump’s tariff rollout—was no coincidence. It signals that Argentina is being treated as the closest ally in South America, where U.S. influence is under pressure under China’s global rise.

• How Drug Cartels Took Over Social Media      The Atlantic

  Cartels are influencers now. They have converted their criminality into a commodity, broadcasting with impunity while law enforcement and social-media platforms struggle to rein them in. On TikTok, drug traffickers filmed themselves fleeing from customs agents in a high-speed boat chase, garnering millions of likes. Some content is less Miami Vice and more cottagecore: farmers harvesting poppy seeds, for instance. Keep scrolling and you might find henchmen bagging bales of $100 bills, tiger cubs lounging in trucks, and dogs trotting with decapitated heads in their mouths.

Global Markets and Economics

• U.S. Treasury Market Functioning from the GFC to the Pandemic    Federal Reserve Bank of New York

  Abstract: This article examines U.S. Treasury securities market functioning from the global financial crisis (GFC) through the Covid-19 pandemic given the ensuing market developments and associated policy responses. We describe the factors that have affected intermediaries, including regulatory changes, shifts in ownership patterns, and increased electronic trading. We also discuss their implications for market functioning in both normal times and times of stress. We find that alternative liquidity providers have stepped in as constraints on dealer liquidity provision have tightened, supporting liquidity during normal times, but with less clear effects at times of stress. We conclude with a brief discussion of more recent policy initiatives that are intended to promote market resilience.

• How Do U.S. Firms Withstand Foreign Industrial Policies?   Xiao Cen, Vyacheslav Fos, & Wei Jiang/National Bureau of Economic Research

  China’s industrial policies (“Five-Year Plans”) displace U.S. production/employment and heighten plant closures in the same industries as those targeted by the policies in China. The impact was not anticipated by the stock market, but U.S. companies in the "treated industries" suffer a valuation loss afterwards. Firms shift production to upstream or downstream industries, benefiting from the boost, or offshore to government-endorsed industries in China. Such within-firm adjustments offset the direct impact. U.S. firms are better able to withstand foreign government interventions provided that they enjoy flexibility, including preexisting business toeholds in the "beneficiary" industries, financial access, and labor fluidity.

• Stock Buybacks and Tax Neutrality: Should Congress Repeal the 1% Excise Tax on Buybacks?    Kyle Pomerleau & John Ricco/Tax Notes

  Lawmakers enacted a 1 percent excise tax on stock buybacks, in part to address concerns that buybacks were tax-favored relative to dividends and had a negative effect on corporate investment. The excise tax does reduce the tax differential between dividends and buybacks, but it does so at the cost of increasing the overall tax burden on saving and investment. Moreover, it introduces and increases existing distortions across types of taxpayers, legal forms of business organization, and forms of financing. Alternative reforms could similarly reduce or eliminate the distortion without introducing others, but they come with important trade-offs of their own.

Recommended Weekend Reads

Special Focus on the Trump Trade Wars and Their Possible Impacts on Global and US Markets, And A Look At India’s Role in Europe and the World

April 11 - 13, 2025

This week, we take a special look this week at trade policy and the potential implications of President Trump’s recently announced (and subsequently suspended for 90 days) tariff regime.   We also found some fascinating reports on India and how it could prove to be a help to a rapidly aging Europe while it faces new opportunities and risks in its reponse to the global turbulance eminating from the global trade battles.

We hope you find these useful and that you have a relaxing weekend.   And let us know if you or someone you know wants to be added to our distribution list. 

Trump’s Trade Wars: A Menu of Views and Possible Impacts

• The Evolution of Global Trade in 2024   Brad Setser/Council on Foreign Relations

  The U.S. trade data for 2024 makes clear that the U.S. trade deficit was expanding even before the threat of tariffs led to significant front-running. Strong import growth in the U.S. is the continuation of a trend that started in 2024, and with the dollar’s current strength, U.S. exports are not keeping pace.

• There’s a Method to Trump’s Tariff Madness     Jennifer Burns of the Hoover Institute/New York Times Guest Essay

  President Trump’s imposition of high tariffs on friend and foe alike has stunned the world and stumped economists. There is no economic rationale, experts say, for believing these tariffs will usher in a new era of American prosperity. But there is order amid the chaos, or at least a strategy behind it. Mr. Trump’s tariffs aren’t really about tariffs. They are the gambit in a more ambitious plan to smash the world’s economic and geopolitical order and replace it with something intended to better serve American interests.
  

• Nontariff Trade Barriers in the U.S. and EU    Federal Reserve Bank of St. Louis

  International trade is shaped not only by tariffs but also by a range of regulatory measures that affect market access. These nontariff measures (NTMs)—such as technical regulations, sanitary and phytosanitary requirements, and licensing rules—are often introduced to achieve public policy objectives like protecting health, safety and the environment.  But NTMs can also serve as trade policy tools, with some designed specifically to limit imports and support domestic industries. Since NTMs operate within complex legal and administrative frameworks, it is often difficult to distinguish between those primarily intended to regulate markets and those introduced deliberately to limit trade.  While much of the focus of trade tensions usually revolves around tariffs, nontariff trade barriers can significantly limit the extent of international trade across countries.  

• The Impact of Tariffs on the US Economy     Torsten Slok/Apollo Capital Management

  In one excellent chart, Apollo’s Chief Economist Torsten Slok shows his estimates of the impact on US GDP and inflation of tariffs and the decline in consumer sentiment and corporate sentiment.  Slok points out Whether we will have a recession or not depends on the duration of this shock. If these levels of tariffs stay in place for several months and other countries retaliate, it will cause a recession in the US and the rest of the world.

• The Economic Effects of President Trump’s Tariffs   Penn Wharton Budget Model

  According to the newly released Penn Wharton Budget Model report looking at President Trump’s proposed tariffs, many trade models fail to capture the full harm of tariffs.  They project Trump’s tariffs (April 8, 2025) would reduce GDP by about 8% and wages by 7%. A middle-income household faces a $58K lifetime loss. These losses are twice as large as a revenue-equivalent corporate tax increase from 21% to 36%, an otherwise highly distorting tax.
  

• The Fiscal, Economic, and Distributional Effects of All U.S. Tariffs Enacted in 2025 Through April 2       Yale Budget Lab

  The Budget Lab modeled the effect of both the April 2nd tariff announcement in isolation and all US tariffs implemented in 2025.  The price level from all 2025 tariffs rises by 2.3% in the short-run, the equivalent of an average per household consumer loss of $3,800 in 2024$. Annual losses for households at the bottom of the income distribution are $1,700.US real GDP growth is -0.5pp lower in 2025 from the April 2nd announcement and -0.9pp lower from all 2025 tariffs. The price level from all 2025 tariffs rises by 2.3% in the short-run. All 2025 tariffs together disproportionately affect clothing and textiles, with apparel prices rising 17% under all tariffs.

• President Trump’s Tariff Formula Makes No Economic Sense. It’s Also Based on an Error    Kevin Corinth & Stan Veuger/AEIdeas

  President Trump on Wednesday announced tariffs on practically every foreign country (and some non-countries), ranging from a 10 percent minimum all the way up to 50 percent.  President Trump described the tariffs as reciprocal, equal to half of the rate of tariffs and non-tariff trade barriers imposed by other countries. However, they are nothing of the sort. The tariff the United States is placing on other countries is equal to the US trade deficit divided by US imports from a given country, divided by two, or 10 percent, whichever rate is higher. So even if the United States has no trade deficit (or a trade surplus) with a country, they still receive a minimum tariff of 10 percent.  The formula for the tariffs, originally credited to the Council of Economic Advisers and published by the Office of the United States Trade Representative, does not make economic sense. The trade deficit with a given country is not determined only by tariffs and non-tariff trade barriers, but also by international capital flows, supply chains, comparative advantage, geography, etc.  

• The U.S. Trade Deficit: Myths and Realities  Brookings papers on Economic Activity

  Different policy directions could, in principle, deliver palpable effects on the trade balance and on manufacturing. One is to tax capital inflows, as suggested by Pettis. A capital inflow tax would weaken the dollar, taxing imports and subsidizing exports, and it would raise the domestic interest rate above foreign rates, encouraging saving while reducing investment. Along with concomitant effects on the liquidity of U.S. financial markets, the macro effects on saving and investment could be harmful to long-term growth, as well as contractionary in the short run. [Another] route would be a Fed cut in interest rates. Unless the U.S. economy moves into recession, a substantial interest rate cut now would be inflationary, not only undesirable in itself. It would also erode the extent to which the dollar’s nominal depreciation was a real depreciation. And without real depreciation, there would be no durable boost in the trade balance or manufacturing employment. A final option that would weaken the dollar, spur employment in tradable industries, and reduce the trade deficit is fiscal restraint. This would have the collateral benefit of mitigating the biggest risk on the U.S. external balance sheet.

• A Balance of Payments Primer, Part I: And why you shouldn’t panic over trade deficits and A Balance of Payments Primer, Part II: The Dollar and All That  Paul Krugman’s Substack

  Is the trade deficit a problem? In the first of two posts, Nobel Prize winning economist Paul Krugman points out that some economists argue that it is, that U.S. trade is distorted by the dollar’s role as the world’s principal reserve currency, which creates an artificial demand for US assets. As he wrote the other day, there’s no reason to believe that these arguments are actually affecting U.S. policy. To the extent that those promoting these views play a role in the Trump administration, it’s as beards — people who provide sophisticated-sounding intellectual cover for what Trump was going to do anyway.  He believe that these arguments are mostly wrong.  In his second post, Krugman argues the international monetary system inspires a lot of mysticism, because it sounds both mysterious and important. As a result, he says, it’s easy to get hung up about the dollar’s role in the world economy.  Elon Musk has issued dire warnings that the dollar may lose its reserve status, causing runaway inflation. And now there’s talk of a “Mar-a-Lago Accord”, based on the belief that US trade deficits reflect the special international role of the dollar, and that we can magically revive US manufacturing through financial engineering.
  

• Are individual investors becoming more sensative to market Stress?    Federal Reserve Bank of Boston

  Are individual investors becoming more likely to cash out during periods of stress? A new note from the Federal Reserve Bank of Boston finds that “retail,” or individual, everyday investors, in prime money market funds reacted with greater “sensitivity” following the COVID-19 financial crisis, compared to the 2008 Global Financial Crisis.  That means they were more likely to “run” on a fund – or quickly liquidate their investment for cash – in 2020 than in 2008. “Retail investors in prime money market funds may be getting increasingly more reactive, and that’s something we need to consider when we think about potential financial stability vulnerabilities,” said coauthor Kenechukwu Anadu, a vice president in the Boston Fed’s Supervision, Regulation & Credit department.

• Trump’s Soveriegn Wealth Fund Brings High Stakes and Serious Risks    Carnegie Endowment for International Peace

  SWFs have been around for more than a century, but they have grown dramatically in recent decades, from about $500 billion in assets in the 1990s to about $13.7 trillion overall today. SWFs have traditionally been set up by states rich in natural resources to manage their budgetary surplus, diversify their economies, and protect their wealth for future generations. The poster child is Norway’s $1.8 trillion SWF, established in 1990. It is the world’s largest SWF and now owns about 1.5 percent of all listed stocks worldwide. (Not all SWFs are funded with profits from natural resource exports; Singapore’s Temasek, South Korea’s Korea Investment Corporation, and the Türkiye Sovereign Fund were initiated from central bank reserves or given assets from state owned enterprises.). Trump’s move to create a SWF isn’t wholly out of precedent for the United States—at least twenty-three states run their own funds, totaling $332 billion in assets (according to the White House). Former president Joe Biden’s team, in fact, discussed establishing a national-level fund during his last year in office. Yet considering Trump’s aggressive dismantling of government oversight bodies, alongside well-established accusations that he has engaged in financial misdealing’s and corruption, his plan to build an American SWF carries substantial risks.

India’s Role in the Increasingly Turbulent World of Trade 

• India Sees Opportunity in Trump’s Global Turbulence   That Could Backfire   Emissary

  Trump’s return has altered the traditional direction of U.S. grand strategy in dramatic ways. His administration’s striking contempt for the liberal order is now clear, but it is also accompanied by atavistic attempts at territorial expansionism, the imposition of “reciprocal” tariffs on U.S. trading partners, and confrontations with many U.S. allies worldwide. In this environment, India has, first and foremost, sought to protect its past bilateral gains by seeking to mollify Trump through conciliatory public diplomacy. Prime Minister Narendra Modi and his senior aides rushed to Washington to meet the president in a highly choreographed display of bonhomie, attempting to reassure him that unlike many of his other national targets, India is neither a free-loading ally nor a foe and would be a valuable partner in his “Make America Great Again” efforts.

• India could help save an aging Europe   Politico EU

  As the continent tilts to the right and its politicians find it hard to explain an influx of refugees from war-torn countries, India is actively trying to present itself as a reasonable partner. That is why India is working out decades-long differences to finalize a Free Trade Agreement (FTA) with the EU – something they have been working at since 2007.