We are entering a structurally more fragmented global system where:
Economic policy is weaponised
Defence spending structurally higher
Financial networks politicised
Commodity control strategic
Tech stack dominance decisive
Dollar dominant but gradually diversifying
Europe structurally behind
EM volatility structurally higher
The transition is gradual but secular. This is not a temporary shock — it is a paradigm shift in global order.
I. Core Thesis: The Rise of Geoeconomics
The global system is moving away from multilateralism toward “great power competition”, where economic policy and foreign policy are increasingly interchangeable (p.2, p.7).
The November US security strategy explicitly treats:
Economic power as a tool to achieve foreign policy goals
Foreign policy as a tool to enhance US economic dominance
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Markets must abandon the “positive-sum economics” framework and instead analyze policy through a geoeconomic lens, where economics becomes part of zero-sum statecraft.
The report references Paul Kennedy’s (1989)The Rise and Fall of the Great Powers — arguing empires decline when military burdens exceed economic strength (p.3).
Evidence of reduced US dominance:
Lower share of global trade
Fewer treaties
Greater competition in FDI and lending
China overtaking US in some material capability metrics
However, uncertainty remains over the future structure:
G-Zero fragmentation?
US-China bipolarity?
Continued US exceptionalism (tech, finance, military)?
2. National Power: China vs US
Using the Composite Index of National Capabilities (CINC) (p.4):
China overtook the US in “raw material capabilities” over a decade ago based on:
Military expenditure
Military personnel
Energy consumption
Iron & steel production
Urban and total population
However, CINC underweights:
Financial depth
Technology
Wealth
In these domains, the US remains dominant:
US share of world imports
US stock market capitalization
Dollar share of cross-border lending
Dollar share of FX reserves
Dollar share in FX swaps
3. Hegemony and Openness
Historically:
Economic openness correlates with dominant powers (Pax Romana → Pax Americana)
Kindelberger (1986), Nye (1977)
Pessimist view:
Transitional power shift → fragmentation, deglobalization, climate inaction
Optimist view:
1945–2000 US dominance was historically unusual
Most growth historically occurred during multipolar systems
Export share of global GDP (chart p.5):
Spikes under US hegemony post-Bretton Woods
Fragmentation risks rising again
4. US Backlash Against Global Public Goods
Under Trump administration:
US reassessing role as global stabilizer
US current account deficit mirrors foreign demand for US assets (p.6)
US largest NATO contributor (chart shows overwhelming scale — log scale warning)
Implication:
The US may no longer provide global public goods at previous levels.
III. The Geoeconomic Toolkit
1. Trade as a Weapon
Trade coercion examples (p.9):
Napoleon’s Continental Blockade (1806)
UK maritime blockade
China embargoes (Lithuania 2022)
Rare earth export controls vs US (2025)
Russia sanctions post-Ukraine invasion (2022)
US 2025 leverage:
Tariff threats used in trade negotiations with Japan and Korea
Rare earth prices spiked following export restrictions (chart p.9).
2. State-Directed Lending & FDI
China’s Belt and Road lending (p.10):
Lower financial returns
Lower haircuts vs private creditors
Political goals prioritized over economics
World Bank (Franz et al., 2024):
Chinese state creditors mean haircut ~12%
Private external creditors mean haircut ~36%
FDI used to:
Secure supply chains
Lock in commodity access
Enhance Gulf political prestige (e.g., Egypt)
3. Direct Financial Assistance
Examples (p.11):
USD 20bn swap agreement between US Treasury and Argentina (2025)
Stabilized peso before municipal elections
Major impact on Argentine bond prices
ERA loans to Ukraine
CFIUS regulates inbound investment for national security.
These tools prioritize strategic outcomes, not financial returns.
4. Financial Network Dominance
US financial leverage (p.12):
Dollar centrality
Fed swap lines underpin global dollar liquidity
Fed = “international lender of last resort”
Network tools:
SWIFT exclusion (Russia 2022)
Russia’s SPFS
China’s CIPS
This is “weaponised interdependence.”
5. Commodities and Energy
Energy as geoeconomic battleground (p.13):
US shifted from energy self-sufficiency to market control
Intervention in Venezuela linked to oil reserves
US now world’s largest natural gas exporter
2025 US–EU gas trade deal
Energy mix differences:
EU: balanced (coal 11%, gas 23%, nuclear 11%, renewables 20%)
US: diversified (gas 33%, oil 36%, coal 9%)
China: coal dominant (~60%)
DRC controls over 70% of global cobalt supply (p.22).
6. Technology Dominance
July 2025:
“Winning the AI Race: America’s AI Action Plan”
US goals:
Export full-stack AI packages
Expand data centers
Reduce frontier model regulation
Reduce reliance on Taiwanese chips (50/50 production split target)
However:
Taiwan semiconductor exports to US still rising — dependence persists (p.14 chart).
US has:
Export controls on chips and software to China
EU:
Aggressive AI regulation
Politico (Dec 7, 2025): Greens urge fines on US Big Tech
IV. Europe’s Structural Weakness
1. Germany’s Fiscal Pivot
Early 2025:
Germany pledged €1 trillion:
Defence
Infrastructure
Motivation:
Fiscal space
Free-rider problem (Olson 1966)
Periphery fiscally constrained
2. Europe’s Defence Gap
Short-term EU defence needs:
≥ €800bn (p.16)
Even with NATO 3.5% target increase:
Insufficient
5% target required for adequacy
Europe lags:
Military capability
AI patents (China & US far ahead)
Financial leverage
Energy independence
Dependence areas:
Starlink
Missiles
Air defense
Intelligence systems
3. Institutional Weakness
Mario Draghi:
Europe has a “slow and disaggregated policymaker process” (p.17).
Example:
November 28, 2025 Reuters:
Belgian PM warns using frozen Russian assets could block Ukraine peace deal.
Economic cost:
Only 0.5% of GDP
Political consensus:
Difficult due to veto powers.
Strategic Autonomy:
De-dollarisation in commodities, defence
Greater Local Debt Issuance:
Increase in local currency debt to enhance autonomy
Resource Competition:
AI, defence, infrastructure capex
US vs China competition in:
Latin America
Cobalt (DRC >70%)
Critical minerals
Jul 13, 2026
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