The sorts of things that could happen
Our recurring theme this year is how the rest of the world might work around and without an unreliable US; and this past week has underlined that that unreliability is really now a core feature, not a bug.
Welcome to, er, last week’s newsletter this week. These are tricky times to follow. We are working on the next Polycrisis / Phenomenal World essay which will expand on the ideas below. The Discord is busy! We’ll be posting a bit more on Bluesky this week (Tim, Kate, both).
-Kate
PS. We’ll both be at the Beyond Neoliberalism conference in late May in Cambridge, England; the line-up is fantastic (Tim is on a panel with Helen Thompson and Amir Lebdioui!). Tickets are all gone for the conference but there are still a few left for the public keynote on May 29.
What is happening?
Some of what happened in markets last week was initially contested (how much was short-term, liquidity-related versus more a significant flight from US assets?). But, towards the end of the week it was clear that there was more than just unwinding of inconvenient trades: US assets and the dollar itself are now considered riskier, and therefore less attractive, than they were before.
It’s hard to overstate what a fundamental shift this represents to the way that the world economy has worked for more than half a century. Several Canadian and Danish pension funds, for example, told the FT they were considering cutting their exposure to private US assets including infrastructure. The market moves would likely be more severe if it wasn’t for the lack of alternatives for the dollar and US Treasuries. There is no magical BRICS currency or yuan internationalisation that will create alternatives any time soon. But trust, once broken, is hard to win back.
What could it mean for decarbonization in the US?
It is hard to find many potential silver linings in terms of US domestic emissions. In passenger transport, for example: putting prohibitive tariffs on the world’s biggest and leading EV producer and a major source of components, and neglecting to either compel or support the domestic industry to improve (by likely rolling back vehicle efficiency standards and unwinding many IRA schemes). None of this is going to make the US auto sector better or more competitive at making the cars that people increasingly want; which would involve more EVs.
There’s little point searching for a coherent strategy in the White House. But we’re not the only ones to point out the continuity in trade and industrial policy from Trump 1.0 - Biden - Trump 2.0 administrations. Tariffs and other trade barriers were maintained by the Biden administration, but with additional packages to develop domestic industries. There has been a shared belief, throughout, about the merits of expanding the US manufacturing sector, even while the definitions and the rationale for that goal varied. Today, the only tool for rebuilding manufacturing is: tariffs. One of the key misunderstandings among many people who should know better is that China got good at making more advanced manufacturing like batteries and EVs due to “subsidies”. Yes, subsidies exist — particularly indirect ones such as land, permitting and financing. But another part of China’s industrial policy has involved creating a highly competitive domestic environment; Tim has long pointed out that’s partly why German auto makers want to remain in China’s market; it is a kind of “fitness centre” for them. The number of EV manufacturers in China was more than 200, and is now reportedly less than 50; one company chief predicted in December that “only seven will survive”.
Polycrisis friends Jonas Nahm and Jeremy Wallace wrote about this in Foreign Policy last week, which described how none of the US tariff efforts would stymy China’s clean tech success:
Chinese local and central governments aided these firms, but it was running through a gauntlet of cutthroat domestic competition that culled the field and hardened these winners to become the green industries of the future.
These are things that people want to buy, and that investors and corporations tend to want to support. The elusive “certainty” that big capital investments require is easier to align with a direction of travel that is forward-looking. It’s harder to feel confident in the industrial base of a country that is both tearing up the rule of law and stubbornly trying to turn the clock back on fundamental sectors like energy, infrastructure and transport.
What could it mean for low-income countries?
So, things don’t look great for the US as a macro-financial hegemon, an industrial hub, and even as a lucrative consumer market. What this all means for countries like EU member states, Japan and South Korea and the big middle-income economies will be complicated — and we’ll explore this more in our next Phenomenal World essay.
But for those who are definitely outside that tier of privilege — the countries most subject to international financial subordination — options are scarce. It wasn’t a surprise that countries immediately sought to placate the Trump White House with pledges to import more US products and cut tariffs. The White House stated that more than 50 countries had requested talks on tariffs just over a week ago.
TIME has a round-up of responses from various countries after the “90 day suspension” was announced late last week.
Lesotho faces tariffs of 50% for the US market, which is its biggest export market for its biggest-employing industry, textiles. Its trade minister, Mokhethi Shelile:
“I don’t know what is going to happen after 90 days,” Shelile said. “I don’t have a good experience with trying to get meetings with [the Trump Administration.]” It’s possible that “after three months, we have not even been able to sit down with the American government to negotiate.”
Cote d’Ivoire’s agriculture minister, Kobenan Kouassi Adjoumani, didn’t mention appeasement or retaliation, but pointed out that tariffs had to be passed onto consumers and expressed hope that strengthening ties with Europe might help to offset the 21% tariffs on its cocoa exports.
What about global multilateral channels, financial architecture and Bretton Woods institutions?
South Africa is the G20 president this year, and one of its objectives is to reform sovereign credit ratings which are linked to the high cost of capital for many African countries; but which are also an embedded element of the international financial system that is fiendishly difficult to change. African Business last month asked what might be possible without US cooperation to several South African thinktank folk. We found comments from Elizabeth Sidiropoulos, chief executive of the South African Institute of International Affairs, particularly interesting:
But areas where South Africa can make feasible progress are climate change and reforms to global governance institutions, Sidiropoulos adds.
“South Africa can work on maintaining the consensus on climate change even if the world’s second largest emitter isn’t at the table.
“We can push changes in some ways in which the IMF operates – for example we can propose to reduce the surcharges that the IMF charges to borrower countries which can make a massive difference to these countries.”
[…]
Nevertheless, Sidiropoulos thinks that there are areas where Africa can improve its financial position without the necessity of G20-wide reform. “Africa needs also to work on the fundamentals to improve investor confidence such as improved governance, predictability, and transparency.”
African countries have for long complained about the perceived bias of established credit ratings agencies to Africa, which they say make credit more expensive for them.
According to a 2023 report by the United Nations Development Programme, African nations could save as much as $74.5bn if credit ratings were determined using more objective criteria.
At present the AU is planning to launch its own credit rating agency, the African Credit Rating Agency (AfCRA), in the second half of 2025.
“Hedge funds and other financiers still have to believe in those credit ratings, which is not a foregone conclusion – but what it could do is force the established agencies to consider the AU methodology, and this might create opportunities to reform the system.”
Some middle-income countries may benefit without such a shift even happening. Bloomberg Businessweek last month had a bunch of comments and excerpts from sovereign debt fund managers saying that the “end of US exceptionalism” trade was good for EMs; and citing funds buying up bonds from Colombia, South Africa, Indonesia and the Philippines. There’s a mechanical aspect to this (weakening dollar; relative risk vs the US) rather than a wholesale reconsideration of risk assumptions. Ken Opalo has a pessimistic take: the kind of increased global uncertainty created by a tariff war is simply not good for perceptions of African countries’ investability. In a full “risk-off” market, emerging markets will be unpopular.
China isn’t going to sweep in and fix this
Lastly: it’s far too optimistic to look to China as a greener and more internationalist power that could replace the US. China’s central government has its own ways of building strategic power and they do not include becoming a real reserve currency issuer, of providing the kind of overseas financing that the US and other G7 countries have.
We wrote in the “Marshall Plans” PW essay about the different promises, and hopes and fears, around US and China’s support to developing countries, particularly in Africa. A key point we made was that while the US had failed to provide a substantive offer, so had China. Even while China’s energy financing to other countries is evolving away from debt financing, it doesn’t appear to be approaching the kind of scale — or the terms — that are required to address the cost of capital barriers these countries face.
But there is more to come
We haven’t touched on many other possibilities, for international collaboration and leadership that might arise from the new US status. One we’ll explore more is the potential for Brazil, which is both BRICS president and COP host this year.
Until later this week!