U.S. Policy Shifts And Global Risks

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U.S. policy shifts — particularly in trade, foreign relations, and monetary strategy — are contributing to a structurally weaker global economic cycle, shaking investor confidence, straining key international alliances, and accelerating geopolitical and supply chain tensions.

The world economy is undergoing a subtle yet profound transformation. Recent shifts in U.S. policy — spanning trade, foreign relations, and monetary governance — are no longer isolated decisions, but signals of a broader departure from established international norms. As global alliances strain under rising protectionism and supply chain nationalism, the stability of past decades is being gradually replaced by structural fragmentation. This article explores how these evolving dynamics are altering capital flows, challenging institutional trust, and reshaping the global economic landscape for years to come.

Risk warning: All investments carry risk, including potential capital loss. Economic fluctuations and market changes affect returns, and 40-50% of investors underperform benchmarks. Diversification helps but does not eliminate risks. Invest wisely and consult professional financial advisors.

From soft landing to structural weakness

The pall of uncertainty and apprehension hangs over policymakers, businesses, and investors like a dense morning fog. The global economy is not collapsing, but it is clearly bending under the strain of shifting sands in U.S. foreign, political, and economic policy. What is taking shape is not a soft landing, but something more sobering: a slower, structurally weaker cycle in a more dangerous and fragile world. Growth in the eurozone, U.K., and Canada may have peaked in the first quarter.

The eurozone and Canada front-loaded rate cuts, and there likely is another cut to be delivered toward the end of the year before the cycle is over. Japan’s economy contracted in Q1 2025, and it is struggling to establish forward momentum. The U.S. auto tariffs threaten a sector that accounts for around 10% of Japan’s GDP and 8% of its employment. The swaps market expected the overnight rate to be close to 1.0% as recently as early March, and now it is seen as a little more than 60 bp.

The illusion of industrial revival

The Trump administration’s tariff policy is a source of much angst and uncertainty. July 9 is ostensibly the end of the postponement of the “reciprocal tariffs.” Treasury Secretary Bessent has suggested an extension — at least for some countries — is possible. The number of deals struck during the 90-day hiatus was dismally low, and the decision to double the steel and aluminum tariffs during the period was unsettling. Moreover, the tariffs were broadened to include not only the raw materials but consumer products that contain these metals, such as dishwashers, dryers, and washing machines.

We are not convinced that the higher tariff regime will bring back manufacturing jobs to the U.S. To the extent that manufacturing capacity is expanded, it will likely be highly automated, including robotics, limiting scope for direct employment. The promised revival of blue-collar employment may prove to be little more than political theater.

It is broadly similar to the transition from agriculture to industry. There have been countless romantic and moralistic narratives crafted, mourning the loss of the yeoman farmer — the backbone of democracy, they claimed — who provided the actual sustenance. There was no more important work than theirs, and the closeness to nature and hard work defined virtue. As agricultural output continued to rise even with fewer people employed on farms, so too with manufacturing. As its workforce has fallen, overall output has increased.

Trust, trade controls, and the weaponization of supply chains

Beyond the “reciprocal tariffs” that will come into effect, it is possible that the results of the U.S. Commerce Department’s investigations into sectors identified as critical to national security will be announced. These investigations, under Section 232 of the Trade Expansion Act (which is the authorization for the tariffs on steel, aluminum, and autos), cover semiconductors, pharmaceuticals, critical minerals, heavy trucks, timber and lumber, copper, commercial aircraft, and jet engines.

The most profound threat to the role of the dollar in the world economy is not the encroachment by the euro, yuan, crypto, or new payment platforms, but the abdication by the U.S. itself. The persistent weaponization of access to the dollar market, capricious use of tariffs, the reversal of positions (like supporting Russia over the EU in a vote on security at the UN), and more broadly treating traditional allies as enemies, soils the U.S. brand and undermines trust. And this is difficult to repair. Even if the internationalists recapture the White House in 2028, who can trust the U.S. if it is four years away from another defection from the global order, which the U.S. was instrumental in constructing?

There have been two geopolitical developments that will have far-reaching implications. After decapitating Iran’s Hamas and Hezbollah proxies, Israel turned its attention to Iran, which the UN watchdog said was no longer in compliance with its uranium enrichment program. It quickly established air superiority. Although reports suggest that neither Israeli nor U.S. attacks destroyed the enriched uranium, the program has been set back a few years.

Many countries in the region and elsewhere seemed ambivalent. While many were dismayed by the escalation of force and the risk of repeating the chaotic results seen in the aftermath of conflict in Iraq, Libya, Syria, and Afghanistan — including the Arab Spring — they were also partly glad to see Iran denied nuclear capability.

The other development involves trade, but it is much bigger than U.S. tariffs. In fact, it is not so much about taxing imports — though, to be sure, the tariffs are a disruptive economic force — but it is about controlling exports. For several years, the U.S. has imposed export controls on semiconductor chips and technology to limit China’s access. The export controls are not simply applied to U.S. companies, but foreign companies that use U.S. technology and/or patents are also restricted.

China demonstrated its ability to weaponize the rare earths and magnets supply chain in a similar way the U.S. has done in semiconductor technology. Yet, it is not symmetrical. The White House crypto and AI czar, David Sachs, warned that China has figured out ways around the chip curbs and that it may be only two years behind U.S. chip design capabilities. By some estimates, the U.S. is 10–15 years behind China in the technology to process rare earths, and 15–20 years behind in industrial-scale rare earth magnet manufacturing and ecosystem maturity.

Reports indicate that China resumed shipments of rare earth magnets after the U.S. retracted some of the measures announced since the Geneva meeting in May. It is not clear whether the shipments are sufficient to make up for the backlog or allow companies to expand their inventory. More than developments in the capital markets, this illustrates changing power dynamics.

China first weaponized rare earths when it banned exports to Japan over a fishing trawler dispute in 2010. Between 2023 and 2025, China began imposing export restrictions on strategic materials to the United States, including gallium, germanium, antimony, graphite, and tungsten. However, the “Sputnik moment” (and there have been several recently, including the Deep Seek AI breakthrough) came when auto assembly lines in the U.S. and Europe were forced to stop due to the lack of rare earth magnets.

The Fed, Trump, and the shifting monetary tide

Lastly, another issue that has sometimes roiled markets has been President Trump’s haranguing of the Federal Reserve to cut interest rates. He blames Chair Powell, but there have been very few dissents during his tenure as chair, and no dissents to ease policy since the last rate cut in late 2024.

Speculation that President Trump will fire Powell, or that Powell will resign, seems misplaced. The most likely scenario is that sometime in September or October, a replacement for Governor Kugler — whose term ends in January 2026 — will be nominated. This person will be expected to be nominated for the chair a few months before Powell’s term ends in May 2026.

When Kugler’s replacement is nominated, it will likely be clear that the Fed is on the verge of resuming its easing cycle, if it has not already begun (Fed funds futures and the swaps market anticipate this at the meeting that concludes September 19). The attacks on the Federal Reserve’s independence may have been exaggerated.

Indeed, part of the cyclical bear market outlook for the U.S. dollar is predicated on the de-synchronization of the monetary cycle. Specifically, as the Fed resumes its easing cycle, many other G10 countries — leaving aside Japan — will be done or nearly done with theirs.

Global fragmentation is the new investment risk

As someone who’s tracked policy-driven cycles for over a decade, I see the current phase not as a temporary disruption, but as a fundamental reshaping of the global economic order. The convergence of U.S. protectionism, supply chain nationalism, and global mistrust isn't just triggering short-term volatility — it's ushering in a slow, grinding shift in capital flows, manufacturing logic, and geopolitical alliances.

If you're an investor or policymaker, you must stop framing this moment through the lens of cyclical downturns or "soft landing" hopes. What we face is fragmentation: in trade systems, in regulatory norms, and in global reserve trust. For portfolio managers, this means hedging not just against inflation or interest rates, but against institutional divergence.

I expect increased capital rerouting into “aligned” economies, rise of dual-track tech ecosystems (U.S.-led vs China-led), and long-term weakening of dollar primacy — not from rivals, but from U.S. overreach. In this context, defensive positioning, regional diversification, and political risk modeling will become core, not auxiliary, parts of any resilient investment strategy.

Conclusion

The global economy is not in crisis, but it is entering a period of heightened fragility marked by slower growth, fractured alliances, and deepening structural challenges. U.S. policy decisions — from tariffs and export controls to foreign relations and central bank pressures — are reshaping the rules of engagement in the world economy. This uncertain environment is amplifying risks, eroding trust in longstanding institutions, and altering power dynamics that will take years to rebalance, regardless of political outcomes in Washington.

FAQs

Why is the current global economic cycle described as structurally weaker?

Because growth is slowing across major economies, and central banks have limited room to respond. Geopolitical instability and erratic U.S. policy decisions are adding long-term stress.

How are U.S. tariffs affecting manufacturing and employment?

While aimed at reviving domestic manufacturing, the tariffs are unlikely to restore blue-collar jobs due to automation and global supply chain shifts, making the effort largely symbolic.

What role does China play in current trade and technology tensions?

China is countering U.S. export controls by restricting access to critical minerals and rare earths, revealing asymmetric vulnerabilities in global supply chains and escalating economic rivalry.

Is the Federal Reserve’s independence under threat?

Despite public criticism from President Trump, the Fed has shown internal unity in its decisions. Market expectations suggest a cautious resumption of rate cuts, with leadership changes likely in 2026.

Team that worked on the article

One of the most widely respected and quoted currency experts, Marc Chandler has been analyzing and advising on the global capital markets for more than 30 years. Throughout his career on Wall Street, Chandler has advised private businesses, hedge funds and asset managers on navigating the foreign exchange market. He previously was the global head of currency strategy at Brown Brothers Harriman and the chief currency strategist at HSBC. In October 2018, he joined Bannockburn as a managing director and chief market strategist.

A keen observer of the interconnection of international politics and economics, Marc appears frequently in the financial press – CNBC, CNBC Asia FOX Business, Bloomberg TV and Radio, Barron’s, The Financial Times, The Washington Post, and more – where he provides his colorful take on the global financial and economic news.

The currency market isn’t just about numbers — it’s about narratives. Understanding global politics, central banks, and investor psychology is key to making sense of the dollar and its place in the world.

Since 2025, Marc Chandler has been collaborating with Traders Union.

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Chinmay Soni is a financial analyst with more than 5 years of experience in working with stocks, Forex, derivatives, and other assets. As a founder of a boutique research firm and an active researcher, he covers various industries and fields, providing insights backed by statistical data. He is also an educator in the field of finance and technology.

As an author for Traders Union, he contributes his deep analytical insights on various topics, taking into account various aspects.

Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO).

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