_The original text is from Eurasia Group's _Top Risks 2025, translated by Odaily Planet Daily's jk.
Introduction:
From a certain perspective, 2025 appears to be extraordinary. If we were to examine Earth impartially as an extraterrestrial species, what would we see? A world with a population of 8 billion, experiencing unprecedented expansion and growth; showcasing astonishing opportunities after thousands of years of stagnation.
Even from the standpoint of geopolitical headlines, we can hold some optimism for 2025. The major wars that dominated the globe over the past year are receding. After three years of Russia's invasion of Ukraine and attempts to overthrow its leadership, negotiations (and even a possible ceasefire) seem to be nearing fruition. Similarly, in the Middle East, after more than a year of fighting in Gaza and other areas, the willingness and purpose to escalate violence appear to have diminished. In the United States, a fiercely competitive presidential election has produced an undisputed winner, with almost no one questioning whether the election was free, fair, or manipulated.
But upon closer inspection, we face enormous problems.
The so-called "national community" is now merely a fairy tale, with governance failing to meet the needs of citizens. Our challenges are global; whether in climate, technology, economy, or national security, they cannot be resolved without strong international cooperation. Yet, under the existing institutional framework, enhancing international cooperation is neither deemed desirable nor feasible. Those most capable of strengthening the political power of global institutions are moving in the opposite direction.
We are returning to a world governed by the law of the jungle. A world where the strong can do as they please, while the weak can only resign themselves to fate. And those strong entities—whether nations, corporations, or individuals—cannot be trusted to act in the interests of the weaker ones under their control.
This is not a sustainable trajectory.
1: The Victory of the G0 World
Eurasia Group has warned for over a decade that the dangers of a G0 world are escalating: This is an era without any single power or power bloc willing and able to drive the global agenda and maintain international order. This deficit in global leadership is becoming extremely dangerous.
By 2025, this situation will catalyze ongoing geopolitical instability, weaken the world's security and economic frameworks, create new power vacuums that will continue to expand, and encourage the rise of rogue behavior, increasing the likelihood of accidents, misjudgments, and conflicts. The risk of a cross-generational global crisis, or even a new global war, is higher than at any time experienced by our generation.
The core issue of the current global order is that key international institutions—such as the United Nations Security Council, the International Monetary Fund, and the World Bank—no longer reflect the actual distribution of global power. This is a geopolitical decline, a "depression cycle" in international relations, rooted in three main points:
After the Cold War, the West failed to effectively integrate Russia into the international system, leading to deep resentment and hostility towards the U.S. and Europe. Today, as a once-great power that has severely declined, Russia under Putin has become one of the most dangerous rogue states globally, actively forming military strategic partnerships with other globally destabilizing actors—especially North Korea and Iran.
In contrast, in the early 2000s, China was integrated into the international order, particularly by joining the World Trade Organization (WTO). The West assumed that global economic integration would prompt the Chinese leadership to liberalize its political system and become a responsible global stakeholder as defined by the West. However, this expectation has not materialized, ultimately leading to deepening tensions and even confrontation between China and the West.
Finally, tens of millions of citizens in developed industrial democracies have concluded that the globalist values espoused by their leaders and elites no longer serve them. Increasing inequality, demographic changes, and dizzying technological transformations have led many to fundamentally question the government and democracy itself, thereby weakening these countries' ability and willingness to lead on the global stage. Most notably, elected President Donald Trump not only incited a surge in unilateralism domestically but also profited from it.
There are three pathways out of geopolitical decline: First, reform existing institutions to make them more efficient and gain broad legitimacy; second, establish new alternative institutions that better reflect the actual distribution of global power; third, destroy the old system and impose a new set of rules by force.
All three pathways are occurring. However, by 2025, the greatest efforts will be concentrated on the third pathway.
Although the U.S. remains powerful, it is unwilling to lead the world. Compared to 2017, Trump's return and a politically more stable, thoroughly unilateralist government will accelerate America's decisive abandonment of its long-held roles as global peacekeeper, defender of free trade, and advocate of global values. The slogan "America First" is not without reason.
Other developed industrial democracies are unprecedentedly weak, unable to fill the leadership vacuum left by America's inward turn. The German government has collapsed, and populist parties may gain greater support in the upcoming federal elections. France is mired in a prolonged political crisis. The UK is led by an unpopular new government that is still struggling to establish itself. Italy, while temporarily relatively stable under Georgia Meloni, who has close ties to Trump, is insufficient to support the global order. Japan's ruling party has lost its majority, and the new Prime Minister Shigeru Ishiba may struggle to last. South Korea is in complete chaos. Canada's Trudeau is about to step down. For former American allies, the current geopolitical strategy is to keep a low profile and pray not to attract the attention of chaos.
Aside from a general yearning for a more polarized world, there is almost no common ground among global South countries; they lack both the power and organizational capacity to lead the world out of geopolitical decline. India, the most powerful and likely candidate among developing countries to become a global leader, remains a low-income country focused primarily on building bridges for national interests. Despite the rising influence of countries like Saudi Arabia and the UAE, they lack the standing to drive profound global reforms.
China, as the second most powerful country on Earth and America's only actual competitor, cannot lead the world even if it wanted to. It not only lacks the legitimacy and "soft power" needed to attract stable followers but is also focused on domestic challenges due to ongoing economic difficulties and policies. Meanwhile, China's partner Russia, a country losing human and economic capital, has no reasonable qualifications for leadership.
In short, as the G0 leadership deficit intensifies in the world by 2025, the prospects for peaceful reform or renewal of the global order do not exist. What remains is greater geopolitical instability, chaos, and conflict. In a situation where no party is able or willing to maintain global peace and prosperity, the risks of economic disruption and dangerous military conflict will continue to rise. Power vacuums will expand, global governance will stagnate, leading to the proliferation of rogue behavior and human suffering. The world will become more divided and more dangerous.
This year's primary risk is not a single event but the cumulative impact of the G0 leadership deficit on the collapse of the global order. We are entering a uniquely dangerous period comparable to the 1930s and the early Cold War. This geopolitical reality is the driving force behind all significant risks in this year's report. The tail risks of truly catastrophic events are increasing every day.
2: Trump's "Rules of Governance"
Trump's second presidential term will be markedly different from the first. With an overwhelming victory in the 2024 election and the unwavering support of a united Republican Party, Trump will take office this time with more experience and organization than in 2017. He has gathered a group of battle-hardened, loyal supporters around him, who have a deeper understanding of how to manipulate the bureaucracy. His team is more personally loyal to the elected president than last time and is ideologically highly aligned: populist JD Vance will serve as vice president instead of evangelical Mike Pence.
Trump's increasing control over the Congressional Republicans, combined with a 6-3 conservative majority in the Supreme Court and a more favorable media environment (such as the growing influence of Twitter/X and populist podcasts), will help him advance his agenda during his second term.
Trump and his core team believe that his agenda during the first term was obstructed by disloyal appointees and political opponents within the so-called "deep state." Therefore, strengthening the White House's control over the federal government and politicizing independent agencies has become a top priority for Trump. From his nominations so far, it is clear that he intends to push these efforts vigorously, such as purging career civil servants from the federal bureaucracy and administrative system, appointing loyalists to key positions he believes were involved in political attacks against him, especially within internal power agencies like the Department of Justice and the FBI.
To control the vast federal spending mechanism, Trump will rely on loyal appointees, threaten to retaliate against disobedient voters in Congress, and seek to unilaterally revoke funds approved by Congress when necessary. Such actions could trigger court battles, further shifting the balance of power from the legislative to the executive branch.
Challenges to the "Rules of Governance"
Trump believes that the so-called "deep state" not only obstructed his agenda but also impeached and prosecuted him for political reasons. After a purge, these institutions he views as adversaries have been weakened, and he is pushing Washington's political norms to the brink of collapse. His control over power institutions will be used to protect himself and his allies from accountability while persecuting and threatening political enemies and critics. Whether these purges and persecutions are successful is irrelevant; mere public threats and heavy investigations are sufficient to stifle dissent and undermine the cornerstone of the American Constitution—equality before the law. This also means that long-considered neutral and fair legal processes are no longer viewed as such.
The independence of executive power and the rule of law will be eroded, making the U.S. policy environment more reliant on the decisions of a strong leader in Washington rather than on established, politically neutral legal principles. Trump may take a stricter regulatory approach to corporate mergers he views as adversarial. Investors will have to carefully interpret the elected president's social media accounts and the ever-changing opinion leaders within his team to predict whether Trump will implement his regulatory and tariff plans that impact the global economy. This highly personalized style of governance may become the biggest risk facing businesses in 2025 and beyond.
If Trump systematically rewards business figures politically aligned with him, granting them preferential treatment in regulatory, legal, and contractual matters, he will promote a system where success is measured by proximity to power rather than market competition. This will exacerbate crony capitalism in the world's largest economy, forcing businesses to spend more time and money cultivating transactional relationships with Trump's political apparatus rather than focusing on creating economic value. Non-compliant businesses will be at a disadvantage. Although markets and businesses may view many of Trump's specific policies positively, this shift will inject structural volatility into U.S. policymaking and weaken the business and investment environment, potentially harming long-term economic efficiency, productivity, and growth.
Most importantly, Trump's destructive impulses will continue to be constrained by his own lack of discipline and disinterest in governance. During his first term, internal bureaucratic struggles delayed policy implementation and led to chaos when policies were rolled out, while his casual handling of procedural rules often put policies at risk in court. Although the current team is more experienced than in 2017, low-level internal chaos will remain a recurring feature over the next four years.
Nevertheless, even if Trump fails to destroy democratic institutions, his indifference to America's long-held values will make the years beyond 2025 an "open season" for political destruction. Just as an unaddressed broken window suggests a disregard for property damage and triggers more serious crimes, small violations of long-standing political norms, if left unchallenged, will indicate that the protective mechanisms of democracy can be willfully ignored. The institutional environment in the U.S. has changed significantly since Trump's first election in 2016: his refusal to publicly disclose tax returns, unwillingness to divest from family businesses, placing family members in key positions, and communicating directly with the public and foreign leaders via social media reflect profound changes in institutional norms over the past decade. As more norms are openly disregarded in the next four years, and more "windows" are willfully broken, the erosion of democratic norms, political institutions, and the rule of law may accelerate further.
Despite the historical prevalence of major corruption scandals involving U.S. presidents—such as Watergate, the Teapot Dome scandal, and Iran-Contra—Trump's second term will mark the first serious institutional regression in the U.S. since the Reconstruction era. And this may not be the last time. Once one party breaks a precedent, the other party often finds it easier to follow suit. Since the early 21st century, the democratic norms, political institutions, and rule of law in the U.S. have gradually eroded. The partisan judicial wars that began with the rejection of Robert Bork's nomination in 1987 due to ideological disputes ultimately led to the elimination of filibuster rules for circuit court nominees, and now have evolved into a situation where Supreme Court justices are confirmed without any votes from the opposing party. The Republican Party's ability to eliminate the filibuster for Supreme Court nominees is precisely because the Democratic Party had previously done so for lower court nominations. This back-and-forth "race to the bottom" game undermines public trust in the rule of law, and rebuilding that trust is far more difficult than destroying it.
3: Deterioration of U.S.-China Relations
In November 2023, the de-escalation agreement reached between President Biden and President Xi Jinping at Woodside temporarily curbed U.S.-China tensions, but Trump's return to power will disrupt this stability, leading to a derailment of the most important geopolitical relationship in the world and exacerbating economic turmoil and crisis risks.
The change in this relationship is primarily driven by trade policy. Trump will announce and implement new tariffs on Chinese goods within weeks of taking office, intending to use tariffs as leverage to force China to make concessions. Although he will not reach his threatened 60% across-the-board tariff, tariffs on certain products will quickly rise to 50%-60% or even higher, with the average tariff on all Chinese imports doubling to about 25% by the end of 2025. Even a more moderate proposal—such as raising the highest tariff to only 40% under the efforts of Treasury Secretary nominee Scott Benset—will still touch China's bottom line.
By the time 2025 arrives, China's economic strength will not match that of the last trade war, but Chinese leaders are prepared to respond more aggressively and are unlikely to make concessions. Technology policy will be an important area to watch. The Chinese government and public harbor strong resentment towards U.S. policies, viewing them as aimed at freezing China's technological development and hindering economic progress. Even events that Trump cannot control, such as the January 19 deadline for ByteDance to divest TikTok, will resonate with ordinary Chinese citizens. In terms of export controls, Trump's security hawks will add more Chinese companies to the entity list, increase licensing difficulties, extend controls to new areas like biotechnology, close loopholes, expand the use of extraterritorial tools, and continue the advanced chip restrictions from the Biden administration. In December of last year, China indicated its readiness to retaliate against the U.S. technology blockade by restricting exports of key minerals.
While Taiwan policy may not immediately trigger a crisis, it will exacerbate the deterioration of relations between the two sides. Hawks like Rubio and Waltz will push for closer ties with Taipei and challenge the U.S. "strategic ambiguity" on military intervention, seeking to provide clearer security assurances for Taiwan. Although Trump himself may not be particularly interested in the Taiwan issue, his administration and Congress will accelerate the expansion of U.S.-Taiwan defense relations and ease restrictions on Taipei in sensitive areas. For example, the U.S. may introduce more asymmetric defense systems for Taiwan, provide military training, and ease restrictions on Taiwanese President Lai Ching-te and his team's "transits" through the U.S., but it is expected that they will not directly challenge the status quo.
Currently, China believes its pressure tactics against Lai Ching-te are effective, as Lai is viewed as an irredeemable "separatist." As long as Lai maintains high popularity and Taiwan's economy performs well, he is unlikely to take radical actions. However, any unprecedented moves between the U.S. and Taiwan—though unlikely—could provoke a strong reaction, including incursions into Taiwan's airspace or territorial waters. If China believes Taipei is advancing de facto independence, or if Washington crosses its "red lines"—such as a visit to Taiwan by the U.S. Secretary of Defense or U.S. Navy vessels docking in Taiwanese ports—it may escalate militarily by blockading or occupying offshore islands. As the 2028 Taiwan elections approach, China's pressure to prevent Lai Ching-te from being re-elected will further increase these risks, making the narrative of "peaceful reunification" even harder to maintain.
Nevertheless, both the U.S. and China are unwilling to proactively trigger a crisis this year, with both leaders attempting to focus on domestic affairs. However, the structural conditions for compromise do not exist. The concessions China can offer—such as purchasing agricultural products and energy, expanding market access for U.S. companies, investing in the U.S., and limited assistance on the Ukraine issue—are insufficient to appease Trump and the hawks in his administration. Meanwhile, unlike the "orderly decline" during the Biden era, when National Security Advisor Sullivan and Foreign Minister Wang Yi provided direction for U.S.-China relations through 25 high-level bilateral channels, the Trump administration will lack the management and communication mechanisms, making U.S.-China relations more devoid of supportive backing.
This year, there are two uncertainties in U.S.-China relations: Trump and Elon Musk. As Trump's chief advisor, Musk's significant business interests in China may make him a potential mediating force. However, China may doubt Musk's ability to deliver on agreements, and he is unlikely to test his influence on such complex diplomatic issues.
The costs of unmanaged decoupling will be heavy. Trump's tariffs will impact Chinese exports, which are the only bright spot in an otherwise weak economy. Exports to the U.S. account for 3% of China's GDP, and high tariffs will threaten China's ability to achieve its growth targets. Although China will implement stronger stimulus measures to offset the impact, policy support will continue to be gradual and reactive, as China leans more towards stability than growth, and domestic demand will remain sluggish. U.S. consumers will also pay the price due to higher prices (see Risk #4: Trump Economics). Unmanaged decoupling will disrupt global supply chains, forcing a restructuring of trade flows and increasing global costs for businesses and consumers (see Risk #7: Global Fallout). As the U.S. establishes national security barriers in more economic sectors, it may extend export and investment restrictions to new areas like healthcare, impacting the efficiency and innovation of the global economy.
While most countries have no intention of getting involved in a new Cold War, the rupture in U.S.-China relations will force key U.S. allies and trading partners, such as Japan, South Korea, Mexico, and the European Union, to take sides in areas involving national security, significantly affecting their economies. The deterioration of bilateral relations will deepen mutual suspicion, hostility, and distrust, increasing the risk of unintended escalation. Although both sides do not wish for conflict, avoiding it in the coming year will require extremely sophisticated diplomatic skills.
4: Trump Economics
Trump is set to take over a strong U.S. economy, but his policies will undermine this advantage by driving up inflation and lowering growth.
The U.S. economy performed strongly at the beginning of this year, with output surpassing pre-pandemic trends, unlike other major economies. The unemployment rate remains around 4%, and inflation is returning to the Federal Reserve's 2% target, creating conditions for interest rates to begin to decline from their peak. The stock market and business confidence also show optimistic sentiment, suggesting a bright future.
However, this optimism is about to shatter. The policy agenda of President-elect Trump poses underestimated risks to the U.S. economic outlook, with two core campaign promises being particularly harmful.
First, he has promised to significantly raise tariffs ("the greatest invention") to correct what he calls "unfair" trade practices and reduce the U.S. trade deficit, which he views as harmful to the nation. China will be the primary target, as Trump will impose tariffs of 50%-60% on certain goods and double the average tariff rate on all Chinese imports to nearly 25% (by the end of 2025). Although this does not reach his threatened 60% across-the-board tariff on all Chinese imports, China will still be forced to respond—first by raising tariffs on U.S. imports and then by taking measures against U.S. reliance on key minerals and supply chains. U.S.-China relations will thus fall into unmanaged decoupling (see Risk #3: U.S.-China Relations).
U.S. consumers and businesses will pay higher prices for imported goods and raw materials, while a stronger dollar will also reduce the competitiveness of U.S. exports.
Those trade partners with large bilateral trade surpluses with the U.S. or seen as helping China evade U.S. tariffs will also become targets of the "tariff vigilante." Additionally, countries that Trump believes rely on U.S. protection or have not paid sufficient dues will also face tariff threats. Trump will use the threat of tariffs as a means to force trade partners to make concessions, but he is also unreserved in implementing tariffs, believing that this will significantly reduce macroeconomic imbalances and benefit the U.S. This year, Mexico, Vietnam, Japan, South Korea, Taiwan, Canada, and Europe may all face tariff threats. Many targeted countries will compromise to avoid tariffs, despite the high costs. This will give Trump early victories and prompt him to double down on his transactional strategy; Mexico is a prime example (see Risk #10: The Mexico Stalemate).
The second key pillar of Trump Economics is the border policy of the president-elect. The Trump administration will strengthen its crackdown on immigration at the southern border, such as reinstating the "Remain in Mexico" program and Title 42, while cutting humanitarian admission programs and providing more funding to law enforcement agencies for mass deportations of undocumented immigrants. While Trump's promise to deport 15 to 20 million immigrants is unlikely to be realized (the number of undocumented immigrants in the U.S. may not even be that high), under the influence of immigration policy hawks Stephen Miller and Tom Homan, Trump may deport up to 1 million people in 2025 and deport 5 million over his four-year term (more likely 3 to 3.5 million).
Reducing illegal immigration and mass deportations will shrink the size of the U.S. labor market, raise wages and consumer prices, and lower the economy's productive capacity. Legal immigration will also not be able to fill this gap. Industries that rely on immigrant labor, such as agriculture, construction, and services, will be particularly hard hit as labor shortages become more pronounced. Additionally, undocumented immigrants are also consumers and taxpayers, and their contributions to Social Security and Medicare, as well as the billions of dollars in federal, state, and local taxes they pay, will disappear due to the crackdown, weakening demand growth and expanding the federal budget deficit.
Overall, Trump's trade and immigration policies will drag down U.S. economic growth and drive up inflation. Other policies, such as deregulation and tax cuts, may promote growth but cannot offset the negative impacts of tariffs and deportations.
In terms of deregulation, the financial sector, large tech companies, the cryptocurrency industry, and fossil fuel producers will benefit from Trump's more lenient regulatory policies. However, the overall impact on the economy will be limited: the U.S. economy is already the least regulated among developed countries, and Trump harvested most of the "low-hanging fruit" during his first term. For example, domestic energy production has already reached historic highs, and lower oil prices will suppress new production this year. Reforms in the approval process for oil, gas, and infrastructure projects may unleash a wave of new investments, but this will gradually manifest over the next few years rather than within 2025.
Regarding tax cuts, the Republican Party will push for a permanent extension of Trump's 2017 tax cuts for corporations and the wealthy, which were originally set to expire at the end of 2025, adding an additional $4.5 trillion in fiscal costs over the next decade. However, given that the fiscal deficit already accounts for 6.5% of GDP and the House Republicans hold only a slim majority, Trump is unlikely to pursue further tax cuts without cutting spending. Even if the "Department of Government Efficiency" (DOGE), led by Elon Musk and Vivek Ramaswamy, achieves some cost savings and efficiency improvements in the federal budget, the room for spending cuts will still be very limited. However, the ratio of deficit and debt to GDP will further swell during Trump's term, pushing up Treasury yields and long-term borrowing costs, which have already reached unprecedented levels in peacetime.
Trump's second term will begin in a macroeconomic environment that is completely different from the first. Corporate valuations relative to earnings are much higher than in 2017; the fiscal deficit has structurally increased, and the ratio of government debt to GDP has soared since the pandemic; inflation remains slightly above target, and interest rates are also high. Compared to 2017, the economic downside risks have significantly increased.
Moreover, Trump 2.0 is not Trump 1.0. The president-elect not only has a unified government and firm control over the Republican Party but has also assembled a team that is more loyal and ideologically unified than last time. This team will enter the government prepared to execute rather than obstruct Trump's agenda.
This does not mean that the scale of policy disruptions will align perfectly with Trump's campaign rhetoric. The implementation of tariffs may fall short of expectations, especially if trade partners meet Trump's demands; certain threats are likely to remain mere bluster. Logistical and political obstacles will limit the scale of mass deportations. CEOs of large corporations, advisors like Musk, and Treasury Secretary nominee Scott Benset's lobbying may persuade Trump to moderate his most destructive policies. Additionally, if poor inflation data or market sell-offs occur before the midterm elections, it may also force him to soften his stance.
However, Trump will fulfill his core campaign promises more broadly than corporate and investor expectations, having a greater impact on the U.S. economy. And that's not all. The uncertainty in policy brought about by Trump's personalized governance style (see Risk #2: Trump's Rules) will itself increase the volatility and uncertainty of economic policy, dragging down trade, investment, and growth in 2025 and beyond. In the long run, this will jeopardize the predictability and performance of the world's most dynamic economy, the most important investment destination, and the issuer of the global reserve currency.
5: Russia's Ambitions
Russia remains a leading global power, and this status has become even more apparent as Iran loses its ability to project power (see Risk #6: Struggling Iran). This year, despite a possible ceasefire agreement between Russia and Ukraine, Moscow will pursue more policies to undermine the U.S.-led global order. Russia will take hostile, asymmetric actions against EU countries, particularly those on the front lines, as these countries continue to support anti-Russian policies.
At the beginning of this year, both Russia and Ukraine will seek to increase their leverage in future negotiations, making them more willing to take risks. This means both sides will launch more intense missile and drone strikes on each other's territory, engage in fierce fighting on the front lines, and escalate conflicts through the assassination of each other's elites. This situation will be prone to escalation.
In this context, President-elect Donald Trump may achieve his long-sought ceasefire agreement later in 2025. He hopes for the war to stop, regardless of whether the EU makes greater efforts to bear the costs of the war. Ukrainian President Volodymyr Zelensky also needs to end the fighting, as Ukraine is gradually at a disadvantage in the war. Trump's pressure to push for a ceasefire will mitigate the political consequences of this unpopular decision, as Zelensky can claim it was forced upon him by the U.S. president. Meanwhile, Putin's forces continue to advance on the battlefield, making it more difficult to persuade him to accept a ceasefire. However, after suffering 600,000 casualties and three years of sanctions, Russia also faces imminent manpower and economic issues, and Putin may agree to a ceasefire, partly to maintain relations with Trump.
The ceasefire terms will freeze both sides' forces in their current positions, effectively allowing Russia to control the territory it occupies, which is a significant concession for Russia. The agreement may ambiguously address the relationship between Ukraine and NATO, allowing both sides to claim victory, but the reality is clear: Ukraine's NATO membership can only be a distant future, if it ever materializes.
Although fighting may stop, a peace agreement is still unlikely to be reached. Russia still hopes to change the Ukrainian regime and formally acquire the territory ceded by Ukraine, while Ukraine plans to wait for an opportunity to recover lost ground in the future. Both sides will rearm during the ceasefire, and sporadic fighting along the control lines may continue. This fragile ceasefire may last until the end of this year, but it is unlikely to endure much longer.
The ceasefire may also weaken the post-war European security architecture, making the continent more vulnerable to a new round of Russian attacks—not only against Ukraine but potentially affecting other regions as well. Northern Europe, the Baltic states, and Poland will view Russia as an existential threat, pouring all resources into supporting Ukraine's military buildup during the ceasefire. Countries like France, Germany, and Italy may follow the lead of these more hawkish European nations, supporting the agreement while attempting to provide security guarantees for Ukraine and strengthening Ukraine's and the EU's defensive capabilities. All EU member states and the UK may pause considerations of lifting sanctions, aligning with a possible U.S. position that ties the lifting of restrictive measures to progress in peace negotiations. Additionally, measures to freeze Russian assets will continue, as the ceasefire agreement will not involve compensation issues.
Trump's transactional attitude towards NATO is also closely related to Russia's ambitions, which will weaken the alliance and encourage Putin to take more action. While Trump will not attempt to withdraw from NATO, the credibility of Article 5 security guarantees will depend on whether countries meet Trump's demands, such as increasing defense spending or reducing bilateral trade surpluses with the U.S. Trump will retain key military assets in Europe but will reduce the rotation of U.S. troops, especially in the costly deployments in Eastern Europe—this will leave frontline countries more exposed.
After a ceasefire, Russia's position relative to Ukraine and NATO will be strengthened, as it will have achieved at least some territorial goals. However, EU countries will continue to pursue hostile diplomatic and security policies towards Russia, with both sides aware that a peace agreement is difficult to achieve and that the ceasefire agreement is fragile and may collapse at any time.
6: Struggling Iran
The Middle East will continue to be an unstable environment in 2025, primarily due to Iran's power being at its lowest point in decades.
Since the attack on October 7, Iran's geopolitical position has suffered a series of blows. First, its proxy organization Hamas was defeated in Israel's ongoing offensive against Gaza. Then, its core proxy network, Hezbollah, lost its entire leadership and thousands of fighters, ultimately reaching a ceasefire agreement with Israel in November and withdrawing from southern Lebanon. A few weeks later, Iran's ally Bashar al-Assad was suddenly ousted from power in Syria. This series of blows has essentially destroyed the "Axis of Resistance." Although Iran still partially controls Shiite militias in Iraq and the Houthi movement in Yemen, its strategy of relying on proxies to deter Israel and project regional power is nearing its end.
Iran still possesses a strong arsenal of missiles and drones, but these weapons have limited effectiveness against Israel, which is thousands of miles away and possesses overwhelming military and technological advantages, supported by the U.S. Iran's nuclear program makes it a "threshold nuclear state," capable of rapidly producing nuclear weapons in about six months, but it would take at least a year to miniaturize a nuclear warhead for installation on a missile. However, any move to manufacture nuclear weapons could be quickly detected and provoke preemptive strikes from the U.S. and Israel. In short, Iran is in an extremely vulnerable state.
In contrast, Israel is in a favorable position. The military successes over the past year have greatly boosted Israeli Prime Minister Benjamin Netanyahu's confidence, as he views Iran's current weakness as a once-in-a-generation opportunity to launch a decisive strike against this arch-enemy. This not only helps further weaken Iran's allies in the region but also allows for direct targeting of Iran itself by undermining its conventional military capabilities or its oil production and export facilities. Additionally, Netanyahu may consolidate his domestic political position through successful military actions. This year, Israel is expected to conduct more covert operations against Iran through asymmetric means, including assassinations of nuclear scientists and leaders of the Islamic Revolutionary Guard Corps (IRGC), sabotage of critical infrastructure, espionage, cyberattacks, and more. Last year's actions by Israel demonstrated that it can unilaterally escalate secret wars and missile conflicts at any time, while Iran's retaliatory capabilities are extremely limited.
Destroying Iran's nuclear program and potentially pushing for regime change in Iran is highly tempting for the anti-Iran hawks within Trump's team. The president-elect is likely to take this action within the next four years unless a diplomatic breakthrough occurs (which is highly unlikely).
However, this is unlikely to happen in 2025. Bombing Iran would effectively be tantamount to declaring war on the Islamic Republic. And despite Trump's reputation for "toughness," he has repeatedly expressed opposition to involving the U.S. in new wars. Trump would be reluctant to risk starting a war that could last several days in his first year back in the White House, a war that would involve striking Iran's air defense systems, communication facilities, and fortified nuclear sites—especially if this could threaten his economic agenda.
This is because one of Iran's main methods of retaliation would be targeting energy infrastructure in the Persian Gulf. Iran's missiles and drones can easily cover these facilities, which are more vulnerable than Israeli targets. Attacks on Saudi and UAE oil facilities could drive up crude oil prices, and if Iran attempts to blockade the Strait of Hormuz—its most extreme retaliatory option—oil prices could soar above $100 per barrel. This scenario is neither what Trump wants to see nor in the interests of his Gulf allies.
Unless Iran rushes to manufacture nuclear weapons—which is unlikely, as reformist President Masoud Pezeshkian and Supreme Leader Ali Khamenei wish to reach an agreement with the U.S. to alleviate their economic woes—Trump will not immediately choose to go to war with Iran. Instead, his administration may restore the "maximum pressure" policy, attempting to force Tehran to make concessions through increased sanctions, enhanced enforcement, and intensified diplomatic pressure. Even if Trump avoids sanctioning Chinese refineries that purchase Iranian crude oil—an unprecedented escalation against China—he can still reduce Iran's oil exports from 1.5 million barrels per day to less than 1 million barrels through sanctions targeting the "dark fleet" that transports illegal oil.
Iran will attempt to engage in negotiations under extremely vulnerable circumstances, but its regime is unlikely to accept Trump's demands for deep cuts and restrictions on its nuclear program. Meanwhile, Israel will choose to wait for Trump's support in jointly striking Iran's nuclear program rather than taking unilateral action. After all, Trump has a four-year term, which gives Netanyahu time to secure Trump's backing, especially when diplomatic breakthroughs seem hopeless. Additionally, despite Israel's strong position, it is not invulnerable, and Iran still possesses a significant arsenal of ballistic missiles and drones, as well as the Houthis and Iraqi militias, all of which could threaten Israel's security. Netanyahu also hopes to push for normalization of relations with Saudi Arabia, so he needs to ensure support from the U.S. and the Arab world (especially Riyadh, which currently has an ambiguous stance) before confidently taking action against Iran's nuclear program.
Nevertheless, there remains a broad risk of uncontrolled escalation this year. Netanyahu may take excessive risks, and Trump, due to his strong support for Israel, is unlikely to restrain him. Any radical move could cross Tehran's ambiguous red lines, provoking a response from Iran. This year, the shadow war may become more overt. The "wounded lion" of Iran still possesses a vast arsenal of missiles and drones, which could be provoked into direct conflict with Israel again. Although diplomacy may somewhat curb escalation, similar to last year's conflicts, any incident or miscalculation resulting in significant casualties among Israeli or U.S. personnel could trigger a dangerous spiral of escalation, with substantial impacts on oil supply and prices.
If the Iranian regime faces internal threats, its leaders, including senior officials of the Islamic Revolutionary Guard Corps (IRGC), may attempt to escalate the conflict to divert attention. In the face of losing too much and struggling to rebuild their proxy capabilities, they may ultimately decide to pursue nuclear weapons as the only means to restore deterrence. This possibility will increase if diplomacy with the U.S. and the West ultimately fails. Even if Tehran genuinely seeks a broad agreement, Trump may view it as mere posturing—or judge it as such under the influence of hawkish advisors and Netanyahu—and bomb its nuclear program before Iran can develop nuclear weapons.
In such a complex situation, with no clear leader, conflict with Iran has become the most significant risk in the Middle East.
7: Global Economic Crisis
In 2025, global markets are hoping for an acceleration of global economic expansion, but they will soon face a sobering blow. The two largest economies in the world—China and the United States—are preparing to export economic instability to other regions, hindering global recovery and accelerating geopolitical fragmentation.
China is experiencing its weakest economic performance in decades. The deepening real estate crisis, rising debt, and collapsing confidence have exposed the limitations of China's growth model. In the face of this predicament, the Chinese model is increasingly relying on its most familiar area: exports. Chinese factories are producing cars, solar panels, and electronics far beyond domestic market demand, leading to overcapacity issues, as China attempts to dump these surplus products overseas. Currently, China's trade surplus has exceeded $1 trillion and continues to expand.
Meanwhile, Trump's plans to correct "unfair" trade practices against the U.S. through tariff policies are undoubtedly pouring fuel on the fire (see Risk #4: Trumponomics). While Trump's tariff threats sometimes successfully force trade partners to concede, tariffs on China will trigger retaliation. Furthermore, Trump's policies will strengthen the dollar and maintain high U.S. interest rates, exacerbating the pressure on the global economy in the most vulnerable situations.
This combination is disastrous for both developed and developing countries. Under the dual pressure of a flood of subsidized Chinese goods and Trump's tariff threats against U.S. market exports, these countries will find themselves in dire straits. China's overcapacity is concentrated in strategic industries that many countries are trying to build. For example, Chinese electric vehicle manufacturers, backed by state subsidies, have driven their car prices down to 20%-30% lower than those of European manufacturers, prompting the EU to investigate and subsequently impose tariffs. Similar situations are occurring with cheap Chinese solar panels, batteries, semiconductors, steel, and aluminum products flooding markets in Canada, Brazil, and Indonesia.
These countries will have to choose between allowing Chinese imports to crush local producers or erecting trade barriers, which will raise consumer prices, slow economic growth, and potentially provoke retaliatory measures from China. This dilemma further exacerbates the fragmentation of the global trading system and threatens the pace of economic recovery.
Countries closely linked to both China and the U.S., such as Mexico, Vietnam, and the EU, will face the greatest risks. When Mexico agrees to assist in preventing China from circumventing U.S. tariffs under Trump's tariff threats (see Risk #10: The Mexico Stalemate), China may retaliate by targeting Mexican manufacturing exports. Each tariff increase and corresponding retaliation will raise consumer prices, drag down economic growth, and disrupt supply chains built over decades. Even the threat of disruption will force companies to establish redundant facilities and maintain higher inventories, increasing costs. The simultaneous adoption of "beggar-thy-neighbor" policies by the U.S. and China will accelerate the fragmentation of the economy and finance, deepen policy uncertainty, and weaken global investment, trade, and growth.
Worse still, a strong dollar and higher U.S. interest rates will limit countries' ability to mitigate these shocks through monetary and fiscal policies. As import costs rise and capital flows out of emerging markets, many central banks will face a difficult choice: either raise interest rates to defend their currencies at the expense of economic growth, or lower rates to support growth while exacerbating inflation. Countries that borrow in dollars will face higher debt service costs and heavier debt burdens, forcing their central banks to maintain interest rates above what their domestic economic conditions require. This will exacerbate tensions between governments and central banks, as we have already seen in Brazil, South Africa, and Indonesia.
Commodity-exporting countries from the Middle East to Brazil and Indonesia will face additional challenges, as weak Chinese demand will pull down commodity prices this year. Many of these countries increased spending during the commodity boom and now face dual pressures: declining revenues alongside rising borrowing costs.
The timing is particularly poor. Global growth is sluggish, inflation is stubborn, and debt levels have reached historic highs. Most emerging markets have never fully recovered from the fiscal stimulus of the COVID-19 pandemic. Even developed economies, such as Japan and Italy, are struggling under concerning debt burdens. Against this backdrop, governments that promised to improve economic prospects in recent elections will face a harsh reality check. Their honeymoon period will be very short, as global economic pressures will quickly translate into political pressures. Many emerging and marginal economies will have to choose between raising taxes, cutting spending, or accepting lower growth.
However, this is not just a problem for developing countries. Even within the G7, the French government has collapsed over budget disputes, and the Canadian finance minister resigned amid escalating trade tensions with the U.S. While few countries face an urgent risk of sovereign default, cracks in government stability will undermine investor confidence. The greatest financial risks may be hidden in plain sight.
Brazil provides an early warning. Recent market turmoil in the country—triggered by disappointment over government fiscal plans—demonstrates how domestic challenges can quickly escalate under external pressures of higher interest rates, a strong dollar, and weak global demand prospects. Even countries with strong fundamentals will find their policy choices limited in 2025.
Of course, there will be winners. Some leaders may successfully negotiate with Trump to gain market access or avoid destructive tariffs. As supply chains shift away from China, manufacturing hubs in India and South/Southeast Asia may attract more investment (although Bangladesh, led by a strongly anti-Trump leader, may see these gains diminished due to punitive tariffs). Vietnam may gain market share in electronics, despite facing Trump's threats. Mexico may benefit from nearshoring trends if it aligns with U.S. demands. Lower oil prices will benefit oil-importing countries like India.
However, the overall impact will be negative, as the increasing barriers are fracturing the global economy, reversing decades of integration achieved through cost reduction, productivity enhancement, and lifting billions out of poverty. The global economy is about to learn a painful lesson: when the two largest economies in the world turn inward, all other countries will pay the price.
8: AI, Towards the Infinite and Unrestricted
In 2025, the capabilities of artificial intelligence will continue to grow, with new models capable of autonomous action and self-replication, further blurring the lines between humans and machines. However, as most governments opt for a light regulatory approach and international cooperation stagnates, the risks and collateral damage from unrestrained AI will continue to increase.
In last year's Risk #4: Uncontrolled AI, we warned that due to political factors, inertia, defection, and the rapid pace of technological change, global efforts to establish AI safeguards would fall short. Indeed, some notable AI governance initiatives emerged in 2024, including actions from the EU, European Commission, and the United Nations. However, without strong and sustained support from governments and tech companies, these initiatives will not keep pace with technological advancements.
Less than two years ago, leading AI researchers called for a six-month pause in AI development, and world leaders gathered in the UK to address the security risks of AI. However, today, most governments are hesitant to regulate AI due to concerns over economic interests, while some tech executives who once warned about AI risks are now downplaying these concerns in public. Moreover, governments and businesses are pouring increasing amounts of funding into training new models rather than strengthening existing safeguards.
By 2025, the already limited AI governance framework will be further weakened. In Washington, President-elect Donald Trump has pledged to abolish the Biden administration's AI executive order, which was developed in close collaboration with major tech companies, and its repeal will threaten the safety testing procedures for high-risk AI systems, as well as measures related to accountability and transparency. The Trump administration plans to rehire Silicon Valley veterans like David Sacks, Peter Thiel, and Marc Andreessen, who view AI safeguards as "woke," cumbersome, and detrimental to U.S. competitiveness in geopolitical competition with China. Even Elon Musk, despite expressing concerns about the existential risks of AI, will focus more on how to leverage AI to weaken regulation rather than pushing for AI regulation; meanwhile, his company xAI operates one of the world's most powerful computing clusters.
Legislative initiatives also face resistance. The most significant example is California's SB-1047 bill, which requires risk assessments and other safety measures for AI models with training costs exceeding $100 million before their release, but it was vetoed by the state’s Democratic governor (although the bill may resurface this year). While other states are implementing chaotic AI regulatory frameworks, none have the influence or capacity to match the potential of the California bill to address extreme or existential risks. Although Congress has shown bipartisan interest in AI, comprehensive federal AI legislation remains unlikely.
As U.S. regulation stagnates, open-source AI models are creating new realities in practice. Now, anyone with basic technical skills can download and run complex large language models (LLMs) on personal devices. Many of these open-source models lack sufficient safety measures and can be used for illegal purposes. They can also be distributed peer-to-peer and run completely privately, making them nearly impossible to control or contain. Moreover, it seems that few are willing to attempt to rein them in.
Even the European Union, which has the most comprehensive AI laws in the world, is showing signs of regulatory fatigue and buyer's remorse. European policymakers are increasingly focused on ensuring AI sovereignty, downplaying narratives about existential risks, believing that these would distract from more pressing issues such as sustainability, labor market disruption, and intellectual property protection. The latest version of the "AI Safety Summit," initiated by the UK, will be held in February in Paris, but has been renamed the "AI Action Summit" and expanded its growth-oriented mission.
As the G0 leadership vacuum deepens (see Risk #1: The Victory of G0), the deteriorating state of global cooperation exacerbates these risks. The Trump administration will dismantle key channels for coordinating AI policy with allies, such as the U.S.-EU Trade and Technology Council, and withdraw from AI cooperation within the G7—although technical cooperation among global AI safety research institutions may continue. Meanwhile, most developing countries prioritize acquiring AI technology over mitigating its risks.
The greatest danger lies in the rapid deterioration of U.S.-China relations. As Washington and China become more deeply unmanageably decoupled, the AI safety dialogue initiated during the Biden administration faces an uncertain future. Although both countries wish to prevent catastrophic consequences and the proliferation of dangerous capabilities, progress remains extremely slow—it took over a year just to agree on excluding AI from nuclear weapons decision-making. The growing distrust between the two sides on advanced technology issues will make it less likely to reach substantial agreements on AI safety.
As a result, the race to develop cutting-edge models and achieve general AI will accelerate in 2025, with demand for electricity, water, and land resources reaching unprecedented levels. In addition to the impacts on energy use and carbon emissions, the disruptive potential of AI will significantly increase. New models will be able to autonomously pursue goals with minimal human oversight. These "intelligent agents" can act independently, interact with real-world systems, and adapt to unexpected situations in real-time.
This increasingly complex capability presents extraordinary opportunities but also brings unprecedented risks in 2025: they will enable users to manipulate markets and spread misinformation more efficiently. In cutting-edge fields, the most advanced models will increasingly show signs of resistance to human control. As AI capabilities advance rapidly with less regulation, the risk of catastrophic accidents or uncontrollable AI "breakthroughs" will continue to rise.
As AI capabilities advance rapidly with virtually no constraints, the risk of catastrophic accidents or uncontrollable AI "breakthroughs" will continue to increase. This risk is further amplified as AI systems are gradually integrated into critical infrastructure, from life-and-death medical decisions to multi-trillion-dollar financial systems, where the consequences of any incident could be extremely severe. An AI optimized for supply chains could inadvertently disrupt global logistics, leading to shortages of critical goods. Interactions between multiple AI trading agents could trigger market failures. Advanced models may even learn to manipulate human operators to serve rogue actors, while the increasing integration of AI into weapon systems pushes the world toward autonomous warfare.
2025 will mark another year of technological development without sufficient safety measures and governance frameworks in place. Due to the incentives to build more powerful AI, meaningful constraints may only emerge when developers encounter hard limits on data, computing power, energy, or funding. Until then, technological capabilities and associated risks will continue to grow unchecked.
9: No Man's Land
The risk of governance vacuums stems from the deepening G0 situation (see Risk #1: The Victory of G0), where the world's most powerful actors—especially the politically divided and dysfunctional United States—are abandoning their global leadership responsibilities. This vacuum exacerbates geopolitical conflicts, destruction, and instability; weakens the role of global governance and multilateral cooperation in the public interest; and emboldens rogue states and non-state actors. It also renders many regions, spaces, and even areas beyond Earth weakly governed or forgotten. Key global public domains such as outer space, the seabed, and even airspace are shrinking as conflict zones expand—a trend highlighted by the December 2024 incident in which Russia shot down an Azerbaijani plane. Missile attacks have now become a leading cause of aviation fatalities, forcing commercial airlines to avoid an increasing number of disputed airspaces.
Currently, no international power is both willing and able to bring stability to these areas or assist the victims affected by G0. Donald Trump's unilateralism and contraction instinct in U.S. foreign policy will worsen the situation in these places, while efforts by civil society or other actors will not fill this void. No one will be held accountable for what happens within these spaces, including the people living in them. For the most vulnerable groups, the human cost is particularly severe—UNICEF reports that currently, one in six children globally lives in conflict-affected areas, a figure that has doubled since the 1990s.
Conflicts in the Middle East have left five ungoverned spaces—Gaza, the West Bank, Lebanon, Syria, and Yemen. In Gaza, criminal gangs, family organizations, surviving Hamas members, and the Israeli military will dominate the devastated Palestinian population for the foreseeable future. Gulf countries are reluctant to intervene in governance, security, or reconstruction, with Saudi-led nations stating they may only participate if the Israeli military withdraws and a clear "post-war" plan emerges. Although the UAE has shown greater interest in recent involvement in Gaza affairs, this may be limited to deploying private contractors, whose performance in post-war environments is often inconsistent. The Palestinian Authority currently lacks both the capacity and legitimacy to govern Gaza, let alone devise a credible plan to return to the region after 17 years.
Meanwhile, the Trump administration will avoid direct involvement in this dangerous security environment. The Israeli military will effectively occupy the area, and the suffering in daily life in Gaza will continue to worsen.
Amid media coverage of the Gaza issue, the security environment in the West Bank will further deteriorate. Armed groups, supported but operating independently from terrorist organizations like Hamas and the Palestinian Islamic Jihad (PIJ), have rooted themselves in northern West Bank cities such as Jenin, Tulkarm, Nablus, and Tubas, turning these cities into hotspots for Israeli military raids. Since October 7, Israeli military tactics have sometimes mirrored those used in Gaza, including airstrikes on buildings and increasing reliance on drones. The frequency and scale of these actions have intensified the already repressed living conditions of Palestinians in the West Bank. Meanwhile, extremist settlers continue to perpetrate violence against Palestinians. Israel will continue to approve new settlement construction, while some officials in Prime Minister Benjamin Netanyahu's government hope to formally annex the West Bank and expect the Trump administration to recognize Israel's sovereignty over the occupied territories.
Lebanon will escape war this year, as the ceasefire agreement reached between Israel and Hezbollah last November is likely to remain in effect, especially after Iran's supply routes through Syria have been cut off. Under a U.S.-brokered agreement, Hezbollah will withdraw north of the Litani River, while Israeli forces will pull out of southern Lebanon. At the same time, the Lebanese army will increase deployments to support the United Nations Interim Force in Lebanon (UNIFIL), a multinational force that has been responsible for monitoring the Lebanon-Israel border for decades. However, due to factional deadlock, a weak economy, and the government's inability to provide stable social services, Lebanon will continue to be a failed state. It will remain unable to prevent Israeli attacks on its territory or control Hezbollah and other armed groups that operate outside state authority.
In Syria, the sudden collapse of President Bashar al-Assad will trigger a significant risk of power vacuum. Multiple rebel groups, some of which hold extreme jihadist ideologies, played key roles in Assad's downfall and will vie for power in the ruins of the old regime. The Sunni armed group Hay'at Tahrir al-Sham (HTS) currently controls Damascus, attempting to establish an inclusive government and consolidate control over the country. If the group can unify other factions and gain international recognition and aid, Syria may achieve stability, and millions of refugees could return home. However, if HTS fails and factions cannot cooperate, Syria will plunge back into anarchy, triggering a new wave of refugees. If the Trump administration withdraws support for its Kurdish allies, the resulting vacuum may allow the Islamic State (IS) to re-emerge within the country.
Yemen may face permanent division. Despite over a year of U.S. and Israeli airstrikes and economic pressure, the Houthis still control the densely populated northern regions. A severe humanitarian crisis will leave millions of Yemenis facing threats of disease and hunger.
Libya remains divided more than a decade after the fall of Gaddafi, with lawlessness persisting. While oil revenues offer hope, production instability and resource competition lead to repeated conflicts, hindering national dialogue and political reconciliation.
In Ukraine, Russia occupies four regions, including Donetsk, affecting approximately 3.5 million residents with weak governance. A ceasefire agreement may be reached, but the terms could effectively cede these territories to Russia. Western attention to these areas is expected to wane rapidly.
Instability in the Sahel region is intensifying. Burkina Faso and Niger are turning to cooperation with Russia for symbolic aid. Frequent coups and terrorist activities complicate the situation, and the withdrawal of the U.S. and France may further undermine stability.
Other regions in Africa continue to be affected by civil wars. Ethiopia struggles to recover from the Tigray War, with extensive damage to medical facilities, civilians lacking basic services, and displaced persons unwilling to return home. The civil war in Sudan, which erupted in 2023, has resulted in 150,000 deaths, with 3 million fleeing to neighboring countries, worsening public health threats, and parts of Darfur entering famine conditions. The Democratic Republic of the Congo remains mired in turmoil due to mineral disputes and armed rebellions, with widespread human rights violations.
In Myanmar, 3 million civilians have been displaced since the military coup, the Rohingya face systematic persecution, ethnic tensions are escalating, and the military government's atrocities continue. In Haiti, a political crisis intertwines with gang violence, leading to a worsening situation.
Although these regions currently have limited direct impacts on geopolitical or market risks, their weak governance and impunity provide fertile ground for terrorism, organized crime, and drug networks, ultimately threatening global stability.
10: The Mexico Stalemate
Mexican President Claudia Sheinbaum and her Morena party won a decisive victory in last year's elections. She now has broad authority, with executive power nearly unchecked. However, Sheinbaum will face significant challenges in her relationship with the United States this year, while also dealing with ongoing constitutional reforms and fiscal pressures domestically. Her diplomatic and governance capabilities will be rapidly tested.
In 2025, U.S.-Mexico relations will become more strained. President-elect Donald Trump has threatened to impose a 25% tariff on all Mexican imports if Mexico cannot curb the flow of migrants and fentanyl into the United States. Additionally, Trump has threatened to impose a 100% tariff on all cars imported from Mexico, citing the large number of Chinese components in these vehicles.
In response, President Sheinbaum is adopting a pragmatic approach, strengthening Mexico's stance on combating drug cartels and controlling migration flows, showcasing recent achievements and promising further action. At the same time, Mexican officials are prepared to make significant concessions on issues related to China to avoid high tariffs. However, these compromises may underestimate the severity of the current challenges.
Compared to Trump's first term, the relationship between the two countries now faces greater resistance. Currently, the U.S. has a more unified and hardline hawkish stance towards Mexico, with Trump's policies no longer constrained by moderate cabinet members. At the same time, bilateral tensions have significantly increased, from fentanyl and immigration to trade disputes, making negotiations far more complex than before. Trump's high demands and the concessions Mexico needs to make may exceed the expectations of the Mexican government, while the consolidation of power within the Morena party also weakens Sheinbaum's space for resistance based on domestic political constraints.
Trump plans to prioritize demanding that Mexico crack down on "transit" investments, curbing Chinese companies from entering the U.S. market through Mexico to evade tariffs. In response, Sheinbaum will actively engage, providing Trump with early victories. However, the U.S. will also pressure Mexico to implement stricter rules of origin in sectors like the automotive industry and may require Mexico to adopt measures similar to U.S. tariffs on China. This will exacerbate economic pressure on Mexico and drive up inflation.
On border issues, Trump is expected to take harsher measures against illegal immigration while demanding that Mexico curb the flow of drugs and migrants into the U.S., and may even require Mexico to accept citizens from third countries. Although Sheinbaum will strive to have the U.S. directly deport immigrants to their countries of origin, she may ultimately compromise to avoid tariffs. Additionally, if Trump implements a tax on remittances, it would deal a heavy blow to the Mexican economy, while his plans to combat drug cartels through military means are likely to provoke sovereignty disputes and escalate tensions.
Challenges of the US-Mexico-Canada Agreement (USMCA)
The review of the USMCA may begin in 2025, a complex and lengthy process. Trump's trade policies are more opaque than during his first term, with long-time hawk Peter Navarro taking on a senior position, further blurring policy accountability. Additionally, Canada may seek to negotiate separately with the U.S. after the Conservative leader Pierre Poilievre takes office, although the likelihood of success is low, it will slow down the negotiation process and complicate Mexico's position. While the USMCA may persist, negotiations are expected to be more confrontational and challenging.
Sheinbaum's personal relationship with Trump may be functional, but it is difficult to establish a close connection. Compared to her predecessor Andrés Manuel López Obrador (AMLO), who shared populist common ground with Trump, Sheinbaum, as a modern progressive and technocrat, has a lower "fit" with Trump.
This difference, combined with a series of uncertainties, will affect U.S.-Mexico relations and suppress the Mexican economy. AMLO's constitutional reforms, including the direct election of federal judges starting in 2025, will weaken judicial independence, reduce checks on the ruling party, and erode investor confidence. Furthermore, Sheinbaum's plans to further promote direct elections for the leadership of autonomous agencies may exacerbate policy instability. Although she has appointed a professional cabinet and decentralized power to technocrats to reduce policy risks, Morena's overconfidence may lead to decision-making errors, and the weakening of institutional checks will further amplify risks.
The Mexican economy faces short-term low growth and a high fiscal deficit (6% of GDP). Sheinbaum needs to push for politically sensitive fiscal adjustments while maintaining social spending priorities; failure to balance these will be difficult to justify.
Mexico has a young population structure, low labor costs, and opportunities for nearshoring in global supply chains, providing conditions for long-term success. However, to unlock this potential, Sheinbaum must overcome significant policy and economic resistance in her first year in office to ensure political and economic stability.
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