With a Supreme Court decision on IEEPA at least a few more weeks away, President Trump continues to barrel ahead with his trade and foreign policy agendas. Last week’s flurry of activity included newly threatened tariffs on a variety of goods and countries, as well as bilateral deals inked and frameworks reached. Meanwhile, geopolitical events continue to shuttle the President’s foreign policy team throughout the world, from Caracas to Istanbul to Moscow to Beijing. Below is an update from around the globe.
COUNTRY-SPECIFIC TRADE
The European Parliament further delayed its vote to codify the U.S. trade deal, which was first stalled due to the Greenland controversy. While the vote is likely to take place in the coming days or weeks, European Union (EU) stalling tactics highlight the degree to which some trading partners have questioned the durability of deals reached with the Trump Administration-whether it’s uncertainty over an IEEPA decision or uneasiness with the prospect of newly threatened tariffs that layer on top of a deal already in place.
No other country more embodies the poster child for a stalled trade agreement, however, than India. Despite being first out of the gate to embrace a reciprocal deal, Prime Minister Narendra Modi’s government has made glacially slow progress in the ensuing months-in part due to the complications of weaning itself off Russian oil, but also due to an insistence that they be treated to the United Kingdom (UK)’s 10 percent rate. As Commerce Secretary Howard Lutnick has said openly, that ship has since sailed.
Yesterday, following a call with Modi, President Trump-via Truth-announced a deal with the India had finally been reached. We await framework details, but the toplines appear to include a reduced reciprocal rate of 18 percent and an Indian commitment to entirely end Russian oil purchases, though Modi did not acknowledge the latter in his X post.
Meanwhile, UK Prime Minister Keir Starmer is keeping a low profile with his recent trip to Beijing, the first visit by a British PM to China in eight years. Starmer’s quiet deal with China stands in contrast to Canadian Prime Minister Mark Carney’s Davos rhetoric and resulting China agreement (see below), and is more narrowly focused on removing visa restrictions, with talks to continue around services, whiskey, and EVs.
Staying in the East, Japan’s snap election this Sunday, February 8, will serve as a potentially seismic milestone for Prime Minister Sanae Takaichi. The country’s politics are directly colliding with its financial outlook as the government moves forward with a zero percent consumption tax on food at the beginning of the new fiscal year (April 1) despite its heavy debt burden. Sunday’s results, coupled with a recent bond market sell-off, will test the new Prime Minister’s political mandate as she seeks to calm the bond vigilantes and stabilize the yen, vis-à-vis coordination with the U.S. Treasury.
President Trump ended last week with a tariff volley against South Korea, due in large part to its legislature’s digital regulatory bills, a disagreement over investment pledges, and the government’s continued outreach to the CCP. This all came to a head in the form of a Truth threat to raise the reciprocal and 232 tariff rates on South Korea from 15 percent to 25 percent. For its part, the House Ways and Means Committee will host South Korean trade representatives this week in an effort to calm the waters.
DONROE DOCTRINE
The President’s recent executive order imposing tariffs on countries that supply oil to Cuba seems to have had one particular target in mind: Mexico. While Trump and President Claudia Sheinbaum continue to affirm their productive working relationship, this issue could add new friction as the Administration seeks to starve the Cuban economy with the hopes of non-military regime change intervention. Couple that with the recent revelation of an alleged FBI raid into Mexico and sovereignty is again a major issue with another close trading partner.
That said, USTR Ambassador Jamieson Greer met with his Mexican counterpart last week and “agreed to begin formal discussions” on possible amendments to the USMCA. The Mexican side noted that discussions with the Americans, which also included a meeting with Secretary Lutnick, included Section 232s (presumably steel and aluminum relief that has been rumored for the past few months), the automotive sector (a priority for President Trump), and the critical mineral supply chain.
Relations with Canada remain much more fraught. After initially providing disinterested support for Prime Minister Carney’s “oil for canola” deal with China, as well as opening the Canadian market to Chinese EVs, the President has since taken the opposing side, warning the Prime Minister that getting “into business with China” was “danger.”
Presumably to prevent Canada from becoming a “Drop Off Port” for Chinese goods, Trump threatened a new 100 percent tariff if the deal were to go through, though the scope of the Canada/China agreement is likely to dictate if/when the new tariffs become effective (if at all). To that end, trade officials from both sides appear to be tamping down the rhetoric with reports that the Canadians provided the American side with a heads up on the deal and got an informal green light to proceed.
But the China deal is not the only source of Trump’s ire towards Canada. The President also announced via Truth that he would decertify Bombardier Global Express planes and all new aircraft made in Canada (not including those already in service), as well as impose a new 50 percent tariff on Canadian aircraft if Canada did not certify the Gulfstream 500, 600, 700, and 800.
Perhaps relatedly, the Commerce Department’s Section 232 investigation into commercial aircraft is with the President as of January 26. The President is now within the 90-day 232 window to decide what actions to take.
Much of the news from Canada, and the resulting U.S. reaction to Carney’s Davos speech, point to domestic politics on both sides. Perhaps in an attempt to further muddy the political landscape north of the border, news broke last week that U.S. officials had hosted members of the Alberta Prosperity Project in Washington, an independence movement.
Turning south again, the Administration took steps to shore up influence and/or control of Latin America with USTR announcing formal reciprocal agreements with both El Salvador and Guatemala following the frameworks reached in November. Ecuador and Argentina are likely soon to follow.
And in a further blow to Chinese influence within the Western Hemisphere, the Panamanian Supreme Court ruled against Hong Kong operator CK Hutchinson last week, annulling its claim to operate both ends of the Panama Canal. This is a death knell to Blackrock’s investment bid and opens the door to new U.S. investors and, ultimately, American control.
IRANIAN TALKS
As the Department of War continues to assemble assets in the Middle East, negotiations between the U.S. and Iran have restarted. According to Iranian news sources, President Masoud Pezeshkian ordered the start of negotiations with Washington last week “within the framework of the nuclear issue.”
President Trump confirmed the direct talks over the weekend, stating that Iran was negotiating “seriously.” This was followed by comments posted on social media by Ali Larijani, Secretary of Iran’s Supreme National Security Council, in which he said that “structural arrangements for negotiations are progressing.”
In order to achieve an agreement, U.S. Special Envoy Steve Witkoff and Jared Kushner are expected to meet with Iranian Foreign Minister Abbas Araghchi in Turkey this Friday, leveraging high-level mediation efforts from Egypt, Turkey, Qatar, Saudi Arabia, and the United Arab Emirates. Prior to traveling to Istanbul, Witkoff met today with Israeli Prime Minister Benjamin Netanyahu for three hours to understand his redlines. Friday’s meeting is still in question, however, as the Iranians have already threatened to pull out. There will likely be additional twists and turns over the next few days.
Thus, the U.S. position on regime change, which the President was all but embracing during recent protests, seems to be shifting back towards a durable nuclear deal. Trump reiterated his redline of “no nuclear weapons” over the weekend while the Iranians are focused on sanctions relief and preserving their ballistic missiles program.
CHINA AI RACE
The AI race continues to dominate U.S./China relations as President Trump prepares for his state visit to Beijing this April. Despite the potential for disruptions to the “truce” reached at the end of October, the one-year agreement appears to be holding, with China meeting its agricultural purchasing commitments and the U.S. greenlighting the export of Nvidia’s H200 chip.
For the first time, the U.S. no longer seems to be losing continuous ground to the Chinese in its race for AI dominance.
Yesterday, news broke of the President’s plan for a new civilian critical minerals stockpile, “Project Vault,” with the help of a $10 billion U.S. Export-Import (Ex-Im) Bank loan, as well as $1.67 billion in private capital seed money. The stockpile will be focused on both rare earths and critical minerals, prioritizing elements like gallium and cobalt.
The 15-year Ex-Im loan will be the largest of its kind, more than doubling the next largest deal. Designed to stabilize pricing for U.S. companies and secure a glaring weak link in the tech supply chain, companies like General Motors, Boeing, and Alphabet are all said to be participating. And there is news this morning of EU outreach on forming a partnership.
This comes amidst public admissions from Chinese technologists and CCP officials that the gap between U.S. and PRC labs may be widening. Indeed, the effects of U.S. semiconductor export controls are more effective than previously known or acknowledged. While President Xi Jinping called for Chinese AI self-reliance by 2027 at the beginning of this year, the evidence shows otherwise.
Despite Xi’s mandate, China is not just failing to make up ground on AI chips, they are losing it. Estimates now show that even a five-year benchmark for surpassing the U.S. is unrealistic, let alone Xi’s 2027 deadline. In fact, one of China’s leading technologists recently told an audience at the January 10 AGI-Next Frontier Summit that while open source models have led to much national optimism, “the gap may not be narrowing-it might even be widening.”
Chip fabrication capability has led to a U.S. compute advantage of “one to two orders of magnitude larger” than China’s. Lack of access to lithography machines, etching tools, high-bandwidth memory, dies, and other software/tools have created persistent fabrication shortages, as have previous central committee directives to crown Huwaei the domestic chip champion. That strategy has backfired, sending production costs 50 percent higher than TSMC.
Until now, Chinese technologists have had to adapt, patching together old generation chips and interoperable models (hardware/software “co-design”) and focusing on more efficient small, industry-specific models that do not burn as many GPUs. But given this AI stack dispersion, software development costs in China will “only continue to grow, leading to a waste of societal resources.”
A U.S. think tank estimated at the end of last year that American firms and their partners will produce 35 to 38 times more advanced processors than China. U.S. chips are already five times more powerful than Huwaei’s and that gap is estimated to grow by 17 times more compute in the next year alone. In this light, Xi’s reluctant decision to begin licensing H200s to domestic firms should be viewed as no surprise.
OUTLOOK/ANALYSIS. The Administration and the U.S. tech stack have shown demonstrable progress over the last year, leading to an objective regression in Chinese compute power. Yes, the CCP will retain its advantage over the U.S. in electricity and state and local AI restrictions have created headaches for hyper-scalers, but the Administration is now making inroads to secure a homegrown critical minerals and rare earth supply chain, China’s key point of leverage against the West. What this means for the next Trump/Xi meeting is unknown, but the American side may very well be in a position to flex its muscles come April.
The health of the U.S. economy will continue to impact both the upcoming China talks, as well as outstanding trade agreements and geopolitical events. For now, ratified agreements appear to be holding despite some friction (IEEPA notwithstanding) and global conflicts are stabilizing. Within that context, we largely view Western political rhetoric critical of the President as noise that is mostly worth ignoring.
Tariffs will continue to present marginal headwinds domestically, which could lead to further exclusion flexibility by the Administration in order to address affordability concerns heading into the midterms (e.g., construction inputs, steel and aluminum). For every datapoint that shows manufacturing subsiding or job growth slowing, the Administration will point to lowered trade deficits, rising equity markets, and flat inflation.
What the White House is particularly banking on is the One Big Beautiful Bill Act (OBBBA) kicking into gear during the second and third quarters, with a sizeable economic stimulus in the form of tax refunds. With a new Federal Reserve Chairman on the way, the prospect of further rate cuts combined with increased consumer spending could create pressure on the bond markets as the year unfolds.
###