The global economy is approaching a high-water mark of economic statecraft (or coercion, or standard-setting, or regulation—take your pick). In our current decade, great powers have had the market share to compel others to sign onto their regulations, swallow imbalances, and rethink military strategy. However, it seems increasingly likely that those gambles are now breaking up. Market-setters have overplayed their hand—and middle powers will ultimately come to benefit.
Global Power through Regulation: The Case of the European Union
The famous “Brussels Effect” has long been the envy of many a technocrat. Using the power of the European single market and early adoption of renewable energies, the European Union’s tailored regulation has set global standards on carbon emissions, agricultural practices, and data use. Several examples stand out, known worldwide by their acronyms. The carbon border adjustment mechanism (CBAM) created a market-based tool to reduce emissions and incentivize the energy transition without explicit fees or prohibitions. The Digital Services Act (DSA) and Digital Markets Act (DMA) counter anti-competitive market consolidation and ensure user data protections. After the state of California replicated the EU’s General Data Protection Regulation (GDPR), even Americans are now saying yes or no to “cookies.”
All good intentions aside, trade officials in Brussels now openly admit to fielding accusations of “regulatory imperialism,” a term found widely in emerging market political commentary. The compliance burden for data protections deterred technology innovation hubs such as India or the Gulf, which could dispense of the European market and favor a brimming indigenous innovation boom. Growing economies also soured on EU standards in the energy and environment sector.
CBAM and deforestation regulations irk even the environmentally-inclined Brazilian President Ignacio Lula da Silva and cast a long shadow over last year’s COP Summit and the ratification of the long-embattled EU-Mercosur trade agreement. Ironically, the grip of EU regulation appears less existential for smaller, nimble markets than for US technology companies that must operate at scale. Calls for “digital sovereignty” —at this time a concept confined to talking points—raise alarm bells in American boardrooms and ignite the politicians who represent them. Smaller markets may be less threatened.
The Brussels Effect is experiencing a reversal of fortune as global partners grow stronger. It is rare nowadays to find European officials who strongly defend it. The European Commission and European Council are keen to unwind regulation in the name of competitiveness—in other words, cut obligations and open public coffers for industry. Up until recently, officials championed the principles of competition policy—setting standards and tightening budgets. These may sound similar, but are two quite different terms, designed for different global environments. A European consensus now holds that regulation incentivized the development of global alternatives, while hampering European growth.
Global Power through Overcapacity: The Case of China
At the height of its trade showdown with the Trump administration last year, China throttled access to critical raw minerals as a negotiating tactic. China held global industry in a “kill switch,” a savvy political move. Western governments had eyed China’s critical minerals deals in Africa and Latin America with increasing scrutiny but never saw the supply chain risk as existential enough to swallow the costs of diversifying.
Now China’s export ban will soon prove self-defeating. Western industrial leaders are on a quiet tear around the world to seal quick deals by outbidding the Chinese in Africa and South America while pouring efforts into expensive state-sponsored contracts with Australia, Canada, Scandinavian countries, and US states—a tactic that will dismantle China’s leverage.
A critical minerals “buyers’ club” and a commodities pricing mechanism may still be a ways off, but China could only use this threat once. Its blackmail has raised the negotiating leverage of current suppliers, most specifically poorer countries such as the Congo or Angola, middle income countries such as South Africa and Chile that have traditionally been price takers than price setters, as well as a broad swath of the industrialized West now willing to pay them a premium.
China’s unfettered abuse of global trade imbalances also faces strong headwinds. Industrial overcapacity is, after all, itself a form of economic statecraft. The theft of international property combined with wide-scale state subsidization has left Western economies scrambling between trying to placate a monster before it gobbles them up or using equally destabilizing tactics to fight back, while developing economies found themselves an extended arm of a Chinese value chain. The absorption capacity for Chinese state-sponsored dumping grew wildly for several decades. Global responses have been patchwork.
This is changing. Over the past five years, China has triggered safeguard mechanisms in nearly every corner in the world. A wide range of countries that appear both geographically and politically incongruous, such as Indonesia, Turkey, Argentina, and Kazakhstan have joined the G7 nations to limit China’s inroads into trade and investment in infrastructure. “Safeguard measures” is of course WTO-speak for tariffs and import bans. Free traders lament this response, but the practice is certainly globalizing as countries become more comfortable countering China’s regulatory imperialism. And with the collapse of consumption within China, leaders have little choice but to continue underpricing their goods abroad, bound in a trap of their own making.
Global Power through Coercion: The Case of the United States
Multiple US administrations drew the wrong conclusions from their generous application of financial sanctions, where the dollar governs most trade settlement and financial transactions. A sanction can bring a factory to a halt on the other side of the world. And not only that factory—the producers of every input in that factory.
Policymakers hoped export controls could become just as powerful, yet financing the movement of goods is different than transporting them. The Biden administration bet that by restricting the delivery of advanced chips to China, and by prohibiting US trading partners from including US chips in their own value chains with China, it could slow indigenous development of advanced technologies and the civilian-military nexus necessary for war, specifically over Taiwan.
The strategy unwound quickly. China scrambled to fill the technological gaps with domestic production, the AI tool DeepSeek was unrolled, and trade loopholes through third parties abounded. In the end, in his sui generis style, Trump licensed the sale of some models in a quid-pro-quo over rare earths, and his administration has since unwound Biden era restrictions on “AI diffusion” via third parties.
Was it ever possible for export controls to hinder Chinese technological advancement? It was intellectually far-fetched and nearly impossible to enforce. The use and overuse of financial sanctions is the subject of every US Treasury memoir, but post-mortems on export controls will show that diverting the flow of US goods is a far greater regulatory risk than flight from the US dollar.
For the US, the great white elephant is of course tariffs, also destined for policy post-mortems. The US Supreme Court’s determination that the International Emergency Economic Powers Act (IEEPA) cannot govern tariffs dealt a blow to trade war absolutism and will prevent the executive branch from using the threat of tariffs as direct political coercion. As US negotiators reassemble a tariff regime through alternative, work-intensive statutes, the damage to trade leverage is visible.
And those in Washington’s crosshairs have reacted, too. Canada has overcome generations of interprovincial trade barriers and transcontinental pipeline infrastructure to alleviate its dependence on the US; Southeast Asia and Latin American regional ties have deepened; European investors have delayed or cancelled US projects, opting for the Middle East; and India—whiplashed by Trump over its import of Russia oil—has embraced European trading partners and committed to unwinding some of its notorious bureaucracy that has long deterred foreign investment. The US economic team hopes that a high-tariff environment will help restore America’s industrial base, and there are select cases where they are likely to succeed. But trading partners are furious. In an attempt to gain leverage over the short-term—the US may well have lost it going forward.
From Biden’s export controls to Trump’s tariffs, the US has exceeded its capacity to gain competitiveness through punitive regulatory policy. Accordingly, the mood has shifted toward the fortification of the US industrial base, and bipartisan consensus has turned toward shoring up private capital and embracing industrial policy. This isn’t just isolationism talking. US regulatory moves have steadily lost their potency when pitted against the diverse power centers of today’s global economy. As a consequence, like the EU, America is opting for public money to boost industry, and less on the regulation of others.
Exiting the Great Power World
What is the consequence of regulatory zeal among great powers? The European Union’s efforts to provide a global framework for transnational public goods have fomented a backlash against climate and data policies, which many nations view as luxury taxes in times of tightened profit margins and stiff competition. China has used its role as the resource and production floor to undercut global industries and create critical dependencies on its raw materials. Yet exploiting global imbalances as negotiating leverage is not a stabilizing element in the global economy. Abusing trade rules decelerates global growth for everyone—a lesson that tariff policy may also teach America. There is a pain threshold that trading partners will absorb before they fight back.
A pessimistic view would hold that the weakening of regulatory and economic determinants of power will force military intervention back onto central stage. After all, advocates of financial sanctions always knew that they were designing alternatives to war in the hope that a diplomatic window will emerge, or a regime will acquiesce. In the case of Venezuela and Iran, decades of sanctions have just ended in military intervention. Financial and economic inducements or punishments were the lower risk option, the bloodless warfare, but the complexity of the global economy rendered them not effective enough—at least in the judgment of US leadership—to preclude kinetic action.
Longer-term optimists would argue that since great power regulatory imperialism is a destabilizing factor for global growth, many will turn against it. In other words, a world governed by sanctions and tariffs will have been an interim phase for great powers, even America. When the world’s largest economies run out of runway to compel or coerce others through economic means, new guidelines for economic conduct among a diverse set of actors will emerge. WTO Secretary General Ngozi Okonjo-Iweala often reminds her organization’s detractors that over 70 percent of global trade is still conducted according to most-favored-nation rules.
What might this look like? Trade agreements will emphasize security of supply, strategic industries and be narrow in scope. Those feting the implementation of the EU-Mercosur agreement should ask whether decades of negotiations were worth the forgone costs of smaller, tailored arrangements that reflect the complexity of today’s global trading environment. Critical minerals clubs are a clear manifestation of this trend. Friend-shoring did not die with the Biden administration, only the definition of “friend” does not necessarily pair with military alliances or political structures. Venn diagrams are still a good mental picture. The winner of that trade game is not the big circle on the margins, but the small points of intersection in the center—the nimbler economies.
With massive industrial and technological advancement underway, competitiveness cannot simply be a battle of fine print between well-trained technocrats in economic power centers, it must also be home grown. For years I argued that the forefront of the international balance of power lay in regulation—and it certainly looked that way from the perspective of an embattled technocrat emerging from the first Trump administration, but the tools are becoming too creative to be sustainable, and Trump has now taken a hatchet job to their credibility.
As middle powers gain comparative advantage, it makes sense that they are liberalizing whereas larger ones are doubling down on industrial policy. The current US administration is strongarming private capital into public-private partnerships and demanding shares of favored companies—state capitalism with Chinese characteristics. China, in turn, will not budge on its policy of underpricing the global economy because it cannot stimulate sufficient domestic demand. The EU is adopting more mechanisms for joint borrowing and capital reform than issuing fresh regulation. The abuse of global interconnectedness by great powers may mean we are, ultimately, exiting a great power world.
Julia Friedlander is CEO of the Atlantik-Brücke, a professional networking association fostering links between Germany and North America. Previously, she served in the US Treasury and the White House National Security Council.
