The Rise of a Zero-Sum Global Order and Its Impact on Geopolitical Risk Premiums

The global economic landscape in 2025 is defined by a stark shift toward zero-sum competition, driven by Trumpian foreign policy and the intensification of U.S.-China rivalry. Tariffs, geopolitical brinkmanship, and the reconfiguration of trade alliances have not only reshaped capital flows but also recalibrated asset valuations across defense, emerging markets, and soft-power sectors. As nations prioritize strategic self-sufficiency over multilateral cooperation, investors must grapple with a new era of elevated geopolitical risk premiums and fragmented global ecosystems.

Tariffs and the Reshaping of Global Capital Flows

The Trump administration's 2025 tariff policies have acted as both a weapon and a catalyst for economic realignment. By imposing effective tariff rates in the mid-teens on global trade partners-rising to near 20% in emerging markets excluding China-the U.S. has disrupted traditional supply chains and redirected capital flows. Emerging markets, particularly in Southeast Asia and Latin America, have seen a surge in foreign direct investment (FDI) as firms seek to diversify away from China and Mexico according to analysis. Meanwhile, the euro area has attracted portfolio inflows, with European investors capitalizing on undervalued assets amid U.S. policy uncertainty as reported.

However, the U.S. remains a magnet for capital, particularly in equities and Treasuries, despite the drag on GDP growth and inflationary pressures from protectionist policies. The Penn Wharton Budget Model estimates that these tariffs could reduce long-term U.S. GDP by 6% and wages by 5%, compounding risks for domestic capital investment and bond yields. For investors, this duality-U.S. resilience amid global fragmentation-highlights the need to balance exposure to domestic growth with hedging against systemic trade tensions.

Defense Sector: Reshoring and Strategic Rebalancing

The defense industry has emerged as a key beneficiary of Trump's zero-sum strategy. Tariffs on steel, aluminum, and electronics have forced a reevaluation of global sourcing, accelerating reshoring of critical components like munitions and drones. Federal incentives for domestic production, coupled with a National Security Strategy prioritizing the Western Hemisphere, have spurred a 15–20% annual growth in defense spending.

Yet, this shift is not without challenges. Joint defense programs with NATO allies have faced delays due to incompatible sourcing rules, while rising costs threaten to strain budgets as noted. For investors, the defense sector offers both opportunities-such as contracts for AI-driven cybersecurity tools-and risks tied to geopolitical volatility. The sector's performance will hinge on the ability of firms to navigate regulatory fragmentation while maintaining technological edge.

Emerging Markets: A New Geopolitical Chessboard

Emerging markets are caught in the crossfire of U.S.-China competition, with capital flows increasingly dictated by strategic considerations rather than economic fundamentals. While the U.S. and China have temporarily paused retaliatory tariffs, the underlying contest over critical minerals and rare earths continues to drive investment patterns. China's near-monopoly in rare earth exports, for instance, has given it leverage to influence global supply chains, prompting U.S. allies to diversify into Southeast Asia and the Middle East.

Geopolitical risk premiums in these regions have surged, with conflicts in the Middle East and climate-driven instability in Africa compounding uncertainties. Investors must weigh the potential for high returns in sectors like infrastructure and energy transition against the risks of regulatory shifts and supply chain disruptions. The rise of "friendshoring"-relocating production to politically aligned nations-further complicates the calculus, as seen in the EU's pivot toward China and India according to analysis.

Soft Power and the Battle for Technological Supremacy

Beyond tariffs and trade, the zero-sum order is reshaping soft-power dynamics. The U.S. has intensified its focus on technological leadership, particularly in AI and quantum computing, to counter China's growing influence. This has spurred investment in domestic R&D and strategic alliances with nations like Saudi Arabia and Qatar. Conversely, China's push for self-reliance in foundational technologies has created opportunities for firms in emerging markets to fill gaps in global supply chains.

Corporate culture is also evolving in response. Companies in defense and tech sectors are aligning talent strategies with national priorities, prioritizing compliance and resilience over cost efficiency. For investors, this shift underscores the importance of ESG frameworks and governance structures that align with geopolitical realities. Sectors like media and education, once insulated from trade tensions, are now battlegrounds for ideological influence, with state-backed narratives shaping public perception and market access as research shows.

Investment Risks and Opportunities in a Fractured World

The rise of a zero-sum global order has elevated geopolitical risk premiums, with BlackRock's Geopolitical Risk Dashboard highlighting heightened volatility in 2025. Investors must now account for three key scenarios: a "Drift" path of prolonged fragmentation, a "Fracture" path of acute conflicts, and an "Adaptation" path of managed cooperation as outlined. Each scenario demands a different approach to asset allocation.

Opportunities lie in sectors aligned with strategic priorities: energy transition technologies (bolstered by the Inflation Reduction Act), critical minerals, and AI-driven defense systems according to market analysis. Conversely, risks are concentrated in sectors exposed to trade wars and supply chain bottlenecks, such as global manufacturing and commodity exports. Emerging markets with diversified trade relationships and robust domestic demand-such as India and Brazil-may offer asymmetric upside, while regions reliant on U.S.-China trade face heightened exposure.

Conclusion

The zero-sum global order, propelled by Trumpian foreign policy and U.S.-China rivalry, has redefined the investment landscape. From reshored defense industries to fragmented capital flows in emerging markets, the implications are profound. Investors must navigate this terrain by prioritizing resilience, diversification, and alignment with evolving geopolitical frameworks. As the world fractures into competing blocs, the ability to anticipate and adapt to shifting power dynamics will separate winners from losers in the years ahead.