The Risks of Geopolitical Realism and Its Impact on U.S. Foreign Policy Stability

The U.S. foreign policy landscape has undergone a marked shift toward geopolitical realism in the 2020–2025 period, characterized by a prioritization of national security, hard power, and strategic autonomy over ideological commitments. This recalibration, exemplified by bold actions such as military strikes on Iran, fluctuating diplomatic ties with leaders like Vladimir Putin and Volodymyr Zelensky, and a reinvigorated military presence in the southern Caribbean, has introduced both opportunities and risks for global investors. While realism's focus on power dynamics may enhance short-term security, its long-term implications for policy stability and market confidence remain contentious.

Geopolitical Realism and Corporate Investment Behavior

The embrace of geopolitical realism has heightened corporate perceptions of geopolitical risk, directly influencing investment decisions. A report by the Federal Reserve Bank of Boston highlights that firms-particularly those in finance, manufacturing, and mining-have significantly reduced future investment plans due to this uncertainty. The volatility stems from the unpredictable nature of realist policies, such as abrupt tariff adjustments and military interventions, which disrupt market fundamentals. For firms with limited liquidity, the risks are even more acute, as they lack the financial flexibility to absorb shocks from geopolitical events.

This trend is compounded by concerns over the U.S. dollar's global dominance. The Trump administration's aggressive tariff policies and geopolitical posturing have sparked fears that the dollar's role as the world's primary reserve currency could erode, with cascading effects on U.S. economic influence and the costs of maintaining a global military footprint. While a temporary detente in U.S.-China trade relations-marked by planned high-level diplomatic engagements-has eased some pressures, broader tensions, such as those in the Russia-Ukraine conflict, continue to weigh on investor sentiment.

Sector-Specific Risks: Defense, Energy, and Critical Minerals

The defense sector has emerged as a key beneficiary of the realist shift, with increased military spending and a focus on technological superiority. However, this comes at the expense of long-term fiscal sustainability, as defense budgets expand in response to perceived threats. Meanwhile, the energy sector faces a paradox: while U.S. policies promoting domestic oil production aim to reduce reliance on foreign suppliers, they risk oversupplying global markets, leading to price volatility. The Trump administration's deregulatory agenda has further muddied the outlook, creating a trading environment where executive orders and tariffs can rapidly alter market dynamics.

The critical minerals sector, vital for both energy transitions and defense systems, presents another layer of complexity. China's dominance in processing 85-90% of global rare earth elements, along with its control over cobalt, nickel, and lithium refining, has become a strategic vulnerability for many nations. In response, the U.S. and its allies have launched initiatives to diversify supply chains. For instance, the 2025 Critical Minerals Framework Agreement with Australia and joint investments with Japan aim to secure alternative sources for EV batteries and magnet materials. Yet, these efforts face headwinds, including China's recent export restrictions on gallium, germanium, and rare earth elements, which underscore the fragility of global supply chains.

Diversification Strategies and Policy Implications

Investors navigating this landscape must adopt risk-sensitive strategies. Governments are increasingly stepping into the critical minerals sector to deploy public capital and form strategic alliances, as seen in the U.S. expansion of its critical mineral list to 60 items, including boron and uranium. Similarly, the energy sector is witnessing a pivot toward LNG as a geopolitical tool, with the U.S. leveraging its export capacity to counter Russian influence in Europe.
However, market responses have been mixed. Despite rising demand for energy transition minerals like lithium and cobalt, investment in exploration and production has stagnated, with prices for these commodities plummeting. This disconnect highlights the need for policy interventions that align market signals with strategic priorities, such as state-backed financing and international agreements to stabilize supply chains.

Conclusion: Balancing Power and Stability

The shift toward geopolitical realism has undeniably reshaped U.S. foreign policy, but its investment implications are far from straightforward. While the focus on hard power and autonomy may bolster short-term security, the resulting policy volatility and supply chain fragility pose significant risks for global markets. Investors must remain vigilant, prioritizing diversification and strategic alignment with national security goals. As Stephen Walt argues, realism demands a nuanced understanding of power dynamics and their unintended consequences. In this context, the challenge lies in balancing the imperatives of geopolitical competition with the need for economic stability-a task that will define the investment landscape for years to come.