#1

New AI Regulations From U.S.

The U.S. government has announced new regulations to restrict the export of artificial intelligence chips and technology, aiming to maintain its global dominance in AI while limiting access for adversaries like China, Russia, Iran, and North Korea. These rules, introduced in the final days of President Joe Biden’s administration, divide the world into three tiers: closest allies like Japan and Britain are exempt from restrictions, 120 countries face export caps, and embargoed nations are completely barred. Key measures include capping the export of advanced GPUs, which power AI models, and imposing licensing requirements for companies like Nvidia and AMD. Cloud service providers, including Microsoft, Google, and Amazon, can apply for global authorizations to build data centers under stringent conditions. The rules aim to close loopholes in existing restrictions, ensuring advanced chips and AI capabilities are not diverted to adversaries. Industry players like Nvidia have criticized the regulations, warning they could stifle competition and innovation by restricting widely available technologies. The Biden administration has positioned these controls as essential for U.S. security and economic leadership, citing AI’s dual-use potential in areas like healthcare, education, and defense, as well as risks like cyberattacks and human rights abuses. The effectiveness of these rules will depend on enforcement by the incoming Trump administration, which is likely to support them as a means of helping U.S. industries and punishing adversaries. Meanwhile, China has vowed to safeguard its interests, signaling potential retaliation. China has already implemented export bans on critical minerals, such as gallium, germanium and antimony, that will harm U.S. chipmakers.

#2

Trilateral Cooperation in the Indo-Pacific

Japan, the Philippines, and the United States have pledged to deepen their trilateral cooperation in response to rising tensions in Asia's waters, particularly concerning China's actions in the South and East China Seas. During a virtual meeting, Japanese Prime Minister Shigeru Ishiba, Philippine President Ferdinand Marcos Jr., and outgoing U.S. President Joe Biden emphasized enhancing collaboration in economic, maritime, and technological areas to uphold international law and regional stability. The leaders reaffirmed their opposition to unilateral changes to the status quo by force, referencing China's aggressive behavior in disputed maritime regions. Biden expressed optimism that President-elect Donald Trump would continue supporting the partnership, which has been institutionalized to ensure long-term cooperation. Japan and the Philippines, both U.S. treaty allies, face territorial disputes with China and have strengthened their defense ties, including ratifying agreements for joint military exercises and conducting trilateral coast guard drills. The deepened trilateral cooperation strengthens their defense by reinforcing alliances, enhancing joint military capabilities, and creating a unified front to uphold international law in the Indo-Pacific region. This partnership improves the ability to counterbalance China's growing military assertiveness and ensures greater security in critical maritime trade routes. However, this increased coordination is likely to escalate tensions with China, as Beijing views such alliances and joint exercises as direct challenges to its regional ambitions and sovereignty claims in the South and East China Seas.

#3

German Economy in Continued Recession

Germany’s economy contracted by 0.2% in 2024, marking its second consecutive year of decline and signaling the longest period of stagnation in its post-war history. The downturn is driven by structural and cyclical challenges, including high energy costs, weak global demand, elevated interest rates, and increased competition, particularly from China. Exports fell by 0.8%, and with incoming U.S. President Donald Trump threatening trade tariffs, further deterioration in export opportunities looms. Domestically, consumer spending rose by 0.3% due to wage growth and eased inflation, offering a small positive note. However, the government’s budget deficit increased to €113 billion, representing 2.6% of GDP. Corporations should expect a continued economic contraction in early 2025, with a credible third consecutive year of recession. Political instability, including the collapse of Chancellor Olaf Scholz’s coalition, has compounded economic uncertainty, leaving Germany lagging behind its eurozone peers. A tangible recovery will depend on clarity in economic, financial, and geopolitical policies following Germany’s federal election in February.

#4

Meta Challenges Anti-Free Speech Governments

Meta CEO Mark Zuckerberg announced major changes to content moderation on Facebook and Instagram, including the removal of fact-checking programs in the U.S. and the introduction of a "community notes" system due to the political bias of fact checkers. This move aligns with the inauguration of Donald Trump and is framed as a return to "free expression," targeting perceived censorship by governments and media. However, several governmental organizations hostile towards free speech have criticized the move. “Digital rights advocates” and fact-checking organizations warn that these changes could dismantle a global "line of defense" against misinformation, risking political instability and violence in countries heavily impacted by disinformation. The European Commission is one of those critics despite their general anti-free speech regulations. The Commission rejected Zuckerberg’s claim that EU data laws amount to censorship, clarifying that the Digital Services Act (DSA) only mandates the removal of illegal content and harmful material (though this ignores the basic problem that they can make any speech they want illegal). Brazil has also targeted Meta, claiming that removing fact checking “could represent fertile ground for the violation of laws that protect fundamental rights of Brazilian citizens.” The United States has historically supported significantly stronger free speech protections than Europe, South America, and elsewhere. This decision will likely make the U.S. at odds with other governments that do not support such robust protections.

#5

Bond Vigilantes and Market Instability

The resurgence of "bond vigilantes"—investors who pressure governments to adopt fiscal discipline by raising borrowing costs—is becoming a concern as major economies grapple with high government spending and rising debt. Global government bond markets have experienced selloffs, with Britain and France particularly impacted due to political instability and unsustainable fiscal policies. Rising U.S. Treasury yields also signal investor skepticism about the incoming Trump administration’s ability to address the U.S. budget deficit. Unlike previous decades when central bank bond buying kept borrowing costs low, the retreat of central banks from such policies, combined with pandemic-era spending and inflationary pressures, has amplified the influence of bond investors. Countries with high debt levels, such as Britain and France, have already faced rising borrowing costs, while emerging markets like Brazil have also experienced financial strain due to wide deficits. Although the U.S. has not yet faced the same intensity of pressure, its growing deficit and surging debt levels—now over $28 trillion—pose risks. Analysts suggest that the rise in Treasury yields reflects both concerns over fiscal spending and expectations of higher interest rates due to strong economic performance. History shows bond vigilantes can drive significant policy changes, underscoring their enduring power in shaping government fiscal behavior.

#6

Europe to Increase Defense Spending

Germany, Poland, Britain, France, and Italy have pledged to swiftly implement NATO's upcoming targets for weapons and troop numbers, with the alliance set to finalize these new capability goals by June 2025 instead of October. This acceleration, prompted by Germany, aims to enhance NATO’s readiness amidst ongoing security challenges from Russia's 2022 invasion of Ukraine and internal pressures, including U.S. President-elect Donald Trump's call for significantly higher defense spending. A NATO summit in The Hague will also discuss raising the alliance’s military spending target from 2% of GDP, with experts suggesting 3%, and Trump advocating for an ambitious 5%. The swift implementation of NATO’s new capability targets and increased defense spending could enhance European stability by improving military readiness and deterrence against threats like Russia. However, heightened defense spending demands may strain national budgets, particularly for countries already facing economic challenges. This could lead to political tensions within Europe, as not all nations may agree on prioritizing defense over other pressing domestic issues. The focus on increasing European defense spending also aligns with Trump’s long-standing demand that NATO members contribute more to collective security. This could strengthen U.S.-European relations if Trump perceives progress toward these goals, but heightened security measures and geopolitical tensions could disrupt supply chains and raise operational costs for companies reliant on stable trade routes and European markets. Firms may need to navigate stricter compliance and regulatory requirements as nations prioritize defense and cybersecurity resilience.

#7

NATO Allies Warn Russia

NATO allies bordering the Baltic Sea issued a joint statement condemning recent damage to undersea infrastructure and warning of potential actions against Russian ships threatening maritime security. The announcement follows incidents of undersea cable damage, including a Christmas Day event involving the Eagle S, a suspected Russian spy ship allegedly dragging its anchor to disrupt power and telecommunications infrastructure. The statement from Denmark, Estonia, Finland, Germany, Latvia, Lithuania, Poland, and Sweden highlighted the risks posed by Russia's "shadow fleet," a network of vessels with opaque ownership used to circumvent sanctions and support its war in Ukraine. NATO Secretary General Mark Rutte announced the launch of Baltic Sentry, a military initiative involving frigates, patrol aircraft, and naval drones to strengthen regional security. While the allies emphasized deterring, detecting, and countering sabotage, the statement stopped short of direct military threats, instead asserting their commitment to protecting infrastructure under international law. The United States has also intensified sanctions on vessels linked to Russia's shadow fleet, targeting their role in exporting sanctioned goods and funding Russia's aggression. While still unlikely, this is an indicator of broader conflict with Russia than just in Ukraine. Russia’s increasing aggression against European nations has already led to a support in more defense spending, but a direct attack on infrastructure would likely lead to both kinetic and cyber responses by NATO allies.

#8

TikTok Ban Likely to Go Into Effect

The Supreme Court appears poised to uphold a law requiring TikTok’s Chinese parent company, ByteDance, to divest from the platform or face a U.S. ban starting January 19. During oral arguments, justices focused on concerns about foreign control and data security, rather than First Amendment implications. The sell-or-ban law, approved by Congress in April 2024, reflects bipartisan worries about TikTok’s ties to the Chinese government and its data practices, raised by both the Trump and Biden administrations. If enforced, the law would remove TikTok from app stores, preventing new downloads and updates, eventually rendering the app outdated and insecure. The U.S. is following other countries, like India and Taiwan, who have already banned the app, and other countries and organizations, like the UK, have banned TikTok on government devices. Ironically, the ban may increase insecurity in the United States as many TikTok users are moving to Xiaohongshu, a Chinese social media app known for travel and lifestyle content. Dubbed “RedNote” by some, Xiaohongshu has seen a surge of curiosity-driven content from new users, but they are unaware of the terms and conditions that are quite stringent. Corporations will need to consider how employees are using Red Note and if the app will allow the CCP access to proprietary information.

#9

Israel and Hamas Agree Ceasefire

Israel and Hamas have reportedly reached a ceasefire agreement aimed at ending the ongoing conflict in Gaza. The agreement, set to begin on Sunday, includes a six-week truce and the withdrawal of Israeli forces from densely populated areas. In exchange, Hamas will release 33 Israeli hostages, while Israel agreed to free over 1,000 Palestinian prisoners. The agreement is pending approval from the Israeli cabinet and Israel has noted that certain details remain unresolved and accused Hamas of tyring to gain last-minute concessions. However, it is likely that the ceasefire will pass. See here for our in-depth analysis of Israel after the war.