PESTLE & MORTAR 23 October 2025

#1

Geopolitics of Critical Minerals

The U.S. and Australia have announced a new rare-earth minerals agreement aimed at reducing Western dependence on China, which currently refines around 90% of the world’s rare earths—materials critical for electric vehicles, wind turbines, precision-guided munitions, and fighter jet components. The deal will expand processing and supply-chain integration between Australian miners and U.S. manufacturers, with Washington providing financing and long-term purchase guarantees to encourage private investment. The announcement comes after China tightened export restrictions on rare earths, requiring foreign manufacturers using Chinese-sourced materials to seek Beijing’s permission before exporting finished products. This move followed earlier episodes where Beijing restricted exports entirely, temporarily shutting down U.S. automobile factories and exposing Western vulnerability to China’s control of the supply chain. While the U.S. and Australia’s partnership is a step toward diversification, analysts agree it will take years for new refining capacity, supply networks, and technological expertise to reach meaningful scale. The rare-earth standoff highlights a defining feature of 21st-century geopolitics with resource leverage as a tool of strategic coercion. For decades, Beijing’s industrial policy of state subsidies, consolidation of producers, export controls, and technology capture has built an unrivaled command over the rare-earth value chain, transforming what began as a low-margin mining sector into a geopolitical chokepoint. The new U.S.-Australia deal signals a strategic decoupling effort within the broader “friend-shoring” agenda by building resilient, allied-controlled supply chains in materials essential for clean energy, defense, and advanced manufacturing. However, in the short to medium term, China’s dominance will remain intact. It still holds the refining capacity, metallurgical expertise, and downstream manufacturing infrastructure for magnets and components. Western efforts are fragmented across multiple agencies and constrained by environmental regulations, high capital costs, and limited political continuity and are unlikely to reach industrial self-sufficiency before the 2030s. This means Beijing retains significant coercive power because it can manipulate prices to undercut competitors, selectively withhold exports to punish geopolitical rivals, and use access to materials as leverage in negotiations over tariffs or sanctions.

#2

China’s Economic indicators

China’s economy is displaying a paradox of external strength and internal fragility. Beijing’s ambitious consumer subsidy program meant to revive spending on vehicles, appliances, and other goods has largely failed to stimulate demand, revealing deep structural weaknesses in household confidence and income security. After years of property-market turmoil, stagnant wages, and youth unemployment, Chinese consumers are choosing to save rather than spend, and much of the state support has been captured by producers through higher prices rather than reaching households. Economists argue that the program treats the symptoms rather than the cause of China’s slowdown, which lies in a system overly dependent on state-led industrial investment and reluctant to expand welfare or redistribute fiscal power to families. At the same time, China has overtaken the United States as Germany’s top trading partner, demonstrating the resilience of its manufacturing base and its continued dominance in global supply chains, even as the West pushes for “de-risking.” This trade success, however, masks vulnerabilities. Europe’s dependence on Chinese goods persists amid growing political friction and looming tariffs on electric vehicles and green technologies. Together, these developments highlight a dual-track reality, an export-driven industrial powerhouse underpinned by state support alongside a cautious, underperforming consumer economy weighed down by insecurity and demographic decline. Without structural reforms that boost household purchasing power, strengthen the social safety net, and rebalance growth away from industrial overcapacity, China risks remaining a high-output but low-confidence economy, sustaining global trade leadership while struggling to generate genuine domestic prosperity.

#3

Wall Street Goes Defensive

Wall Street has entered a defensive posture after one of the most turbulent stretches for markets since August, with investors retreating from high-growth sectors and piling into traditionally stable industries such as utilities, healthcare, and consumer staples. These sectors, which tend to perform well regardless of the economic cycle, are now leading the S&P 500 for the first time since mid-2022 as traders brace for signs of slowing growth. Simultaneously, investors have sought safety in bonds and gold: the 10-year Treasury yield fell below 4% for the first time in a year, and gold prices set new records, signaling growing demand for low-risk assets. The shift follows a sharp uptick in volatility on October 10, when renewed trade-war rhetoric between President Trump and China’s Xi Jinping triggered a temporary selloff. Although the major indexes have since rebounded and the S&P 500 remains near record highs, beneath the surface, more cyclical industries (regional banks, homebuilders, retailers, and airlines) have slumped, exposing vulnerabilities that the broader market rally had masked. Despite these warning signs, many analysts remain cautiously optimistic. Corporate earnings remain strong in aggregate, with S&P 500 companies projected to post 16% growth over the next year, the fastest pace since the post-pandemic recovery in 2021, and expectations for rate cuts have supported valuations. However, several strategists note that these rate expectations are already priced in, leaving limited room for upside. The economy’s recent growth has been heavily concentrated in AI-related investment rather than broad consumer activity, with government data showing that AI infrastructure spending is now the primary driver of GDP gains while consumer spending stagnates.

#4

Eritrea-Ethiopia War More Likely

A new Eritrea–Ethiopia war is becoming increasingly likely after a year of mounting tension, even though mutual uncertainty about victory has so far deterred both sides from fighting. Once close partners, Prime Minister Abiy Ahmed and President Isaias Afwerki split over the Tigray war and Ethiopia’s push for sea access. Leaders in Addis Ababa have questioned Eritrea’s 1993 independence, while both capitals accuse each other of hostile intent. Reports of arms purchases and deployments near Assab, the Red Sea port coveted by Ethiopia, suggest preparation for conflict. Deterrence has held because neither side trusts that it could quickly prevail along a long and difficult border, because external reactions by the United States and Gulf actors are hard to predict, and because politics in Tigray complicate any war plan. New developments inside Tigray are eroding that restraint and are now the main driver of risk.

The core issue is that shifting alignments in Tigray could tip the region into war. Tigray is a swing actor with roughly a quarter million mobilized fighters and territory that straddles much of the frontier. The TPLF’s leadership is fragmented. Former interim leader Getachew Reda has leaned toward Addis Ababa, while party chief Debretsion Gebremichael and the dominant faction have moved closer to Asmara. Two recent steps illustrate this trend: the reopening of the Zalambessa border post without federal involvement and the TPLF’s violent consolidation of power in southern Tigray. These moves, combined with stalled implementation of the 2022 Pretoria Agreement and unresolved issues such as demobilization, disputed western Tigray territories, and the return of displaced people, have pushed the TPLF to seek leverage and security through closer ties with Eritrea.

#5

Trump’s Trade Policies Hurting Farmers

The Trump administration’s trade war with China has inflicted deep and lasting harm on the U.S. agricultural sector by cutting off export markets, driving down prices, and pushing farmers into dependency on government bailouts. The White House’s decision to release more than $3 billion in emergency aid from the Commodity Credit Corporation shows the scale of the damage. China, once the buyer of nearly half of all U.S. soybean exports, has sharply reduced purchases from almost 1 billion bushels to just over 200 million after Beijing imposed retaliatory tariffs in response to Trump’s trade measures. As China simultaneously invested heavily in Brazil’s soybean industry to diversify its supply, U.S. farmers lost long-term market share that will be difficult to regain. At home, record harvests have created a glut of corn and soybeans, depressing prices to near break-even levels, while tariffs on imported steel, aluminum, and equipment have raised the costs of farm machinery and fertilizers. Many producers now face projected losses exceeding $100 per acre on soybeans, tightening cash flows and increasing the risk of default on rent or credit payments. Although Trump has floated an additional $10 billion bailout to offset the crisis, delays from the government shutdown have left farmers unable to access essential safety-net programs. These short-term subsidies cannot replace the structural losses caused by disrupted trade. The combined effect of retaliatory tariffs, high input costs, and eroded global competitiveness has made U.S. farmers less self-sufficient, more reliant on federal aid, and increasingly marginalized in global markets as China and South America fill the vacuum.

#6

UK Takes New Approach to Drones

Britain is preparing to give troops explicit legal authority to shoot down unidentified drones threatening its military bases, with Defence Secretary John Healey set to fold the powers into an Armed Forces Bill after citing a pattern of Russian-linked provocations (19 drones crossing into Poland, a Russian airspace violation over Estonia, and a campaign to subvert Moldova’s election). The proposal would formalize “shoot on sight” options that today exist only in extreme circumstances, complementing current counter-UAS measures such as tracking, signal hijacking, and diversion; while initially limited to military sites, ministers have not ruled out extending the regime to critical civilian infrastructure like airports in light of repeated airspace disruptions and temporary flight shutdowns across Europe. Contextually, the move follows stepped-up UK and NATO air patrols on alliance frontiers. For Europe, this sets a practical and legal template that will likely ripple through NATO capitals: expect accelerated procurement of layered counter-UAS (RF detection, radar-EO fusion, jammers, hard-kill interceptors, and eventually directed-energy), tighter civil-military coordination with air-traffic control, and clearer cross-border playbooks for classification, warning, and engagement to manage liability in dense air corridors. It will also push alliance harmonization around thresholds for force, proportionality standards in populated areas, and data-sharing for rapid attribution, key to preventing inadvertent escalation with Russia while still denying adversaries grey-zone leverage against bases, ports, power plants, and airports.

#7

Issues with U.S. Banking

Recent market turbulence indicates renewed fragility within the U.S. banking system, as concerns over rising credit losses, commercial real estate exposure, and elevated funding costs have reignited investor anxiety. Asian and European financial stocks fell sharply after signs emerged that U.S. regional banks are struggling with deteriorating loan portfolios and weaker-than-expected earnings, with several lenders increasing provisions for bad debt and reporting margin compression from higher deposit costs. These pressures are particularly acute among mid-sized institutions that lack diversified revenue streams and are heavily exposed to commercial real estate loans made during the low-interest era, many of which are now maturing into a higher-rate environment. The resulting credit deterioration has raised the specter of additional capital-raising, forced mergers, or even policy intervention by the Federal Reserve and FDIC. Investor confidence remains fragile, with widening credit spreads and declining equity valuations reflecting fears of contagion that could further tighten credit conditions. For U.S. financial institutions, profitability is being eroded, balance sheets are under pressure, and regulatory scrutiny is likely to intensify as policymakers weigh financial stability against inflation control. Although large banks remain well-capitalized, regional lenders face a grinding period of balance-sheet repair, consolidation, and restricted lending, conditions that threaten to slow credit growth, dampen economic activity, and extend the aftershocks of the post-pandemic rate cycle well into 2026.

#8

Germany’s Political Turmoil Tests Europe’s Stability

Germany stands at a crossroads as political tensions within Chancellor Friedrich Merz’s coalition threaten to stall key reforms and weaken Europe’s largest economy. Merz, who took office in May, entered with a vision to restore public confidence, strengthen the armed forces, and make Germany more competitive. Yet his coalition with the Social Democrats is showing signs of strain, placing his ambitious agenda at risk. The disagreement first emerged over military reform. Defense Minister Boris Pistorius proposed a voluntary recruitment plan to strengthen the Bundeswehr, while Merz's conservative bloc questioned its effectiveness and suggested a fallback conscription system. Pistorius rejected the compromise, leading to a public standoff and the cancellation of a joint press conference. At the same time, pension reform has faced obstacles. Legislation to freeze benefits until 2031 is opposed by younger conservatives, who argue it unfairly burdens future generations, threatening to stall Merz's domestic policy goals. This internal discord is eroding public confidence. Approval ratings for Merz have declined, while support for the far-right Alternative for Germany is rising. Analysts warn that ongoing coalition infighting will likely lead to political stagnation similar to recent challenges in neighboring countries. The stakes extend beyond domestic politics. A weakened Germany will likely slow progress on European Union priorities including collective defense, energy security, and economic reform. Allies rely on Berlin’s leadership to maintain NATO unity and respond effectively to global crises.

#9

Ukraine Targets Russian Critical Energy Infrastructure

A Ukrainian drone strike ignited a fire at Russia’s Orenburg gas processing plant, forcing a temporary intake suspension from Kazakhstan. The attacks align with Kyiv’s recent drone campaign targeting refiners and critical energy facilities to strain Moscow’s financing power and production capacity. Beyond weakening Russia’s war machine, the uptick of strikes has rippled through the domestic sector, as seen through officials-imposed fuel rations, long queues forming at gas stations, and surging fuel prices, including A-95 reaching record-high prices in late August. The attacks are increasing domestic frustration and loss of confidence in the government, exposing vulnerabilities beyond infrastructure protection and energy sector dependence. Moreover, the various refinery shutdowns, as Ukraine has hit 21 of the 38 largest refineries this year, have pushed wholesale prices up 40% since January, even forcing small-scale petrol stations to shut down. The strikes have prompted the Kremlin to impose tighter export controls, including a partial fuel export ban through October 31, straining foreign markets and consumers dependent on Russian energy, as seen in September’s oil market price rise due to supply risk. Ukraine's drone strategy illustrates how modern warfare increasingly blends both military and economic domains, where targeting critical infrastructure can weaken adversaries’ military power and financial resilience, disrupt supply chains, and induce volatility in global markets, forcing companies to brace for tighter margins and production delays.

📰 Looking for more analysis:

✉️ Subscribe to Strategic Memo our weekly deep dive into the most important geopolitical developments impacting businesses.

🎙️ Listen to our latest podcast Boardroom Statecraft: Apple Amazon Spotify