PESTLE & MORTAR 26 June 2025

#1

Budget Bill Increases Fiscal Risks

Senate Republicans are advancing a sweeping tax-and-spending package, informally dubbed the “One Big Beautiful Bill,” that aims to extend Trump-era tax cuts, cap state and local tax deductions, expand charitable write-offs, and implement deep cuts to Medicaid and clean energy programs. The bill includes provisions designed to benefit older Americans, such as enhanced retirement savings and healthcare tax relief, while analysts warn it would disproportionately shift wealth away from younger generations by increasing long-term deficits and raising effective taxes on future workers. Although the package is being fast-tracked under budget reconciliation rules, key elements have been struck down by the Senate parliamentarian, adding procedural hurdles. Economists estimate the bill could add up to $3 trillion to the national debt. The U.S. already pays $952 billion on interest payments, and the debt is higher than GDP. Higher federal debt from the proposed bill is extremely likely to harm businesses by pushing up interest rates and creating long-term economic uncertainty. As government borrowing increases, it competes with private sector demand for capital, leading to higher costs for business loans, investment financing, and credit. This slows expansion plans, reduces hiring, and increases the cost of doing business, especially for small and mid-sized firms. In the longer term, concerns about fiscal sustainability could trigger market volatility or future tax hikes, further complicating financial planning for businesses across sectors.Senate Republicans are advancing a sweeping tax-and-spending package, informally dubbed the “One Big Beautiful Bill,” that aims to extend Trump-era tax cuts, cap state and local tax deductions, expand charitable write-offs, and implement deep cuts to Medicaid and clean energy programs. The bill includes provisions designed to benefit older Americans, such as enhanced retirement savings and healthcare tax relief, while analysts warn it would disproportionately shift wealth away from younger generations by increasing long-term deficits and raising effective taxes on future workers. Although the package is being fast-tracked under budget reconciliation rules, key elements have been struck down by the Senate parliamentarian, adding procedural hurdles. Economists estimate the bill could add up to $3 trillion to the national debt. The U.S. already pays $952 billion on interest payments, and the debt is higher than GDP. Higher federal debt from the proposed bill is extremely likely to harm businesses by pushing up interest rates and creating long-term economic uncertainty. As government borrowing increases, it competes with private sector demand for capital, leading to higher costs for business loans, investment financing, and credit. This slows expansion plans, reduces hiring, and increases the cost of doing business, especially for small and mid-sized firms. In the longer term, concerns about fiscal sustainability could trigger market volatility or future tax hikes, further complicating financial planning for businesses across sectors.

#2

China’s Auto Market Indicates Broader Weakness

BYD has begun scaling back production across multiple Chinese plants, cancelling night shifts and reducing output by around one-third—and has postponed adding new production lines. These measures, taken at roughly four factories, stem from rising inventory levels and missed sales targets, even after aggressive price cuts, signaling that its rapid growth may be slowing. Meanwhile, some local Chinese governments are actively promoting the export of so‑called “zero‑mileage” used cars, which are new vehicles passed off as used in order to access export quotas and meet regional auto-sales goals. These zero‑mile exports constituted about 90% of China’s 436,000 “used” car exports in 2024, driven by subsidies, simplified paperwork, and infrastructure support from local authorities. The practice inflates domestic demand statistics, bumps GDP figures, and sustains factory output amid sluggish consumer markets. These signs from China’s auto sector signal deeper economic troubles. BYD’s retrenchment reflects weak domestic demand, even in high-growth sectors like EVs, while the use of accounting tricks to boost car exports reveals growing pressure on local officials to mask overcapacity and sluggish consumer spending. Together, these trends suggest China’s economy is weaker than official data implies, with structural challenges like falling confidence, distorted markets, and unsustainable growth tactics weighing on real recovery.

#3

South Korea Appoints First Civilian Defense Chief

South Korea’s President Lee Jae-myung has appointed Ahn Gyu-back, a seasoned lawmaker and current chair of the National Assembly’s defense committee, as Minister of National Defense, marking the first civilian to hold the post in 64 years. The appointment fulfills a key campaign promise by President Lee to enhance democratic oversight and civilian control over the military following the political fallout from the December 2024 martial law crisis, which severely damaged public trust in the armed forces. Ahn replaces former Defense Minister Shin Won-sik, who is now under investigation for his role in that failed coup attempt. Lee’s move is part of a broader effort to restore public confidence in government institutions, reinforce rule of law, and signal a clear departure from military influence in national politics. The decision reflects a strategic reshaping of South Korea’s civil-military relations at a time of heightened regional tensions and evolving defense challenges. The appointment is a significant step toward restoring political stability after the martial law crisis. It signals President Lee’s commitment to reinforcing democratic norms, civilian oversight of the military, and institutional accountability, key factors in rebuilding public trust. By sidelining figures associated with the failed coup and promoting a respected lawmaker with legislative defense expertise, the administration is seeking to neutralize military overreach and prevent future destabilization. This move is likely to calm domestic anxieties, strengthen rule-of-law governance, and stabilize civil-military relations. While challenges remain, the transition to civilian leadership will likely reduce the risk of internal unrest and bolster confidence in South Korea’s democratic resilience.

#4

Tensions Between Cambodia and Thailand

Rising tensions between Cambodia and Thailand have erupted into the most serious border dispute in over a decade, triggered by a deadly skirmish in the contested Emerald Triangle that left a Cambodian soldier dead. In response, Cambodia halted fuel and gas imports from Thailand, banned Thai agricultural goods and media, and restricted cross-border travel. Thailand retaliated by closing border checkpoints and threatening further cutoffs, including energy and communications. The situation has been worsened by a leaked phone call between Thai Prime Minister Paetongtarn Shinawatra and Cambodian leader Hun Sen, inflaming nationalist sentiment and straining Thailand’s already fragile political coalition. Cambodia has appealed to the International Court of Justice, while Thailand insists on bilateral negotiations and rejects the court’s jurisdiction. ASEAN has so far failed to mediate effectively, though Malaysia has offered support. The conflict has disrupted trade, energy supplies, and regional tourism, and poses growing risks to political stability in both countries. A kinetic conflict between Cambodia and Thailand would severely destabilize Southeast Asia, disrupting regional trade, energy flows, and cross-border investment. Both countries are key transit points for goods, tourism, and labor, so any escalation risks broader economic fallout across ASEAN. A protracted dispute could credibly draw in regional powers, strain already fragile political coalitions in both nations, and weaken ASEAN’s credibility as a conflict-resolution body. For businesses operating in the region, the conflict raises risks related to supply chain reliability, access restrictions, and reputational exposure tied to nationalist backlash or sanctions.

#5

UK Increases Control of Google

Britain’s Competition and Markets Authority (CMA) is moving to exert greater control over Google’s search business under new powers granted by the UK’s Digital Markets, Competition and Consumers Act. The CMA plans to designate Google as having “strategic market status,” which would allow it to enforce changes such as fairer search result rankings, improved access for alternative services, and data portability for competitors. These measures aim to reduce Google’s dominance in the UK, where it controls over 90% of the search market and plays a key role in the digital economy. The designation is expected to be finalized by October 2025, and failure to comply could result in fines. Google has pushed back, warning that the changes will likely stifle innovation and limit new feature development in the UK. The UK’s regulatory push will likely disrupt how U.S. firms access and use search data for AI development, potentially restricting data sharing, complicating transatlantic partnerships, and forcing companies to adapt to a more fragmented regulatory environment. This move is also likely to heighten tensions with the United States, especially under the Trump administration, which has accused European governments of unfairly targeting American tech firms. By imposing stricter controls on a flagship U.S. company, the UK risks being seen as undermining American innovation, which will likely trigger retaliatory rhetoric or strain broader U.S.-UK economic relations.

#6

Central Banks Diversifying From Dollar

Central banks are increasingly diversifying their foreign exchange reserves away from the U.S. dollar, signaling broader concerns about the long-term stability of the American economy and shifting geopolitical dynamics. According to a new survey by the Official Monetary and Financial Institutions Forum, one-third of central bank reserve managers who collectively oversee approximately $5 trillion plan to increase their gold holdings over the next two years, marking the highest proportion ever recorded. This trend reflects declining confidence in the dollar’s role as the world’s dominant reserve currency, driven by growing U.S. fiscal deficits, unpredictable tariff policies, and the weaponization of the dollar through financial sanctions. In response, many reserve managers are turning to gold as a hedge against both inflation and geopolitical uncertainty. At the same time, other currencies are beginning to gain appeal. The euro is viewed as a short- to medium-term alternative, offering stability within a rules-based system, while the Chinese yuan is increasingly seen as a long-term diversification tool. This shift has far-reaching implications for the global economy and U.S. influence. A diminished role for the dollar will increase borrowing costs for the United States, raise exchange rate volatility for businesses operating internationally, and complicate trade settlements and financial flows that have long relied on dollar-based systems. The weakening of dollar dominance may not be sudden, but the trendline is clear and accelerating.

#7

Oil Markets Experience Some Volatility

The oil market has been roiled by recent geopolitical tensions, mostly the conflict between Israel and Iran, but U.S. shale producers have largely resisted political pressure to ramp up drilling. Despite President Trump’s calls for increased domestic production in response to rising crude prices and Middle East instability, frackers are holding back due to global oversupply, economic uncertainty, and the lingering effects of tariffs. Many have reduced rigs, cut budgets, and focused on financial discipline under investor pressure, citing high costs and volatile prices. Although oil briefly spiked following Israeli strikes on Iran, prices quickly retreated when it appeared energy infrastructure was spared. Prices have since rebounded modestly on hopes tied to a ceasefire and positive U.S. demand indicators, with Brent and WTI hovering around $68 and $65 per barrel, respectively. Executives warn that only a sustained rise above $65–$100 per barrel if Iran disrupts the Strait of Hormuz would justify new drilling, and even then, the response would be slow. This dynamic illustrates how geopolitical conflict can generate rapid market volatility without triggering immediate operational shifts, underscoring the need for businesses to conduct integrated geopolitical and corporate security assessments.

#8

Iran Potentially Targeting Critical Infrastructure

U.S. critical infrastructure, including sectors such as energy, water, transportation, and communications, was on high alert amid heightened tensions in the Israel–Iran conflict, with officials warning of credible Iranian cyber retaliation. Although no major cyber incidents targeting U.S. assets have been confirmed, joint advisories from ISAC groups (Food & Ag, IT-ISAC) urge companies to boost cybersecurity defenses, share threat intelligence, and adopt a “Shields Up” posture learned from the Russia‑Ukraine cyber‑war playbook. Experts caution that Iran’s cyber operations may include disinformation, DDoS attacks, phishing campaigns, and even destructive malware—all potentially spilling over into U.S. systems given digital interconnectivity. This situation illustrates how geopolitics directly impacts corporate security, particularly for companies tied to critical infrastructure or operating in sectors of national interest. The heightened risk of Iranian cyber retaliation demonstrates that private entities, even those far from the immediate geographic theater, can become indirect targets in international disputes. These risks arise not because the companies are political actors themselves, but because their systems, services, or data can be leveraged for strategic impact by hostile state or non-state actors. It highlights a central truth: in today’s interconnected world, geopolitical tensions ripple across supply chains, digital networks, and business operations.

#9

DeepSeek Aids Chinese Military

DeepSeek, a Chinese AI startup based in Hangzhou, is reportedly aiding China’s military and intelligence efforts while evading U.S. export controls, according to U.S. officials. Officials allege that DeepSeek has provided user data and analytics to China’s surveillance apparatus, and appears to be navigating around restrictions on high-end U.S. semiconductors—such as NVIDIA’s H100 chips—via shell companies in Southeast Asia and remote use of foreign data centers. These actions have raised alarm in Washington, prompting a U.S. House committee to investigate whether export controls are being undermined. This situation highlights critical shortcomings in the enforcement of export restrictions and underscores growing concerns that Chinese firms may be using U.S. technology to enhance military AI capabilities, potentially fueling an acceleration in China’s strategic advance.

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