Trade war, AI bubble, and political rifts

Written by: arndxt

Compiled by: AididiaoJP, Foresight News

2025 is a turning point in the economic cycle.

The market has fallen into a paradox.

Beneath the calm surface of optimism for a soft landing, the global economy is quietly fracturing along the lines of trade policies, credit expansion, and technological overreach.

The next misalignment in the global economy will not stem from a single failure, neither from tariffs nor from artificial intelligence debt, but from the feedback loops between policy, leverage, and belief.

We are witnessing the late stage of a super cycle, during which technology supports growth, fiscal populism has replaced trade liberalism, and monetary trust is slowly eroding.

The prosperity has not yet ended, but it has begun to fracture.

This week's volatility is significant in small ways.

The volatility index experienced its biggest surge since April, as concerns over U.S.-China tariffs reignited, before retreating on the eve of the weekend after President Trump confirmed that the proposed 100% import tariff would be “unsustainable.” The stock market breathed a sigh of relief; the S&P 500 index stabilized. However, this relief is superficial; the deeper narrative is one of exhausted policy tools and overstretched optimism.

Stable Illusion

The intention of the July trade agreement between the US and Europe was to anchor a fragile system.

However, it is now gradually disintegrating under the influence of climate regulatory controversies and American protectionism. Washington's demand for U.S. companies to be exempt from ESG and carbon disclosure rules highlights the widening ideological divide: Europe's decarbonization vs. America's deregulation.

At the same time, China's new restrictions on rare earth exports, including a ban on magnets containing trace amounts of Chinese-sourced metals, have exposed the strategic vulnerabilities of global supply chains. The United States' response: a threat to impose a 100% tariff on Chinese imports, a political stance with global consequences. Although this threat was later retracted, it reminded the market that trade has become a weaponized finance, more a lever of domestic sentiment than a lever of economic rationality.

The World Trade Organization warns that goods trade will sharply slow down by 2026, reflecting a reality: companies are no longer investing in supply chains with full confidence, but rather are investing with contingency plans.

Artificial Intelligence Super Cycle

At the same time, a second narrative is unfolding in the artificial intelligence economy, which is more subtle but potentially more consequential.

We are transitioning from productive expansion to speculative finance, where “vendor financing has surged and coverage has thinned.” The speed at which large-scale enterprises are leveraging their balance sheets for expansion has now outpaced the speed that can be validated by income, which is a typical sign of exuberance at the end of a cycle.

This is not a new phenomenon. Out of the 21 major investment booms since 1790, 18 ended in collapse, usually when the quality of financing deteriorated. Today's frenzy of capital spending on artificial intelligence is reminiscent of the telecom bubble at the end of the 1990s: real infrastructure gains are entangled with credit-driven speculation. Special purpose entities, vendor financing, and structured debt—tools that once inflated mortgage-backed securities—are making a comeback, this time dressed in the guise of “computing power” and “GPU liquidity.”

The irony lies in the fact that the prosperity of artificial intelligence is productive, but unevenly distributed. Microsoft shows confidence by financing its expansion through traditional bonds. CoreWeave, under pressure, finances through special purpose entities. Both are expanding, but one is building enduring capability; the other is building fragility.

Volatility symptoms

The surge in the volatility index reflects deeper market unease: policy uncertainty, concentrated stock leadership, and credit pressure beneath the veneer of booming valuations.

When the Federal Reserve now signals a rate cut amid slowing growth, it is not stimulus but risk management. The two-year Treasury yield has fallen to its lowest level since 2022, which tells us that investors are pricing in a deflation of confidence, not just interest rates. The market may still cheer every dovish turn, but each rate cut undermines the illusion that growth is self-sustaining.

Comprehensive: Trade, Technology, and Trust

The connecting thread between tariff politics and the euphoria of artificial intelligence is trust, or more precisely, the erosion of trust.

The government no longer trusts its trading partners.

Investors no longer trust the consistency of policies.

The company no longer trusts demand signals, so they are overbuilding.

Gold prices have broken through 4000 USD, and rather than being about inflation, it is about the erosion of faith: in the fiat currency system, in globalization, and in institutional coordination. It is a hedge, but not against price, rather against policy entropy.

The road ahead

We are entering a “fractured prosperity”: a period where nominal growth and market peaks coexist with structural vulnerabilities:

The way artificial intelligence investments drive GDP is similar to that of the railroads in the 19th century.

Trade protectionism has stimulated local production while draining global liquidity.

Financial fluctuations swing between euphoria and policy panic.

At this stage, the risks are cumulative.

Every time tariffs are withdrawn, every time capital expenditure announcements are made, and every time interest rates are lowered, the cycle is extended, but the ultimate collapse is compressed. The issue is not whether artificial intelligence or trade bubbles will burst, but how intertwined both will have become when they do.