The conventional thinking, that you can motivate others to do what you want with a mixture of punishment and reward, is at best shortsighted and outdated. Its biggest flaw is that it assumes away any agency and integrity on behalf of those you try to motivate. The whole thing is predicated on the perception that they have nowhere else to go.
It is true that the carrot might be so sweet that going elsewhere might be inconvenient and less rewarding, but once they’ve been threatened, let alone hit, with a big stick, most people will reassess their need for convenience.
This week the Financial Times* brought up some points in support of the world walking away from the current shrinking carrot/flailing stick situation.
Other countries than the USA make up 85% of the world economy. Sure, it is overwhelmingly annoying if the US doesn’t want to trade anymore, but its part of international commerce has been decreasing for along time, and it is not as if we do not have anywhere else to go. If we must structurally change our global supply chains, why not cater to the majority?
And for the thousandth time, tariffs hit at home first and elsewhere only until elsewhere finds alternative trading partners.
We have consciously decoupled our economic tracks. As mentioned in last week’s Risk Report, many countries and central banks have already conquered inflation and have much more wiggle room to lower interest rates to the benefit of their own consumers, businesses, and banks alike. There is little reason to wait for the Fed to move and most of us are not.
The safe haven just became less safe. It used to be that US assets and the dollar itself were the glitziest couple as they frolicked through the flowery meadows hand-in-hand. That relationship broke up, or is at least on a break since early April.
As FT puts it:
[Its] stocks carry political risk for the first time. Its bonds no longer act like they are truly risk-free. The dollar is no longer acting like a magnet during periods of stress, nor like a currency anticipating an upswing in American economic growth.*
Thus, the world is taking another look at the menu and finding assets that (comparatively) haven’t lost their shine, such as gold and the European capital markets which are ripe with new investment opportunities.
And let’s just stick with the capital flows for a second. They are the other part of the trade equation. US consumers buy a lot of foreign goods. They pay for them in dollars. The sellers do not want those dollars lying around in cash and therefore buy US assets, such as treasury bonds and stocks. If those assets are not (as) attractive anymore, they will be sold. That will lower prices, weaken the dollar, and raise interest rates in the US.
Now that might just be a healthy sign that capital markets are working as they should—supply goes up, price goes down—if it wasn’t for the fact that those assets are used to fund a lot of debt.
At writing time, the US national debt is $36.5TN, it has a budget to finance of 6.2% of GDP (which by the way is just shy of $30TN) and a current balance of 4.1% of GDP.
Granted, if trade goes down, so does the current balance, but there is a timing issue with that. It takes a lot longer to change trade routes and supply chains than it does to redirect capital flows.
And every time the world sells a US treasury bond or an Apple share with the click of a button, that potentially adds to the supply, weakens the dollar, and raises interest rates ever so slightly. That makes it more expensive to pay back that debt.
Of course, this is a two-sided dollar bill. If US assets are worth less and carry higher risk, that affects everyone holding them which includes a lot of the world. Over the past weeks, we have seen the damage a sell-off can cause, and how much it takes to stop it, once it gets going.
No one wants to be hit by that stick, though the motivational effect of it will be shorter and shorter as the appeal of the carrot fades.
*Source: FT Opinion: Trade Disputes, April 21st, 2025 and FT Opinion: The Long View, April 11th, 2025
Regitze Ladekarl, FRM, is FRG’s Director of Company Intelligence. She has 25-plus years of experience where finance meets technology.
This article is part of the FRG Risk Report, published weekly on the FRG blog. To read other entries of the Risk Report, visit frgrisk.com/category/risk-report/.