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This edition of Geostrategic Analysis focuses on shifting global trade policies, highlighting key trade agreements between the EU, UK, and a variety of Asia-Pacific markets. Progress on these agreements demonstrates that global trade policy is a blend of liberalization and protectionism, with varying impacts across sectors and geographies. This edition also explores developments in the European energy sector, driven by the REPowerEU initiative and the aim to phase out reliance on Russian gas imports.
Other issues are also explored, including the persistent tensions between India and Pakistan despite a ceasefire, how China-Philippines maritime disputes may disrupt economic activities and the outlook for the G7 summit in Canada. Lastly, the indicator of the month explores a significant correlation between US political risk and gold prices.
In the monthly Geostrategic Analysis, the EY-Parthenon Geostrategic Business Group (GBG) provides its insights on key geopolitical developments. Each issue includes our take on recent or upcoming political risk events and what they mean for global business. Subscribe Now
Topic 1
Shifting global trade policies are reshaping markets with a mix of liberalization and protectionism.
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Read moreWhile attention has been focused on US tariff policy, other countries have continued to liberalize trade among themselves.
In December 2024, the EU and Mercosur1—whose members are Argentina, Brazil, Paraguay and Uruguay — finalized negotiations on an economic partnership agreement after 25 years of on-and-off negotiations. Ratification is now pending.
On 6 May, the UK and India2 signed a free trade agreement, which was years in the making and completed after a flurry of negotiations over the past two months.
On 8 May, the US and UK3 unveiled the general terms of an Economic Prosperity Deal to lower bilateral tariffs and increase market access.
On 12 May, the US and China4 announced a 90-day reduction in the bilateral tariffs that were imposed in early April, to allow time for further negotiations.
On 21 May, China and the Association of Southeast Asian Nations (ASEAN) concluded the final negotiations on upgrading the China-ASEAN Free Trade Area (CAFTA) agreement to include the green economy, digital technologies, supply chain connectivity and other industries.
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Read moreFollowing the first post-Brexit set of agreements at the UK-EU summit in mid-May, London and Brussels will continue to pursue a new strategic partnership to strengthen coordination on security, trade, and broader economic issues. They aim to ease trade barriers, support economic growth, and provide greater regulatory alignment between the UK and EU.
The EU will continue to pursue a variety of other economic partnerships to diversify its trade and investment relationships. The EU and Mexico5 will seek ratification of the modernized EU-Mexico FTA that was finalized in January. The EU and India will continue to negotiate a bilateral FTA via a phased approach that they aim to finalize this year. The aspiration is also to finalize negotiations on the Indonesia–EU Comprehensive Economic Partnership Agreement this year. And Australia and the EU will seek to build on the progress they have made regarding agricultural market access, critical raw material supplies, and services sector liberalization in their bilateral FTA negotiations.
Trade liberalization efforts will also continue in the Asia-Pacific. The country-level ratification process for the upgraded China-ASEAN FTA will begin. And following the UK joining the Comprehensive and Progressive Trans-Pacific Partnership — which now accounts for about 18% of global trade and 15% of global GDP — in December 2024, a variety of other countries’ accessions will now be considered. Costa Rica has formally commenced the accession process, while Mainland China, Ecuador, Indonesia, Ukraine, Uruguay and Taiwan have applied. There are reports that the Philippines, South Korea and Thailand are also considering applying for CPTPP membership.
After a five-year pause, China, Japan and South Korea have re-initiated their trilateral FTA negotiations. The aim of this proposed FTA is to deepen economic integration and supply chain connectivity among East Asia’s three largest economies.
The US will continue to negotiate bilateral deals with its trading partners ahead of and likely following the end of the 90-day pause on most reciprocal tariffs on 9 July. Negotiations are likely to focus on reducing tariffs, expanding market access and announcing purchase agreements for US exports. If deals are not reached and the US reimposes its reciprocal trade policy, it is expected that some US trading partners will impose retaliatory tariffs. Significant attention will be on US-China negotiations to maintain or extend bilateral tariff reductions before the 90-day pause expires in mid-August.
Major sectors affected include industrial products, consumer goods, agriculture, technology and energy.
Specific policy actions – such as tariffs – and more general policy volatility and uncertainty have contributed to downward pressures on US financial assets. At their lowest point during the administration’s first 100 days, US equity indices fell more than 12% and the US dollar declined by about 9% against a basket of international currencies – although both rose again by the end of the period. Business leaders should explore how different policy scenarios could impact markets in the coming months and seek to build financial resilience.
Higher tariff rates – particularly the bilateral tariffs between the US and China – could cause persistent supply chain disruptions and heighten inflationary pressures. In the short term, executives should assess supplier impacts, consider negotiating cost sharing, and conduct wargaming for pricing strategies. In the medium term, they should explore demand outlook scenarios and determine whether and how to proceed with capex and investment plans.
As debates unfold on trade, tax and other policies, there are opportunities for business leaders to help shape the agenda. As with any change of administration, executives should engage with stakeholders – including policymakers, regulators, civil society groups, employees, investors and customers – to inform policies and shape business strategy. Executives should continue engagement with industry associations or other groups on common policy topics.
Significant policy changes are likely to have long-term ripple effects across sectors and markets; and further policy shifts are expected in the coming months. The range of policy outcomes and business implications will therefore continue to expand, creating a volatile and uncertain global operating environment. Executives should use strategic foresight methodologies, such as scenario planning and tabletop exercises, to systematically manage this uncertainty to build resilience and have more confidence in their strategic decisions.
For more information, contact Courtney Rickert McCaffrey and Bridget Neill.
Topic 2
Banning Russian gas will create opportunities and challenges for Europe.
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Read moreIn April 2025, the oil markets were roiled by two major disruptions. First was the sweeping tariffs announced by the US on 2 April, followed by escalating tariff rates between the US and China.
The second was a day later, when OPEC+ announced its members would accelerate planned output increases.
This triggered significant price volatility. Brent crude prices fell from above $75 per barrel to a low of just below $63 on April 82.
The drivers of volatility remain fluid. A 90-day pause on most US tariffs may have contributed to short-term stability, but trade policy uncertainty remains.
Significant withdrawals of capital in oil markets may persist, as funds still invested have moved to new positions and strategies. Investors will likely seek investments deemed lower risk until there is greater clarity on trade dynamics as well as OPEC+ intentions.
US liquified natural gas (LNG) demand, however, may increase as some countries may increase US LNG imports as part of negotiations with the White House to reduce bilateral trade surpluses.
EY modelling of the tariffs in effect in mid-April suggests global real GDP growth could be reduced by 0.5 percentage points in 2025 and 0.7 percentage points in 2026. The modelled impact of the resulting lower oil demand and weakened market sentiment could exert downward pressure, with a price decline of 25%. Actual price setting will incorporate myriad factors, though, and OPEC+ actions will be critical in setting market sentiment in a period of weakening demand fundamentals.
Volatility is likely to persist until there is greater clarity on economic performance or OPEC+ policy. In response, oil and gas companies are expected to prioritize cost optimization, operational efficiencies, and supply chain reassessment. Capital spending on projects may be reviewed as project costs rise and downside price risks increase.
For companies in the US unconventional space planning to further consolidate positions or for players looking to replenish reserves through acquisitions, M&A may become more complex to execute as volatility may widen bid-ask spreads, potentially slowing deal activity.
For more information, contact David Kirsch, Marek Rozkrut, Daksh Tyagi.
Topic 3
India-Pakistan tensions, China-Philippines disputes, G7 summit outlook.
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EY-Parthenon strategy consulting services can develop growth, transaction or turnaround strategies to help organizations increase profitability and long-term value
Read moreThe ceasefire between India and Pakistan is holding, but both countries remain on high alert after a series of intensive engagements in early May. Following the clashes, both governments have publicly committed to renewed negotiations over Kashmir, but so far, no plan to address key underlying issues, such as terrorism and resource management, has emerged. Water rights are a particular concern as India maintains the suspension of the Indus Waters Treaty that was originally announced in the wake of the terrorist attacks in Kashmir. Pakistan has requested that India lift the suspension to avoid water shortages in Pakistan.
Heightened tensions over Kashmir pose potential operational, reputational and talent risks to India's business environment. If the ceasefire holds, the immediate economic impact is expected to be limited. Indian financial markets recovered quickly after an initial downturn and although tourism likely will be disrupted in the short term, it will likely rebound quickly absent further fighting. Greater tensions will reinforce demand for advanced military equipment in both countries, especially drones, aerospace systems and artillery. India’s large indigenous defense industry9 will likely have growth opportunities as the government expands manufacturing capacity.
How EY-Parthenon can help
EY-Parthenon strategy consulting services can develop growth, transaction or turnaround strategies to help organizations increase profitability and long-term value
Read moreChinese and European leaders have sought to improve bilateral ties to offset higher uncertainty in global markets. Various recent meetings – including between Chinese President Xi Jinping and Spanish Prime Minister Pedro Sanchez and between European Commission president Ursula von der Leyen and Chinese Premier Li Qiang – have highlighted bilateral willingness to work together to provide stability to the global economy. President Xi is planning to meet with EU leaders in July, likely to advocate for more cooperation amid US trade disputes. However, structural issues may stall material progress in resolving bilateral differences, in particular EU allegations of unfair state subsidies, which will likely be further exacerbated by fears of dumping as Chinese companies seek new export markets as alternatives to the US.
China is likely to accelerate pro-business policies such as expanding market access and addressing some of the EU’s operational concerns such as IP rights and regulatory uncertainties. This will probably improve policy predictability, especially for European businesses in China. It could also limit downside risks of additional tariff or non-tariff barriers as both sides seek to signal positive business environments, particularly in previously targeted sectors such as manufacturing and agriculture. If progress can be made on resolving bilaterial differences, the appetite for Chinese investments in Europe is also likely to recover, particularly in strategic industrial sectors such as advanced manufacturing and technology.
For more information, contact Famke Krumbmüller.
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Read moreIncidents between China and the Philippines in the South China Sea have been frequent in recent months and are likely to remain a key area of contention in the region. Filipino President Ferdinand Marcos Jr. has notably taken an assertive stance on sovereignty issues and has focused on strengthening the Philippines-US alliance. The 12 May Philippines midterm elections produced a Senate that is more centrist and also more aligned to Vice President Sara Duterte, who historically has taken more moderate positions on China affairs. The outlook for Filipino policy has therefore become more uncertain.
While mutual economic interests between China and the Philippines will likely prevent any material escalation that directly impacts trade and commerce, some sectors are disproportionately exposed to higher uncertainties if the bilateral relationship deteriorates. Natural resource exploitation could be disrupted by contentious activities in the disputed waters of the South China Sea, which could affect the Philippines’ plans for an energy transition away from coal. Philippines agricultural exporters may have reduced market access to China, as they have previously faced restrictions and trade barriers in China following bilateral disputes. For Chinese projects such as investments, the risks of disruptions, delays and cancellations are higher during periods of geopolitical tensions, such as on the Mindanao and PNR South Long Haul railway projects.
Canada will host the 50th annual Group of Seven (G7)10 summit from 15-17 June, bringing together the leaders of Canada, France, Germany, Italy, Japan, the UK and the US. Under newly elected Prime Minister Mark Carney’s leadership, Ottawa’s G7 presidency will likely focus on retaining G7 unity amidst geopolitical and trade policy tensions. A G7 Foreign Ministers’ Statement11 in March reflected a focus on maritime security, while the G7 Finance Ministers and Central Bank Governors in May focused on global economic resilience and security — both of which are likely to receive significant attention at the leaders’ summit as well. An invitation to Ukrainian President Volodymyr Zelensky to attend will likely reinforce G7 members’ commitments to Ukraine’s defense.
Artificial intelligence (AI) is likely to be high on the agenda as the G7 seeks to implement the AI Principles and Code of Conduct, although debates may arise as some governments pursue divergent regulatory trajectories. Maritime issues related to the “geopolitics of the oceans” — including freedom of navigation in contested waterways, competition in the Arctic, the security of seabed internet cables and access to critical minerals — will highlight implications for global supply chains and could provide signals about potential ocean-based investment opportunities. CEOs and government affairs teams should monitor the G7 summit communiqué for commitments made by leaders on these issues.
Topic 4
Strong correlation between increased US political risk and gold prices.
For even longer than the US dollar and US treasuries, gold has been considered a safe-haven asset. As US political risk has gone up, so has the demand for and price of gold. GeoQuant’s daily measure of US political risk has moved in tandem with the daily price of gold since the November 2024 election (with a correlation of 0.84). Meanwhile, higher US political risk has been unusually weighing on dollar-denominated assets, with the US dollar index (DXY) steadily weakening since January and US Treasury yield rising, potentially signaling an end to American exceptionalism in financial markets.
US financial market dynamics and volatility are increasingly driven by shifts in US political risk – similar to market dynamics in other countries. Consequently, it is imperative for wealth and asset management executives to monitor political developments and be prepared for negative impacts of US political risk on US assets. These fluctuations can directly affect asset valuations and investment returns, necessitating that businesses adjust their strategies and risk management frameworks accordingly to mitigate potential risks and capitalize on emerging opportunities.
Outlook for the war in Ukraine, agricultural tariffs, minerals-for-security, Argentina’s outlook and more
India’s “multialignment strategy,” AI developments, Germany's political shift, long-term impact of tariffs and more
EU to boost defense, fragmented global automotive market, Gaza de-escalation, growing political influence of populists and more
The EY-Parthenon Geostrategic Business Group (GBG) provides its take on key geopolitical developments and the impact of these political risks on international business. Each monthly EY-Parthenon Geostrategic Analysis issue includes assessments of recent or upcoming geopolitical risk events and what they mean for companies across sectors and geographies.
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