Shifting Alliances, Trade Balances, and Recessions

The United States and Russia held talks in Saudi Arabia regarding the cessation of the Russia-Ukraine war. This meeting took place without the involvement of Ukraine in mid-February 2025 (Reuters, February 2025).

After undergoing a complex process, including disputes between U.S. President Donald Trump and Ukrainian President Volodymyr Zelenskyy at the White House in Washington, D.C., Ukraine accepted the U.S. proposal for a 30-day ceasefire. The ball is now in Russia's court.

One of the motivations behind the U.S. initiative is President Trump's campaign promise to lower egg prices, which now reach nearly 5 U.S. dollars per dozen. This serves as a metaphor for inflation (cost-push inflation) caused by increased geopolitical tensions following the outbreak of the Ukraine-Russia war, which has resulted in disruptions to global supply chains.

The sanctions war has resulted in an increase in the cost of living in the United States. In January 2025, the Consumer Price Index (CPI) reached 317.67, higher than the previous month, which was 315.61. In fact, the CPI for January is the highest in the last four months.

Russia's offer of mutually beneficial cooperation to manage rare earth materials (rare earth materials) is geoeconomically attractive to the US. This step is a deterrent to China which dominates 70 percent of world production (Andrew-Speed and Howe [2021, Oxford Institute for Energy Studies]).

While on the surface US policy is a return to fossil fuels, beneath the surface there is a recognition that the next industrial cycle will be powered by new and renewable energy. The party that feels marginalized by this realignment is the European Union (EU) which has been a loyal ally of the US.

They also began to prepare to be more independent from the US, especially in security matters with the discourse of rearmament. Germany, for example, prepared 500 billion Euros to transform its economy including infrastructure and defense industry. As a result, the 10-year bond yield rose sharply by 20.8 percent in 1 week.

The split between the EU and the US has led portfolio investors to start diversifying their risks by not solely parking their funds in US dollars. The EU has begun to view the US as an unreliable partner (News Letter, [New York Times, February 2025]). Portfolio investors are reducing the weight of their investments in US financial assets due to increased risks, which explains the decline in the US dollar index.

All this time, the US dollar has been considered a safe haven when uncertainty rises. However, now the opposite is happening—the dollar index has dropped significantly, from 107.7 on February 28, 2025, to 103.3 on March 7, 2025. In this situation, gold commodities have become a temporary refuge for portfolio capital. The global gold price has reached its highest level in the past nine years, at approximately 2,985 US dollars per ounce as of March 14.

The US dollar has long been considered a safe haven when uncertainty increases. But now it is the opposite.

This situation has become increasingly complicated with the initiation of the first round of U.S. tariff wars against China, Canada, and Mexico. China retaliated with reciprocal tariffs, targeting U.S. agricultural exports such as soybeans and wheat. Meanwhile, Canada responded with counter-tariffs and threats to impose a 25 percent export tax on its electricity exports to the U.S. (Cases and Jones, [The Canadian Press, March 2025]).

That means electricity bills for the states of Minnesota, Michigan, and New York could potentially skyrocket. Mexico is also retaliating in kind with details to be announced later. Through the forward-looking expectations path, inflation due to potential price increases for products affected by tariffs is starting to bite.

Here is an illustration for automotive products with increased tariffs. A car manufactured in the US but containing Canadian and Mexican parts could cost $3,000 more than before (Bloomberg et.al, Fortune February 2025]).

The US inflation rate in January was recorded at 3 percent, up from 2.9 percent in the previous month. This is an increasing trend for the fourth consecutive month.

The impact was reflected in the US500 stock index which plunged from 6,146 on February 19, 2025 to 5,623 on March 11, 2025. Responding to this situation, Trump delayed the implementation of tariff increases for Canada and Mexico for several products for a month. The impact was that the US500 slightly reversed, from a freefall trend to 5,637 as of Friday (3/14/2025).

Pessimism about the US economy is increasing because it is considered not to understand the logic of economic scale. The US, Canada, and Mexico were previously tied into one supply chain through the US-Mexico-Canada agreement (USMCA) in July 2020.

US growth had previously slowed to 2.3 percent in Q4-2024 from 3 percent in Q3-2024. The growth rate is expected to slow further as public consumption fell 0.9 percent in January 2025, after 5 consecutive months of increases (Baccardax, [March, 2025]).

This is a turnaround linked to tariff policy. The above weakening of US economic indicators raises new concerns that the US will soon enter a recession or even stagflation (Cox, [CNBC, March 2025]).

As the EU and US alliance breaks down, the trade war is predicted to widen globally. Unlike before when the US dollar weakened, this time other countries' currencies tend to weaken.

This is especially experienced by countries that have a trade balance surplus (not current account) with the US, such as Vietnam, Japan, Korea and others (World Population Review, March 2025]).

Although not in the top 10, Indonesia must be vigilant because it is in 15th position with a trade surplus of 19.3 billion US dollars. The rupiah had strengthened from Rp16,567 per US dollar on February 27, 2025 to Rp16,291 on March 7, 2025.

Next, the rupiah to the range of Rp 16,300 per US dollar at the end of last week due to this issue. This is different from the Euro and Poundsterling which immediately strengthened sharply due to the influence of the reallocation of portfolio capital from the US.

But it’s not all negative. Every action invites a reaction. The prospect of a global trade war has JPMorgan Chase raising its probability of a US recession from 30 in early 2025 to 40 percent (Levitz, [Vox, March 2025]).

This pessimism if it moves like a downward spiral can spread into a global recession that can actually open up new opportunities. The EU and the countries that are members of BRICS have the opportunity to form their own sub-game ala Harrington (1987) which can become a market for Indonesia.

In addition, as Vietnam did, which is in the top 3 trade surpluses with the US, the path remains open for Indonesia to explore various trade agreements (Guarasacio and Vu, Reuter, March 2025]). Another positive factor is that Brent oil prices have fallen to around 70 US dollars per barrel.

For Indonesia, the development of the world oil market is expected to make mobility-based sectors continue to contribute to resilience in an increasingly uncertain world. To that end, all potential domestic leverage from public consumption, investment, and government spending must be mobilized.