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Authored by Charles Hugh Smith via OfTwoMinds blog,

This is why a recession will catalyze a collapse of the credit-asset bubble-dependent economy down to its foundations.

Narrative control works by having a pat answer for every skepticism and every doubt. Boiled down, the dominant narrative holds that the Federal Reserve (central banking) and the central government have the tools to quickly reverse any dip in GDP, a.k.a. recession, and return the economy to expansion.

The unstated foundation of this narrative is that recessions are bad, as only permanent expansion is good. That this isn’t “free market capitalism” doesn’t bother anyone, because the whole point of central banking and government is to eliminate the rough edges of “free market capitalism” with the sandpaper of “state capitalism,” which creates or borrows as much money as needed to smooth over any spots of bother, a.k.a. recessions.

That recessions are essential market dynamics is not part of the narrative, which is conveniently binary: recessions bad, expansion good. Markets reflect human emotions, famously fear and greed, which manifest as debt and speculation, a.k.a. animal spirits: when we’re confident and feeding off an expansion that appears to have no limit, then we borrow more money (debt expands) and “allocate the capital” (i.e. place it at risk to reap a future gain) to increasingly risky speculative investments.

This allocation of borrowed money into speculative assets pushes the price of those assets higher, increasing the collateral to support further borrowing to fund more speculation. In this manner, debt, asset valuations, collateral and speculation all fuel one another in a seemingly endless expansion that makes every participant richer.

This pyramiding of debt and “wealth” generates two self-liquidating dynamics: interest and risk. All debt comes with interest, the compensation due those who put their money at risk by lending it to the borrower. This debt service rises as debt expands, and also as risk increases: the riskier the speculation and the borrower, the higher the interest rate paid by the borrower.

Central banks can play games to reduce interest rates even as risk and interest payment rise, but since central banks own only a fraction of the total outstanding debt, their ability to “corner the market” is nil.

Their gaming the system to enable further expansion of debt and speculation functions not by actually buying up the majority of the new debt, it functions as a signal: the Federal Reserve has our back, they will bail out / recapitalize any lender losses while suppressing interest rates below what the unfettered market would demand, and so the pyramiding of debt, speculation and “wealth” can continue, apparently indefinitely.

But signaling has intrinsic limits, for it doesn’t increase the income needed to service additional debt or guarantee speculations will pay off. These are the Achilles Heels of the central banking perpetual motion machine: for the vast majority of borrowers, both private and public, income doesn’t automatically increase as debt increases. Income is influenced by market factors (supply and demand), technologies, state interventions (subsidies, stimulus spending, etc.) and the expansion or contraction of debt, interest rates and speculative investments.

In the total-economy context, what matters are total factor productivity gains and the distribution of those gains to wage earners, enterprises, owners of assets and the state, which collects taxes from all three of the private-sector classes. This distribution changes with social, political and financial tides.

The past 50 years have seen productivity gains flow to capital (corporations and owners of assets) at the expense of wage-earners. This means households and small businesses must service debt from a shrinking share of the economy. As a result, borrowing more becomes increasingly risky for both borrower and lender.

As more of the output goes to corporations and owners of assets, their collateral, income and creditworthiness rise, meaning they can borrow more at lower rates of interest than wage earners and small enterprises. The more they can borrow, the more they can own and the more they can earn.

These are the core engines of extreme wealth and income inequality. The rich get richer because they have the means to borrow more income-generating assets at lower rates than wage earners. And unlike wages, this asset-generated income rises as assets increasing in value support additional borrowing as they serve as collateral.

On the most fundamental level, if economic expansion no longer increases the income of household borrowers enough to service more debt, the entire structure of expanding debt, collateral and speculation is destabilized. Ultimately, assets generate income from either 1) issuing more debt, 2) investing more in risk assets or 3) consumer spending. All three are interconnected, i.e. tightly bound, as any decline in the expansion of debt, investing or spending eventually bleeds through to reduced ability to service more debt and the end of the expansion of debt.

Since debt is inherently risky–borrowers can default, i.e. stop paying interest and principal on the debt–then depending on expanding debt for economic expansion is also increasing risk, especially if household earnings are stagnating while debt and interest payments are increasing.

Since the percentage of output flowing to wages has been declining for 50 years, households have funded spending by borrowing more money. Prior to the 2000s, college students borrowed very little to fund their education. Now student loan debt is measured in the trillion-dollar range. Auto loans and credit card debt has also soared, along with shadow-banking debt that isn’t even tracked: pay-in-installments, etc.

Speculative investments are also inherently risky: the investment can fail to pay off. If the speculation was funded by debt, then both the borrower and the lender go broke when the speculation fails.

Stagnating earnings, increasing debt to fund spending and increasingly risky debt-funded speculation generate a credit-asset bubble-dependent economy: economic expansion is now dependent on debt expanding to fund spending and the speculation that pushes asset valuations higher, increasing the collateral for even more borrowing.

Once income is no longer rising fast enough to service higher debt loads, defaults cascade throughout the system, triggering avalanches of declining income for both assets and wage earners as households default on rent, auto loans, student loans, credit cards and mortgages, collapsing consumer spending and laying waste to lenders and employers, who respond by reducing borrowing and laying off employees.

Speculations that looked sound in expansion go broke as lenders pull risky loans, household spending dries up and collateral collapses as risk assets are sold off to reduce risk by raising cash and paying down debt.

Credit-asset bubble-dependent economies are tightly bound systems: any drop in income and valuations, any tightening of credit, any rise in interest rates and any decline in collateral (i.e. the valuations of risk assets) feeds back into every other part of the system, creating a self-reinforcing feedback loop of defaults, layoffs and sagging asset valuations.

In an economy saturated with debt, stimulus doesn’t generate expansion, it generates inflation which limits central bank stimulus. Without that signal that “the Fed has our back,” speculation and the borrowing that funded it both dry up. Once the inflow of new credit-funded investment falters, asset valuations enter a self-reinforcing free-fall.

In a credit-asset bubble-dependent economy, this inevitable unwinding is viewed as an unexpected catastrophe:

In an economy that allowed recessions to clear bad debt and excessive speculation, credit-asset bubbles popping is viewed as inevitable and normal.

What few seem to understand is 1) the last “real recession” that cleared excesses of debt, leverage and speculation was 1980-82, 45 years ago and 2) the buffers that enabled the eventual recovery back then are gone. Where total debt was low in 1980–about 50% more than GDP–now it’s triple GDP. That means “borrowing our way to expansion” isn’t possible: borrowers are already unable to service existing debt, never mind more debt.

As for the Fed rescuing the debt bubble by dropping interest rates to zero: recall that the Fed isn’t buying more than a sliver of the $106 trillion debt; it’s only generating a false signal that risk is low. In the real world, risk is rising inexorably due to excessive debt, interest payments, leverage and speculation.

As for bailing the system out as in 2008, that is no longer possible, either. The system was “saved” by recapitalizing the financial sector–the source of new debt and speculation. But this time around, the economy is saturated with debt, income has stagnated and cannot support more borrowing, and the credit-asset bubbles in housing and financial assets has reached unprecedented heights of risk, i.e. fragility.

This is why a recession that clears the system of excessive debt, leverage and speculation leaves a devastated economy incapable of expansion: the system is now totally dependent on excesses of debt, leverage and speculation for its survival, never mind expansion, and once that collapses (as all bubbles do), the signaling, confidence and wealth that enabled the bubble will no longer exist.

As for saving the system by converting fiat money to precious metals or cryptocurrencies: the debt–and the income needed to service the debt–will also be converted, and that doesn’t change the inevitable collapse of credit-asset bubbles and all the economic activity that depended on the permanent expansion of that credit-asset bubble.

This is why a recession will catalyze a collapse of the credit-asset bubble-dependent economy down to its foundations. A re-inflation of a new credit-asset bubble will be viewed as the “solution,” but that unstable system will no longer be viable. The real solution will be re-arranging the economy to thrive not on credit-asset bubbles but on productivity gains that are widely distributed to all the productive elements, not just the wealthiest asset owners.

This process will be time-consuming and difficult, as all the “winners” in the current bubble economy will expect both a return to outsized gains and a continuation of their outsized share of the gains. Neither will be possible, as the changes will demand time, sacrifice and massive long-term investment in productive assets.

The systemic risks inherent to a credit-asset bubble-dependent economy cannot be extinguished, they can only be cloaked or transferred to others. These artifices enable the expansion of the bubble at a cost paid by everyone when the system’s self-liquidating dynamics pop the bubble.

*  *  *

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While sentiment is sagging to multi-year lows, ‘hard’ data is pushing growth forecasts higher (GDPNOW) and holding stocks at record highs.

This morning we get a fresh glimpse at America’s manufacturing segment – hard data – with US Factory Orders (admittedly for November) surging 2.7% MoM (significantly better than the +1.6% MoM expected), bouncing strongly from the 1.3% MoM decline in October. 

This dragged orders up 5.4% year-over-year…

Source: Bloomberg

This was the biggest monthly advance since May 2025.

Core Orders (ex transportation) rose 0.2% MoM, also rebounding from a 0.1% MoM decline in October…

Source: Bloomberg

The final print for Durable Goods Orders were all in line with the flash prints.

Of course, this data remains significantly stale (and we face the possibility of another government shutdown to screw things up again), but overall, the trend is your friend (and supported by strong jobless claims data).

Authored by Aldgra Fredly via The Epoch Times (emphasis ours),

President Donald Trump announced on Jan. 27 that farm equipment maker John Deere will invest $70 million to build an excavator factory in North Carolina.

“It’s brand new, the best in the world. And I think it’s going to pay off very, very big,” the president said during an event in Iowa. “We don’t make them here. This is going to be the only excavator entirely made in the United States of America.”

The White House later said in a post on X that John Deere will build two new factories in the United States, including one in North Carolina that will help “move excavator production BACK to America.”

The second factory is a state-of-the-art distribution center, which will be built near Hebron, Indiana, the company said in a Jan. 27 statement. Both facilities are expected to open next year, it said.

John Deere said the North Carolina plant will manufacture excavators previously produced in Japan and will employ more than 150 workers when it opens.

The company said that it has broken ground on the Indiana project, a facility designed to streamline John Deere’s operations and ensure the timely delivery of equipment and parts. The project is expected to generate about 150 jobs, it added.

“Our investment in these new facilities underscores John Deere’s dedication to strengthening the backbone of American industry and supporting local economies,” John Deere CEO John May said. “We believe in building America, and these projects represent our intent to continue driving innovation and job creation in the United States.”

John Deere said last year that it would invest $20 billion in the United States over the next decade, calling it “a powerful signal” of its long-term commitment to building and growing domestically.

The company also made clear that it has no plans to shut down domestic manufacturing.

Texas Agriculture Commissioner Sid Miller welcomed the move on Jan. 27 and expressed hope that John Deere would choose Texas as the site to build its next factory.

“I applaud President Donald J. Trump for standing up for American workers and bringing manufacturing back home. John Deere’s decision to build new factories in the United States is a win for our economy, our workforce, and our national security,” Miller said in a post on Facebook.

“This is the kind of leadership that puts America first and rebuilds our industrial strength. Now let’s keep that momentum going and make sure the next one is built right here in Texas.”

Winter storm Fern is mostly over, its resulting damage, however, will linger for a long time.

To assess the economic impact of the brutal winter storm, BofA chief economist Aditya Bhave looked back at Winter Storm Viola, which hit the US in February 2021. Both storms put roughly half the country under a winter weather advisory. Consumer spending fell by 0.9% m/m in February 2021, after a 1.3% increase in January. However, this swing probably wasn’t entirely due to Viola: January 2021 spending was also boosted by the passage of the CAA in December 2020, and favorable seasonal adjustments. 

In his analysis Bhave used the latest BofA aggregated credit and debit card data (report available to pro subs) to zoom in on the effect of Viola. Total card spending was down 3.7% y/y in the week ending February 19, 2021, compared to a trend of about +6% y/y in prior weeks.

Accounting for a pickup in card spending growth in the weeks after the storm, the BofA economist estimates that at least 0.6% of spending was lost over a one-month period due to Viola. That’s a little more than a quarter of the Jan-Feb swing in total consumer spending, and works out to about a 0.5% drag on Q1 2021 GDP growth.

The slowdown in total spending due to Viola might have been larger than the impact on BAC card spending, because cash transactions would most likely have taken a bigger hit. Moreover, some of the rebound in spending growth after Viola might have happened for other reasons. Finally, the bank’s estimate above only looks at spending: other components of GDP would also have been affected by Viola.

Accounting for these factors, Bank of America thinks the headwind to Q1 2021 GDP growth from Viola might have been as large as 1.5%, which means that with strategist consensus expecting a roughly 1.5%-2% growth in Q1 before the winter storm, the US economy may be stagnant in the first quarter.

That said, the analogy isn’t perfect as Viola caused significant damage in the South, with extended disruptions to the power grid in Texas. It now appears that Winter Storm Fern won’t be as disruptive, partly because the region is now better prepared. But Fern has resulted in a lot more snowfall in the Northeast, which has a larger concentration of higher-income HHs. So it isn’t clear whether Fern will cause more or less economic damage than Viola.

In any case, BofA’s initial estimate is that the drag on Q1 2026 growth will be in the range of 0.5-1.5%.

The good news is that the bank does not expect any lasting impact on the trajectory of the economy. This means there is as much upside to 2Q GDP growth as there is downside to 1Q.

Here we go again. 

President Trump threatened to hike tariffs on goods from South Korea to 25% from 15%, citing in a Truth Social post what he said was the failure of the country’s legislature to codify the trade deal the two nations reached last year, a failure which was obvious from miles away as the terms of the trade deal require Korea to invest hundreds of billions – which it doesn’t have – in the US.

The new rate would apply to autos, lumber, pharmaceutical products and “all other Reciprocal TARIFFS,” he wrote in a social media post. It probably would not apply to memory chips which are already the most expensive thing on plant earth, at least until the RAM producing cartel starts to, well, producing RAM again.

If implemented, the move could have wide-ranging effects on major South Korean companies that export to the US, such as Hyundai Motor, which sent 1.1 million vehicles to America in 2024. 

As Bloomberg notes, Trump’s announcement marks his latest move to ratchet up trade tensions with allies. In recent weeks, he has threatened to raise duties on Canadian products to 100% if Ottawa signed a trade deal with China (it then promptly said it would not) and to slap new charges on European countries’ goods over his quest to seize control of Greenland.

The USDKRW gapped up 0.7% to 1452 on the news, amid thin liquidity before the local market open.

Authored by Charles Hugh Smith via OfTwoMinds blog,

Goliath dies not because collapse occurs, but because scale mistakes itself for life. What survives was never his.

This guest essay by longtime correspondent 0bserver speaks to a dynamic woven into all of my work: the intrinsic impossibility of fixing what technocratic management broke with more technocratic management. Attempts to do so result in doing more of what’s failed, with fatal consequences for the systems being “fixed,” as the technocratic elite holds the power to impose policies but is immune to the consequences of the failure of those policies. Those fall on the system, which then veers into incoherence and Model Collapse.

I’ve been reading Luke Kemp’s Goliath’s Curse: The History and Future of Societal Collapse with care, because the book is serious, well-researched, and written from within institutions that spend their days thinking about systemic fragility. Kemp is not unserious, nor is he shallow. His diagnosis of elite failure, complexity, inequality, and institutional overreach aligns with much of what many of us have been warning about for years.

Where I think the book ultimately fails, however, is not in what it sees–but in what it cannot see from the altitude at which it operates.

Kemp’s collapse framework is managerial. Collapse is treated as a system-level pathology to be prevented through coordination, governance, and institutional reform. This makes sense given his professional formation and affiliations, but it creates a blind spot that becomes more consequential the longer one reads: continuity is assumed, not explained.

The book speaks fluently about sustainability, inequality, elite capture, and long-term risk. Yet it does not seriously engage with inheritance–not inheritance as wealth alone, but inheritance as transmission: skills, trades, family structure, norms, fertility, competence, and responsibility carried forward across generations. Sustainability is framed as system stability rather than generational renewal.

This omission matters, because collapse is not the absence of order. It is the failure of particular scales of organization. When large institutions fail, life does not disappear–it reorganizes. The question is not whether systems can be stabilized indefinitely, but whether anything capable of inheritance remains when stabilization fails.

Luke Kemp is excellent at identifying fragility in centralized systems. He is far less interested in, or perhaps less equipped to examine, the base-rate reality that most societies muddle through breakdowns via informal order, households, and local competence. This is where pessimism overweights evidence. Failure is dramatic and legible; endurance is quiet and distributed.

Where this becomes decisive is in Kemp’s proposed solutions.

When collapse looms, the remedies offered are more coordination, better governance, stronger institutions, improved global frameworks, and smarter management of risk. Complexity is to be handled by expertise; inequality by policy; instability by coordination. The scale that failed is asked to save itself.

This is the core problem.

The solutions operate at the same level as the failure.

Centralization is offered as the cure for overextension.

Governance is offered as the cure for institutional fragility.

Coordination is offered as the cure for complexity.

The very mechanisms meant to prevent collapse amplify its consequences when they fail.

Recent history supplies proof–not theory.

The financial collapse of 2008 rescued banks while households absorbed the loss. Large institutions were recapitalized immediately; families lost homes, savings, and years of accumulated effort. Recovery was declared long before household continuity returned.

The pandemic reinforced the same pattern. Large corporations were deemed essential, while small and local businesses were declared nonessential and shuttered. Compliance favored scale; capital consolidated upward; independent capacity quietly disappeared.

A third proof is now unfolding without crisis declarations. Large banks continue to grow while private equity consolidates trades and local services–plumbing, HVAC, electrical, veterinary clinics, small manufacturing. Businesses are bought, debt-loaded, stripped, and optimized for extraction. Ownership disappears, stewardship evaporates, and nothing is left to inherit when failure arrives.

These outcomes are not policy accidents.

They are the predictable result of scale-first solutions.

Systems are stabilized.

Households are tested.

Continuity bears the cost.

What troubles me most is that Goliath’s Curse critiques elites and inequality while failing to recognize how insulated analysis itself has become. Collapse expertise that cannot be lived becomes abstract. Risk is modeled without skin in the game. Moral urgency is asserted without moral grounding. The book makes moral claims–about obligation, responsibility, and injustice–without ever naming the source of those obligations.

This creates a quiet contradiction. Moral language is necessary to motivate coordination, but moral foundations are left ambiguous to preserve managerial flexibility. In the absence of grounding, obligation eventually collapses into power.

Nassim Nicholas Taleb has a name for one failure mode here: the intellectual yet idiot–not stupid, not malicious, but insulated from consequence. I don’t think Luke Kemp himself is the target. The framework is. Collapse theory that remains legible only to institutions will always propose institutional solutions, even when the problem has already migrated below that level.

The real threat is not collapse per se. Systems rise and fall. The real threat is the dissolution of the family and the erosion of inheritance.

Institutions can be recapitalized. Markets can reprice. States can fragment and re-form. Families cannot be substituted.

When families fail to reproduce competence, culture, and responsibility across generations, nothing downstream inherits. What follows is not collapse but vacancy.

Goliath dies not because collapse occurs, but because scale mistakes itself for life. What survives was never his.

That is the argument I think Goliath’s Curse gestures toward but cannot complete from where it stands. The book diagnoses fragility well. It does not yet explain endurance.

And in the end, endurance–not prevention–is what decides the future.

This is a guest essay by longtime correspondent 0bserver.

CHS here: note that the global technocrat elite follows a power law distribution in where they attended university:

…and the power they wield in markets and institutions:

*  *  *

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US Durable Goods Orders soared 5.3% MoM in (admittedly very lagged due to the shutdown) preliminary November data (significantly exceeding the 4.0% MoM expected and a major rebound from October’s 2.1% MoM decline), boosted by bookings for commercial aircraft and other capital equipment.

Source: Bloomberg

That big jump (the biggest in six months) pushed durable goods orders up 10.5% YoY – the 3rd biggest increase since June 2022.

Under the hood, non-defense aircraft spend soared, defense spending dipped and motor vehicle orders were flatish…

Source: Bloomberg

Meanwhile, Core Orders (ex Transportation) rose 0.5% MoM (also better than expected)…

Source: Bloomberg

This was the 8th straight month of increases, leading to a 4.4% YoY rise in orders – the best since October 2022.

The data out Monday also showed the value of core capital goods orders, a proxy for investment in equipment that excludes aircraft and military hardware, increased a larger-than-forecast 0.7%.

 

 

While it’s ancient history now – even preceding the record long government shutdown – and nobody will care, moments ago the BEA reported that its first revision of third quarter GDP came in a bit hotter than expected as US GDP grew slightly more than initially reported, supported by stronger exports. Due to the recent government shutdown, this updated report for the third quarter of 2025 replaces the release of the third estimate originally scheduled for December 19, 2025, the BEA reported.

Inflation-adjusted gross domestic product increased at a revised 4.4% annualized rate, the fastest in two years, and up 0.1% from the initial estimate, primarily reflecting upward revisions to exports and investment that were partly offset by a downward revision to consumer spending. That said, the change was minuscule: it went up from an unrounded 4.340% to 4.370%.

Compared to the second quarter, the acceleration in real GDP in the third quarter reflected upturns in investment, exports, and government spending, as well as an acceleration in consumer spending. Imports decreased less in the third quarter than in the second. 

Real GDP was revised up 0.1 percentage point from the initial estimate, primarily reflecting upward revisions to exports and investment that were partly offset by a downward revision to consumer spending. Imports were revised up. 

Here is the breakdown: 

• Personal consumption contributed 2.34% to the bottom line, slightly lower than the 2.39% originally reported.
• Fixed Investment added 0.15%, also revised lower from 0.19%
• Change in private inventories was a net improvement, raising from -0.22% to -0.12%, if still subtracting from the bottom line
• Net trade (exports less imports) was also revised favorably up from 1.59% to 1.62%
• Finally, government added 0.38% to the bottom line print, effectively the same as 0.39% before.

And visually:

Real gross output increased 3.2% in the third quarter, reflecting increases of 4.4% for private services-producing industries and 2.1% for government that were partly offset by a decrease of 0.1% for private goods-producing industries. Real gross domestic income (GDI) increased 2.4% in the third quarter, the same as previously estimated. The average of real GDP and real GDI increased 3.4%, the same as previously estimated.

From an industry perspective, the increase in real GDP in the third quarter reflected increases of 5.3 percent in real value added for private services-producing industries and 3.6 percent for private goods-producing industries that were partly offset by a decrease of 0.3 percent in real value added for government.  

Finally, while it’s beyond ancient history now, the price index for gross domestic purchases increased 3.4% in the third quarter, the same as previously estimated. The personal consumption expenditures (PCE) price index increased 2.8 percent, and the PCE price index excluding food and energy increased 2.9%, both the same as previously estimated. A much more timely print of core PCE for November will be reported at 10am today.

While president Trump took military force over Greenland off the table (for now at least) during his Davos speech, this makes a bruising  diplomatic showdown virtually assured. And ahead of whatever trade escalation the Trump admin may announce next, EU leaders toughened their position and want the European Commission to ready its most powerful trade weapon against the US if Donald Trump doesn’t walk back his Greenland threats.

According to Politico, which cites five diplomats with knowledge of the situation,  Germany joined France in saying it will ask the Commission to explore unleashing the Anti-Coercion Instrument (ACI) at the emergency EU leaders’ summit in Brussels on Thursday evening. Berlin’s move brings the EU closer to a more forceful response, with Trump’s escalating rhetoric about the Danish territory and its supporters having prompted key capitals to harden their stance on how Europe should react.

“The resolve has been there for a few days,” one of the diplomats said. “We have felt it in our bilateral talks … there is very broad support that the EU must prepare for all scenarios, and that also includes that all instruments are on the table.”

Politico also writes that what governments request of the Commission meeting on Thursday would be decided largely by what the U.S. president says in his Davos address on Wednesday; and as reported earlier Trump maintained maximum pressure to force Europe to yield control of the territory to the US. Trump’s speech came as several European leaders had been trying to arrange meetings with the president on the Davos sidelines to talk him down from imposing the tariffs. 

Aside from the anti-coercion tool, or “trade bazooka,” leaders have also discussed using an earlier retaliation package that would impose tariffs on €93 billion worth of U.S. exports. Two of the EU diplomats indicated that it is possible to impose the tariffs first, while the Commission goes through the more cumbersome process of launching the powerful trade weapon.

So what exactly is the ACI?

Europe’s “trade bazooka” has a 10-point list of possible measures on goods and services. They include:

• Curbs on imports or exports of goods such as through quotas or licenses.

• Restrictions to public tenders in the bloc, worth some 2 trillion euros ($2.3 trillion) per year. Here the EU has two options: Bids, such as for construction or defence procurement, could be excluded if U.S. goods or services make up more than 50% of the potential contract. Alternatively, a penalty score adjustment could be attached to U.S. bids.

• Measures impacting services in which the US has a trade surplus with the EU, including from digital service providers Amazon, Microsoft, Netflix or Uber.

• Curbs on foreign direct investment from the United States, which is the world’s biggest investor in the EU.

• Restrictions on protection of intellectual property rights, on access to financial services markets and on the ability to sell chemicals or food in the EU.

The EU is supposed to select measures that are likely to be most effective to stop the coercive behavior of a third country and potentially to repair injury.

What does the ACI allow?

The ACI offers a broad and flexible array of countermeasures: its aim is not merely to reciprocate, but to provide the EU with calibrated responses depending on the nature and impact of the coercion:

• Trade measures are the first type of possible responses. These could consist of the imposition or increase of customs duties, import/export quotas or licenses and limitations on the free movement of certain products.
• Services and non-tariff measures can also be introduced. The instrument also provides responses in the services sector, for example restrictions on the provision of cross-border services, limitation of access to certain service markets, changes in access criteria or licensing for third-country providers.
• Controls on FDIs and public procurement are probably the most powerful aspects of the ACI. They allow the EU to impose restrictions on access to EU public procurement markets for entities of a coercive third country; they may limit foreign direct investment (FDI), particularly in sensitive sectors, or impose conditions on investors from third countries in strategic areas.
• The ACI also allows action on intellectual property rights, financial market access or certain export controls & licensing, reflecting the need to cover broader economic areas where coercion may manifest. That said, the ACI does not allow everything. In particular, restrictions must be targeted at specific entities of the coercive country and proportionate to the harm caused. Broad investment bans in the third country would exceed this framework. In addition, measures must comply with WTO rules and relevant bilateral investment treaties; broad restrictions on a major partner like the US could raise serious legal challenges. 

Specifically, the ACI could allow the EU to impose tariffs on services imports from the US. For reference, a flat 10% tariff on all EU imports of US services could mechanically raise about EUR 50bn in revenues.

That said, the US firms selling services into the EU have substantial market power, especially in digital services. This implies that European consumers would find it difficult to substitute away from services imports from the US and would likely need to shoulder a significant share of the services tariff. However, the ACI would also allow the EU to take broader retaliatory steps against US services companies, including an increase in the digital services tax (DST), investment restrictions or “buy Europe” clauses in procurement (such as defence).

Original purpose of the Anti-Coercion Instrument

According to Credit Agricole (full note available to pro subs), the EU’s decision to introduce the Anti-Coercion Instrument (ACI) arose from a combination of geopolitical developments, trade conflicts and the perceived limitations of existing mechanisms.

In recent years, several third countries have increasingly used economic measures as leverage to influence EU or Member State policies. Notable precedents include China’s economic measures against Lithuania following its recognition of Taiwan’s representation, as well as repeated instances where countries applied unilateral tariffs, trade restrictions or investment barriers to press political demands. These cases highlighted that traditional WTO dispute settlement procedures were insufficient, since they typically address breaches of trade rules rather than coercive political pressure.

Against this backdrop, the European Commission proposed the ACI at the end of 2021. After a long EU legislative process, it was finally adopted by the European Parliament in plenary on 3 October 2023. The regulation was subsequently signed and entered into force on 27 December 2023

What it is, legally speaking?

The ACI falls within the broader scope of EU trade law. It is a directly applicable regulation (not a directive), meaning it bindingly applies uniformly in all Member States, without need to be devised in national law. 

Its structure combines a clear procedural framework with an indicative list of possible countermeasures, while strictly regulating their use to ensure compliance with international law. 

It defines economic coercion as a situation “where a third country seeks to exert pressure on the European Union or a Member State to influence a strategic choice or political decision by applying or threatening to apply measures affecting trade or investment”. This definition encompasses a wide range of practices, from punitive tariffs to restrictions on market access, services or investments. 

The instrument applies regardless of the identity of the third country and whether the coercion is formal or informal, allowing the EU to respond to behaviours that might not be illegal under WTO rules but are used as political leverage. 

How does the EU invoke the ACI

The ACI was proposed in 2021 as a response to criticism within the bloc that the first Trump administration and China had used trade as a political tool.  European law gives the European Commission up to four months to examine possible cases of coercion. If it finds a foreign country’s measures constitute coercion, it puts this to EU members, which have another eight to 10 weeks to confirm the finding.

Confirmation requires a qualified majority of EU members, the support of 55% of member states representing at least 65% of the EU population, within 10 weeks. This is a higher hurdle to clear than that for applying retaliatory tariffs.

The Commission would normally then negotiate with the foreign country in a bid to stop the coercion. If that fails, it can implement ACI measures, again subject to a vote by EU members. These should enter into force within three months.

Since the ACI is European, the whole process takes an eternity to implement, and could take anywhere from a few months to a year to complete. By then, whatever plans Trump has vis-a-vis Greenland would be largely consummated. 

According to Goldman, the EU will activate the ACI if the US escalates tensions further, but without implementing any measures immediately to leave additional time for negotiation. In other words, it is unlikely that any actual implementation of the ACI will take place in 2026 even assuming full-blown trade war returns.

More in the Credit Agricole and Goldman notes explaining the EU’s Retaliation Options available to pro subs.