[New Year Special Commentary Series] ⑥ From Trade War to Complex Competition

2025 Review: Trade Wars and AI Frenzy

2025 was a year swept by the gale of trade wars. In January 2025, the second Trump administration, upon its inauguration, declared 'Liberation Day' and threatened indiscriminate tariff impositions on allies and adversaries alike. The subsequent developments are as known. South Korea, along with the EU and Japan, had to promise enormous investments in the US to lower the 25% reciprocal tariffs imposed by the Trump administration. While ostensibly a negotiation to lower tariff rates, it was a peculiar negotiation aimed at achieving a tariff rate of 15%, significantly higher than before the talks. This was the result of President Trump's transactional approach, using tariffs-for-investment as an all-purpose tool against allies. However, the fact that considerable unresolved issues remain in the process of translating investment agreements into implementation foreshadows one aspect of the world order in 2026.

2025 was also a year of unprecedented uncertainty for the United States. The belief that semiconductor export controls had solidified dominance over the AI industry was rapidly shaken by the 'DeepSeek Shock,' dubbed the 'Second Sputnik Moment.' DeepSeek's release of lightweight models, unlike those from US tech giants such as OpenAI and Google, presented a new AI business model possibility, serving as a wake-up call for the US AI industry, in President Trump's own words. The stronger the pursuit by China, the greater the resolve to secure an advantage in the high-tech competition. This is reflected in the Trump administration's declaration of intent to exercise 'full-stack leadership' in the AI industry. Consequently, regardless of any limited relaxation of US export controls, China's strategy to build its own AI ecosystem appears to have passed the point of no return.

World Order Outlook for 2026

In 2026, discord surrounding the implementation of trade agreements is expected to persist. Furthermore, as the US and China continue trade negotiations on one hand and pursue supply chain reorganization on the other, a complex competition will unfold, expanding its battlefield to areas such as physical AI and digital currencies.

Trade War 2.0

The world in 2026 is expected to enter Trade War 2.0 in two aspects. First, although major US trading partners such as South Korea, the EU, and Japan have pledged large-scale investments, the specific implementation methods vary. There are two reasons for this. Firstly, if investments in the US are not made in a timely manner, disagreements are highly likely to arise between the US and its partners regarding the binding nature and responsibility of implementation. In particular, President Trump, facing the midterm elections in November 2026, may exert pressure on partner countries to claim victory once again.

Another issue is that even full implementation of investment agreements may not resolve the problems. This is due to the structural flaws of the tariff-investment linkage pursued by the Trump administration. The primary objective of the Trump administration's trade war was to resolve trade imbalances. The problem is that attracting US investment as a tool for tariff negotiations, as it grows in scale, can actually exacerbate trade imbalances. It remains unclear how the Trump administration will interpret the results of faithful implementation of the agreements.

Secondly, in 2026, the repercussions of the trade war may begin to emerge within the United States. Domestically, inflationary pressures are increasing, and externally, the critical task of concluding US-China trade negotiations remains ongoing. It is true that the US government's tariff revenue has increased as a result of the Trump administration's all-out trade war. US tariff revenue began to surge in April 2025 and exceeded $205 billion by October, a 2.6-fold increase compared to $78.9 billion in July of the previous year. Inflation in the US stood at around 2.9% by August 2025, indicating that tariffs had a lesser impact on prices than initially expected. This is because the proportion of the price increase due to tariffs borne by US consumers remained at 30% to 40%. However, based on projections that the impact of future tariff impositions will be fully passed on to the US, with the consumer burden ratio expanding to approximately 60%, inflationary pressures are expected to intensify in 2026. This is an unfavorable domestic political environment for President Trump, who is facing midterm elections.

US-China Trade Negotiations and Beyond

US-China trade negotiations represent the greatest challenge in 2026. This is because China in 2026 is no longer the China that was pressured by the first Trump administration in 2017. As conflicts escalated over the reasons for the non-implementation of the Phase One agreement in 2020, China has continuously prepared to shift from a reactive strategy towards the US to a proactive and preemptive one. While China still maintains a strategy of retaliating against US tariff impositions with its own tariffs, it has simultaneously been pursuing a multi-dimensional strategy that includes upgrading legal and institutional means to counter the US domestically, utilizing international organizations externally, and strengthening cooperation with the Global South. The results of these domestic and international accumulations were starkly revealed during the negotiation process with the US in 2025. China pressured the US by repeatedly bringing up export controls as a bargaining chip during key negotiation phases in response to the Trump administration's offensive.

Export controls will remain a key tool in China's strategy against the US in 2026. Above all, China's share in major critical minerals is overwhelming. Based on refined products, China's global market share stands at 96% for graphite, 91% for rare earths, 78% for cobalt, 70% for lithium, 44% for copper, and 31% for nickel. It will be difficult for the US and its allies to overcome this structural vulnerability in the short term. Furthermore, China has been strengthening its internal capabilities by restructuring its domestic industries to maximize the effectiveness of export controls. The Chinese government has integrated numerous rare earth companies, centered around China Rare Earth Group and China Northern Rare Earth, which hold dominant positions in the supply of medium and light rare earths. This has further strengthened its domestic capacity to implement the weaponization of rare earths more rapidly and broadly.

Just as China has sought countermeasures against US pressure over the past nine years since the first Trump administration, it is now time for the US to respond to China's counter-offensives. The US intends to counter with 'Pax Silica' in December 2025. While managing conflicts with China through a dual approach of pressure and negotiation in the short term, it is seeking solutions in the medium to long term that can fundamentally resolve dependence on China with like-minded countries and effectively enhance pressure on China.

Geopolitical Risks and Supply Chain Reorganization

As the WTO projects a 2.4% increase in global merchandise trade for 2025 in its Global Trade Outlook, global merchandise trade has shown resilience despite geopolitical uncertainties such as trade wars, US-China strategic competition, and the Russia-Ukraine war. Services trade, which is less directly affected by tariffs, also showed robust growth of 4.6%, albeit lower than initially projected.

Several notable changes are expected in 2026. Firstly, as indicated by the projected growth rates of 0.5% for merchandise trade and 4.4% for services trade, the outlook for 2026 is not particularly bright. Complex changes are anticipated regarding structural shifts in supply chains. First, the average number of production stages in global value chains (GVCs) is expected to lengthen due to the impact of supply chain disruptions. Second, as reshoring and regionalization intensify in major economies such as the US, China, and the EU, external dependence is expected to decrease.

This heralds an acceleration of the reorganization of the global trade order along geopolitical fault lines. Since the outbreak of the US-China trade war, the US and China have achieved considerable success in reducing their direct dependence on each other over the past several years. However, a phenomenon of increasing indirect dependence has emerged, where market access is maintained, or even expanded, through third countries, bypassing direct sanctions. This has led to the emergence of connector countries such as Mexico and Vietnam. President Trump's targeting of these countries from the beginning of his term was aimed at reducing indirect dependence on China. In 2026, the game of discovering alternative routes to maintain market access to the opposing country's market and attempting to block them will continue.

New Battlegrounds

Physical AI

In 2026, major countries including the US and China will continue their dual dynamics of competition and cooperation in the AI field. While AI competition in 2025 centered around Large Language Models (LLMs), the front has already expanded to competition in physical AI, aiming to secure dominance in autonomous driving and humanoid robots starting from early 2026. In 2025, China's electric vehicle (EV) sector delivered a significant shock to the global market by exporting its domestic oversupply. As of October 2025, EV sales (including plug-in hybrids) reached 17.1 million units, a 25.5% increase year-on-year. BYD ranked first globally with 3.32 million units, followed by China's Geely (1.78 million units) in second place. In contrast, Tesla, a leader in the EV market, saw a 7.7% decrease in sales to 1.308 million units compared to the previous year.

A new competitive landscape is forming in autonomous driving. In addition to the leader Tesla, Nvidia has unveiled its autonomous driving platform Alpamayo, presenting a new competitive model. In the humanoid robot sector, while Tesla's 3rd generation Optimus and China's Unitree (R1) are fiercely competing, Hyundai Motor's subsidiary Boston Dynamics unveiled Atlas at CES in January 2026 and announced plans to deploy it in automotive plants within two years, signaling the full opening of the next-generation humanoid robot market.

Although the forefront of the competition in autonomous driving and humanoid robots is between companies, the underlying reality is competition between nations. In the case of autonomous driving, as seen with Nvidia's first application of Alpamayo in the 2025 Mercedes-Benz CLA, corporate competition ultimately becomes ecosystem-building competition. In this process, the linkage between national strategy and corporate strategy is crucial, given the high probability of alliances and rivalries forming along geopolitical fault lines. The situation is no different for humanoid robots. Hyundai Motor announced a strategic partnership with Google DeepMind and revealed plans to integrate Gemini Robotics, DeepMind's AI foundation model, with Atlas. This signals that ecosystem building will proceed centered around nations within their respective blocs.

Stablecoins vs. Digital Yuan

Digital currency is another trigger for US-China strategic competition. With the Genius Act enacted in July 2025 and set to take effect in 2026, stablecoins are poised to become a new factor of change in the digital asset market and the global financial order. The US, concerned about negative impacts on dollar hegemony, had aggressively regulated digital currencies such as stablecoins and CBDCs. However, the Trump administration's decision to permit stablecoins stems from the difficulty of ignoring the reality that users have surpassed 500 million globally, particularly in countries where their currency values have plummeted since Tether (USDT) was launched in 2014. Furthermore, a shift in perception has occurred, recognizing that stablecoins could actually strengthen dollar hegemony. This judgment is supported by the fact that the Genius Act requires stablecoin issuers to hold reserves of cash-like assets, including dollars, to meet redemption requests, and that 99% of all stablecoins are dollar-based. Conversely, China is negative towards cryptocurrencies, including stablecoins, citing their failure to meet customer identification and anti-money laundering requirements, thus placing them in a regulatory blind spot. Instead, China is actively promoting the digital yuan to challenge dollar hegemony.

South Korea's Response Strategy

With global economic order uncertainties expected to persist in 2026, what response strategy should South Korea adopt? For the past several years, South Korea's economic security risks have stemmed from China or Japan. However, with the inauguration of the second Trump administration, it is time for South Korea to establish a new economic security strategy that addresses the emergence of US risk.

First, South Korea must prepare for the normalization of trade negotiations. Following the agreement on the basic direction of tariff negotiations at the South Korea-US summit in August 2025, a detailed agreement was reached after several months of difficulty. Compared to the EU and Japan, the uncertainty of implementation has been significantly reduced. However, there is a possibility that the Trump administration may demand a second round of negotiations if trade imbalances are not resolved, regardless of their cause. South Korea needs to proactively prepare to prevent such a situation from materializing. Given the Trump administration's potential pursuit of 'intentional inconsistency' from a transactional perspective, a multi-dimensional strategy beyond a case-by-case logical approach is required.

Second, in 2026, the scope of conflict is expected to expand beyond tariffs. While 2025 focused on narrow tariff negotiations, in 2026, the US is likely to shift its priorities to new issues in addition to the implementation of agreements. The framework for this is already embedded in the South Korea-US Fact Sheet concluded in November 2025. Examples include the promotion of the 'Buy America in Seoul' initiative in cooperation with US states to expand exports of US goods to South Korea, and demands that US companies not face discrimination in digital service sectors, including bandwidth usage fees and online platforms.

Third, South Korea must prepare for the indirect impacts arising from the weaponized interdependence between the US and China. Since experiencing weaponized interdependence from China in 2017 and Japan in 2019, South Korea has implemented various countermeasures, including diversification, strengthening technological sovereignty, and enhancing the competitiveness of its materials, components, and equipment industries. However, as evidenced by China's expansion of export controls in October 2025 to include products from third countries that utilize Chinese technology, not just US products, weaponized interdependence is becoming more comprehensive. Attention must be paid to prevent South Korean companies operating overseas from suffering indirect damage.

Fourth, South Korea must prepare for the ecosystem competition in advanced industries between the US and China. The US and China have already entered into full-stack competition in key advanced industries, including AI. The trend of the US and China forming their own independent ecosystems is irreversible, and thus, the fragmentation of the world economic order will continue. However, fragmentation should not be a regression to the past but a reconnection. South Korea should aim to play a leading role in preventing the world order from regressing into fragmentation by cooperating with like-minded countries and ensuring a stable reconnection. ■

■ Lee Seung-jooProfessor of Political Science and International Relations, Dean of the College of Social Sciences, Chung-Ang University.

■ Responsible Editor: Lee Sang-junEAI Research Fellow
Contact: 02 2277 1683 (ext. 211) | leesj@eai.or.kr