The first three weeks of the year will reshape the world

Over the last generation, several assumptions undergirded international relations and commerce. Shared values would always unite the U.S. with Western democracies, the global production of everything from semiconductors to oil made economic interdependence unavoidable, and an independent U.S. Federal Reserve and an infinite supply of Asian savings would keep world finance on track.

This month, a series of proverbial earthquakes have shaken all those assumptions with the potential to reshape the political and economic landscape for years to come. Though the fog of uncertainty still hangs, here’s my take on what happened and why it matters.

The U.S. uncouples from Europe

Years from now, we may look at President Trump’s declaration from Davos that the U.S. must acquire Greenland the way previous generations looked at the fall of the Berlin Wall in 1989. Just as the wall’s collapse symbolized the triumph of the West, Trump’s Greenland grab may come to embody the end of the West as a collection of nations united by values.

In the days before Davos, Trump promised to wage trade war against Europe unless he got Greenland, a territory of Denmark, a fellow member of the North Atlantic Treaty Organization. His administration refused to rule out military force. By week’s end he had withdrawn the threats, without formally renouncing the goal.

A U.S. seizure of Greenland would effectively spell the end of NATO. That Trump was prepared to take that risk left international leaders looking at the United States in a new, more fearful light.

This is the culmination of a profound schism between the U.S. and Europe over what should unite them. For Europeans, it’s democracy, freedom and human rights. For Trump officials, it’s history and culture. Europeans see their biggest threat as Russia. Trump thinks it’s “civilizational erasure" brought on by mass immigration and low birthrates, as his National Security Strategy puts it.

For now, NATO remains intact and trade peace is holding. But the turmoil in markets last Tuesday, when stocks fell and bond yields and gold rose, hint at the anxiety that awaits as the political and economic institutions that bind the West slowly unravel.

A new Monroe Doctrine built on resources

In 1823, President James Monroe declared the Western Hemisphere off limits to European colonization. China is, arguably, this era’s equivalent to European colonizers. In search of markets and resources, it has extended its influence throughout Latin America. By removing Venezuelan dictator Nicolás Maduro, Trump has exercised his own corollary to the Monroe Doctrine, depriving China of a key foothold.

Numerous U.S. presidents have meddled in the region. But whereas they prioritized the installation of a friendly government and, in Venezuela’s case, democracy, Trump prioritized control of Venezuela’s oil while leaving its leadership largely intact.

China comes in from the cold

Even Trump’s fiercest critics credit him for opening their eyes to China. Western leaders no longer see it as a benign partner, but an adversary whose ambitions and values are fundamentally at odds with their own. This brought hopes of a new global bargain in which the U.S. and other free-market democracies deepened links while decoupling from China. In 2024, Canada got on board, hiking its tariff on Chinese electric vehicles to 100% to match the U.S.

But when Trump returned to office he showed little interest in such a bargain. He hit Canada with tariffs and talked of annexation. Two weeks ago, Canada recalibrated. Prime Minister Mark Carney struck a deal with China to slash the EV tariff while China reduced duties on Canadian canola.

Though small in the scheme of things, the deal showed how third countries must swallow their misgivings about China if they want to hedge their dependence on the U.S. As Carney noted in Davos, “not every partner will share all of our values."

Canada should not kid itself. America on its worst day is more democratic and law-abiding than China on its best. Geography dictates that the U.S. is its natural economic partner, and changing that will be costly. Trump has set out to demonstrate just that, threatening 100% tariffs if Canada proceeds with the China deal.

American technological autonomy advances

Semiconductors are often called the new oil. If so, then Trump’s deal this month with Taiwan ranks up there with the development of shale two decades ago. The Commerce Department said Taiwan Semiconductor Manufacturing, as part of $250 billion in new Taiwanese investment, will add to several chip factories in Arizona. In exchange, the U.S. would cut tariffs on Taiwan and exempt companies like TSMC that invest in the U.S. altogether.

These aren’t just any factories. They will make the advanced chips essential to the artificial intelligence, communications and mobile applications designed by Nvidia, Qualcomm and Apple. Production of such chips has long been concentrated in Taiwan and South Korea, and the U.S. lack of such capabilities is a key vulnerability.

The deal shows that that manufacturing can be reshored under the right conditions.

Taiwan will remain the dominant supplier of these chips for the foreseeable future. But just as shale made the U.S. energy-independent, and thus less invested in keeping the Middle East stable, having some degree of chip autonomy makes it less invested in keeping Taiwan free.

War between the president and the Fed

Many presidents have sought to pressure the Fed on interest rates, but none as much as Trump. After months of his attacks, his Justice Department took the most drastic step yet, initiating a criminal investigation of Fed Chair Jerome Powell, ostensibly over his testimony on building renovations.

Powell, who had previously declined to respond to the attacks, came out swinging, calling the investigation a pretext to neuter the central bank’s independence.

The outcome of this battle matters immensely to investors around the world who have long assumed the Fed would act in the long-term interests of the U.S. economy and global stability. Trump wants a Fed chair who puts his agenda first—i.e., lower rates, faster growth, and a higher stock market.

There are still institutional guardrails. The Supreme Court signaled this past week it is not inclined to let Trump fire a Fed governor, Lisa Cook, over alleged mortgage misrepresentations. Such a removal without due process, judicial review or remedy “would weaken, if not shatter, the independence of the Federal Reserve," Justice Brett Kavanagh said.

Even if the guardrails hold, the Fed won’t be the same. Its next chair, to take office in just four months, risks the same treatment if he defies the president.

Japan and the end of easy money

While Trump’s Greenland grab roiled markets, events half a world away fed the turmoil as Japanese bond yields shot up and the yen fell.

For decades, the Bank of Japan used both zero interest rates and government bond buying to combat inflation that was too close to zero. Inflation is now comfortably above zero. As the bank has slowly raised rates, bond yields have marched steadily higher.

Then this past week, when Prime Minister Sanae Takaichi called a snap election with a promise to cut taxes, she crystallized fears that Japan’s already massive debt will become unsustainable.

The world has a stake in this because Japan is one of the world’s largest, if not the largest, creditors. Its government and investors hold $1.2 trillion worth of U.S. Treasury debt. Japan increasingly needs those investors to buy its own debt. Adjusted for exchange rates, markets think Japan will be paying much more to borrow than the U.S., Germany or Switzerland in a decade’s time, calculates Marcel Kasumovich, senior advisor to Evenflow Macro, a research firm. The market is telling the Bank of Japan “to hike rates a lot."

As Japanese rates rise, debtor nations will feel pressure to offer higher rates to keep Japanese investors buying their bonds. The U.S., whose government is the world’s largest borrower, is especially vulnerable.

This list isn’t exhaustive. Federalism is under strain from aggressive immigration enforcement in Minnesota and counterprotests. Trump has already suspended some funds to the state and threatened to invoke the Insurrection Act to send in active-duty troops.

Any of these events alone would be a game-changer. In combination, they will reshape global economic and political patterns with consequences we don’t yet fully understand. And it’s only January.

Write to Greg Ip at greg.ip@wsj.com