Welcome back. The conversations continue here in Davos 2026 as we try and understand what the world is going to look like in 2026 and beyond. Joining us now to talk about the global economic order, the changes that we are seeing to trade, to the impact of tariffs, and of course what we could expect at the end of Davos 2026 with President Trump making many announcements that could in fact impact the NATO alliance, that could impact the future of Europe. Joining us on the program is Eswar Prasad of Cornell University. Many, many thanks, Mr. Prasad, for joining us here. The Doom Loop, that's your new book. How appropriate a title is that? So, you know, what do you make of the many developments that have shaped 2025 and what that tells us about what the world is going to look like in '26?
I think what we are seeing here in Davos is a moment when there seems to be a crumbling of the traditional world order as we knew it, where there was a well-defined alliance of the Western countries, the liberal market-oriented democracies. It was seen as standing in counterpoint to China and other socialist economies. But what we are seeing is a fragmentation of the world order driven by a variety of forces that I think are feeding off each other in a negative way. So in The Doom Loop, I talk about the interaction between domestic politics, economics, and geopolitics, and all of these could work together in a very positive way. So if you think about globalization, for instance, it was supposed to make people in all countries and generally the entire world much more prosperous and thereby bring countries together. And the idea was that globalization, because it would be a positive-sum game where everybody could benefit from trade, for instance, would be a counterbalance to the zero-sum game of geopolitics, where one country can gain influence only if another country loses influence. But what has happened right now is that even globalization
has become seen as a zero-sum game or even a negative-sum game, where one country gains, another country has to lose, and that means that this balancing force is gone. So the zero-sum game of geopolitics now becomes much more dangerous because there are no offsetting forces. So the concept of the doom loop now is that these forces are feeding off each other in a way that generates instability rather than stability. And I think what we're seeing here in Davos is a prime example of that, with Donald Trump likely to make a speech that suggests a splintering of the Western alliance. So it creates a lot of fragmentation in the world in all of these dimensions: political, economic, and geopolitical.
So on the back of what you've just said, the many changes that you have spoken of and alluded to, we're now talking about structural changes. This is not a cyclical downturn. What you suggest is a structural change that could have implications and an impact over the next few decades.
That's right. If you think about the way civilization has progressed, there have been times when there's been a shift in one direction and then a correction. Even the United States has gone through these periodic corrections where it lurches to one extreme and then lurches to another extreme. But what is very important is there was a self-correcting mechanism in place. The same was true on the global stage as well. But going back to the US, if you think about what created the self-correcting mechanisms, it was really the institutions such as the democratic process, the rule of law, the free press, and all of those institutions are really being whittled away right now, if not really being destroyed. The same is true at the international level. The institutions that were seen as maintaining the rules of the game are now being seen as less legitimate. They're being seen as less legitimate by the advanced economies which set them up, but also by the emerging market countries, China, India, and others, that feel that those institutions are not serving their interests well. So we are seeing a breaking apart of the rules of the game. So I think it's going to be much harder to put these things back together and for the corrective mechanisms to work. So the way you phrased the question is exactly right, that we are not in the middle of a cyclical change. I think something more fundamental in terms of reshaping the world economic order is in progress.
So, you know, how do you believe this reshaping is going to take place? What will this reshaping lead us to? At this point in time, what we're seeing are tactical, you know, changes. For instance, with the US taking the position that it's taken, you've suddenly seen Europe rediscover or reset or attempt to reset its ties with China. As you look at this reshaping of the economic order, you know, what do you see? More blocs emerging? Do you see more bilateral relations emerging? How is this likely to play out?
One possibility, which we saw in the last few years already, is more fragmentation. If you think about global trade, you know, the benefits are so large that I don't think we're going to retreat from global trade. But certainly, rather than trading with all the countries of the world, we see trade falling along geopolitical lines. That is, countries that are geopolitical allies build stronger trade and financial relationships with each other. Now that means that you're denying countries the benefits of much freer, much broader trade, but countries feel that this is one way for them to reduce exposure to geopolitical and other risks.
But there is a problem with this fragmentation. It might serve countries well in the short run, but now you have geopolitical and economic lines falling along the same ways, and economics or trade, which used to be a bridge between geopolitical divides, is gone. So it means even more instability, and that I think is very worrying. But overall, I think we're not going to see trade disappear. Now, regional blocs are certainly going to form because, again, countries are trying to figure out how best to generate the benefits of trade. But we're also in a very particular moment right now, which I think is worth considering. Certainly, there are two great powers right now, the US and China, that are sort of well matched militarily, economically, financially, and so on. It would be a compelling proposition when the US is trying to impose tariffs on practically every other country for the rest of the world to say, 'Let us reduce our trade with the US. Let us trade more with each other.' But there is a problem. The second largest economy in the world, China, is now facing significant domestic problems, and the way they are generating growth is through exports.
Yeah. And when the second largest economy in the world is not pulling the world along but is in fact counting on the rest of the world to absorb its exports, that creates a problem. So for all the countries stuck in the middle, it's countries like India, but also even the advanced economies like Japan, Germany, the United Kingdom, all of these countries are not doing very well economically. They need exports, and they're terrified about being swamped by cheap Chinese goods landing on their shores. So they're really caught in the middle. So the notion of the US being isolated, which would be in normal times a logical proposition, is unlikely to play out.
It is unlikely to play out. And you, you know, you talked about China and that trade surplus that we've seen coming in from China at a record all-time high. And that is of course going to be a challenge for the rest of the world, as you point out. But you know, here in Davos, while there's a lot of conversation around trade and tariffs, there's also the hope around AI and what it's likely to do as far as global growth and the global economy is concerned. How does that figure in the new order, in the doom loop?
