Michael Spence: Technological Progress Will Drive Growth While Protectionism Risks Fragmenting Trade

As globalization undergoes profound transformations, economic uncertainty is impacting markets worldwide in unprecedented ways. From inflationary pressures and the resurgence of protectionism to rapid technological advancements, the global economy is at a critical turning point. Governments must navigate a delicate balance between stimulating growth and mitigating risks, while central bank policies, fiscal strategies, and industrial restructuring have become key variables shaping the future economic landscape.

At the same time, technological progress is redefining industries. Breakthroughs in artificial intelligence, quantum computing, and renewable energy are accelerating capital market transformations, significantly affecting labor markets, productivity, and global supply chains. Technology is not only a new engine for economic growth but also a fundamental pillar of national competitiveness, intensifying global competition in this arena.

How will the global economy evolve in 2025? What challenges and opportunities will major economies face? How will the rise of protectionism, AI-driven transformations, and shifts in U.S.-China relations shape the new world economic order? To explore these pressing issues, Southern Finance spoke with Michael Spence, Nobel Laureate in Economics. A globally renowned economist, Spence previously served as the Dean of the Stanford Graduate School of Business and was awarded the 2001 Nobel Prize in Economic Sciences for his groundbreaking contributions to information economics.

In recent years, he has focused on global economic restructuring, the impact of AI on growth, and the evolution of a multipolar world. His co-authored book, Permacrisis: A Plan to Fix a Fractured World, provides insightful analyses of the deep-rooted challenges facing the world economy and its future trajectory.

In this conversation, Spence provides an in-depth analysis of the structural shifts in the global economy in 2025, the impact of Trump’s policies, the evolution of U.S.-China relations, the AI investment boom, and potential "black swan" risks. Despite ongoing challenges, he highlights the crucial role of technological advancements, supply chain restructuring, and the rise of emerging economies in shaping the global landscape in the coming years. Regarding China, he underscores its growing influence in the AI race, global governance, and economic transformation.

Additionally, Spence evaluates potential U.S. trade, immigration, and monetary policies under a Trump administration, assessing their broader economic implications. He emphasizes that while globalization is being redefined, the world is not heading toward complete isolation—nations must continue to strike a balance between competition and cooperation. The full interview follows.

Southern Finance : The first question concerns the outlook for 2025. What do you believe will be the most significant structural shifts shaping the global economy in 2025? Additionally, in your opinion, what are the primary risks and opportunities for the global economy in the coming year?

Michael Spence: The global economy is highly complex. At present, there remains considerable uncertainty, though some clarity is emerging regarding the policy direction of the new U.S. administration. The general expectation is that a broad and potentially radical deregulatory agenda will be beneficial for businesses and the overall economy. As a result, an uptick in economic growth is a reasonable expectation.

However, it is still unclear whether the U.S. will pursue extensive tariffs or opt for negotiations. I tend to believe that negotiations will prevail. By the end of the year, we are likely to have a clearer picture of the global economic trajectory.

In China, the ongoing efforts to address demand-side imbalances, which have been constraining economic growth, are expected to yield progress. While these imbalances may not be entirely eliminated, economic growth is likely to strengthen, benefiting numerous economies. India is currently experiencing a slowdown, but looking ahead, it is likely to demonstrate strong economic performance.

Among the major economies, Europe remains a key consideration. While there are many dynamic economies in South Asia, Latin America, and other regions, a detailed review of each is beyond our scope. Overall, these economies are expected to sustain their recent positive growth trends.

The global economic center of gravity will continue shifting toward Asia. A crucial question is whether Europe will take the necessary actions to accelerate structural transformation and deepen economic integration. Those familiar with Mario Draghi’s report to the European Commission will recognize that a key uncertainty is whether the European Union will advance in this direction. If not, economic stagnation in the region is a distinct possibility.

Germany is currently in a technical recession, but signs of recovery may emerge. Structural changes, such as closing the digital gap with China and the United States, will require time. However, if Europe moves forward with reforms, confidence in the region’s economic future will strengthen, generating momentum for further growth.

At present, decision-making power lies with European policymakers and the European Commission in Brussels. The post-war global economic order was built on a multilateral framework that facilitated increasingly open trade and capital flows. While this trend has slowed, it has not been entirely reversed.

A multilateral framework is likely to persist, primarily due to leadership from China and possibly the European Union. One certainty is that the Trump administration does not strongly support multilateral institutions and agreements. While this does not signify the end of global economic cooperation, the framework will evolve.

The United States will assume a less active role, shifting the responsibility of maintaining a functional, though more fragmented, global economic system to other major economies. China will play a crucial role in shaping this emerging structure.

Southern Finance : Given the current uncertainties, many of them appear to stem from the United States, particularly with the return of a "Trump 2.0" administration. His well-known economic policies—including tariffs, immigration restrictions, and withdrawal from global agreements—have marked a shift toward protectionism. What lasting effects do you foresee on global trade and supply chains in 2025 as a result of these policies?

Michael Spence: I believe we will see a continuation of existing trends. The global economy has already begun fragmenting in response to sanctions and trade restrictions, often justified on national security grounds.

This fragmentation is particularly evident in U.S.-China relations, where both countries have imposed barriers based on their strategic priorities. Regardless of whether tariffs increase further, this pattern is likely to persist. However, many analysts—including myself—believe that maintaining a functional working relationship between the two nations remains essential.

While Trump’s rhetoric can at times be confrontational, particularly in relation to Mexico and Canada, the most probable scenario is that he will ultimately seek mutually beneficial agreements. The United States and Mexico share key economic and security concerns, such as drug trafficking and undocumented immigration, which necessitate cooperative approaches.

There are multiple dimensions to these bilateral relationships that lend themselves to collaboration, and despite existing uncertainties, a cooperative framework remains the most viable path forward.

Southern Finance : At present, inflation remains a critical issue in many countries, particularly in the United States. Some argue that restrictions on immigration could further exacerbate inflationary pressures. However, the Trump administration contends that increasing oil and gas production will lower energy costs and, in turn, reduce inflation. What is your perspective on this approach? Can withdrawing from the Green New Deal and aggressively expanding fossil fuel production effectively achieve the intended goal of reducing inflation?

Michael Spence: I do not believe this approach will serve as a comprehensive solution. While it may provide some short-term relief, it would come at the expense of the long-term global energy transition, which is essential for sustainability.

There are inflationary components within the Trump administration’s economic agenda, to the extent that we currently understand it. Increasing fossil fuel production could have a deflationary effect, but its impact may be limited.

In his speech at the Davos Forum, Trump explicitly stated his intention to request that OPEC lower oil prices. However, whether OPEC will comply is uncertain. Moreover, oil prices are determined on a global scale and are not solely influenced by U.S. policy, as Trump’s request implicitly acknowledges.

Beyond energy policy, other aspects of Trump's economic program could influence inflation. For instance, his administration is reportedly planning to deport approximately 11 million undocumented immigrants, many of whom are currently part of the U.S. workforce. Given that labor shortages have contributed to inflation in key sectors, reducing the labor supply would likely further elevate inflationary pressures.

Additionally, tax cuts and increased deficits tend to be inflationary. However, Trump has also stated his intention to reduce the size of the federal government, which may involve cutting certain programs to lower the deficit. This creates a complex fiscal equation, making it difficult to predict the overall impact of his policies in advance.

There is a reasonable likelihood that inflationary pressures will persist, potentially necessitating interest rate hikes to contain them. Furthermore, if such pressures materialize and the Trump administration attempts to influence the Federal Reserve to lower interest rates, this would likely exacerbate inflation rather than alleviate it.

Southern Finance : In our previous conversation and in your book Permacrisis, you mentioned that higher interest rates may persist for an extended period—what is commonly referred to as "higher for longer"—but not indefinitely. However, at present, it appears that the Trump administration is likely to exert pressure on the Federal Reserve to loosen monetary policy. Considering this, what trajectory do you expect the Federal Reserve to take in terms of monetary policy in 2025?

Michael Spence: In the short term, the Federal Reserve will likely maintain its current course, focusing on bringing inflation down to approximately 2%. The President of the United States does not have direct authority to dictate the Federal Reserve’s policy direction.

Over the longer term, however, the President can exert influence through appointments to the Federal Open Market Committee and the Board of Governors. In the short run, I do not anticipate a shift in the Federal Reserve’s strategy. The institution will continue to respond to evolving economic conditions, but its primary mandate—balancing inflation control with economic growth and employment stability—will likely remain unchanged.

Southern Finance : What unforeseen risks or "black swan" events should policymakers and businesses prepare for in 2025?

Michael Spence: Predicting black swan events is inherently difficult. If such an event were to occur, it would most likely take the form of a geopolitical conflict stemming from a breakdown in trust and cooperation, leading to an escalation of tensions. The specific location of such an event is uncertain.

Additionally, climate change remains a persistent risk, as the frequency and severity of extreme weather events continue to increase. While these events may not have a direct, singular cause, the overall trend is clear.

To date, we have not experienced a climate-related black swan event severe enough to trigger a fundamental tipping point, such as the sudden collapse of Antarctic ice sheets or a significant shift in the Gulf Stream. However, such possibilities remain, and their consequences would be profound.

On a somewhat less dramatic scale, we continue to witness rapid technological advancements that present both opportunities and challenges. Breakthroughs in artificial intelligence, quantum computing, and life sciences are occurring at an accelerating pace. For example, the recent innovation from China in the form of DeepSeek has taken the global AI community by surprise, with experts now working to understand the methods behind this advancement.

Similar breakthroughs have been observed in other fields. The Nobel Prize in Chemistry was awarded for the development of AlphaFold by DeepMind, which has revolutionized protein structure prediction. Additionally, Google has reportedly made significant progress in reducing error rates in quantum computing systems. While fully functional quantum computers have yet to materialize, ongoing advancements in biomedical sciences, physics, and material sciences suggest that the coming years will bring transformative discoveries.

Southern Finance : You just mentioned DeepSeek as a recent technological breakthrough from China. What is your perspective on China's role in the global AI race?

Michael Spence: China is a major force in artificial intelligence, primarily due to its vast pool of highly skilled and well-trained professionals.

This has been the case for some time. Previously, there was significant collaboration between AI researchers in the United States and China, but rising geopolitical tensions have hindered such exchanges. Until DeepSeek, many believed that U.S. restrictions on semiconductor exports—particularly advanced GPUs—would slow China's progress in AI development.

Historically, technological constraints have often led to innovative solutions. During the Cold War, for example, Soviet hardware was considered inferior to that of Western nations. Yet, Soviet software engineers were widely regarded as world-class, as they developed sophisticated software solutions to maximize the capabilities of their hardware.

In a similar vein, DeepSeek represents an example of how technological barriers can drive new forms of innovation. If AI development becomes less dependent on high-end semiconductor hardware, it could significantly lower entry costs, enabling broader participation from additional countries and research institutions.

Looking ahead, China and the United States are expected to remain the primary drivers of AI advancements. However, it is encouraging to envision a future where talented scientists and engineers from around the world, including those from emerging economies, have greater access to the tools and resources necessary to contribute to AI progress on a global scale.

Southern Finance : Recently, U.S. President Trump announced a substantial investment of up to $500 billion through the Stargate Project, which focuses on artificial intelligence. Given the scale of this investment, how do you anticipate it influencing the U.S. economy? Additionally, do you see this exacerbating economic disparities between emerging and developed economies? Could it lead to any significant unintended economic consequences?

Michael Spence: This is a considerable investment, and one of the key challenges will be the increased demand for electricity to support AI infrastructure. Both the Chinese and American governments are undoubtedly aware of this requirement. In the short term, the most significant impact of AI will be in the AI sector itself and in the scientific fields. While AI will eventually have a profound effect on the global economy, economic transformations tend to take time. Many businesses are still in the early stages of determining how to integrate AI into their operations.

At Davos, for example, a tech executive mentioned that only about 15% of companies have figured out their AI strategy, while the remaining 85% are still evaluating its potential applications. Until businesses establish clear AI adoption strategies, its impact on the broader economy will remain limited. Over time, industries will identify the most effective AI use cases. Healthcare, for example, holds immense potential for AI applications, including ambient intelligence and biomedical advancements. AI’s role in industrial automation, particularly in China and Germany, will differ significantly, with a stronger focus on robotics and manufacturing efficiencies. Similarly, supply chain management stands to benefit from AI-driven solutions that can reduce inefficiencies and handle complex logistics beyond human capabilities.

I expect AI’s impact on the economy to be gradual but significant. By the end of this decade, its influence will become more evident in macroeconomic indicators such as productivity and growth rates. However, disparities in AI adoption may emerge, with some sectors and regions integrating AI much faster than others.

To illustrate how quickly AI can be adopted in certain fields, take AlphaFold, DeepMind’s breakthrough in protein structure prediction. Currently, 2.5 to 2.7 million biologists across 190 countries are using it. Adoption in the scientific community happened rapidly because the tool was open-source and immediately useful. However, such swift adoption does not typically occur in broader economic contexts. AI’s economic effects will likely intensify gradually over the next decade.

Southern Finance : Your book Permacrisis was published in the fall of 2023, and since then, it has been released in multiple languages. Now, more than a year later, do you believe global risks have worsened, or has the world improved?

Michael Spence: I would say the overall situation remains largely unchanged. Over the past year and a half, no developments have emerged that I would classify as either unexpected or inconsistent with our previous assessments.

We have experienced additional economic and geopolitical shocks. At the time of publication, there was already one significant global crisis. Now, there are two. Hopefully, these will be resolved in the relatively near future.

We also anticipated significant technological and scientific advancements, and these have materialized—perhaps even faster than expected. However, the fundamental economic trajectory remains the same.

The one aspect that was not widely anticipated was the magnitude of Trump’s electoral victory. Many analysts predicted a close race, but the final outcome was clear and decisive, with the Republicans securing control of both the Senate and the House.

This shift will have material consequences for many areas, including the global economy. Beyond that, however, the overall economic trends remain on track. We continue to see the evolution of global trade, supply chain diversification, and Chinese companies expanding their international presence. Some of these investments are strategic—helping Chinese firms navigate trade restrictions—but many are driven by genuine market opportunities.

From a broad perspective, there has been no drastic shift in global economic dynamics since we wrote the book. The world remains on a relatively consistent trajectory, with gradual adjustments rather than abrupt changes.

Southern Finance : In our previous conversation, you emphasized the need for emerging economies to have a stronger voice in global governance. Given the current geopolitical landscape, how do you view China’s evolving role as both a leading emerging economy and a key player in this multipolar world order?

Michael Spence: Trump’s victory provides additional clarity in this regard. The United States is expected to further disengage from multilateral agreements—a trend that was already evident in previous policy decisions, such as withdrawing from the Paris Climate Accords and the World Health Organization.

This pattern suggests that the U.S. will continue to step back from multilateral commitments, rather than reversing course. However, this does not signal the end of multilateralism. Instead, China is positioned to assume a greater leadership role, potentially along with a coalition of high-middle-income emerging economies.

While protectionist tendencies are on the rise globally, this does not necessarily mean that the world will shift to complete economic isolation. Many economies still recognize the benefits of trade and cooperation, even as they navigate national security concerns and geopolitical tensions.

During the Biden administration, although certain trade and security restrictions were implemented, they were not explicitly anti-multilateral. The U.S. occasionally acted unilaterally, but it did not seek to dismantle global economic cooperation.

The Trump administration, however, appears to have a different approach. If the current global economic system is to remain functional, China will play a crucial role in maintaining and shaping it.