The US is in danger of falling increasingly behind China in 2026 as the Asian giant tightens its grip on drones, battery storage, robots and manufacturing, although the No 1 risk to global stability is the US under President Donald Trump, Eurasia Group said on Monday in its closely watched annual forecast of threats, challenges and hotspots.
“It’s a time of great geopolitical uncertainty. Not because there’s imminent conflict between the two biggest powers, the United States and China – that isn’t even a top risk,” said Ian Bremmer, Eurasia Group’s president and founder.
“The United States is itself unwinding its own global order, the world’s most powerful country is in the throes of a political revolution,” he added.
Trump will continue working to dismantle any checks on his power and capture US government machinery to use against his enemies, the group said, although growing economic headwinds could see him ease his aggressive tariff policy.
China, meanwhile, will have secured more of a hold on the global economy as it moves from the world’s most fossil-fuel dependent economic system to the first “electro-state”.
The report noted that China already produces three-quarters of the world’s lithium-ion batteries, 90 per cent of its neodymium magnets and is the leader in solar panels, wind turbines, EVs and commercial drones.
As the gap between China and US producers widens, emerging countries will increasingly swing Beijing’s way as the shift from placating Trump to acquiring less expensive Chinese energy and communications infrastructure occurs.
“Expect frustration to build in Washington,” the report said, especially if China’s bet on smaller, cheaper AI models powered by its huge alternative energy investment prevails. “Washington is asking the world to buy 20th-century energy, while Beijing offers 21st-century infrastructure.”
But China’s future is far from halcyon, the report said.
China ‘faces deflationary pressures, consumer low confidence in 2026’
China’s deflationary spiral will widen in 2026, fuelled by its property crisis, industrial overcapacity and worried consumers, the group predicted, as Chinese President Xi Jinping favours political control and tech dominance over economic reform and stimulus.
“Escaping that kind of trap requires decisive action. Beijing won’t deliver it,” leading to continued high youth unemployment and social tension, it said.
Trump’s tariffs will further undercut China’s outlook as firms either reduce their prices to compete in non-US markets or spend more to transship into the US through third countries, undercutting profit margins.
China faces a “lost decade” of deepening deflation, it said. “Margins collapse, forcing even well-run firms to cut wages and jobs to stay afloat. Workers spend less. Demand weakens further, so firms cut prices again.”
Eurasia said a quarter of all listed Chinese firms are unprofitable, the highest level in 25 years.
On other fronts, China enters 2026 with 10 consecutive quarters of worsening deflation; disposable income is stalled at US$5,800 per person; and personal consumption is just 39 per cent of GDP – half the US share.
Among the other risks the group sees in 2026 include: Trump’s continued power plays in Latin America; a Europe increasingly under siege; an ongoing dragged-out conflict in Ukraine; and the expansion of Trump’s “state capitalism with American characteristics” as he encourages pay-to-play foreign relations and US government stakes in more American firms.
“Trump will face mounting pressure to show his agenda is delivering for American voters,” said Eurasia Group. “The prospect of political setbacks will push this administration to double down, not pull back.”
Other risks it sees include artificial intelligence that stifles normal social development and leads to a financial bubble as demand fails to keep up with a projected US$3 trillion in investment by 2030.
“Deliberative democracy requires informed, engaged citizens capable of independent thought. AI risks producing the opposite,” it said. But it added that policy will have a big impact on any AI-driven human dislocation and alienation.
“None of this is inevitable,” it said. “China’s government is deliberately restricting the deployment of consumer-facing, engagement-maximising AI.”
Beijing continues to face firm US military posture in Asia, Taiwan support
Unlike prior years, there was scant mention of Taiwan in the 46-page report. Eurasia made a quick mention of Beijing’s programme to develop drone swarms in any Taiwan operation.
And citing Trump’s increasingly aggressive foreign policy, it noted that US-China military tension has not eased, particularly after Washington approved a US$11.1 billion arms package to the self-governing island last month.
“Despite a detente with China on trade, the military posture in Asia hasn’t softened; Washington just sent Taipei its largest-ever arms sale package,” it said.
Beijing sees Taiwan as part of China to be reunited by force if necessary. Most countries, including the US, do not recognise Taiwan as an independent state. But Washington is opposed to any attempt to take the self-governed island by force and is committed by law to supplying it with weapons.
Eurasia’s final two risks for 2026 are a US-Mexico-Canada free trade area that languishes, creating a “zombie deal” that fuels further uncertainty in North America; and growing tension and conflict over water as the shared resource becomes increasingly contested.
The firm’s effort to see into a crystal ball follows on the heels of a tumultuous year in US-China relations that saw serial trade wars, high-stakes brinkmanship over US semiconductors and Chinese rare earth minerals and a sit-down in late October between Trump and Xi that put a wobbly floor under the downward spiral.
‘The world’s two largest economies are set to export disruption to everyone else’
This year’s outlook follows several relatively on-target predictions Eurasia made a year ago days before Trump took office, including growing global instability, eroding global institutions, weakening transatlantic ties, Trump’s concerted bid to erode the rule of law and a deterioration in US-China relations.
The broad outline of most of its 10 scenarios for the year just ended held up relatively well, although some of the group’s predictions were perhaps not as extreme as projected, particularly once the two presidents sat down in South Korea two months ago.
“The world’s two largest economies are set to export disruption to everyone else this year, short-circuiting the global recovery and accelerating geoeconomic fragmentation,” it listed as its number seven risk for 2025.
“Trump’s policy mix will also strengthen the dollar and keep US interest rates higher, increasing pressure on the rest of the world when it’s least equipped to handle it.”
In addition to its top 10 expected annual risks, Eurasia releases a few “red herrings” – eventualities that others predict but that it considers unlikely.
Eurasia said it did not buy the idea that Trump’s tariff wars in 2026 will be as globally destabilising or worse than in 2025. This follows, it said, because Trump’s economic leverage is more constrained after Beijing matched his threats blow for blow and China made clear to the transactional president its power over rare earth supply chains.
Eurasia believes the expected four meetings this year between Trump and Xi and the fact that both giants stepped back from the brink on blocking trade in chips, soybeans, rare earths should prevent free fall in 2026.
“Both sides learned from last year’s tariff war that they faced a lose-lose proposition,” the firm said. Trump “is as genuinely open to deal making with Xi Jinping as he is with American allies.” --- Report from SOUTH CHINA MORNING POST
