Rebalancing Bilateral Trade or Reordering Global Production?

The latest regulatory developments on economic security & geoeconomics

By Paul Nadeau, Visiting Research Fellow, Institute of Geoeconomics (IOG)

Treasury Sanctions Hamas Military Wing: On October 2, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) designated a member of Hamas’s military wing, along with two individuals and two purported charities they operate in France, for their roles in a network that moved more than $2 million to Hamas through charitable fronts and cryptocurrency. Additionally, the U.S. Department of Justice indicted the Hamas member and three U.S. residents who donated to the network.

Japan Expands Russia Sanctions: On October 3, Japan imposed new sanctions on Russia, including its first-ever vessel sanctions, banning the provision of certain services to 35 vessels in the Russian shadow fleet. Japan also expanded its asset-freeze list to include 33 entities and nine individuals linked to Russia’s military sector, including organizations involved in helping Russia evade financial sanctions through the use of cryptocurrency, and four entities in the United Arab Emirates and Turkey that were found to have helped Russia evade sanctions.

OFAC Updates, Cleans Entity List: On October 5, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) removed 125 individuals and entities from its sanctions lists, including deceased individuals, defunct companies, and entries lacking sufficient identifying information, and updated 22 entries to improve compliance screening in the third round of its sanctions modernization effort.

Treasury Applies First Fines Under New Outbound Investment Rules: On October 7, the U.S. Treasury Department issued its first penalty under the Outbound Investment Security Program (OISP) against a global venture capital firm for failing to submit a required notification of an investment by its controlled foreign entity into a Chinese embodied AI company. The OISP, which became effective on January 2, 2025, currently requires notification to Treasury of certain types of investments and prohibits certain other types of investments by U.S. persons into entities in or connected to the People’s Republic of China, the Special Administrative Region of Hong Kong, and the Special Administrative Region of Macau that are engaged in certain activities in the quantum computing, artificial intelligence, and semiconductor sectors.

U.S. Judge Allows Groups of Importers to Apply for IEEPA Refunds: On October 8, a judge on the U.S. Court of International Trade (CIT) certified a class of importers seeking refunds for tariffs imposed under the International Economic Emergency Powers Act (IEEPA) that was overturned by the U.S. Supreme Court in February. The decision allows companies that have not filed litigation for refunds pursue them together instead of each company filing an individual lawsuit, but they still need a separate ruling ordering U.S. Customs and Border Protection (CBP) to repay them. The U.S. Department of Justice is expected to appeal CIT’s certification and will likely challenge any refund order at the U.S. Court of Appeals for the Federal Circuit, delaying the payout of any refunds.

UK Expands Russia Sanctions: On October 8, the United Kingdom’s Foreign, Commonwealth, and Development Office sanctioned 38 targets, including Russian oil companies, shadow fleet tankers, suppliers of goods for the Russian war effort, and cryptocurrency exchanges and payment platforms suspected of aiding Russian sanctions evasion.

U.S. Sanctions ICC: On October 9, the U.S. State Department announced that it had sanctioned the International Criminal Court in response to the Court’s efforts related to the prosecution of U.S. citizens.

U.S. Launches Investigation into IP Abuses: On October 9, the U.S. International Trade Commission (ITC) announced that it had launched an investigation under Section 337 of the U.S. Tariff Act of 1930 into certain vertical power delivery systems, related components, and computing devices incorporating such systems. The investigation covers more than 20 companies from China, Germany, Taiwan, and the United States. Section 337 investigations consider issues of intellectual property infringement and are initiated following a complaint by a U.S. firm, in this case by Massachusetts-based power technology company Vicor Corp. Investigations typically take 12-16 months to complete and the ITC can issue exclusion and cease-and-desist orders restricting the affected products from entering or being sold in the United States at the conclusion of the investigation.

EU Makes Major Expansion of Russia Sanctions: On October 12, the European Union adopted additional restrictive measures against 1,569 individuals and entities in Russia’s military-industrial complex, including missiles, UAVs and aircrafts, making the measures the EU’s largest-ever package of listings targeting Russia so far and the total number of listings under the sanctions regime to almost 4600. In a separate announcement on October 12, the European Council announced that it had adopted restrictive measures against 77 individuals who were involved in the elections for the Russian State Duma held in September 2026 in Russian-occupied territories of Ukraine. In a third announcement on October 12, the European Council announced that the EU had designated three individuals and four entities for activities linked to the growing military and economic cooperation between North Korea and Russia, including the deployment of North Korean workers in Russia, commercial and industrial cooperation, and the “arms-for-oil” trade.

UK Adds Iran Sanctions: On October 12, the United Kingdom’s Foreign, Commonwealth, and Development Office announced that it had sanctioned two individuals for their roles in facilitating or engaging in hostile activity on behalf of the Iranian regime, with the clear intent of threatening, planning, or conducting attacks overseas.

U.S. Expands Sanctions on Drug Cartels: On October 13, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) sanctioned four individuals and 11 entities connected to the Mexico-based Cartel del Noreste, including individuals and businesses involved in quarter horse racing, construction, trucking, and the oil and gas sector.

Canada Updates “Deemed Ownership” Provisions: On October 13, the Canadian government announced that it had updated its sanctions guidance on its “deemed ownership” provisions to align its policy with the EU and the U.S., clarifying that total aggregate ownership or control by all listed persons together should be considered.

Treasury Fines Bank of America for Violating AML and Sanctions Laws: On October 13, the U.S. Treasury Department announced enforcement actions imposing more than $1.21 billion in penalties against Bank of America (BoA), a U.S. bank, for violations of anti-money laundering (AML) rules and sanctions laws. More specifically, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) assessed a $1.2 billion penalty for the BoA’s failure to mitigate and report priority national security risks, including Chinese money laundering networks and illicit finance along the southwest border, the Treasury Department’s Office of the Comptroller of the Currency (OCC) assessed a $750 million civil money penalty for BoA’s deficient and ineffective BSA/AML (anti-money laundering) compliance program, and the Treasury Department’s Office of Foreign Assets Control (OFAC) announced an $11.6 million settlement agreement with BoA over apparent violations of numerous sanctions programs, including on Iran, Russia, narcotics, and global terrorism.

U.S. Sanctions DPRK Cyber Fraudsters: On October 13, the U.S. Justice Department announced coordinated actions against the North Korean government’s schemes to fund its regime through remote IT work for U.S. companies, including an indictment, two arrests, searches of laptop farms, and seizures of approximately 187 computer devices.

New U.S.-Japan Investment Project Announced: On October 15, GlobalFoundries, a New York-based semiconductor firm, announced that Japan will invest up to $21 billion in two chip factories in New York state that will be jointly owned by the U.S. government (taking a 4 percent stake) and Japanese interests, and operated by GlobalFoundries. The factories will make so-called “essential chips” which are not as high-end as advanced semiconductors but essential for vehicles, industrial equipment and communications gear.  The announcement is part of Japan’s agreement to invest $550 billion in the United States in exchange for the United States lowering tariffs on Japanese cars and other imports from 25 percent to 15 percent.

EU Targets Sanctions Circumvention: On October 15, the European Council adopted restrictive measures against three individuals and nine entities involved in the import of sanctioned goods to Russia and in the circumvention of EU sanctions related to oil and financial transactions.

President Trump Waives New Russia Sanctions; Final Decision Forthcoming: On October 16, U.S. President Donald Trump signed an executive order waiving tariffs on Russia under the Lindsey O. Graham Sanctioning Russia and Iran Act of 2026 which had been signed in law in September and was set to take effect on October 18. U.S. Secretary of State Marco Rubio said on October 17 that Trump would take up to 60 days to consider the economic impact of the bill. The announcement comes after an October 9 agreement for the United States to purchase over 300,000 metric tons of diesel from Russia which had followed the issuance of a temporary license from the U.S. Treasury Department on October 9 authorizing transactions involving Russian diesel through April 7, 2027.

Operation Economic Outcast Updates:
・On October 5, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) issued an alert warning foreign financial institutions that they could be sanctioned without advance notice for continuing to transact with Iran’s financial sector as part of Operation Economic Outcast.

・On October 8, the U.S. Treasury Department’s Office of Foreign Assets Control (OFAC) announced that it had sanctioned a network of shadow fleet tankers and associated companies that the Iranian regime relies on to move billions of dollars’ worth of petroleum and petroleum products to foreign markets. In a concurrent announcement on the same day, the U.S. State Department sanctioned 10 entities, six individuals, and five vessels involved in the trade of Iranian-origin petroleum or petrochemical products.

・On October 15, the U.S. Treasury Department sanctioned an Iraqi bank that supports Iran’s proxy militia groups, as well as offshore banks and shadow financiers that have moved hundreds of millions of dollars through shell companies and foreign‑exchange specialists across the Middle East and Asia. In a concurrent announcement, the U.S. State Department designated Cuba-based Banco Internacional de Comercio S.A. (BICSA) for operating in or having operated in the financial services sector of the Cuban economy, and for having provided services to the designated Iran-based Karafarin Bank since at least 2022.

Analysis: Rebalancing Bilateral Trade or Reordering Global Production?

By Andrew Capistrano, Visiting Research Fellow, Institute of Geoeconomics (IOG)

Eighteen months after Trump announced his “Liberation Day” tariffs, the global trading system is still adjusting to the disruption. It might therefore be worth taking stock of what has changed, and how far the tariff policy has advanced the Trump administration’s stated aims. Of its several rationales, two were most relevant to trade issues: reducing US bilateral trade deficits and rebuilding domestic capacity in strategic industries. Bilateral tariffs, so the logic goes, could advance both aims, changing the trade ledger while also shifting the geography of production. But a policy organized around US bilateral balances has had effects that extend across the global trading system.

Both aims—and Trump’s bilateral logic—can best be understood against the backdrop of the persistent US trade deficit with China and US reliance on Chinese manufacturing supply chains, which together contributed to the erosion of the US industrial base. Those concerns have become more acute as weak domestic demand and excess capacity in China have made exports increasingly essential to its growth model. However, by making access to US demand more costly, US tariffs force Chinese producers to find demand elsewhere, most notably in Europe. This year, the EU’s goods deficit with China exceeded €1 billion a day, raising fears that Chinese import competition was accelerating European deindustrialization. The recent push for an EU “kill switch” against unfair trading practices is the clearest sign of a rapid hardening of the EU’s position. Still, Europe’s challenge is but one example of the strain confronting the global trading system; the wider effects on external balances and the geography of production are still unfolding.

So is this what “rebalancing trade” looks like? The answer depends on which of the administration’s two aims one assesses. The first could be called “ledger rebalancing”: changes in recorded trade balances, whether bilateral or aggregate. The second could be called “geoeconomic rebalancing”: changes in where strategic manufacturing capacity is located, who owns it, and who controls essential inputs. The two can coincide, with ledger rebalancing clearest at the bilateral level, while geoeconomic rebalancing is partial and harder to measure. Neither, however, is sufficient to durably rebalance the persistent surpluses and deficits across the global trading system. That kind of deeper adjustment presents a collective-action problem that bilateral tariffs are ill-suited to solve.

In short, US bilateral tariffs can initiate adjustment across the wider system, but cannot determine where the pressure lands or resolve global imbalances alone.

On ledger rebalancing, the shift is visible. From January through August 2026, the US goods deficit with China was $109.6 billion, down from $145.9 billion in the same period of 2025. But meanwhile, the US deficit with Mexico rose from $128.6 billion to $155.9 billion, and with Vietnam from $113.1 billion to $163.9 billion. These nominal bilateral figures do not measure domestic value added and span a volatile period of tariff rate changes and import frontloading. The pattern is nonetheless clear: the deficit with China narrowed as those with connector economies widened.

In 2025, this primarily redistributed the ledger: the bilateral deficit with China fell sharply while the overall US goods deficit reached a record $1.24 trillion. The 2026 figures offer stronger evidence of aggregate improvement: the broader goods-and-services deficit declined 19.9% year-on-year. Bilateral ledger rebalancing is therefore occurring, with signs pointing to possible near-term aggregate rebalancing as well.

Yet aggregate improvement in the US can coexist with widening pressure elsewhere. Recent Chinese trade data show exports surging across advanced and emerging markets—almost everywhere except the US—indicating that China’s exports are being redirected rather than its growth model rebalanced. The result is wider pressure on trade balances and industries across the global trading system.

On geoeconomic rebalancing, however, the evidence is harder to assess because it cannot be read directly from bilateral trade figures. Some production has moved from China to Mexico and Vietnam, but its final export location does not reveal who owns capacity, adds value, or controls essential inputs. A shipment may be rerouted with little processing, a Chinese company may establish a factory abroad, or a local or foreign firm may relocate production, add substantial domestic value, and continue to rely on Chinese components. The same change in the ledger can therefore conceal very different changes in the production map.

In this context, gross trade can connect the ledger to production. Federal Reserve studies of Trump’s first-term tariffs on China find evidence of both trade diversion and production relocation through Mexico and Vietnam, while Chinese ownership and input links remained present in segments of the resulting supply chains. Such fragmentation can leave headline trade surprisingly resilient because gross statistics record every cross-border transaction along a product’s route without revealing where value and control reside. If a good once shipped directly from China to the US is instead assembled in Vietnam using Chinese components, the data record both the components entering Vietnam and the finished export to the US. The additional border crossing adds to measured global trade even if final US demand is unchanged, while shifting part of the recorded US deficit from China to Vietnam. Yet Chinese inputs may remain embedded in the final product, and Vietnam may contribute anything from limited assembly to substantial domestic value. Longer supply chains can therefore expand gross trade and rearrange bilateral ledgers without equivalently relocating value added or productive control.

From a US perspective, shifting production to Mexico or Vietnam may retain Chinese inputs and sacrifice efficiency, yet it might still be considered geoeconomic rebalancing—by reducing concentration inside a major rival, establishing alternative manufacturing nodes, and creating opportunities to diversify inputs. The 2025 National Security Strategy reflects this logic, promoting Western Hemisphere supply chains while warning that intermediated goods and Chinese-built factories can perpetuate dependence. Production in these economies also gives Washington greater influence over the terms of market access than it has vis-à-vis China, but one must conclude that geoeconomic rebalancing remains far from complete.

Canada provides a contrasting example of what happens when the US pursues geoeconomic rebalancing in narrowly national rather than regional terms. Tariffs on Canadian steel and autos, combined with uncertainty over whether USMCA will remain a trilateral framework, threaten an industrial base deeply integrated with that of the US. Canada is consequently scrambling to diversify from its dependence on US demand through China, Europe, and other markets, possibly even through associate membership in the EU.

In ledger terms, diversification could reduce Canada’s reliance on a single export market; geoeconomically, however, it forces choices among domestic industries. The terms of Canada’s partial rapprochement with China capture the tradeoff: tariffs on a quota of Chinese EVs were lowered in exchange for reduced Chinese barriers to Canadian agricultural exports, while tariffs on Chinese steel remained. The arrangement offers relief to farmers but exposes automakers to greater competition, while continued steel protection limits broader accommodation with China. Nor is Europe a straightforward alternative. Like Canada and China, the EU is seeking external demand as access to the US market becomes less certain, but it is also hardening against Chinese import pressure just as Canada selectively eases its trade restrictions. Trade among the three may therefore diversify their individual ledgers, but it cannot by itself replace US demand for all three. Canada thus shows how a US-centered production strategy can push allies toward partners with whom their interests only partly align.

The EU’s challenge, in turn, shows how adjustment pressure can travel across the system and turn a ledger problem into a production problem: its widening deficit with China is concentrated in manufactured goods that compete with established European capacity, even as European producers depend on Chinese components and critical materials. This might explain why the EU’s response spans both forms of rebalancing. The hybrid-vehicle understanding and proposals for stronger trade defenses seek to manage Chinese import pressure and the bilateral ledger; the Industrial Accelerator Act, local-content requirements, and efforts to secure critical inputs instead seek to preserve capacity and influence where strategic goods are made. Germany’s movement toward the stronger position long favored by France suggests that concern about its industrial base is overcoming its previous caution on trade restrictions, and EC President von der Leyen’s endorsement of the Franco-German agenda indicates that this shift is becoming EU policy. These measures constitute the EU’s emerging approach to ledger and geoeconomic rebalancing.

There is a bit of irony in how the EU arrived at this position. The US organized “Liberation Day” around bilateral tariffs at a time when Europe and other partners had little appetite for a common effort to confront China’s growing surplus. By restricting Chinese access to US demand, the policy helped intensify the pressure that later brought Europe closer to the US diagnosis; but by targeting the EU as well, it made coordinated action more difficult. The US and China have now extended their tariff truce just as Europe is adopting stronger defenses against Chinese import pressure.

The reversal becomes more intelligible through the two forms of rebalancing. A smaller bilateral deficit with China allows Trump to point to progress on the ledger, while China’s leverage over critical minerals gives the US reason to preserve room for negotiation. Relocating productive capacity across the supply chain—from upstream inputs to downstream manufacturing—will take years, so the tariff pause can buy time for geoeconomic adjustment. Europe is at a different point in the process: it is beginning to manage Chinese import pressure and protect its production base, but could face the same critical-minerals leverage if its trade measures truly threaten Chinese exports.

Although a coordinated US-EU approach would carry greater weight, the two are acting on different timetables without a common strategy to manage China’s export surge. The diagnosis has converged more than the strategy: trade pressure has propagated systemically, while the policy response remains bilateral.

A year and a half after “Liberation Day”, the bilateral ledger is changing faster than global production. It seems the most defensible conclusion is neither that tariffs have had no effect nor that Trump is on track to rebalance the global trading system. Measured against the administration’s two aims, the bilateral deficit with China has narrowed, but the US continues to run a large overall trade deficit. Tariffs have also influenced investment, shifted the burden of absorbing China’s surpluses, and forced other governments to reconsider their industrial positions. Yet these shifts will only amount to durable geoeconomic rebalancing if alternative manufacturing hubs increase local value added and reduce US dependencies on Chinese-owned capacity and essential inputs.

Trade rebalancing, after all, is not a single outcome. It can mean changes in bilateral or aggregate balances, a geoeconomic reordering of strategic production and ownership, or what could be called “systemic rebalancing”: durable adjustment across major economies in the saving, investment, production, and consumption patterns that generate persistent current-account imbalances. Bilateral tariffs allow the US to act unilaterally and can set wider adjustment across the global trading system in motion. But unless major surplus and deficit economies alter those underlying patterns in parallel, unilateral measures may redistribute the pressure without resolving the imbalance.

Indeed, because trade balances systemically, no country can complete that rebalancing alone.

(Photo Credit: Steve Travelguide / Shutterstock)

Disclaimer: The views expressed in this IOG Economic Intelligence Report do not necessarily reflect
those of the API, the Institute of Geoeconomics (IOG) or any other organizations to which the author belongs.

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