PRS Geopolitics (Summer 2025): The Legality of the Trump Tariffs, Gunboat Diplomacy with Venezuela, Our New AI Models, and Recent Studies from the IMF and NBER

PRS Geopolitics

Summer 2025

The summer of 2025 is gradually ending.  In the Northern Hemisphere the evenings are getting slightly cooler, and the mornings don’t shine as bright.  Even in the US South – which had excruciatingly hot days several weeks ago – the moderating temperatures have been welcomed. The Crepe Mrytle trees around the PRS office are shedding their leaves. The skies have yet to develop the hue of the pending hurricane season. Many of our clients have returned from their holidays, while others are getting in the last couple of weeks prior to Labor Day.

However, what is not cooling down is political risk in the US. On the international trade front, on August 30^th, the US Court of Appeals for the Federal Circuit found that the broad tariffs imposed by President Trump earlier in the year were illegal as they went beyond the scope of the International Emergency Economic Powers Act (IEEPA).  Specifically, the Court ruled that while the IEEPA gives the president authority to “regulate” imports in a national emergency, it does not explicitly authorize the imposition of broad tariffs – a power traditionally reserved for Congress.

The Court largely upheld a lower court’s finding but imposed a temporal element, effectively delaying the ruling’s effect until mid-October, which will give the Trump Administration time to appeal to the Supreme Court. The president has asked the Court for an expedited ruling.

How the Court will rule is difficult to determine at this point.  There are solid arguments on both sides of the issue, ranging from a traditional, judicial deference to executive authority on issues of trade and foreign policy, to those that say the American Constitution vests the power to levy tariffs solely with Congress, and the president cannot unilaterally impose such taxes. 

However, one of the more practical issues – and we think this approach will hold sway and work its way into the legal reasoning of most of the judges– is whether the Court wants to rule in a manner that will upend existing and ongoing trade deals and put into play the associated costs of doing so.  Many countries have been negotiating with the Administration for months and have worked out reasonable accommodations.  International business must respond to these changes.

Also on PRS’ radar is the recent US attack on an alleged Venezuelan drug boat in international waters.  The Administration says the bombing of a vessel operated by the ‘Tren de Aragua’ – deemed as a foreign terrorist organization – was designed to send a message to others in the business that transporting drugs to the US will no longer be tolerated.

Yet, there is some ambiguity surrounding the attack – as well as some legal issues – that the Administration may well have to address in the coming months.  Very little information has been made public regarding the specific drugs on board and the legal basis for the strike. Indeed, on the latter, there is a body of thought that holds the assault may have violated international law, with the UN Convention on the Law of the Sea (UNCLOS) being held up, as the law generally prohibits states from interfering with vessels on the high seas. Exceptions exist, but lethal force is generally limited to self-defense or other narrow circumstances.

On a geopolitical basis, the attack comes amid an increased American military presence in the southern Caribbean and a accumulation of warships. This has heightened tensions with the Venezuelan government of Nicolás Maduro, who has accused the Trump administration of seeking regime change. 

PRS risk governance board has discussed the issue of regime change in Venezuela for some time.  During his first term, President Trump used what was labelled a “maximum pressure” campaign against Venezuela, which involved sanctions and a considerable number of public pronouncements that sounded like ousting Maduro was desired.

While the recent naval buildup suggests a return to this strategy, it should be noted that economics will likely play a significant role going forward.  A new, more US-friendly regime in Caracas could lead to the removal of sanctions and unlock substantial international financial assistance, reportedly exceeding $50 billion.  A more predictable operating environment would benefit foreign capital.  A more stable economy could help address Venezuela’s hyperinflation, food shortages, and poverty rate. If events move in this direction, it wouldn’t be surprising if the Administration cited such benefits.

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The summer months were quite productive as we made considerable progress in the development of our AI models.  We are presently engaging with select clients to perform some testing of the various platforms, which will allow us to provide some very interesting tools with which to mine the PRS data. Our new team in Montreal is very experienced and our discussions about the possibilities of the data – now and into the future – are exhilarating.  The data will be hosted at various sites around the globe, taking advantage of our presence in Paris and London.

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One of the nice items to note as the autumn months approach is that our geopolitical risk data have now surpassed the 7.5 million mark – in terms of vetted risk points – and have appeared in over 1,000 published articles and book chapters.  PRS’ CountryData Online (https://www.prsgroup.com/explore-our-products/cdo/) portal contains all the data available, where direct access is provided. The data can also be accessed via university libraries, which subscribe to the database for their users

On this score, there have been some very interesting studies of late using our data. One recent work – appeared in the National Bureau of Economic Research’s Working Paper series, looked at how innovation reacts to foreign political risk and its economic consequences.

Specifically, in a model that considers how foreign political shocks can disrupt the supply of foreign inputs, the authors show that greater political risk abroad increases domestic innovation, thereby lowering reliance on risky sourcing countries. They then combined data on sector-level technology development with time-varying measures of industry-level exposure to foreign political risk and report three sets of empirical findings.

1/ Sectors and commodities with higher exposure to foreign political risk exhibit significantly greater innovative activity. This finding holds across sectors in the US, across country-sector pairs in a global sample, and across critical minerals that are essential for modern economic activity.

2/ The response of innovation is particularly strong when risk emanates from geopolitical adversaries. This is consistent with our finding that trade restrictions are more likely to emerge between non-allies following a rise in political risk in either country.

3/ Directed innovation reduces countries’ reliance on imports from risky foreign markets. In doing so, technological change abroad amplifies the negative effects of domestic political risk on export performance.

(https://www.nber.org/system/files/working_papers/w33964/w33964.pdf)

On a related note, I’m often asked by my private clients about investment destinations and how types of country risk affecting FDI flows. This is part of the now longstanding discussion over various ‘push and pull’ factors.

The IMF’s Working Paper series has done an incredible job on this score and has done an equally admirable job of using our data to illuminate some of the specific factors.

In the Fund’s 2025 Article IV Consultation (1^st Review) of El Salvador’s Extended Fund Facility, the authors use our ICRG data to show that political and economic stability risk indicators display increasingly significant impacts on FDI trend inflows.  And that improvements in our ICRG “Law and Order” indicators have strong positive effects, generating cumulative FDI gains exceeding 0.1 percentage points of GDP in FDI trend inflows over a year. (https://www.imf.org/en/Publications/CR/Issues/2025/07/15/El-Salvador-2025-Article-IV-Consultation-First-Review-Under-the-Extended-Fund-Facility-and-568621)

Enjoy the final days of summer and thanks as always for your continued support.

CHRISTOPHER MCKEE, PHD CHIEF EXECUTIVE

Christopher McKee is PRS’ CEO and Owner. An international political economist, global investor, entrepreneur, and author, Chris received his PhD from Queen’s University (Canada) and has been involved in the field of geopolitical risk, limited recourse financing, and private sector development for the past 25 years.