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Geopolitics • Middle-Class Economics • U.S., Europe, Latin America

What Will Another Year of Geopolitical Uncertainties Mean for the Middle Class?

A nonpartisan, evidence-based look at how global instability can affect prices, wages, credit conditions, and public budgets—and why reasonable analysts disagree about the size of those effects.

Reading time: ~10–12 minutes • Written for an informed general audience

Why this question keeps returning

Middle-class households rarely experience geopolitics as geopolitics. They experience it as second-order effects: a utility bill that stays elevated, a delayed replacement part that becomes more expensive, an employer that pauses hiring, or a government budget that suddenly has less room for public services and tax relief. The core question for 2026 is not whether geopolitical risk exists—it clearly does—but whether it will materially shape middle-class living standards across the United States, Europe, and Latin America, and how large that influence is compared with domestic forces such as housing supply, labor markets, healthcare pricing, and national fiscal and monetary policy.

This essay lays out the main arguments on both sides. Proponents argue that geopolitical uncertainty is now structurally embedded in global trade, energy, and security spending in ways that will continue to influence prices, jobs, and public budgets. Skeptics argue that the economic effects are frequently overstated, uneven, and often dominated by domestic constraints—and that economies and firms adapt more quickly than headlines imply. Where credible figures exist, they are included; where they do not, uncertainty is made explicit.

What “geopolitical uncertainty” means in economic terms

In economic terms, geopolitical uncertainty refers to heightened unpredictability in cross-border relations that affects the rules of trade, investment, security, and mobility. It includes wars and conflicts, but also sanctions, tariffs, export controls, maritime security risks, cyber disruption, and strategic industrial policy. The economic relevance is not the existence of international tension per se, but whether it changes costs, delays, prices, credit availability, or the allocation of public spending.

How a headline becomes a household cost

Geopolitical risk typically reaches middle-class households through four transmission channels.

1) Shipping and trade costs

Global supply chains remain heavily dependent on maritime routes. When a key corridor becomes risky, shipping lines may reroute, adding time and fuel costs and increasing insurance premiums. UNCTAD reported that vessel rerouting pushed global ton-miles (distance traveled per ton of cargo) to a record 6% increase in 2024, and that by May 2025 tonnage through the Suez Canal was still about 70% below 2023 levels—evidence of sustained avoidance of that route.

The IMF noted that the Suez Canal normally carries about 15% of global maritime trade volume, and that diversions around the Cape of Good Hope increased delivery times by 10 days or more on average during the Red Sea disruption period.

2) Energy markets

Oil and gas markets are global, and energy costs feed into transport, utilities, and input prices. UNCTAD also highlights the Strait of Hormuz as a key exposure point, through which about 11% of global trade and roughly one-third of seaborne oil pass.¹ Even when energy prices are not spiking, the risk of disruption can influence pricing, shipping costs, and business planning.

3) Financial conditions and confidence

Uncertainty can tighten financial conditions if lenders and investors demand higher compensation for risk or if central banks remain cautious about inflation re-accelerating. For the middle class, this channel matters because borrowing costs—mortgages, auto loans, revolving credit—are among the most consequential “prices” households face each month.

4) Public budgets and policy trade-offs

Security concerns can shift public priorities toward defense, resilience, and border management. SIPRI estimates that world military expenditure rose to $2.718 trillion in 2024, a 9.4% real-terms increase from 2023—its steepest year-on-year rise since at least 1988.³ NATO reports that European Allies and Canada increased collective defense investment to 2.02% of combined GDP in 2024 (more than USD 482 billion in 2021 prices), and that in 2025 all Allies are expected to meet or exceed 2% of GDP.

These channels are widely recognized. The debate is about magnitude, persistence, and distribution: how often these forces meaningfully change middle-class living standards, and for whom.

The proponent case: why impacts could be material

Proponents generally argue that geopolitical uncertainty has become a structural feature of the world economy, not a rare disruption. They emphasize persistence (not merely shock), the costs of mitigation, and the limited financial slack of many middle-income households.

Persistent shipping disruption can create ongoing costs

Proponents point to evidence that rerouting has not been purely temporary. UNCTAD’s report that Suez tonnage was still about 70% below 2023 levels by May 2025 suggests that avoidance can persist even after the initial wave of incidents.¹ They also emphasize that “cost” is not only freight rates: it includes delays, inventory strategies, and higher insurance costs that can flow into pricing and availability.

On insurance, Reuters reported in March 2024 that war-risk premiums for Red Sea voyages were around 1% of a ship’s value for weeks, compared with around 0.5% before the attacks, with discounts varying by underwriter and risk profile.

Trade policy volatility can raise costs and uncertainty

Another proponent claim is that geopolitical competition increasingly operates through tariffs, export controls, and industrial policy. A frequently cited empirical benchmark is research on the 2018 U.S. tariff episode. Amiti, Redding, and Weinstein report that the incidence of tariffs fell on domestic consumers, with a reduction in U.S. real income of $1.4 billion per month by the end of 2018.

Fragmentation and relocalization can be costly in scenario studies

Proponents also cite institutional scenario work suggesting that deeper fragmentation could reduce long-run output. The IMF has noted that the longer-term cost of trade fragmentation could range from 0.2% of global output in a limited scenario to nearly 7% in a severe scenario, with larger losses possible for some countries if technological decoupling is added.⁷ The OECD reports modelling in which relocalization efforts could decrease global trade by over 18% and reduce global real GDP by more than 5%, without consistently improving resilience (and increasing GDP volatility in more than half the economies modelled).

These figures are not forecasts; they are scenario results. Proponents argue they still matter because they indicate the direction and potential scale of costs if policy trends intensify.

Rising security spending reshapes fiscal choices

With military spending at historically high levels and defense-investment targets increasingly met, proponents argue that fiscal trade-offs could be more persistent than in the past decade. SIPRI’s documented rise in global spending and NATO’s statements about collective investment levels are cited as evidence that security is not a short-lived budget line item.

The skeptic case: why impacts may be overstated

Skeptics generally accept the transmission channels but argue that pass-through is often limited, adaptation is faster than assumed, and domestic policy choices usually dominate middle-class living standards.

Not every shock becomes sustained household inflation

One skeptical point is that shipping and insurance costs are only one component of final prices, and firms may absorb costs or substitute suppliers. Even in energy, large spikes can ease. Eurostat reported that EU household gas prices fell 8.1% in the first half of 2025 (to €11.43 per 100 kWh), and that household electricity prices were broadly stable at €28.72 per 100 kWh (a 0.5% decrease) compared with the second half of 2024—though still above pre-2022 levels.

Skeptics use this as a reminder that the economic footprint of geopolitics can vary substantially over time and across categories, and that extrapolating from worst moments may mislead.

Adaptation can blunt marginal damage

Firms have incentives to adapt: reroute shipping, diversify suppliers, adjust inventories, redesign products. The IMF’s description of the Red Sea shock emphasizes rapid diversion of routes, even as delivery times rose by 10 days or more on average.² Skeptics argue the relevant question is often the marginal effect of “another year” of risk relative to an already-adapted baseline.

Domestic constraints often dominate middle-class outcomes

Skeptics emphasize that the largest pressures on middle-class living standards are frequently domestic: housing supply constraints, healthcare pricing, labor-market institutions, tax and benefit design, and market competition. In this view, geopolitics may amplify costs, but it is rarely the principal driver of whether a household can afford rent, obtain healthcare, or build savings.

Strategic spending and industrial policy can create winners as well as losers

Skeptics also note that responses to insecurity—industrial investment, defense procurement, infrastructure and resilience spending—can generate jobs and demand in certain sectors and regions. The distribution is uneven: benefits may be concentrated while costs are diffuse. That unevenness can complicate claims about “the middle class” as a single, uniform economic actor.

Regional lens: U.S., Europe, Latin America

Exposure differs across regions, even when the same global forces are at work.

United States

In the U.S., the middle class is especially sensitive to borrowing costs and to policy-driven price effects on tradable goods. Tariff research is often central to debate because it provides a concrete empirical benchmark: the 2018 episode is associated with measurable welfare costs borne primarily by domestic consumers.

Europe

Europe’s exposure has been closely tied to energy security and fiscal reallocation toward defense. Recent EU household energy price data show relative stabilization in early 2025, but at levels still described as above pre-2022 norms—consistent with the idea that geopolitics can shift baselines even when acute spikes subside.  NATO’s documentation of higher collective defense investment underscores the fiscal dimension.⁴

Latin America

In many Latin American economies, vulnerability is often amplified by external finance conditions, currency dynamics, and food-price sensitivity. Remittances can be an important stabilizer for households: the Inter-American Development Bank projected that remittances to Latin America and the Caribbean would reach $161 billion in 2024 (a 5% increase versus 2023).  Food inflation remains elevated in many low- and middle-income countries globally; the World Bank reported that in available August and November 2025 data, domestic food price inflation was above 5% in 45% of low-income countries and 43.5% of lower-middle-income countries (shares vary by update and dataset coverage).

Facts, estimates, and uncertainties

A careful assessment of “another year of uncertainty” benefits from separating three layers of knowledge.

Established facts (documented recent evidence)

Recent evidence shows persistent rerouting of maritime trade, with longer delivery times during disruption periods and sustained reductions in certain transit volumes. It also shows historically high levels of global military spending and growing compliance with defense-investment targets in Europe and allied states.

Credible estimates (scenario-dependent)

Institutional scenario analyses suggest potentially large long-run costs from severe fragmentation or aggressive relocalization, but these figures are contingent on policy choices and the degree of actual separation. The IMF’s 0.2% to nearly 7% range, and the OECD’s modelling of >18% trade and >5% GDP reductions under relocalization, should be read as conditional scenarios rather than forecasts.

Uncertainties (not reliably predictable)

The timing and severity of shipping-route risks, the direction of energy markets, and the policy decisions that determine fiscal trade-offs are all uncertain. Even when incidents slow, risk premia may persist, and when markets normalize, they may do so faster than expected. This uncertainty is a central reason credible analysts disagree about how much “another year” will matter for households.

Conclusion: a cautious synthesis

The most defensible conclusion is neither complacent nor alarmist. The proponent case is strongest where data clearly show active transmission channels—maritime rerouting and extended delivery times; elevated war-risk insurance during periods of escalation; rising defense spending and shifting fiscal priorities; and measurable welfare losses in documented tariff episodes.

The skeptic case is strongest where evidence supports partial normalization and adaptation, and where domestic constraints plausibly dominate living standards. The recent stabilization (though not full normalization) of EU household energy prices illustrates that geopolitically linked pressures can ease and that baselines can shift without constant escalation.

For the middle class across the U.S., Europe, and Latin America, the cautious expectation is a higher baseline of volatility with uneven effects—sharp in certain categories and places, muted in others—interacting with domestic affordability pressures that remain central to household well-being.

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