The global trade war launched by Trump has already resolved into one between the two dominant actors of the world economy, the US and China. The question is posed: who holds the cards? Who will blink first? This question determines the fate of the world economy.
Trump believes that by launching extremely aggressive opening salvos in this trade war he will intimidate and shock China into making a deal. He sees tariffs as a negotiating tactic, and the bolder he acts, the better a deal (for the US) he will force China into. But he has not understood China’s strengths, nor the US’ weaknesses.
On Thursday 3 April – the day after his administration launched its trade war, so-called Liberation Day – JD Vance thought it wise to tell Fox News that, “We borrow money from Chinese peasants to buy the things those Chinese peasants manufacture”. No doubt he was playing to his base in America, but Xi Jinping also has a base in China, and that has a role to play in how China responds to US threats.
Naturally, the Chinese government seized on the opportunity, helping to spread these offensive comments around Chinese social media. Chinese people are acutely aware of the ‘Century of Humiliation’, as they rightly call it, that they suffered at the hands of arrogant western imperialists, and bristle at being called peasants. Without much effort, the Chinese government can and will rally the population along the lines of “who are these arrogant, lazy Americans to call us peasants? We will show them who the real peasants are!”
By not only launching the trade war – which already put the Chinese regime in a position of being able to blame economic pain on American imperialists – but also making such inept remarks, the Trump administration has raised China’s ‘pain threshold’ in this dramatic trade war.
The Chinese economy will feel significant pain, however. It faces being completely cut off from its largest market. It has therefore a very strong incentive to negotiate with Trump, make concessions and come to a deal. On the other hand, Xi Jinping risks losing a lot of face if he is seen to do so.
Who will win?
Yanis Varoufakis, the ‘erratic Marxist’, seems to think America has a big advantage in this trade war. Regarding Europe, he posted on 8 April that, “When you are running a $240 billion surplus with America annually, you cannot win a trade war. Full stop.” China’s trade surplus was $295 billion last year, according to Reuters. According to Varoufakis’ logic, it is therefore in a very weak position: by threatening to freeze it out of its enormous market, the US can bring China to heel.
Is it true that the country with the large trade deficit, i.e. the country that provides a large market to the other, is in the stronger bargaining position? The truth is far more complex and many sided than Varoufakis suggests, at least for China. Above all, a country with an enormous trade deficit is hardly in a position of strength generally, even if its market is decisive for the exporting country.
A trading relationship is just that – a relationship. A trading relationship such as that of the US and China, i.e. the relationship at the heart of the world economy, is a symbiotic one: each depends on the other.
China has been preparing for this moment, developing markets and relationships elsewhere, and developing more home-grown technology to increase its independence from the US. There is, however, no real alternative to the US market for China; China produces too much for it to be absorbed by the rest of the world market.
For the US, there is no alternative to Chinese manufactures; they are too cheap and too high in quality. To remove them from the US economy, as Trump is ensuring, would cause unacceptable economic damage long before any renaissance in US manufacturing took hold, if it ever did.
The logic of the tariffs is that the US can force China to concede, thanks to the US’ dominant position as the world’s largest market. But if the US is China’s largest market, that means the US market is dependent on Chinese goods. What happens to the US market if these are suddenly removed?
Many, many consumer products that Americans rely on for all manner of things, from the frivolous to the essential, will either disappear or balloon in price. The iPhone, for instance, which is made in China, would increase in price from about $1,000 to around $1,800 or even $2,000, depending on how much of a hit Apple is prepared to take. According to The Economist, an American-made iPhone could cost as much as $3,500. No wonder Trump made a late concession for smartphones!
China’s manufacturing expertise, technology, infrastructure, and skilled labour mean that there is simply no alternative supplier for manufactures, whether of finished consumer items like iPhones, or of capital goods and parts. According to Goldman Sachs, for 36 percent of the goods that the US imports from China, China is the dominant supplier, meeting over 70 percent or more of American demand.
The reverse figure is just 10 percent – i.e. only 10 percent of Chinese imports that are from the US can only be sourced from the US.
A renaissance of US manufacturing?
Now, Trump’s aim is apparently to spark a renaissance of US manufacturing, so perhaps he simply does not care that US consumers will suffer huge inflation or empty shelves in the short term, so long as over the next few years high quality manufacturing jobs return to America. If that were to happen in a big way, perhaps the US working class would not mind the temporary pain as well.
The trouble is, existing US manufacturing is heavily reliant on Chinese components. Thus, what remains of US manufacturing will suffer enormously because they will either no longer be able to get these vital components at all, or will have to pay vastly more for them, as they will be hit by tariffs. This would make these manufacturers much less competitive and as a result, many US manufacturing jobs could actually be lost – the exact opposite of the aim of these tariffs.
For instance, the Financial Times predicts that these tariffs will have the effect of making Tesla decisively less competitive than the Chinese electric vehicle manufacturer BYD. On the one hand, BYD began diversifying away from the US market after Trump’s initial restrictions on Chinese EVs during his first presidency. On the other hand, Tesla will now face the obstacle of having to pay tariffs on imported components. While the barrier on Chinese imports will protect the home market, those 25 percent costs on imported components will give it a disadvantage relative to BYD on the world market.
The reality is that modern manufacturers are generally so complex and hi-tech that returning the manufacture of all the components to the US would be very difficult indeed. It would take a very long time and a huge amount of money to train up the workers and to rebuild the technology and infrastructure. It may not be possible to do so, and even where it is, it will take much longer than Trump’s term to see results. For instance, it is estimated that for Apple to move 10 percent of its supply chain back to the US from China, it would cost no less than $30 billion and would take three years. And, if it were actually achieved, it would result in unpalatable price rises for consumers due to the higher wages in America.
These entirely US manufactured items would also be completely uncompetitive on the world stage, so the relatively small scale of US goods exports – a key part of why the US has a large trade deficit with China and other countries – would remain.
China, on the other hand, faces losing its biggest market at a time when it is beset with chronic overproduction. In many industries, China’s productive capacity alone exceeds global demand. According to Reuters, “China’s solar cell production capacity totalled 1,000 gigawatts last year, more than double global demand”. Similar situations exist in industry after industry.
China’s economic model may be very competitive, but it remains part of the same capitalist world market, and it cannot escape the limitations of that. The model is based entirely on heavily investing in industrial production so as to provide jobs and to outcompete rivals. But the end point of this process, which is now being reached, is that the world becomes flooded with Chinese products, threatening to destroy industries and jobs not just in America, but everywhere. Even Russia, which officially enjoys a friendship with China ‘without limits’, finds it necessary to put tariffs on Chinese goods to protect its own industries.
For these reasons, the Chinese economy is slowing down, jobs are drying up, and its all-important housing and construction sector is in deep crisis. China is also loaded up with debt, because this investment boom has been financed on a capitalist basis, through speculation. Trump’s massive tariffs pose a serious threat to the Chinese economy, because they mean its underlying problem – massive overproduction – will only be increased further, forcing them to either find new markets elsewhere, or to close down plants and lay off millions of workers.
If the tariffs remain in place, the US economy is, on the other hand, threatened with chronic shortages, inflation, and job losses. Neither side will ‘win’ this trade war, because these economies are two sides of a doomed capitalist system. On balance, however, China actually has the better cards, not the US. According to Arthur Kroeber in the Financial Times, the US’ “reliance on Chinese industrial inputs is three times that of China’s reliance on US components. Higher input prices are already hurting business investment.”
These shortages threaten the entire range of economic activity in the US, from toys and clothing, to rare-earths, hi-tech magnets, and anything involving electrical circuitry and processing power. Completely severing the US economy from the Chinese, as the tariffs attempt to do, would cause very serious economic damage to the US.
The other deficit
The US government has $36 trillion in debt, which is about 124 percent of its GDP. It is by far the largest debt owed in the world. As a proportion of GDP, it is also one of the highest.
This debt is closely linked to the enormous US trade deficit. Both are products of a decline in competitiveness on the world market. One reason the debt is so high is because tax intake is not high enough. The amount an economy can be taxed is relative to its strength – if profits and exports are booming, they can be taxed more.
Because US consumption is so high, relative to its production and to other capitalist economies, the US market is the number one market in the world. The US also has the world’s dominant financial monopolies and largest capital markets. Together, these mean that the US dollar is, and has for many decades been, the world’s ‘reserve currency’, representing a ‘safe haven’ for global finance.
There is an objective need in capitalism for a ‘safe haven’ from the turmoil and uncertainty of the market. Once American capitalism became dominant in the world economy, the US state was seen by capitalists as fundamentally sound – it would not default on its debts, because it was so strong economically, politically and militarily. Once it became recognised as such, its ‘safe haven’ status was reinforced further in a kind of feedback loop. Because capitalists knew that it had this status, they knew that other capitalists would continue to lend it money in confidence, which made it even less likely that it would ever have difficulty paying its debts.
This is why the US share of ‘global equity market capitalisation’, i.e. the proportion of global stocks and shares that are from the US economy, is around 65 percent, whereas its share of world GDP is just 25 percent. Why is its share of global stock markets so out of proportion with its economy? Mainly because global trade and finance needs this ‘safe haven’ and lubricant which US treasuries (i.e. federal debt bonds) and the US dollar have come to represent. But the economic fundamentals underpinning this have atrophied considerably.
This situation has also given the US government the ‘exorbitant privilege’ (as it is called) of being able to borrow far more than it would otherwise be able to, at very low interest rates. It has been able to exploit its safe haven status for a long time.
This is why US government debt is so vast. The US government has been able to live beyond its means for decades by virtue of the unique position of being the centre of global trade and the largest market in the world.
This ‘privilege’ is inextricably linked to the vast US trade deficit for these reasons. The US has essentially been borrowing from the countries that sell it goods (mostly China), and using that borrowed money to buy more goods from those same countries. This is totally unsustainable and is a central contradiction of the world economy.
This is also why holding a massive trade deficit does not mean the US has all the cards in a trade war.
The dominance of the dollar
And lo-and-behold, it appears that it was precisely this contradiction that caused Trump to scale back his ‘Liberation Day’ tariffs on most of the world last week. By imposing enormous tariffs on the rest of the world, the US was threatening its status as the financial safe haven, for a number of reasons.
It meant that capitalists could not trust in the stability and ‘openness’ of the US state. Remember that US stocks and shares were around 65 percent of the global market for them – because capitalists feel that the American economy is stable, the ‘rule of law’ is sacrosanct, i.e. the government will not suddenly carry out policies that are adverse for the capitalists’ interests, because it ‘respects’ private property so much. Suddenly, all this was threatened. For example, in the last week, big Canadian and Danish pension funds announced they are pulling out of the US market precisely due to the political volatility of the country.
The effect on the dollar, US stock markets, and the bond market “looks like good old capital flight”. Global capital was, for the first time in a very long time, not flocking to the US economy – as has always been the case previously when the capitalists faced choppy waters – but away from it. Ever since ‘Liberation Day’ the dollar has been falling in value, and it continues to slide.
Trump may desire a weaker dollar, because this would make American exports cheaper and therefore boost US manufacturing. But he does not want, and certainly should not want, the dollar to lose its status as the global reserve currency. On 30 November last year, he made it very explicit that he understands how vital it is that the dollar keeps its status, when he tweeted the following:
“The idea that the BRICS Countries are trying to move away from the Dollar while we stand by and watch is OVER. We require a commitment from these Countries that they will neither create a new BRICS Currency, nor back any other Currency to replace the mighty U.S. Dollar or, they will face 100% Tariffs, and should expect to say goodbye to selling into the wonderful U.S. Economy. They can go find another “sucker!” There is no chance that the BRICS will replace the U.S. Dollar in International Trade, and any Country that tries should wave goodbye to America.”
The dollar is not about to be replaced by some other currency as the global reserve. But it may be on the cusp of losing its position of outright dominance, and US government debt would as a result become much more expensive.
Indeed, last week, interest rates on US government debt rose at the quickest pace since the 1980s. The Japanese government was apparently selling US treasuries in large numbers, which pushes up the interest rate for the US. There is the looming threat that China may start doing the same, and it is the second biggest single holder of US debt outside of America. It may not have to actually start selling to have that effect: it may instead simply stop buying more US government debt, which in the long term would be disastrous for the US.
On Saturday 12 April, Forbes quoted a foreign exchange strategist at the Dutch multinational bank ING as saying: “The question of a potential dollar confidence crisis has now been definitively answered — we are experiencing one in full force”.
The US economy, and by extension, the world economy, has for decades been surviving on a kind of confidence trick. So long as it can keep borrowing to keep its market the centre of the world economy, it can keep borrowing to keep its market going. The moment that trick no longer works is like the moment Wile E Coyote looks down and realises he has run off the edge of a cliff. A precipitous fall ensues.
If the US can no longer keep borrowing at low interest rates, it will face a full-blown financial crisis, putting the government into default territory unless it embarks on massive austerity. And yet Trump’s programme is to launch big tax cuts in a few months time, which would put even more pressure on the deficit and would likely lead to a further spike in the interest rate the government has to pay.
A US default would in turn spark a global crisis that could quickly become a new depression, and the US would no longer have the financial tools to bail out the financial system, as in 2008. A default may well be avoided, but the means to avoid it, such as printing money, would have their own very serious consequences for the US and the world economy, such as massive inflation and a collapse in confidence in US capitalism.
Is Trump a fool?
The crisis he appears to have sparked has been lept upon by the liberals as proof that Trump has no plan, understands nothing, and has made a massive ‘unforced error’.
It was not a bizarre unforced error, but an acceleration of objective political and economic processes well under way, which reflects the dead end of capitalism in general and, in particular, the relative decline of US imperialism.
It is well known that the most ‘bipartisan’ policy in Washington is that of using tariffs and trade restrictions to hold China down. Both wings of the US ruling class are in favour of this, and Biden’s administration applied massive economic warfare onto China. It was Biden’s restrictions on exports to China that had the unintended consequence of weakening Trump’s hand in this trade war. This caused the Chinese to dedicate huge resources over the last four years to trading more with other countries and developing indigenous technology (to circumvent the restrictions on selling certain technology to China). This has had the effect of better insulating China against precisely the kind of trade war Trump is now carrying out.
Biden’s Inflation Reduction Act was also widely understood to be a form of protectionist economic warfare against Europe. It was the Biden administration that provoked war with Russia in Ukraine, part of the aim of which was to weaken Europe (especially Germany) by driving an economic wedge between it and Russia. That has now had terrible consequences for Europe but also for US imperialism, since Russia is winning that war.
US administration after US administration has used and abused the dollar’s status by applying sanctions on all of their enemies. These only work (insofar as they actually do) because of the centrality of the US market and financial institutions: when the US applies sanctions, it can rely on the compliance of businesses all over the world. If they ignore the sanctions, which it is their right to do, they will be cut off from the US market and the entire global financial system, which the US controls through SWIFT. Trump’s above-quoted threat to BRICS countries is only a more crude expression of the same tactic US governments have been using for decades.
The trouble is that the long term effect of constantly wielding sanctions as a punishment is that it eventually encourages other countries to start putting into place alternatives to the US financial system. That is why China and Russia have been developing alternative financial instruments that would allow businesses and governments to make payments that completely circumvent the US financial system.
In fact, the dollar’s dominance was already beginning to decline before Trump came back into office, and with it, the rate of interest on US government debt was going up.
As Stanford University’s Institute for Economic Policy Research pointed out:
“The value of outstanding Treasuries fell 26 percent from 2020 to 2023, one of the biggest drops since World War I. To try to stabilize the Treasuries market during the pandemic, the Fed stepped in with what Lustig calls “staggering” purchases of Treasuries. For several quarters from 2020 to 2022, the Fed bought all the long-term Treasuries the U.S. government issued. But when it stopped buying, yields surged — and prices dropped.”
Rising class anger
Trump won the election because US capitalism is in crisis. There is widespread hatred for the establishment and the status quo, and the American working class hates globalisation and the deindustrialisation it has led to. This mood has long-term objective causes and cannot be ignored. The apparently ‘rational’ and ‘sensible’ liberals have no answers to this class anger and are responsible for its rise.
Trump’s own ideas regarding trade negotiations, about which there is an enormous amount of speculation, are secondary. Trump came to power promising this angry working class a fundamental break with the policies that have led to decades of stagnant wages, deindustrialisation, indebtedness, and rising inequality.
Unlike mainstream liberal politicians, Trump is actually attempting to carry out his promises, without watering them down. If he now backs down from this trade war, all of his campaigning, his movement, his promises and the hopes he has raised, would have been for nothing. The status quo, ‘deep state’ ‘globalists’ as he calls them, would have won. The big man who tells people to ‘fight like hell’ would have capitulated at the first fight. The whole world would know that his projection of power and confidence upon which his negotiating position is based, is a bluff. So he is under enormous pressure not to do so.
However, in Xi Jinping and the Chinese economy, the ‘unstoppable force’ of Trump is meeting an immovable object. If Xi Jinping were to fold in order to regain access to the US market, he would be telling the world that China can and will be bullied. It would be giving up any claims to being an alternative power to the US in the Pacific region.
Xi Jinping’s political credibility within China is based on his ability to finally raise China up to a position to challenge the US. Nationalistic rhetoric has been promoted by his regime for some time, to give it a base of support. Preparations have long been in the works for such a confrontation with the US, and the Chinese people know this.
In China, there is a very deep feeling of humiliation at the hands of arrogant westerners. America’s actions are understood for exactly what they are: attempts by an ailing imperialist power to hold down China and keep it poor. The Chinese Communist Party has always based its credibility on claiming to be anti-imperialist (despite the fact that China is in fact now an imperialist power) and on leading China to a position of strength and independence.
If, in this context, Xi gives Trump more or less what he wants, it would seriously damage Xi’s regime, especially given that it is the Americans who have launched this trade war and are to blame. JD Vance’s above quoted comments help to give Xi a strong political hand; they help to sell the idea of temporary economic hardship inside China – which after all would be the fault of these arrogant westerners – so that China may strike a powerful blow at the enemy.
The Art of the Deal
A deal between China and America will most likely be reached eventually – there is too much at stake for it not to be. But Trump’s actions and the relative weakness of the US in this situation have raised the stakes and made it much harder to find a way to this deal without him significantly losing face.
When the US working class sees that the much hyped ‘America First’ programme means not the return of well paid jobs and “a new golden age of America” as Trump recently promised, but either a serious economic crisis or an embarrassing capitulation to China – or some combination of the two – they will be even more angry than before. To think that they will simply accept this calmly, as if waking up from a mass delusion, and return to the business-as-usual liberals, would be the greatest delusion of all.
The decline of American imperialism and the sharp crisis of capitalism this entails, means that, one way or another, the working class will have no choice but to fight for its own interests. Not ‘America First’, but ‘The Working Class First’ will be its demand.
This is the most serious trade war since the 1930s, if not ever. It indicates not the madness of Trump, but the dead end of capitalism. The world is not big enough for the imperialist powers of America and China. From being a source of growth for the world, their relationship now threatens the entire world capitalist system. There is no solution on a capitalist basis. The only way forward is to take the world economy out of the hands of the parasitic billionaires who are carving and re-carving it up between themselves, and put it in the hands of the workers of the world.
