What’s the end game for the tariff wars?
Over the past several days, multiple reporters and others who follow my podcast and writing have asked my perspective on the current fixed-rate credit spreads. So, here’s my perspective (which should, of course, in no way be construed as investment advice).
President Trump’s 3 Economic War Fronts
In a nutshell, what I believe we are seeing right now is a part of President Trump’s bigger plan for the nation’s economy. Here’s how it breaks down:
1) The Economic War with Other Countries on Trade
The obvious front is President Trump’s renegotiation of trade around the globe. As of April 9th, President Trump has called for a 90-day pause in tariffs to give time to the reported 70+ countries that have called the White House to negotiate. Even though no deals have been struck, markets have made immediate gains on this news.
Trump appears to remain committed to driving revenue from foreign tariffs to offset tax on income and capital gains. A few days ago, the Trump team said they were receiving around $2 billion a day in tariff revenue. In negotiations, staying power is of the utmost importance. President Trump is demonstrating that he can hold on longer than his opponents, putting the cards more in his favor for negotiations. (Remember that with negotiation, the issue isn’t necessarily about doing what’s fair, but about knowing and leveraging what the other person will give.)
2) Economic War with Jerome Powell and the Fed to Lower Rates
Over the past weekend, the 10-year treasury note hit a low of 3.8%, and then skyrocketed to 4.44% on Wednesday. The 30-year had a similar trajectory, rocketing to 4.88%. This is potentially pushing (or even forcing) the hand of Jerome Powell to cut rates now. However, at the last Federal Open Market Committee (FOMC meeting), Powell said he and his colleagues are “not in a hurry” to lower interest rates. Over the past week, Powell has reiterated this message by continuing to say, in essence, “We’re going to wait and see.”
On Friday (April 4), Trump responded by again urging Powell to consider lowering rates, despite the market turmoil. “This would be a perfect time for the Fed Chairman Jerome Powell to cut interest rates…cut interest rates, Jerome, and stop playing politics!” For the Trump plan to work over the next four years, President Trump would need (not want) rates to be much lower. Lower rates unlock real estate, manufacturing, energy, and pretty much every market that President Trump is interested in right now. If the Fed and Jerome Powell keep rates higher for longer, it could stifle the economic boom the Trump team is hoping for.
3) The Economic War with China
Could Scott Bessent, the current Treasury Secretary, who broke the Bank of England with Soros and Druckenmiller back in the 90s, be trying to break China as well? China stands out as the only country to put up a retaliatory tariff. The U.S. increased its Tariff by another 50%, effective April 9, which puts the total tariff to 104% for China. As of mid-afternoon on April 9th, President Trump announced he would increase it again to a 125% tariff. China’s stock market has plummeted over the past few days in panic selling to near an all-time low.
Could this be the leverage the U.S. uses to break China’s economy? As background, we can observe that China’s economy is in a very interesting place. During Covid, China stayed closed much longer than the rest of the world, for a period of around 2 ½-3 years. Many foreign companies moved away from China and went to Vietnam and India for their manufacturing. This really hurt the Chinese economy.
Furthermore, China has demographic issues — they had a baby boomer generation, had lots of kids, then went to the one child policy that resulted in a huge drop in population for several decades. Now they’re incentivizing their population to have more kids. As a result, the country’s 20–50-year-old adults must support a very large elderly population and a growing population of kids. This is putting a huge squeeze in the middle as the age of the Chinese population and the spread of their demographics are failing them.
Additionally, any foreign players have moved away from China. They have a shrinking population, and their market returns are falling. As a result, they’ve added stimulus during the last quarter, including a 50-basis-point cut in the reserve requirement ratio (RRR), freeing up about 1 trillion yuan for new lending, and a 20-basis-point cut in the seven-day reverse repo rate. They’ve printed a ton of money in Q1 and again last week to spur their currently lagging economy.
All this shows the weakness of the current Chinese economy. Kevin O’Leary yesterday called for a 400% tariff on China because “they don’t play by the rules.” No President has stood up to China to force it to play by the rules. China has blocked many U.S. companies from competition in China, steals U.S. intellectual property, and manipulates its currency against ours.
The United States is the largest economy and consumer in the world. In the U.S., we currently consume $19.5 trillion per year. China is forecasted to consume about $5.9 trillion. The U.S. is the world’s largest consumer, at 30% of world goods, and we’re consuming at least 3x more than China. But China has about three times as many people as we have, which makes the disparity even greater. Measurements vary, but by most estimates, we consume roughly 4-9X more than a Chinese person per capita.
While we enact this economic trade war, we also put China in a tight box. We are saying, China, how much do you need us? In the U.S., we are the major consumer of the world, by a huge magnitude. As the old business adage says, the customer is always right. We are the customer of China. But we can choose to go other places. We have options. If China doesn’t want to work with us, it might be a little more expensive, but we can go to Mexico, we can go to Indonesia, we can go to Vietnam.
But China doesn’t have that option. There could conceivably be an end game plan to really put pressure on China, to put this trade wall up in a way that either forces them to work with us and be true partners, or to literally crack the Chinese economy.
A steep trade war with China may cripple their economy. If people in China don’t have jobs, income, or food, they will be forced to revolt and take down the Communist Chinese Government. Bessent could be trying to break the economy of China just like he did to the Bank of England nearly three decades ago.
As of April 9th, it appears that the 104% tariff (now moving to 125% tariff) on China has potentially forced China into dumping their U.S. Bonds (which they are a large holder of), spiking the yield rates on almost all treasuries. They could be doing this to hurt the U.S. by hurting the bond market, or what I believe is more probable is that they are dumping these bonds to prop up their own currency. The Yuan vs the U.S. dollar hit an 18-month low last week, spiking down before recovering. China is feeling the squeeze much more than the U.S. is, and they are going to extraordinary measures to prop up their currency and economy.
What’s the End Game?
If Scott Bessent is truly trying to break the Chinese economy (which he knows a thing or two about in the case of the Bank of England), it leaves China with a few options:
- China renegotiates and drastically changes the rules of how it pegs its currency and trades with foreign partners. They allow our companies to work and sell in China with no barriers (think Facebook, Google, YouTube) that currently can’t be in China. Furthermore, China shows strong protocols to protect U.S. Intellectual property, which they have stolen for years.
- New leadership in the Chinese Government. After months of currency and economic collapse, people and officials could rise up in a coup to overthrow the communist party and Xi as its leader, bringing new leadership and a chance for a new order of trade and government.
- China is backed into a corner economically and uses military action. Economic wars often precede physical wars. There is a scenario where China elects to lash out (like many wars have started in the past) because they have no other option. There are many different scenarios on how this would play out, but with the current data we have, the U.S. military per year spends more money on military defense than the next 10 countries combined (including China). I don’t believe the Trump team wants this outcome, but this could be a possibility.
If there’s someone on earth that has the power to crack the Chinese economy, it’s the United States, with President Trump and, more importantly, Scott Bessent (the man who cracked the Bank of England). They would be the ones to do it.
