Comment w/c 7th April 2025

‘The United States cannot just go on soaking up everyone's excess production in the form of global imports and Treasury bonds’

Sub-heading in The Times for article by Juliet Samuel

This quotation bears out our commentary on 10^th February called, ‘The Consequences of Currency Manipulation’; but, as we pointed out at the time, the massive U.S. trade imbalance has been a chronic issue for the world's economy going back over several decades. It's been made all the more acute because the U.S. dollar is (currently) the world's reserve currency, and therefore contains a bias towards over-valuation.

However we all know that, if you try to resolve an endemic problem which has built up over decades in just a few weeks, it can cause major, and potentially disastrous, disruption.

On 11^th November our commentary ‘Walking into the Unknown’, shortly after the U.S. election, explained the root cause: the sheer scale of U.S. debt, then standing at $35 trillion but still climbing fast.

If implemented over a period of time during which economies and businesses could adjust to align with a new trade strategy, tariff alignment could help to keep the pressure for change in a controlled way. However, as we've said in the past, democracy’s Achilles’ Heel is short-termism, and Trump's only got three and a half years in the hot seat (even if he thinks he might get longer).

so — it's Everything, Everywhere — All at once: and chaos is upon us.    

The Provost of King’s College Cambridge Gillian Tett set out the overall picture very clearly on last Saturday’s Today programme:

• The Goal: to ‘Make America Great Again’
• The Strategy: to reset the huge trade imbalances; and
• The Tactics: the raft of tariff announcements made last Wednesday.

She pointed out that the tariff changes should be seen as a means to an end, but not the end in itself.

The problem is that all the bravado in the White House Rose Garden totally ignored the massive indebtedness to which the United States is exposed, and which cannot be dispensed with ‘Executive Orders’.

The proportion of foreign-owned debt was 23% in 2024, somewhat lower than the 33.9% level ten years earlier, but the overall level was still standing at $8 trillion. Japan and China are the two largest foreign holders, and they have been for the past twenty years: now, with $1.1 trillion and $0.75 trillion respectively. However, Chinese exposure has more than halved over the past ten years, and that may be significant.

All other countries now account for $5.8 trillion, with the United Kingdom exposure standing at $0.69 trillion, only just behind China. The European Union exposure is $0.37 trillion.

It's interesting to compare and contrast these levels with the import tariffs which were applied last week:

It's unlikely that Japan, the European Union and the United Kingdom would take aggressive action in response to the tariff announcements last week, but China has already done so with their 34% tariff on U.S. imports and by placing barriers on the export of rare earth materials. With Chinese holding of U.S. debt reduced from $1.3 trillion to $749 billion over the past ten years, they are less exposed to a collapse of confidence in the U.S. dollar. As the website Investopedia explains, the old ‘Mexican standoff’ (note: this refers to the metaphor, not the country!) may no longer be strong enough to deter an attempt by China, as the lead country in the BRICS group, from seizing the opportunity for the Renminbi to take top spot as the world's reserve currency.

If this were to happen, the consequences could be every bit as challenging as nearly one hundred years ago as the world entered the great depression. The chances of recession are already estimated at 60%, but a collapsing U.S. dollar could easily drive this over the edge to force mass unemployment and poverty across the United States, before manufacturing businesses have the chance to establish new business operations in America. We should also bear in mind that not only would this take time, but also the extent of automation in their new factories will be very significant, thus reducing the potential of further employment.

As if to underpin these warnings Jesse Norman MP, shadow leader of the House of Commons and author of ‘Adam Smith: What He Thought and Why it Matters’, included these comments in his Sunday Times News Review on 6^th April:

• ‘… lessons forgotten as the world lurched into catastrophic trade wars in the 1930s, catalysed in part by America's Smoot-Hawley tariffs Act of 1930, which greatly increased the devastation of the Great Depression’; and
• ‘… the deep irony is that today, almost exactly 250 years after the publication of The Wealth of Nations and the founding of America, the White House is at risk of pursuing economic doctrines close in spirit to those whose damaging effects precipitated the revolutionary war that created The United States in the first place.’

Where would this leave the rest of the world?

China would double down on building its domestic economy in order to make good use of its current domestic manufacturing capacity, and will no doubt look to the European Union and Australasia to continue trading operations. But it would be a major challenge for western democracies to avoid being shaken hard by the collapse of confidence in the United States, and the security umbrella which America has provided for the past eighty years, already under threat following Trump's posturing over Ukraine, would be seriously compromised.

These are the risks to which we are now exposed as Trump's rush to establish his vindictive tariff regime takes effect. It would have been far better to reach a cross-party consensus about a transitional set of adjustments in order to address these huge trade imbalances over two to three presidential terms; but no doubt his disdain for ‘Sleepy Joe’ and the Democrat Party prevented him from even considering such a measured approach.

So now we all have to run this gauntlet of unpredictability, and we must just hope that China regards a stable world order as more important than seizing the opportunity to dominate.

Gavin Oldham OBE

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