China's Tariffs As A Mike Tyson Knockout Punch To America

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The world sold more goods to the US than it purchased. The world didn't supply these excess goods out of the kindness of their hearts. Nor did they get bamboozled into accepting worthless paper from the printing presses of the US Federal Reserve.

The world made up the difference by accepting American assets in lieu of goods. Paper currency and US government debt are just claims on American assets. And foreigners have been claiming American assets. About 40% of the market cap of US stocks is now held by foreigners – up from less than 5% in 1965.

The greatest event in economic history was the opening of the North American continent for capitalist exploitation. The US has always traded assets for labor, whether through settler colonialism, pioneers, slavery, immigration or trade.

The political economy of America's asset and labor allocation has made trade“deficits” all but unavoidable. What should have been avoided was concentrating the spoils of this assets-for-goods business model in so few hands.

Trump has just implemented import tariffs which rends asunder this assets-for-goods business model. Unfortunately, America is short $1.2 trillion per annum of goods production and conjuring up much capacity domestically is highly unlikely in the short term.

The rest of the world, however, is presented with a different but altogether more favorable conundrum. Goods, formerly exchanged for American assets, will now have to be exchanged for other goods, the productive capacity of which already exists.

China, to nobody's surprise, is a major manufacturer of bass boats. The non-American market for bass boats is essentially zero. It should be far less costly to convert bass boat production to other products (scooters, jet skis, flying cars, who knows?) than to build the capacity from scratch in the US - the factories, engineers, machinists and technicians already exist in China.

Reshaping the market so that existing productive capacity finds buyers should be a lesser hurdle than creating this capacity where none exist. This is the“increase domestic consumption” strategy.

The more ambitious strategy would be to create a new set of assets to replace American ones. The new asset class of the world's ultimate fantasy is surely Global South infrastructure. This is the holy grail of rational economic development and the theoretical basis for President Xi Jinping's Belt and Road Initiative.

Well before Trump's tariff temper tantrum, Chinese policymakers have long understood that capital flowing from less-developed Asia to fund consumption in more developed America - the Lucas Paradox - was highly problematic.

The BRI project was devised to correct this unnatural development model for the Global South, where capital from a richer China flows to less developed economies to fund infrastructure construction. In this case, our bass boat factory can be retooled to make excavators or cement mixers to build power plants in Nairobi or Ashgabat.

There are, of course, obstacles to this model on top of retooling bass boat factories. To date, the BRI project has shelled out $1.2 trillion, with a significant slowdown in recent years.

The Covid recession has damaged China's BRI portfolio, forcing outstanding loans to be restructured, often extending tenures or taking haircuts which, given China's surging exports and growing economic integration with the Global South, may be justified.

For the BRI to significantly offset a diminished US market, the Global South will need to demonstrate more consistent creditworthiness.

These two strategies – increase domestic consumption and reaccelerate BRI – can be the uppercut follow-up. China has been loath to fund direct consumption stimulus beyond modest car and appliance rebate programs.

The government has leaned heavily on investment, the benefits of which flow to consumers as better infrastructure, lower prices and more innovative products.

Over the long term (10-40 years), this investment strategy has increased China's household consumption more than any other economy – all 194 of them and twice as fast as second place South Korea.

This time, however, China may just need to lean into stimulating domestic consumption. China (and Hong Kong) exported $477 billion of goods to the US in 2024 with another $100-200 billion in transshipments through third countries like Vietnam and Mexico with the goods skewed towards consumer products. Stimulating another round of investment will soak up steel and cement capacity but not electronics, furniture and appliances.

Announcing a consumption stimulus takes the heat off of global markets, which have been bracing for a flood of Chinese goods redirected to their shores, preventing tariffs from cascading across the world.

Not only would it backstop the deflation induced by the Trump tariffs but exacerbate American inflation, putting the Federal Reserve in a stagflation bind.

But can China make up for lost American demand? Does China have the financial firepower? While not the path favored by the Chinese Communist Party's conservative style, the fact that the government has not been profligate suggests that there is ample financial firepower.

Various agencies have pegged China's debt-to-GDP ratio at a high 300% – above that of the US which, in recent years, has been inflated down to 275%.

This is far off the mark. Like in many other calculations, consensus Western economists are using the wrong denominator. China has been reporting GDP on a completely different basis for decades (see here ) and as such, its debt-to-GDP ratio is closer to 150% or even lower.