Though tariffs may be the opening salvo, a coordinated strategy of economic statecraft is now required to end economic dependence on China.
The United States has carried the load of global consumption for a long time. As the world’s largest importer, issuer of the world’s reserve currency, and market of last resort, the United States has absorbed the world’s excess capital for generations, boosting global growth, helping to lift 700 million Chinese citizens out of poverty, and taking on an astronomical amount of debt. What would life be like for America if it were not the leader of the free-market economy and the dominant player in the global monetary system?
The Trump administration’s tariff assault aims to wake Americans from decades of driving on economic autopilot. As we have slumbered, China has overtly orchestrated a systematic, multi-decade exchange rate devaluation to finance an unprofitable, forced, and militarized industrial boom. It is time to address this manipulation.
Their commission of such tactics has distorted global trade and capital imbalances at the expense and repression of Chinese households. For Americans, abundant capital inflows have inflated asset values for the wealthy while imposing financial repression on average workers, who struggle to keep up with the rising cost of living. We now find our national economic security in peril. If we do not address this disequilibrium, free market economies risk the very real prospect of flatlining and fading out.
The moment of global economic confrontation has arrived, and not a moment too soon. For all the delicate tiptoeing around the issue of “de-risking,” we now face the inevitable; we must decouple from China. Japan has blinked first in raising rates, selling foreign sovereign bonds, and reinvesting domestically.
Make no mistake. This is not going to be a comfortable ride.
To meet the moment, the United States faces the dilemma of balancing re-industrialization with financial repression (keeping interest rates artificially low). Rebalancing will require the tough love of national capitalism (as elegantly phrased by Russell Napier).
Dollar hegemony is our most valuable weapon. The American republic’s prize asset is coveted by allied and adversarial nations alike. No other country offers the allure of prosperity and gratis access to capital markets. The story of the dollar’s dominance, however, is also a tale of imperial hubris that led to our current economic constraints.
In the 1970s, the Nixon administration introduced its New Economic Policy and established diplomatic relations with China. Over the next several decades, American manufacturing productivity was exchanged for low-cost Chinese production. As the Cold War faded and global trade grew, so did the circulation of and demand for the U.S. dollar.
Before the 1970s, world still operated under the Bretton Woods Agreement, which tethered a nation’s fixed exchange rate to the full faith and credit of the dollar, thirty-five of which equated to one ounce of gold. However, unlike Bretton Woods, no body of nations ever convened to agree to the system of American backstopping of deficit-driven consumption that emerged in its wake. Moreover, no group of nations has ever agreed to China’s tactical and subversive devaluation of its currency, which distorts trade and capital account balances, leading the world to today’s massive trade imbalances.
The United States and its allies sacrificed a generation of innovation and intellectual property to China, giving rise to a weakened American middle class, social instability, and populism. As Americans fought distant wars in Iraq and Afghanistan over resources and terrorism, our adversaries built up their military-industrial complexes with stolen intellectual property and slave labor.
We must awaken to rally for a fight we should have seen coming. Though tariffs may be the opening salvo, a coordinated strategy of economic statecraft is now required.
We must withdraw our critical industries from dependency on Chinese production subsidized by forced labor practices and toward an alliance of nations willing to defend free market economies.
It is time to rewrite the rules of trade to exclude China’s anti-market practices and quickly re-establish better terms of trade engagement and ally-shoring with like-minded partners.
We must also provide meaningful support to the American working-class household, investing in education, restoring tradecraft, building critical infrastructure and key industries, and supporting the family unit (yes, daycare matters).
U.S. banks must increase credit to small businesses and lower- and middle-market industries, which form the manufacturing base, along with adequate market liquidity and a reasonable cost of capital for domestic manufacturers.
We can secure a path to economic prosperity for this and future generations of Americans. It will require taking some risks and acknowledging that the status quo of our trade engagement with China is untenable.
About the Authors:
Damon Pitler is Managing Director of Investments at AI Infrastructure Partners and Chief Financial Officer of EVelution Energy. He is also on the Board of Directors of the Critical Minerals Forum.
Elaine Dezenski is a senior director and the head of the Center on Economic and Financial Power at the Foundation for Defense of Democracies. She was formerly an acting and deputy assistant secretary for policy at the U.S. Department of Homeland Security.
Image: Pla2na / Shutterstock.com.
