You have heard a great deal about the ongoing trade war that has officially “launched” this past Friday. President Donald Trump fired the opening salvo with the $34 billion in first-round tariffs on China.
There is a point in expounding on the reasons. Economists have come down for and against his arguments that the Chinese must be stopped from “acquiring” (aka stealing) futuristic, sensitive, and leading AI and robotic technologies. It’s true that there will never be a stronger position¬†than now for the United States to apply pressure against Beijing.
There are several reasons for this. On paper the U.S. economy is growing strongly. A combination of the Trump tax cuts and increased domestic spending have helped to spur this growth. There may be a consequence for these choices in the future.
If the tax cuts and spending one-two knockout combination do not keep the economy growing strongly for the foreseeable future, then the predictions of the Congressional Budget Office will come true. The unsustainable deficit could require the country to pay a dramatic price before long. An over $20 trillion dollar national debt (and counting) will have to be paid for eventually.
Meanwhile, this is the last window of time when the United States still has a larger economy than China’s. The world’s second largest economy will soon overtake the world’s largest. History is our guide for how this happens and what it means. Other countries have been the dominant power in their own day and slipped to number two as well.
Most recently and relevantly, the British Empire declined from being the top dog of largest economic, military, trading, and even scientific/technological power in the world (sounds familiar). It did not happen overnight for them either, but over a period of decades in their case.
There is a difference now though. Events and technology are moving much faster today than they did around the turn of the 20th century through World War I (and even extending to the outbreak of World War II). Our “special relationship” partners the Brits lost their status as largest economy in the world at the end of the 1800’s technically (to the United States).
They did not lose their dominant military edge for another 15-20 years with the outbreak of the First World War. By ultimately winning the “Great War,” the British maintained their still-dominant position in the world on paper. Yet this was primarily thanks to their closest allies and friends, which included the rising stars the United States and other former British colonies Canada, Australia, and even India.
They helped to project British influence and power around the world even when Great Britain no longer had the dominant economy and subsequently military muscle to do so. Eventually with the fall of their leading economic position came the loss of military leadership.
Our situation in the U.S. today is the same as Britain’s was a century ago. They had their “Britannic Century” from 1814-1914. During that period the “sun never set on the British Empire.”
The U.S. has similarly enjoyed an “American Century” that began with the end of World War I in 1918/1919. Is it a coincidence that 2019 is next year?
President Trump has this last moment in the sun for the U.S. as the world’s leading economic power to attempt to shape the economic and geopolitical future. Within only a¬ year or two, China will pass the U.S. as the largest economy. By some economic measurements they already have. We are living in that transition period, like the British did before us.
The difference is that the trade war today is pitting the U.S.¬ against¬ the economic rival that will replace us. The British were not at odds with the U.S. when they gracefully passed the leadership baton. The Chinese are not the same “special relationship” partners that the British were and still are with us.
So the Chinese hit back with the same tariffs of $34 billion that we applied against them. The U.S. is already working on another $500 billion worth according to the President. The Chinese do not have $500 billion in American imports to hit back at, but they can not be made to look weak or lose face, since they are the next globally dominant economic power.
How will they retaliate then? They do have a secret economic weapon to use in the unfolding trade war, a war by financial means instead of military ones. They are the largest holder of U.S. Treasuries. This is a huge part of that $20 trillion debt the U.S. has racked up over the years.
When the Chinese run out of exports to hit back at, they can simply start selling U.S. Treasuries on the markets. Without enough buyers of American debt, the final days of the dominant U.S. economic empire will be numbered.
Is Your Retirement Portfolio Prepared for the Loss of American Economic Leadership?
The government can not finance its massive military and spending programs without issuing this debt every single year. The CBO says that we will run trillion dollar deficits indefinitely. As the largest buyers of our debt that make it all possible, it is the Chinese who will ultimately decide if we are able to keep doing that or not.
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