As Trump whips US economy into confusion, nationalism rises with global ills
(Originally published Jan. 30 in “What in the World“) China’s manufacturers are making less and less money.
The latest from China’s National Bureau of Statistics shows that industrial profits fell 3.3% in 2024, the third year of declines. The NBS’ figure measures companies with more than 20 million yuan in revenue. The last time profits grew was in 2022 when they rose 5.9% as the nation bounced back from Covid. Manufacturers are still burdened with massive oversupply and cannibalistic price-cutting. They’ve been trying to sell their excess production anywhere that will import it, but the world just can’t absorb it.
Moves in Washington won’t help. Newly coronated U.S. President Donald Trump said last week he would impose an additional 10% punitive tariff on Chinese imports as early as next month. Trump said the additional tariffs are meant to punish China for exporting chemicals used to make the fentanyl smuggled into the United States. He has already imposed punitive tariffs on Colombia for refusing to accept deported migrants, and has threatened tariffs on Denmark, a key European ally, if it refuses his demand to cede Greenland to the U.S.
A growing U.S. trade deficit will only encourage Trump to deploy tariffs—whatever the inflationary impact they impose on American consumers and the economy. That gap widened 18% in December to a record $122.1 billion. U.S. exports fell 4.5%, while imports climbed by 4%, led by the largest increase in industrial imports since 1993. Matters won’t be helped, either, by a widespread crackdown and deportation of “criminal aliens” who provide the U.S. economy with cheap labor in low-wage sectors like agriculture and food-processing where most Americans won’t work.
The growing U.S. trade gap led the Federal Reserve’s Bank of Atlanta to slash its prediction for U.S. economic growth in the fourth quarter to 2.3%, from 3.2%. Despite buying more from abroad, American consumers are becoming more pessimistic: the Conference Board’s index of consumer confidence fell in January for the second straight month.
But tariffs and the threat of trade wars hitting U.S. net exports and consumer spending power may not be the biggest danger Trump poses to the economy. The larger threat is what Trump considers one of his most powerful negotiating tactics: what he likely calls unpredictability, but which is just ill-informed caprice. The latest example is his about-face Wednesday on his Monday order to freeze federal grants and loans, which sparked panic in Washington. Another own-goal: his offer to pay members of the nation’s largest workforce—the 2 million employees of the U.S. Federal government—seven months’ pay to resign so he can cut costs and appoint more loyal workers.
Ignoring what impact on the Federal deficit, U.S. creditworthiness, and U.S. GDP massive layoffs of government employees might have, the sheer caprice of his many edicts in the first days of his Administration have introduced a level of uncertainty to U.S. businesses that is likely to prove toxic to investment and growth. Trump has already forced U.S. companies to set up “war rooms” and hotlines to try to make sense of the flurry of orders emanating from the White House and how they’ll affect business.
As for China, it already faces weak consumer spending, capital outflows, a slumping property market, and producer price deflation—all of which is making banks vulnerable to a sudden default shock. As pessimism about the economy grows, banks and other investors are piling into the perceived safety of government bonds. Their buying has pushed yields on Beijing’s 10-year treasury bonds to 1.6% from 2.5% a year ago.
Low rates are normally good for reviving economic growth. But as discussed in this space a couple of weeks ago, China has run into an interest-rate paradox. Low yields on Chinese bonds are encouraging more companies and savers to move money out of China to the U.S., where rates remain higher and bond yields are rising thanks to persistent inflation and worries that Trump may also widen the government deficit by cutting taxes. That has prompted the U.S. Federal Reserve to hold its benchmark interest rate steady, defying Trump’s call for further cuts. With more of Trump’s inflationary tariffs looming, the Fed has instead adopted a “wait-and-see” stance.
Capital outflows are depriving China’s economy of the spending and investment needed to revive growth. So, China’s central bank, the People’s Bank of China, has been working to arrest the decline in rates and so narrow the spread between Chinese and U.S. bond yields. The PBoC is also warning that their rampant purchasing of bonds is making banks even more vulnerable to a sudden fall in asset prices.
Trump and even his Democratic political opponents will undoubtedly continue to exploit China’s weaknesses as part of their mistaken belief in what Yale historian Michael Brenes and Van Jackson from New Zealand’s Victoria University of Wellington call, in a piece for Foreign Affairs, “a zero-sum approach toward Beijing.” Continued American persistence to preserving its outdated global hegemony to the detriment of the rest of the world will only continue to destabilize the planet. Refusing to recognize that it’s growing income inequality and climate change behind most global problems and not threats to U.S. primacy prevent the U.S. from tackling these real issues and instead feed rising nationalism and the “great power competition” that has emerged alongside it.
In this environment, it’s perhaps little surprise that The Bulletin of the Atomic Scientists has moved its Doomsday Clock to just 89 seconds to midnight—its closest ever.