by Edward Ring
By the time this is published, everything may have changed, and that is to be expected. Throughout his career, well before and since becoming a politician, Trump has explicitly stated that he does not think it is always a good strategy to be predictable. And while markets love predictability, sometimes markets, and the systems propping them up, need disruption. This is such a moment.
Nobody should deny that the anxiety is genuine. An older friend of mine, well into his 70s, still working but ready to retire, is wondering how he and his wife will survive if their savings are wiped out. That’s true for all of us, but it begs the question: What if the painful restructuring we may be about to endure, and which may last for many years, is necessary to avoid an even worse fate?
Trump’s abrupt escalation of import tariffs goes well beyond violating the principles of comparative advantage, but we can start there. “Comparative advantage” is not all it’s cracked up to be. Repeated in business schools as if it were gospel since the 1980s, it goes something like this: “Wool is cheaper in Scotland, and wine is cheaper in France, so France should sell their wine to Scotland, and Scotland should sell their wool to France.” Everybody wins. Period. That’s the extent of it. That is the essence of free trade theory.
In the real world, though, policies that rely on “comparative advantage” doctrine as their moral justification have gotten pretty ugly. While overall economic growth may be maximized when every nation exports products that it produces most cost-effectively, the local impacts are not always benign. Nations that produce coffee at competitive global prices, for example, end up with valuable cropland converted from food production to coffee plantations. These coffee plantations are typically owned by multinational corporations that repatriate profits to low-tax nations elsewhere while buying off a small local elite that streamlines the regulatory environment. Meanwhile, the nation becomes dependent on imports for everything except coffee, and even the coffee ends up priced out of reach for the average citizen. Replace “coffee” with any specialty product, and all too often, the “gains of trade” translate on the ground into nations with seething, destitute populations dependent on accumulating debt and foreign aid.
These examples aren’t restricted to foreign nations, nor are they restricted to commodities. While American multinationals moved manufacturing overseas, in the process destroying millions of jobs and thousands of communities in America, it wasn’t just cheap wool, cheap wine, and dirt-cheap flat-screen TVs that were pouring into the country in exchange. We offshored our production of steel, our chip manufacturers, our pharmaceutical industry, and much more.
And even that devastation was tolerated for decades because its effects were mostly felt in what we now call rust belt states. Our service economy and tech sectors boomed, along with what was left of manufacturing, satiating a majority of the population that loved buying cheaper foreign imports. But this whole scheme could never go on forever. America’s trade deficit in 2024 was up to $918 billion, a new record. America’s cumulative trade deficit, nearly all of it incurred since 2000, is now estimated in excess of $17 trillion.
To balance the trade deficit, there is what economists call the “current account.” If dollars flow overseas for us to purchase foreign imports in excess of foreign nations spending dollars to purchase our exports, the surplus dollars are repatriated in the form of foreigners bidding up the prices for assets they purchase in America. A slight oversimplification would be that trade deficits equate to cheap flat screens and unaffordable homes. But there is another reason America has huge trade deficits. It floods the world with dollar-denominated transactions, and by permitting foreigners to buy American assets, we effectively collateralize our currency. And so long as America is for sale in this manner, that helps sustain the dollar as a hard currency.
That comes in handy. For 46 out of the last 50 years, Americans have logged federal budget deficits. So far, the dollar’s status as the dominant transaction and reserve currency of the world gives America’s federal government the ability to borrow money by selling Treasury Notes.
This is all well known and rehashed beyond the need to elaborate further. So, why are people acting like this was sustainable? How long can the global economic model rest on American trade deficits funding the military and industrial development of nations that, in some cases, aren’t even allies, with all of it balanced through foreign purchases of American assets? And how long will international demand for dollars finance federal budget deficits?
To understand why this had to come to a head, consider federal budget trends in recent years. In 2019, the last year of Trump’s first term, the federal budget was $4.4 trillion, with interest payments of $400 billion. For 2025, the first year of Trump’s current term, the projected federal budget is $7.0 trillion, with interest of just under $1.0 trillion.
What changed? While the COVID pandemic was used to justify massive infusions of stimulative federal cash into the economy, much of it probably necessary, why hasn’t spending been reduced since the pandemic’s impact has been over for at least two years? Are we supposed to just expect massive federal budget deficits year after year? Is it sustainable to log a federal budget deficit that has grown from an alarming $900 billion in 2019 to $1.9 trillion in 2025, more than twice as much?
A roughly accurate summary of the economic reality we confront is federal budget deficits of $2 trillion per year and trade deficits of $1 trillion per year. Trade deficits translate into growing foreign ownership of American assets. Federal budget deficits add up in the form of accumulating, interest-bearing national debt. In 2019, the interest payments on what at the time was $22 trillion in national debt had already reached $575 billion, at an average interest rate of 2.5 percent. By 2024, the national debt had skyrocketed to $35 trillion, an increase of $13 trillion in just six years. Interest payments in 2024 were $1.1 trillion, and the average interest rate had risen to 3.3 percent.
“Average” interest rate requires explanation. Ten-year treasury notes currently pay 4.4 percent. Interest rates have risen over the past few years. Imagine if that continues, and $35 trillion (or more) in treasury notes mature and are reinvested at 4.4 percent. That would raise the annual federal interest payment on the national debt to $1.5 trillion.
At what point does this become a crisis? And if we wait until there is another financial crisis, will we be able to borrow our way out of it again? No wonder Trump’s team is cutting bureaucracy and hoping to eliminate massive entitlements fraud. By every metric that matters, the size and obligations of the federal government have exploded in the last six years, and it can’t go on.
Which brings us to the geopolitical reality we must confront: the rise of China. No other nation has done more to finance the rapid industrialization of China than the United States. But now, the United States depends on China for critical minerals, electronic equipment, machinery, iron, steel, medical apparatus, organic chemicals, pharmaceuticals, and much more. Every year, the biggest percentage of our trade deficit is with China, over $300 billion in 2024. The Chinese invest this surplus in Treasury Notes but also use it to purchase strategic assets in the United States. And how has China treated us as we finance the meteoric rise of its economy?
Here is a transcript of comments made by noted investor and businessman Kevin O’Leary on CNN last week.
“I do business with China; they don’t play by the rules. They’ve been in the WTO for decades, and they have never abided by any of the rules they agreed to when they came in. They cheat, they steal, they steal IP, I can’t litigate in their courts, they take product, technology, they steal it, they manufacture it and sell it back here. This is not about tariffs anymore. Nobody has taken on China yet, not the Europeans, no administration, for decades. As someone who actually does business there, I’ve had enough. I speak for millions of Americans who have IP that has been stolen by the Chinese. I have nothing against the Chinese people, but the government cheats and steals and finally an administration that puts up and says, ‘enough.’”
O’Leary thinks Trump should impose 400 percent tariffs on China. Maybe that will get their attention. He also suggested that America, with what is still the biggest economy and biggest domestic market on earth, may not have this much economic leverage in the future. He’s right. Now is the time to exert economic pressure on China because a decade from now, it will be too late.
The Trump administration recognizes three realities that softer heads and wishful thinkers try to either deny or bury in nuance. (1) We are in a cold war with China, and if we don’t step up, we will lose. (2) We have hollowed out our manufacturing prowess, and that must change. Fast. (3) Federal spending is out of control; the trends are unprecedented and must be reversed.
This is the rest of the story. Tariffs are just the beginning salvos in a fight we can’t avoid any longer.
Back in 1986, Herbert Stein, an economist at the American Enterprise Institute, in reference to US federal debt, famously said, “If something can’t go on forever, it will stop.” That was 40 years ago, when America’s epic debt binge was still in its first decade. Since then, it has gone on and on, and as the numbers indicate, it has intensified in the last few years.
It will stop. The only question is when and how. One must forgive the anxiety that is triggered in so many because of our current administration’s attempts to confront the unsustainable. But for those calling themselves economists who now, with unwarranted certainty, decry Trump’s bold gamble as unnecessary or foolish, less charitable sentiments might be appropriate.
https://amgreatness.com/2025/04/16/trump-confronts-economic-and-geopolitical-reality/
