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Are U.S. Tariffs Intended to Isolate China? Are Market Forces and Japan's Aligning to China causing Failure of the U.S. Tariffs Plan?

Are U.S. Tariffs Intended to Isolate China? Are Market Forces and Japan's Aligning to China causing Failure of the U.S. Tariffs Plan?

Is the Future Economic Axis of the World an alliance of Russia - China - India?

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CedarOwl
Apr 24, 2025
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Are U.S. Tariffs Intended to Isolate China? Are Market Forces and Japan's Aligning to China causing Failure of the U.S. Tariffs Plan?
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What is the Big Picture?

Economist Yanis Varoufakis (former Finance Minister of Greece) connects the dots - a must watch presentation, see below - to explain the big picture on what is happening at a geo-political level together with the rationale behind the tariffs. U.S. has unleashed a new cold war against China over the past several years, starting in about 2014. Why?

  • Nothing to do with Taiwan.

  • Nothing to do with China spying on the U.S. - the U.S. NSA is much better than China at spying in any case; counter-surveillance is good to counter the surveillance for stability.

  • No threat by China of Chinese imperialism - China not setting up bases in Mexico or near the U.S. anywhere in the world. China is focused on economic trade. Unlike the U.S. which has bases all over the South China Sea area and elsewhere in China’s neighborhood.

  • The U.S. is concerned that China will begin acting in the Asia-Pacific region as a hegemon in a manner similar to the way the U.S. has been acting as a global hegemon over many decades, and eventually this will morph into an imperialistic force in the Americas - even though this is not the case with China. Therefore the U.S. is trying to control China through various choke points in the Asia-Pacific region.

  • In 1968 for the first time, the U.S. became a “deficit country’ - a net debtor nation. At the time, National Security Advisor Henry Kissinger knew that historically every empire that went from being a surplus country to a deficit country faded its hegemony. The strategy at the time was to increase deficits and create net aggregate demand for the net exports for Germany, Japan and later for China, with the U.S. Dollar being the world’s reserve currency and the monopolistic global payment system. This strategy has worked for several decades up to now.

  • In recent years, the U.S. and China have developed “cloud capital” - essentially high-technology platform companies creating the new digital economy of the world. Consistent with this “cloud capital” infrastructure, China has developed a CIPS (Cross-Border Interbank Payment System), a Chinese-currency based system to help facilitate international transactions. This is in direct competition with the current globally-focused U.S. dollar system and SWIFT.

  • The U.S. is fearful of this CIPS system as being a “clear and present” danger to U.S. hegemony globally. The U.S. wants to reduce the capacity and attractiveness of this new emerging system. This is what is fundamentally driving the U.S. tariffs plan - to isolate China and prevent other countries from doing business with China. We wrote in our recent posting:

“We think the biggest goal of the U.S. on the tariffs is an attempt to isolate China from the rest of the world in terms of trade and relations. It is likely that in all the tariff negotiations with another country (other than China), the U.S. will attempt to not only negotiate for 0% tariffs but also require the country to stop or severely restrict trade and/or relations with China - this is already happening on negotiations with Vietnam as even though they are offering 0% tariffs to the U.S., the U.S. is rejecting this offer unless Vietnam agrees to severe restrictions on trade flows with China. We think this “negative” approach will eventually backfire, with countries accelerating their de-dollarization and trade away from the U.S..”

Are the U.S. tariffs an attempt to isolate China? What are the implications of the tariffs to the Global Economy and the Investment Environment?

CedarOwl
·
Apr 10
Are the U.S. tariffs an attempt to isolate China? What are the implications of the tariffs to the Global Economy and the Investment Environment?

Amidst the growing pressures of unsustainable government debt, along with diminishing demand for the bonds of its debt, the U.S. believes that a manufacturing renaissance in the U.S. will help to address its massive debt, deficits and trade imbalance challenges. Will it work? Let’s delve in to explore.

Read full story

China’s Initial Response to the U.S. Tariffs Plan and Strategy of Isolating China

Many countries are already in the process of de-dollarizing and moving away from the U.S. dollar based system, to minimize the leverage and weaponization of the U.S.-based system on their political and economic systems. The U.S. tariffs plan and approach to negotiating trade deals is forcing countries to choose between doing business and trade with the U.S. or with China.

Whereas the U.S. is taking more of a negative approach, with penalties and nullification of loans and the imposition of tariffs as “sticks”, China is taking more of a positive approach, providing economic assistance and development as “carrots”. There is the potential for China to consider even selling its U.S. Treasury Bonds as a response to the U.S. tariffs plan - thereby causing U.S. interest rates to rise and U.S. Treasury Bonds to fall (to which the U.S. would be forced to issue more debt to buy existing debt or to which the U.S. would be forced to use other methods of financial repression), and then using those proceeds to foster the positive approach of providing economic assistance and development to countries to continue trading and doing business with, instead of their turning into a coalition aligned with the U.S. forcing termination of trade and business activities with China.

Courtesy of Sean Foo - link here
China’s “Carrots” Investment for Economic Development and Assistance to Countries Internationally .. Courtesy of Sean Foo - link here

How will all this geo-political posturing and development play out? We believe that the trend of de-dollarization and move away from U.S. trade will accelerate because a positive “carrots” approach is more likely to work than a negative “sticks” approach.

Even Japan as one of the U.S. long-time allies and trading partners is now considering aligning more with its neighborhood in Asia and with China:

Economist Sean Foo points out the large level of critical economic exports from Japan to China, and elucidates in a podcast (link here) and in another podcast shown below as well in this regard and in regard to the effects on the U.S. dollar and U.S. markets:

Sean proclaims and explains how the U.S. is now caving into China on the trade war and the trade embargo (attempt by the U.S. to form an alliance of countries agreeing to not do trade with China):

With China essentially “winning” the trade war and as a natural progression on all the above events, the Global South / BRICS++ countries led by Russia, China and India will strategically and increasingly come together as an economic power-house in the coming years. One of our Most Admired Advisors (MAA) Louis-Vincent Gave explains in this podcast below.

The Future Economic Alliance between Russia, China and India

“The massive story of the next ten to twenty years will be the economic integration of Russia, China and India together. Right now that seems unfeasible as China and India don’t get along. Remember that 15 years ago, Russia and China were at each other’s throats as well. Meanwhile you look forward to an integration of these three blocks where Russia supplies the commodities, China provides the capital goods and the cheap funding because it’s got the cheapest funding in the world, and India provides the cheap labor because neither China nor Russia have cheap labor anymore. You integrate these three economies, you have an economic boom of epic proportions. The big question is who does the funding, who does the lending, in what currency, and here the obvious answer for me is it gets done in Hong Kong Dollars and with Hong Kong as the financial center. So essentially what we are going to see in the evolution of our global financial system is that just as in the 1950s and 1960s Europe recycled its excess dollars to London and helped create the Euro Dollar Market, we are starting to see the same thing where Asia is recycling its excess dollars into Hong Kong. It’s not a Euro Dollar Market, we are going to have an Asia Dollar Market, but it’s going to be based on the Hong Kong Dollar not the U.S. Dollar. And Hong Kong is going to have a boom that will be very similar to the boom that we have witnessed in London in the past fifty years.”

As we observed in one of our recent posting:

“The U.S. appears to be realizing that China has leapfrogged the U.S. in all industries over the past several years, as we have observed in prior posts. Especially over the past few years in which the G7 has been focused more on social issues, gender studies, DEI and uneconomical ESG initiatives, at a time when China has been focused more on engineering studies, innovation, opportunities for all and on economical ESG initiatives.”

How has China leapfrogged the U.S.? In addition to a strong focus on engineering studies, China has refocused lending from the property sector the industrial sector since 2018 - this is perhaps one of the most revealing and important charts in the world to view and to understand on its implications:

Implications to our Investment Approach and Model Portfolios

We think it is likely a relatively small and limited negotiated deal between the U.S. and China is likely within the next few months. However this deal is not likely to change the above mentioned trends materially.

Also we think it likely that the whole U.S. tariffs idea will be rescinded by the end of this year if not sooner (as Sean Foo points out in the above podcast), but not before significant damage is done to the U.S. economy and to the U.S. financial markets - especially the U.S. bond market. Here are the thoughts of Dr. Albert Friedberg, a top fund manager who uses the principles of the Austrian School of Economics in his investing approach:

“Three factors are likely to abort the tariff insanity. First among them, the courts. One lawsuit is already moving through the courts to challenge the use of the 1977 International Emergency Economic Powers Act (IEEPA) as justification to impose a 20% tariff on China imports. As reported this weekend, Simplified, a Florida business, is arguing that “there is no necessary connection between the across the board tariff and the opioid problem” and that “the IEEPA does not authorize a president to impose tariffs.” According to Simplified, and in the words of a Wall Street Journal editorial, “tariffs violate the Supreme Court’s major question doctrine, which requires executive actions that present a question of ‘vast economic and political significance’ to be clearly authorized by Congress.” There is little doubt that more such challenges will appear and that at some point, the executive branch will be forced to retract this insane economic policy.

A second reason to be optimistic that the rise in tariffs will not last through the end of the year is political. Republicans, holding a very slim majority in Congress, are likely to panic at the sight of rising unemployment given that mid-term elections are just 18 months away. I expect them to be putting pressure on the executive soon, which could run from growing resistance to support his programs to as much as a challenge to his authority to raise tariffs single-handedly, an effort with which Democrats will gladly go along.

Finally, and perhaps most important, fiscal revenues should very soon fail to meet Trump/Navarro’s expectations, especially their prognostication that tariffs will bring in an extra $600 billion per year. The fiscal situation facing the present administration is nothing less than catastrophic. Spending for fiscal 2025, reflecting Biden-era measures (the current fiscal year began October 2024) is coming in at an all-time record high.” - source link here

Whether or not the above-mentioned limited U.S.-China trade deal or the cancellation of the whole tariffs idea happens, what are the implications of all of these trends and developments on our Investment Approach and Model Portfolios? Let’s delve in on the details …

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