International investors spent much of 2024 fussing over China’s problems with a home crisis and depreciation. In the year ahead, it’s America’s switch on the warm seat.
Donald Trump’s business battle is making headlines, but it’s the gaping gap between US net foreign investment and national bill that’s quickly escalating.
forcing the approaching Treasury Department crew to come up with a strategy to maintain US finances, so that the world’s largest economy won’t suffer from higher prices from both investors and funds rating agencies.
Washington has so far been able to avoid a judgment and live madly beyond its means. However, during the Trump 2.0 age, the current bill imbalance may become more difficult to finance.
One reason is that Washington’s persistent apathy is catching up with it. As more immigrants show less interest in US resources, President Biden’s post-Covid-19 borrowing binge is about to come due. Another risk is that Trump’s designed supersized tariffs will bring about.
At the same time as the US federal debt buyers are reluctant to boost their exposure to a fragile US dollar, these two dynamics are about to collide in stunning and unexpected ways.
As Biden prepares to pass the baton again to President-elect Trump, he leaves the incoming administration with a US national loan topping US$ 36 trillion. Trump pushing to make the$ 1 trillion-plus tax breaks from his first 2017-2021 word permanent and add new ones may exacerbate the problem.
The US net foreign investment location, or the difference between overseas assets that Americans own and those that are owned overseas, is nearly the size of the US GDP at the moment. Compared to the$ 18 trillion it was when Trump took office in 2021, it is bad$ 24 trillion.
On Trump 2.0’s view, though, the US will face a knife in the economic road: press its excesses further into the dark or design a strategy to minimize Washington’s dependency on imports.
Team Trump appears to be more inclined to go the original way than the latter so much. The impact of additional tax breaks on China, Japan, and the developing world’s developing countries ‘ benefits may grow. His tariffs and trade restrictions would reduce use and improve US inflation.
At a time when Beijing is facing poor retail revenue and recession, that could mean slower US expansion and lessening the need for Chinese products. Chinese families might not have the funds to purchase US items as much. Additionally, it may cause a huge dollar war to start if China weakens the yuan to maintain export competition.
” Beyond alienating friends and colleagues, Trump’s taxes will probably refuse to advance his obvious goal of reducing the US business imbalance”, says Takatoshi Ito, a Columbia University , economist who served as Japan’s assistant vice minister of finance.
Ito goes on to say that “global trade may also drop” if other nations impose punitive tariffs. Also, large US tariffs may fuel regional inflation, forcing the Federal Reserve to raise interest rates, which would likely cause the US dollar to appreciate, causing exports to fall and imports to rise”.
Trump, Ito warns, is also set to increase America’s fiscal deficit, as he has promised sweeping tax breaks without identifying saving cuts that do make up for the lost income. As fiscal deficits undermine regional savings and investment, the trade deficit, too, will increase. ” In other words”, he notes, “like President Ronald Reagan in the 1980s, Trump is likely to rule over twin imbalances”.
James Knightley, key international scholar at ING Bank, says the “increase in the cost of items, coupled with possible supply-side boundaries in the labour market as a result of Trump’s proposed emigration policies, could , even result to a one percentage point increase in inflation”.
Naturally, Trump will point the finger elsewhere, accusing Washington’s trading partners of “dumping” goods or maintaining artificially low exchange rates.
” Some observers, including myself, speculate that Trump’s pick for Treasury Secretary, Scott Bessent, might even call for a special G20 meeting to pressure other countries to revalue their currencies vis-a-vis the dollar, a move that would recall the 1985 Plaza Accord“, Ito explains.
Ito comes to the conclusion that, unless Trump takes a prudent approach to tariffs on imports from the rest of the world, the US will be restrained in terms of both economic dynamism and global influence.
Thickening the plot, Trump has hinted at engineering a weaker dollar exchange rate and commandeering the Federal Reserve’s decision-making authority. The outlook for global inflation, America’s credit rating, or investor confidence in the dollar are all in jeopardy.
As 2025 begins, all eyes are on Moody’s Investors Service, the only major credit rating company to still grade the US AAA. If the upcoming US Congress evades the debt ceiling or shuts down the government to gain political advantage, that may change quickly.
All of this comes in view of the declining international demand for US government debt. Foreign official organizations have been reducing the value of US Treasury securities for more than ten years. The void has been filled by domestic financial institutions.
Problem is that domestic funds could be in the red if US stocks dropped precipitously, making American assets less appealing to foreign investors. That would make it even more improbable that US financial institutions could fund a government deficit of 6 % of GDP.
Economists all agree on how America needs to stop being dependent on imported goods. The key is increasing productivity, rekindling innovation and creating a new manufacturing model. That includes boosting training, encouraging a new generation of industrial entrepreneurs, and improving infrastructure.
It also means investing more in semiconductors, artificial intelligence and other sectors to raise America’s innovative game. Washington should be scrambling to revitalize corporate America given the ways in which Boeing, General Motors, Intel, and other ground-breaking brands run the risk of becoming also-rans.
Biden made a slight switch in order to increase his domestic economic muscle. The Trump 1.0 era was about tripping China on the racecourse. Biden concentrated more on limbering up to compete with China in a natural way.
Case in point: the , CHIPS and Science Act , that Biden signed into law in 2022. It deployed$ 300 billion to strengthen domestic research and development. Biden took other steps to incentivize innovation, raise America’s semiconductor capabilities and increase productivity.
A$ 1.7 trillion tax cut, whose main focus, did little to boost domestic capacity or competitiveness, marked a radical change from the Trump era. Had Trump’s tax scheme boosted innovation and productivity, US inflation might not be rising at a 2.7 % year-on-year rate.
The London School of Economics ‘ Economist, Ken Heydon, warns of the “risks of regulatory capture,” whereby regulations are influenced by specific industries rather than the public good.
Biden, he explains, retained most of Trump 1.0’s trade restrictions, which he calculates are reducing US GDP by$ 55.7 billion, decreasing wages and costing full-time equivalent jobs.
” As for’ fixing’ the trade imbalance, over Trump’s first presidency the US trade deficit soared to its highest level since 2008, increasing from$ 481 billion to$ 679 billion”, Heydon says.
Washington’s fiscal expansion policies mean the US will continue to spend more than it produces, perpetuating the “underlying reason for the trade deficit”, in the first place, Heydon adds. He argues that a tax on imports is thus, in effect, a tax on exports.
The impact, Heydon notes, is both direct through raising the cost of inputs, stifling productivity-enhancing competition and prompting retaliation and worsening of trade conditions, as well as indirect through currency appreciation and permitting wage increases in the import-competing industries, which then spill over to the broader economy.
Unfortunately, neither Trump 1.0 nor Biden rolled out credible plans to rival Beijing’s multi-trillion-dollar effort to lead the future of electric vehicles, robotics, semiconductors, renewable energy, artificial intelligence, biotechnology, aviation, high-speed rail and other sectors.
Instead, Biden also resorted to tariffs, joining Trump back to the 1980s, when such policies might have worked. Trump has long been confined to that time, a time when Japan played the nemesis role that China still does today.
Between 2017 and 2021, Trump’s advisors tried to make 1980s-style trickle-down economics great again. They failed, just as Trump’s top Asia ally in Tokyo did. Then-Prime Minister , Shinzo Abe , also thought the recipe for greater prosperity was surging stocks. Wages didn’t rise much, though, undermining the broader economy.
Trump’s current barrage of tariffs may occur as his incoming administration has what Chatham House economist David Lubin refers to as” a dollar problem.” According to Laubin, Trump has shown a” clear preference” for a weaker exchange rate in recent months to boost US export competition and help the country’s trade deficit.
And yet”, as the market has sensed since the US election,” Lubin says”, the much more likely outcome is that his policies end up strengthening the greenback. The risk is that the US dollar, which is already expensive, becomes more overvalued, which could lead to more global financial instability.
Since it is not overvalued at the moment, the dollar, Lubin adds, probably has a good deal of room to keep rising.
The US current account deficit, which is the broadest indicator of a nation’s trade deficit and a rough but useful indicator of financial vulnerability, was just under 3 % of GDP last year. This is roughly half what it was before the global financial crisis in 2006, which heightened the risks associated with an overvalued dollar for the final few years of Trump’s second term.
The global economy can often benefit from a rising dollar. According to Lun, it “has a tendency to depress global trade growth, restrain developing nations ‘ access to international capital markets, and make it more difficult for nations whose currencies will be weakening to keep inflation under control.”
” If and when the dollar becomes unsustainably expensive, a further problem will present itself: how to deal with an overvalued currency without risking a lot of financial dislocation, “he adds.
How Trump’s desire for a weaker dollar might turn out and what it might mean for Asia in 2025 are undetermined. China may find itself in danger as a result of Washington’s decades of American extortion during the Trump 2.0 era as a result.
Follow William Pesek on X at @WilliamPesek