The hegemon at an impasse

The hegemon at an impasse

No tariff package, no matter how adventurous, can prevent the economic decline of the American economy, because what it has lost is trust.

Following the Swiss negotiations, tariffs between China and the US have been withdrawn for the time being. However, they have not alleviated the problems facing the US. Rather, they reveal that the Trump administration's measures are incapable of delivering on his promises. Protecting its own market does not make the US more competitive on the world market, nor is it capable of getting its hopelessly excessive debt under control. It would be more honest to admit that China has the upper hand.

by Rüdiger Rauls

[This article posted on 6/3/2025 is translated from the German on the Internet, https://www.manova.news/artikel/der-hegemon-in-der-sackgasse.]


A delicate situation

Donald Trump and his people seem at a loss. The latest tariff increases have not solved the core problem facing the US. The US economy is no longer competitive, particularly in the industrial and goods production sectors, and is therefore increasingly unable to finance the country's national budget on its own. However, in order to continue to fulfill its governmental responsibilities, in particular to shoulder the high costs of the military and, increasingly, debt servicing, it is dependent on private and institutional investors who are willing to lend money to the US government at interest.

With the growing interest burden, the gap between the US government's revenues and expenditures is widening. Deficits are rising, and with them, debt. This has now reached 36 trillion (36,000 billion) US dollars.

To keep bond investors in a buying mood, the US is forced to offer them attractive, i.e., higher interest rates.

The coupons on US bonds are about one percentage point higher than those on German bonds with the same maturity. But despite the higher interest rates, US bond prices are falling, which means their yields are rising.

Over the weekend, Moody's became the third major rating agency to downgrade its assessment of the US's debt sustainability. Standard & Poor's had already taken this step in 2011, followed by Fitch in 2023, and now Moody's has also downgraded the credit rating from AAA to AA1. This has led to selling pressure on US bonds with a corresponding rise in yields.

“The yield on ten-year government bonds reached 4.58 percent, while the 30-year yield climbed to 5.08 percent” (1).

These are not good prospects for the US. This year alone, it will have to sell “nine trillion dollars in new government bonds” (2) to refinance maturing bonds and continue to finance its budget deficit. However, the interest rate on the new bonds will have to be roughly in line with current yields, i.e. around five percent for long-term bonds, otherwise investors will not be overly interested. This means that interest costs will accelerate even further and account for an even larger share of the budget. As a result, deficits and government debt are likely to rise even more sharply than before.

The fact that US bonds are meeting with such low demand is unusual in times of crisis. Normally, US government bonds have been sought after when there is uncertainty in the world. This is because the US bond market has the decisive advantage that no financial market in the world is as liquid as the US bond market. Due to its high absorption capacity, bonds have been traded in almost unlimited amounts to date. This means that there is virtually no risk for investors in terms of the availability of their finances.
Loss of confidence

In this respect, the US has always been regarded as a rock in the storm, a safe haven for investors around the world. The willingness of international investors ensured the necessary inflow of capital to the US, which supported the dollar. Now, however, capital is flowing out of the US, and not only that. Christian Sewing, CEO of Deutsche Bank AG, noted that American bonds are being “sold on a large scale.” He attributes this to “growing doubts among investors” (3). The dollar is not spared either. This means that America is losing the trust of its financiers.

The downgrading of the credit rating by the three most important rating agencies is the preliminary end point of a development that was already made public in 2011 with the first downgrade by Standard & Poors.

Despite all the measures taken by US governments, the US economy is losing its earning power, or at least it is not sufficient to finance the state in the long term.

All the theories and promises of economic science have in reality led to a further erosion of American financial power.

Neither the tax cuts hailed as a panacea, nor the lowering of interest rates through monetary policy, nor even tariffs or subsidies brought about a turnaround. Only the US debt continued to rise inexorably. Interest payments “correspond to the gross domestic product of Sweden this year and exceed defense spending” (4). Nevertheless, Trump wants to cut taxes, as he promised during his election campaign.

But it is precisely this promise of tax cuts combined with higher tariffs that has now prompted the last rating agency to downgrade the US credit rating. Lower taxes were not only intended to ease the burden on citizens. They were also intended as an incentive for companies. According to economic theory, the taxes saved would give companies more capital for investment. Trump sees it the same way. However, the rating agencies see the lack of government revenue in an already hopelessly over-indebted country.

Many investors, especially foreign ones, seem to share this view and are therefore ignoring US government bonds or even selling them. The US is losing the confidence of investors, while Trump is losing prestige among his supporters.

“The University of Michigan's general sentiment index plummeted to 50.8 in May from 52.2 in April [and] among voters who identify themselves as Republicans, overall sentiment fell from 90.2 to 84.2 — the weakest reading since last November” (5).

Inflation expectations even reached their lowest level since 1981.
Two developments

The US is likely to lose ground in this trade conflict, as its financial situation has deteriorated further. Much will depend on investor confidence. However, Trump cannot restore this by decree.

The trade deficit, which the tariffs were supposed to reduce, is now set to increase, as many importers are taking advantage of the temporary easing of tensions to stock up on Chinese goods.

It is becoming increasingly clear that the US economy is likely to perform worse without Chinese products.

Even if China itself suffers from this trade conflict, its prospects for the future look much better. The People's Republic has it in its own hands, as it is not as dependent on the favor of the financial markets as the US. China's strength lies in the broad industrial base that the country has built up over the past decades, making it the world's largest producer of goods. This position is supported by extensive supply chains and established trade relations with almost all countries in the world.

This is a fundamentally different situation from that of the US. The US is trying to increasingly seal off its market with tariffs so that cheap competing products are kept off the market altogether or are subject to surcharges that bring them up to the price level of US products and their production conditions.

The tariffs only improve the competitive position of American companies on the American market, not on the world market.

Trump's tariff policy is a defensive battle, a rearguard action against an economically increasingly powerful China, a more or less orderly retreat from the global market. The tariffs are an admission that this competitive struggle has been abandoned because it cannot be won. The aim is to at least hold on to the US market, the country's own bastion.

China is not pleased with US tariff policy, but it does not pose a threat to the country. On the contrary, the US withdrawal from the global market opens up new opportunities for the Chinese. While the Americans have to figure out how to replace Chinese products, the Chinese have a surplus that they can use to serve other markets and even tap into new ones.

It is not without reason that Europeans in particular fear a glut of cheap Chinese goods. What poses a threat to many European countries, including Germany in particular, is a favorable opportunity for some other European countries, but above all for many Third World countries, to buy cheaply. Chinese manufacturers will have to grant price reductions in order to be able to market their own production volumes. This applies in particular to everything that was intended for the US market.

Not every country, even in Europe, has its own automotive or heavy industry that could compete with Chinese products, not even wealthy Switzerland. They will certainly not complain about cheap cars or other Chinese goods that can now be delivered to them at lower prices. The same is likely to apply to Third World countries, which are poorer than Switzerland and have even less economic power.

The flood of Chinese goods that Europeans fear will be very welcome in other countries.

As a result, there has been no sign of a slump in Chinese economic activity so far. Although Trump raised tariffs to a peak of 145 percent, China's foreign trade grew by 5.6 percent in April. (6) China is using its existing supply chains and trade agreements to utilize its own production units to full capacity and to gain new markets and customers.

The weak growth in the domestic market has also been largely overcome with a subsidy program for the purchase of electric cars and a trade-in program for consumer goods. Retail sales of household appliances recorded double-digit growth for eight consecutive months through April. Over 34 million consumers purchased more than “51 million appliances, bringing sales of related products to 174.5 billion yuan (US$24.24 billion)” (7). This particularly benefited low-income households.

Sources and notes:

(1) CGTN (China Global Telecom Network) May 22, 2025: Tariffs weigh on leading US retailers amid mounting economic pressure

(2) Frankfurter Allgemeine Zeitung (FAZ) May 17, 2025 Sewing sees investors doubting the US

(3) ibid

(4) FAZ May 19, 2025 America loses credit rating

(5) CGTN May 22, 2025 Poll: Republicans lose confidence in Trump's policies, consumer sentiment declines)

(6) CGTN May 22, 2025 China's foreign trade stable in April

(7) Chinadaily May 23, 2025 China's retail sales of household appliances continue to grow at double-digit rates.

Rüdiger Rauls, born in 1952, is a reproduction photographer and author of several books. His best-known works include “How Money Works,” “The Future of Socialism,” “Colony, Corporation, War,” and “The Development of Early Societies.” He runs the blog “Political Analysis — A Materialist Interpretation of World Events and Developments.”