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Following the Swiss negotiations, tariffs between China and the US have been withdrawn for the time being.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 unable to deliver on his promises. Protecting its own market does not make the American state more competitive on the world market, nor is it able to get its hopeless over-indebtedness 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 areas of industry and goods production, 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 US$36 trillion (36,000 billion).

In order to keep bond investors in the mood to buy, 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, the prices of US bonds 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. After Standard & Poor's took this step in 2011 and Fitch in 2023, Moody's has now followed suit by downgrading the credit rating from AAA by one notch 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 yield on 30-year bonds climbed to 5.08 percent” (1).

This does not bode well 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 the budget deficit. However, the interest rate on the new bonds will have to be based roughly on current yields, i.e., around five percent for long-term bonds, otherwise investors will not be overly interested in them. 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 American bonds are in such low demand is unusual in times of crisis. Normally, American government bonds were sought after when there was 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 American bond market. Due to its high absorption capacity, bonds could previously be traded in almost unlimited amounts. 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 considered a rock in the surf, 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 that's not all. 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 from this either. In other words, America is losing the confidence 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 & Poor's.

Despite all the measures taken by American governments, the American economy is losing its earning power; at any rate, 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 touted 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 this year to the gross domestic product of ... Sweden 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 coupled with an increase in tariffs that has now prompted the last rating agency to downgrade the US credit rating. Lower taxes were not only intended to relieve the burden on citizens. They were also intended as an incentive for companies. According to economic theory, the taxes saved would provide companies with more capital for investment. And that is how Trump sees it too. But the rating agencies see the lack of government revenue in a country that is already hopelessly over-indebted.

Many investors, especially foreign ones, seem to share this view and are therefore ignoring or even selling US government bonds. 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, general 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 suffer in this trade conflict because its financial situation has continued to deteriorate. Much will depend on investor confidence. But Trump cannot restore that through decrees.

The trade deficit, which tariffs were supposed to reduce, is now set to increase, as many importers are taking advantage of the temporary respite to place orders in China to build up their stocks.

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

Although China itself is also suffering 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 out of the market altogether or are subject to surcharges that bring them up to a price level that corresponds to that of US products and their production conditions.

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

Trump's tariff concept 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 be able to hold on to one's own bastion, the US market.

China is not pleased with American tariff policy, but it does not pose a threat to the country. On the contrary, the US's retreat 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, allowing them to serve other markets and even tap into new ones.

It is not without reason that Europeans in particular fear a glut of low-priced Chinese goods. What poses a threat to many European countries, especially Germany, 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 offer discounts in order 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 that are poorer than Switzerland and have even less economic power.

The Chinese flood of goods that Europeans fear will be very welcome in other countries.
So far, there has been no sign of a slump in Chinese economic activity. Although Trump had 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 slow 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 ($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 Survey: 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. The best known are “How Does Money Work?”, “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.”