In the not too distant past, Western offshoring and capital flowed into China lit the fuse of its industrial explosion which helped make it the world's second largest economy. India now stands at the same crossroads -- where geopolitics meets opportunities. 

When I started drafting my previous blog on the 5 Scenarios of the US-China Tariff War, I coined The Taiwan Factor, The Indian Factor, and The RMB Factor which I thought are key issues but hardly spoken of by any pundits, of which I intended to do follow-up blogs. Since then I have seen The Economist and Wall Street Journal articles talked about the benefits of the tariff war to India. This has taken some thunder off this blog. However they are India-centric articles. My India Factor is China-centric.

In the previous blog on  The Taiwan Factor, I explained every US-China tariff war scenario has Taiwan smack in the middle of the conflict due to its coveted prowess in the semiconductor sector. Similarly, every scenario in the tariff conflict has India standing to gain substantially. This potential for India has great economic ramifications for the sub-continent and immense geopolitical stress for South Asia.

Let’s break it down:

1. India as a Key Beneficiary of Supply Chain Realignment:

Trump haters forget things fast. Long before Trump's tariffs, the US had already imposed tech bans and export controls against China --
Key aspects of restrictions imposed by the Biden admin:-
* Restrictions on advanced AI chips - an export ban on high-performance chips used in AI applications to China (chips that are 7 nm and below, this also affects Taiwanese TSMC).
* Bans on semiconductor manufacturing equipment -- this involves the EUV photolithographic machine of Dutch company ASDL).
* Controls on US persons - US individuals supporting China's semiconductor development needed licences.
* Restricts circumvention through third countries.
* Prohibits US involvement in China's sensitive tech sectors (semiconductors, quantum tech, AI).

Even before Trump took second term office, multinationals had already started to seek to diversify away from China to avoid economic and political risks. Apple, Foxconn, and other tech players have already shifted portions of their operations to India. Dell, HP, Cisco and Intel were already in talks with India.

These are the major US names that have manufacturing bases, or interlocked with Chinese manufacturers - Apple, Tesla, Microsoft, Qualcom, Amazon, Dell, Nike, Caterpillar, HP, Intel, GM, Ford, Levi, New Balance, Gap, Coca-Cola, Pepsico, Starbucks, 3M, Walmart, P&G, Colgate-Palmolive, Cisco,  etc. 

China not only faces the prospect of these big US brands relocating out of the country but its integrated supply chain magnifies the problem as foreign-owned support industries similarly reshore and local supply chain companies collapse.

The pull factor of India is its large English-speaking labour pool, a huge domestic market, a growing digital economy, improving infrastructure, government incentives (like PLI – Production Linked Incentive schemes), longstanding democratic system, and more importantly, a strategic alignment with Western interests, all of which generally presents a cultural and political proximity to the US.

2. Strategic implication:

India is positioned to capture part of the exodus of global manufacturing. It is building itself up not just in assembly, but in chip packaging, semiconductors, pharmaceuticals, and green tech—industries traditionally dominated by China.

The tariff war places India in a similar strategic moment as China was decades ago. If it capitalises well, through policy, improved infrastructure, reduces its regulatory complexity, and improve the ease of doing business, it could follow a similar economic growth trajectory, it could possibly become the next tech and manufacturing hub. 

 
India stands to grow stronger economically and technologically, raising its profile as an alternative to China in the Global South and among Western allies. 

3. Deep geopolitical tensions between Between China and India:

The two countries went to full-scale war once (Sino-Indian War 1962). There have been many military conflicts and skirmishes due to unsettled border disputes. The latest  was the deadly 2020 Galwan Valley skirmish which involved hand-to-hand combat. India views China's close ties with Pakistan as a direct security threat.

China-Pakistan Economic Corridor (CPEC) - Jammu & Kashmir are disputed territories between India and Pakistan. CPEC runs through Gilgit-Baltistan, a region in Jammu & Kashmir. India sees this a violation of sovereignty, of China trying to establish a permanent presence in Pakistan-administered part of Kashmir. Just a few days ago, an Islamist terrorist attack on Indian tourists in India-administered Kashmir where 26 non--Muslim tourists were singled out and shot dead in cold blood. India has always blamed Pakistan of sheltering Islamist Kashmirish terrorists on their side of the border.. This attack was the last straw as India chose to punish Pakistan by suspending a treaty for sharing the distribution of water from the Indus River. Pakistan has called this an act of war. Tension is developing.

China-Pakistan military co-operation - China is Pakistan's largest arms supplier and a key military partner. Joint projects include JF-17 fighter jets, naval systems and missile systems. India sees this as tilting the regional military balance.

Nuclear axis - China helped Pakistan develop nuclear weapons capability in the 1980s/90s. 

Diplomatic coordination - China and Pakistan are aligned in various international forums to block or criticise India on various issues,

Encirclement and strategic depth - 

India sees itself boxed-in. To the North-West lies arch enemy Pakistan, a friend of China. to the North East, China itself. To the south, China has projected its naval presence in the Indian Ocean, a maritime trade passage critical for both India and China. China's navy has a presence in Pakistan's Gwadar Port, and in Sri Lanka the Hambantota Port is leased to China for 99 years as a debt repayment.  Both these ports have hosted Chinese naval and dual use research vessels.

String of Pearls strategy of China - This is China's broader strategy of a network of military and commercial facilities in the Indian Ocean Region. India sees this as an intrusion into its traditional sphere of influence. For centuries the Maldives Islands have been an appendage of the Indian economy. But since joining the Belt and Road Initiative, substantial Chinese investments have poured into the islands. Just like Sri Lanka, Maldives had fallen into the Chinese debt trap. Its co-operation with China went into a higher gear when Marxist President Mohd Muizzu took office in 2023. The following year China and Maldives signed a Defence Agreement with China providing weapons and training to Maldivian forces.

In 2025 comes real trouble. Maldives claims the Chavos Archipelago. The Dutch first arrived at the uninhabited Chavos in 1638 but gave it up by 1710. French took possession in 1715 and brought enslaved people from Africa and Madagascar to work there. The French administered Chavos together with Mauritius, both of which were ceded to UK in 1814. In 1965 UK detached Chavos from Mauritius and created the British Indian Ocean Territory which was deemed illegal under international law. UK ceded independence to Mauritius in 1965 and continued to administer Chavos to this day as a BIOT.
 

In 2010 Maldives submitted a claim to the UN Commission on the Limits of the Continental Shelf (CLCS) for an extended continental shelf, which overlapped with Chavos. This claim was for maritime rights, not sovereignty over the islands. President Miuzzu now claims sovereignty on Chavos from UK.

The sovereignty of Chavos today is unresolved. UK has "de facto" sovereignty as they administer it. Mauritius has "de jure" sovereignty, legally recognised by UN and ICIJ. For reason not yet made public, UK seems willing to accede Chavos to the claims of Maldives.

There is no doubt China is pulling the string for the Maldives' claim. The reason is obvious. One of the small islands in the Chavos Archipelago group is Diego Garcia. It is where the US has their huge military base. Diego Garcia base is of utmost strategic importance to US. It offers a vantage point for operations across the Middle East, Africa and Asia. The base supports a wide range of military assets like long-range bombers, aerial refueling takers, which enhances US rapid deployment capabilities. This base plays crucial roles in operations in wars in Iraq and Afghanistan, as well as ongoing missions against the Houthis in Yemen. 

It is in India's national security interest to have Diego Garcia remain under UK and the US. .

4. India and Quad :

The Quadrilateral Security Dialogue (Quad) was formed in 2007 as a strategic forum involving US, Japan, Australia and India. It arose from the collaborative efforts of these 4 nations in the 2004 Indian Ocean tsunami where they coordinated humanitarian efforts. It had one meeting in 2007 and then went into slumber due to Australia's concerns of potential diplomatic tensions with China. The Quad was revived in 2017 due to growing concerns over China's assertiveness in the Indo-Pacific region. The Quad facilitates joint naval exercises and info sharing to bolster maritime security ensuring freedom of navigation and overflight in the Indo-Pacific. The Quad offers India avenues for cooperation in infra development, digital connectivity, and emerging technologies. 

 5. Does India’s Rise Soften China’s Stance Toward the US?

India's industrial development has been stuck in its track for 70 years with manufacturing sector today taking up only 18% of GDP, unchanged since 1960. A combination of infrastructure deficits, financing constraints, regulatory rigidity, high input costs, and services oriented growth model has kept India's industrial base from achieving the scale seen in other emerging economies.

China is in a dilemma. Its intransigence in the tariff war will drive more manufacturing and capital to India. By their very  own act, China might well provide the impetus for India to becoming an economic power house, that is, assuming the Indians can brush up their act with improved infrastructure, improved bureaucracy and make it easier to do business.

"Economic might bolsters a country's capacity to protect itself, and national security forsters a positive environment for growth."
Rajeswari Pillai Rajakopalan

India's emergence as a manufacturing powerhouse, which comes with it economic leverage, would reshape its border dynamics with China and influence in the Indo-Pacific maritime seas, something that China would vehemently want to prevent. 

Conclusion:

The India Factor in the US-China tariff war is a complex and strategically significant element that touches on geoeconomics, supply chains, diplomacy, and long-term balance-of-power calculations. 

With a low industrial output and a per capita ranked about 143rd in the world, India has no economic clout in Beijing's chessboard. By taking a hardcore position against US tariffs, China risks helping India on its way to manufacturing might and economic leverage. Thus China may end up loosing influence on two fronts - economically and geopolitically. The Indian Factor forces China to adopt a more calibrated approach instead of an aggressive confrontation with the US. China will tone down its adversarial approach, balance confrontation and engagement to avoid isolating itself and feeding the rise of its nemesis. This is not a capitulation to US but a matter of staying in the game.  

For Washington, cultivating India as a manufacturing and geopolitical counterweight to China fits both economic and security objectives.

VP Vance's visit to Delhi April 21-24 was officially a trade and diplomacy mission. No doubt analysts in Beijing will see it as a strong message to China of US-India cementing relationship and encouraging manufacturers to relocate to the Indian sub-continent.

For Beijing, therefore, the challenge is to avoid trade-war tactics that inadvertently empower India, and at the same time deepen India’s strategic integration with the West.

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THE TAIWAN FACTOR IN THE US-CHINA TARIFF WAR IS TIP OF THE SPEAR IN TECHNOLOGY RIVALRY

The Taiwan Factor isn't about trade, it's about who writes the rules of the future 

What if I were to tell you the Chinese were the first in recorded history to practice protectionism thousands of years ago. China had the technology for the production of silk from silk worms (Brombyx mori). They had perfected the technology for extracting and weaving the silk. The technology was considered a state secret protected by (1) death penalty for anyone revealing it; (2) the state owning the whole process and supply chain; (3) workers lived in isolation. Because they had the monopoly, they controlled the price. They weaponised silk which was used as a tool of diplomacy. The Chinese protected the technology so well for thousands of years until the 6th century CE when two Nestorian Christian monks smuggled some silk worms out.

In the previous blog I wrote about the five scenarios of the tariff war - Full Decoupling, Economic Cold War, Controlled Decoupling, Managed Rivalry, and Reconciliation. Every scenario is shaped by the risk of a Taiwan crisis. If conflict breaks out, the world shifts instantly into Cold War or even hot war territory, with catastrophic economic consequences for both countries and the global economy. Taiwan often looks like a side issue in the US-China tariff war and thus hardly covered by all those experts vying for online spotlight. Actually it is deeply centre stage not purely because of trade but strategic terms.

Most of the world holds the view America is the big bully in the tariff war. I think there is much to be said for the US if the tariffs were a quick-fix attempt to rebalance trade and even out unfair trade practices. But tariffs meant to protect domestic industries is something that is not arguable for protectionism begets inefficiencies. Protection for targeted industries for national security is difficult to argue against. However Trump needs to be wary of war and China hawks who may hijack and weaponise tariffs to subvert China's development.

Friend or foe, I think more people see the US in unfavourable light given their propensity to interfere in the internal politics of other countries and their involvement in too many wars. Most see China as a benign superpower that has never been involved in any major wars. Memories are short and people forget the generosity of Americans who are always first on the scene in natural disasters playing major roles such as 2004 Indian Ocean Tsunami, 2010 Haiti Earthquake, 2005 Kashmir Earthquake, 2011 Japan Earthquake, 1970 Bhola Cyclone, 1985 Mexico Earthquake, even 2003 Bam (Iran) Earthquake they were there. Where other countries cheated in world trade with currency manipulation, the Americans voluntarily devalued USD in response to economic pressures, trade imbalances and global monetary system adjustments such as in 1973 Bretton Woods and 1985 Plaza Accord.

Tech as a Battleground:
The U.S. views dominance in technology as the key to maintaining global influence both in trade and military prowess. China’s 'Made in China 2025' strategy aims to match and overtake the U.S. in tech, much of which still depends on Taiwan's industrial output. Taiwan’s chip sector is seen as a strategic bottleneck that both superpowers want to control, protect, or leverage.

Taiwan is home to TSMC (Taiwan Semiconductor Manufacturing Company) — the world's most advanced and dominant chipmaker. Chips are the "oil" of the modern economy — there are chips in all things electronic, such as smartphones, AI, military tech, electric vehicles, cloud systems, etc.

Both the U.S. and China cannot fully decouple from Taiwan without disrupting their supply chains for high-end tech. China wants tech self-sufficiency; the U.S. wants to prevent China from accessing advanced chips that could power military or surveillance systems.

The U.S. has already imposed chip export controls on China, and Taiwan companies are caught in the middle.

Supply Chain Crossroads:
Taiwan is a global logistics and tech node. Taiwanese firms produce not just chips but components for U.S., Chinese, European, and Japanese products. Any trade war with tariffs on electronics or tech components indirectly hits Taiwan's business. Taiwan’s economy is deeply tied to both U.S. and Chinese demand, so even when the fight is U.S.-China, the pain (or gain) shows up in Taiwan’s factories and stock market. Even though Taiwan isn’t setting tariffs, its industries and geopolitical position make it the quiet center of gravity in this whole U.S.-China economic rivalry

"The number of transistors on a chip doubles approximately every 2 years, while the cost per transistor decreases."
Moore's Law

The chart below shows as the chip gets smaller, there is an uptick in performance and significant reduction in energy usage. Power reduction is extremely important for huge energy consumers such as crypto-miners and AI data storage, as well as mobile devices such handphones.

This is not exactly a physical law, but more of an engineering and economic benchmark. It was introduced in 1965 by Gordon Moore, co-founder of Intel.

OK bear with me now. We need to skim through some technical stuff in order to understand the situation.

Microchips lie at the heart of all electronic devices. A chip is an integrated circuit (IC) built on a silicon wafer, where transistors and other components are intricately etched and connected to perform computing tasks. The transistors are the devices that do computational work in a computer. The more the numbers of transistors that can be packed onto a chip, the greater its computing power. With miniaturisation, more and more transistors can be packed onto a chip. Today, there are billions of transistors on a chip. Miniaturisation allows the chips to be used in smaller and smaller electronic devices such as implantable medical devices and smart dust.

However, the industry is hitting 2 constraints:
* Atomic scale limits — once transistors get to smaller than a few atoms thick, they break the laws of physics. 'Quantum tunneling' happens, which is basically leakage of electrons. This causes power wastage, generates heat and corrupts the binary logic state which means computational errors. Quantum tunneling is one reason why the industry is approaching the end of Moore's Law using classical CMOS scaling — it’s not just manufacturing limits, but physics itself getting in the way.
* Photolithography - this is the art of making circuitry patterns using ultra violet (UV) lights which are then etched onto the wafer. Lower and lower wavelengths of UV is used for smaller and smaller chips in order to get precise resolutions. Current technology is EUV (Extreme UV) lithography which is critical for use in 7nm, 5nm, 3nm, and 2nm chips.

Photolithography is challenging, but for transistors, physics is the deeper constraint. The soon-to-be-produced 2nm chips represent one of the last frontiers in silicon-based chip shrinking before hitting atomic scale limits.

Semiconductors are central to everything — smartphones, AI, weapons, cars. Both the U.S. and China know whoever controls this industry has the upper hand.

This is where Taiwan's TSMC comes in.

The top 3 chip makers :
TSMC - Taiwan company, the largest producer and most advanced chips in the world. 

NVIDA - US company, tops in games chips and for AI application.
SMIC - China-owned, several years behind TSMC in technology.

In July 2024 TSMC completed their trial production of 2nm chips (A20) and will go into mass production in 2nd half of this year. Apple is their first customer who will use the A20 in their Iphone 18 series. Each new smaller chip brings greater computing power and energy consumption reduction, which, and more importantly of all, drives a whole new upgrades in all sorts of electronic devices across the board. More computing power means better multitasking, and faster computation, which is especially crucial for AI.

The A20 is up to 30–40% energy savings compared to 5nm chips — huge for phones, laptops, and data centers. It is key to:
* Advanced AI models
* Edge computing
* 5G/6G devices
* Autonomous vehicles
* Quantum-class encryption and simulations

Edge computing needs some explaining:
Instead of sending data "to the cloud" (where the data server is) for processing, this can be done "at the edge" — like on a sensor, smartphone, or nearby local server. This provides for (1) lower latency (faster response time), (2) reduced bandwidth usage, (3) better privacy and security (sensitive data stays local) and (4) increased reliability (less reliance on connectivity). Edge computing is exploding because it serves 3 critical needs - (a) for IoT (Internet of Things) devices, (b) need for real-time processing (e.g., drones, vehicles, medical devices), (c) data volumes too large to send to the cloud constantly.

TSMC had a plant since 2020 (under Trump term 1) in Phoenix, Arizona, US. Since then their fabrication facilities have chalked up to US$65 billion in investments. In March 2025 they committed another US$100 billion in order to produce 30% of their A20 chips in US. In addition, TSMC receives substantial funding, cheap loans and US$100 billion tax credits from the US government.

TSMC has a plant in Nanjing, China since 2016. However, this fabricates only legacy chips, not the cutting edge chips of 7 nm and below. Due to geopolitical pressure, TSMC is focused on expansion in Taiwan, Japan, US and EU.

Where is China in all this?

Lay people the world over, including almost all Singaporeans, believe China has surpassed the U.S. in technology. China builds fast and big. It dazzles the world with visible achievements and fast progress. Let's wonder at these capabilities and achievements:
* Massive Market Scale Rapid Deployment : Cashless payments via WeChat Pay and Alipay; Facial recognition, AI surveillance, smart cities; 5G network rollout by Huawei and ZTE. China scaled digital platforms far more widely and deeply in daily life use.
* Hyper-Integrated Ecosystems : WeChat = messaging + payments + news + shopping + ride hailing; Douyin (TikTok China) = short video + live commerce + fintech. This integration allows mass data collection, leading to AI refinement and user-specific applications.
* Hardware Integration and Adaptation : Drones (DJI); Surveillance systems; Smart appliances; Industrial automation; Electric vehicles (BYD, NIO). China makes things “smart” — smart homes, smart cities, smart factories — and connects them via IoT and cloud platforms.
* AI and Big Data at Scale : Loose privacy norms; Government-corporate synergy; Strong presence in surveillance, fintech, logistics. Baidu, SenseTime, and Alibaba are leaders in computer vision, voice recognition, and AI diagnostics.
* Fast Iteration and Local Customization:Speed-to-market (products can move from idea to store shelf in weeks); adapting foreign tech to local needs quickly (e.g., localizing apps, devices). Shenzhen is known as the hardware Silicon Valley — highly flexible, vertically integrated supply chains.
* Government-Driven Applications : State involvement accelerates adoption in areas like Digital Yuan (e-CNY) — world’s first large-scale central bank digital currency (CBDC); smart traffic, energy, and logistics systems; AI-backed public administration, including courts and social credit systems

China promotes soft power and nationalism, positioning itself as a tech leader in the Global South. Many developing countries see Chinese infrastructure and tech as aspirational. Chinese diaspora communities may also amplify national achievements out of pride, which contributes to public perception. Chinese state media heavily promotes “Made in China 2025” and similar initiatives as signs of dominance. Some international media repeat these messages without critical analysis, creating an echo chamber. This is further amplified by thousands of so-called ixperts and influencers whose videos and tiktoks often go viral.

China's semiconductor value chain:

As part of China’s push to become more self-sufficient in semiconductor manufacturing and reduce reliance on foreign suppliers, China established two key players at the turn of the millennial.

SMIC (Semiconductor Manufacturing International Corporation):
This is China’s largest and most advanced foundry, HQ in Shanghai (2000). It has the capability to fabricate 7 nm chips thus it is a few generations behind Taiwan's 2 nm chips. However, SMIC's 7 nm chips has limited capability. They have less computing power and energy reduction compared to TSMC's 7 nm chips. The reason is because they are using DUV (Deep UV) machines while TSMC is using cutting edge EUV (Extreme UV) machines.

SMEE (Shanghai Micro Electronics Equipment):
While semiconductor companies are powerhouses, they depend on one critical machinery - UV photolithographic presses. There was up till 2002, only one UV photolithographer company in the world, and that's the Dutch company ASML. Their cutting edge technology allows them to make EUV photolithographic machines that work on very low light wavelengths of 13.5 nm which supports fabrication of chips 7 nm and below.

China set up SMEE also HQ in Shanghai (2002) to manufacture their own UV photolithographic presses. While it has come far, it is 20 years behind the Dutch. SMEE is currently using yesterday's DUV technology which uses light wavelength of 193 nm. DUV machines cannot be used for chips of 7nm and below. SMEE was able to use multi-patterning, a walkaround process, to make DUV machines that can be used for 7 nm chips. But these are not cutting-edge, the chips have less computing power and less energy reduction than what TSMC produces.

China is at a crossroad because it's technology is choked by US which has banned the sales to China of 7 nm and below chips to China and EUV photolithographic machines by ASML. Is US the big bully that forces Taiwan and Netherlands not to sell cutting edge technology to China? Absolutely not. US holds the original technologies and it is simply exercising its contractual intellectual proprietary rights to advantage.

Key IPs in the semiconductor value chain held by US:
* EDA Software (Electronic Design Automation) - These are essential tools used to design chips without which advanced chip design is nearly impossible. China can manufacture some chips, but designing competitive ones without this software is an uphill climb. Three U.S. companies dominate - Synopsys, Cadence, and Mentor (Siemens USA)
* Chip Architecture IP - U.S. companies control core design IP such as: x86 architecture (Intel, AMD); RISC-V (open, but US-led); Arm (British origin, but heavily interlinked with US IP and licensing oversight.
* Materials and Process Patents - Many process patents for extreme miniaturization (2nm, 3nm) are held by U.S. firms like IBM, Intel, Applied Materials. These are critical for making EUV-compatible photoresists, masks, and etching steps.
* EUV photolithography - ASML (Netherlands) builds the world’s only EUV photolithography machines. But key components inside ASML's EUV tools come from the U.S., including - Laser light source (from Cymer, a U.S. company owned by ASML), Precision optics, software systems, and vacuum components control systems with U.S. software and firmware. Therefore, any EUV export to China requires a US export license, because of US content rules (the “Foreign Direct Product Rule”).

Other key IPs in semiconductor value chain held by US-friendly nations:
1. ASML (Netherlands) - Photolithography equipment (EUV and DUV). Only company in the world that makes EUV photolithography machines, critical for chips of 7nm and below.
2. Tokyo Electron (Japan) - Etching, deposition, cleaning, photoresist coating. Global leader in multiple front-end chip manufacturing processes.
3. JSR, Shin-Etsu Chemical, Sumco, Tokyo Ohka Kogyo (Japan) - Raw materials and photoresists. Shin-Etsu and Sumco are top silicon wafer producers. JSR and TOK are photoresists and specialty chemicals used in photolithography. Japan provides ~90% of the world’s photoresist and high-purity chemicals for chip production.
4. Carl Zeiss SMT (Germany) - Advanced optics. Supplies the ultra-precise lenses used in ASML's EUV machines. Without Zeiss optics, ASML’s machines wouldn’t work.
5. DISCO Corporation and Advantest (Japan) - Ensure chips are cut, packaged, and validated precisely. DISCO - Saws and grinders for slicing wafers; Advantest - Semiconductor testing systems.
6. GlobalWafers (Taiwan) - Silicon wafer supplier. One of the top three suppliers of the ultra-pure silicon substrates all chips start from.
7. Merck KGaA (Germany) - Specialty gases and chemicals for etching and cleaning. Supplies high-purity gases and materials crucial for chip etching and doping.

US Leverage Over Taiwanese TSMC:
TSMC uses US design tools, process tech, and equipment (e.g., from Applied Materials, Lam Research, KLA). It relies on U.S. customers like Apple, Qualcomm, NVIDIA. Thus TSMC cannot sidestep US restrictions without losing access to design software and key equipment.

US leverage over Dutch ASML:
Although based in the Netherlands, ASML relies on US IP and components. The US successfully pressured the Dutch government to deny China access to ASML's EUV machines. Also restricted some DUV systems (deep UV), which are a step down but still critical.

Semiconductor value chain overview:
Upstream - Raw materials, design tools, wafer fabrication tools.
Midstream - Chip designers and manufacturers (foundries)
Downstream - System integrators, end-product makers.

China has constraints and technology gap of several years in the upstream and midstream segments, namely in EUV Machines, EDA tools, and high end photolithography/inspection. It is however very strong in the downstream segment due to its prowess in manufacturing.

In the US-China tech rivalry, China is the The Master of Application and Scale while the US controls the brains and innovation in IP. China’s strength lies in its speed, scale, and execution. It has become a global leader in the application and deployment of technologies, even when it does not own the underlying IP. The U.S. maintains technological superiority through its ownership of foundational science, architecture, and intellectual property — the core blueprints upon which others build.

For strategic reasons, US wants to cut China off from cutting edge technology. This has forced China to urgently develop self-sufficiency. Currently it is decades behind US in some of the original technology critical for the semiconductor sector. Pardon the pun, but at the moment, the chips are against China. US semiconductor technology has basically reached the end of Moore's Law, China is still on the curve. The question is, can they catch up real quick.

Taiwan is not just economic — it’s a security flashpoint. China sees Taiwan as a breakaway province and uses the trade war to push back on American support for Taiwan. The U.S. uses tariffs and sanctions partly to limit China’s economic rise, which directly affects Beijing’s long-term strategic goals, including Taiwan reunification. The US has defense commitments to Taiwan under the Taiwan Relations Act. There are many who doubt US has the stomach to commit to Taiwan's defence in light of perceived power projected by China's economic and military might. The ramification of what's at stake given Taiwan's deeply entrenched position in the midstream sector of the semiconductor value chain must surely steel American resolve. Taiwan is now producing the 'silk worms' with US technology, surely the Americans would want to protect this the way the Chinese did in ancient times.

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US-CHINA TARIFF WAR : THE 5 SCENARIOS, RISKS, OPPORTUNITIES, AND GEOPOLITICS

You think tariffs are just numbers in the news. But behind every percentage are a number of families out of of work, businesses shuttered, futures derailed. We are a small boat in choppy waters -- when the big ships start ramming each other, we must steer with precision or be swamped. If you believe we are immune to the storm, then you have not understood what keeps Singapore afloat. Trade is our lifeblood. When others close their doors, we must sharpen our minds, open new windows, and never ever grow complacent.
A speech that Lee Kuan Yew would have given

Recently Mr. Lee Hsien Loong gave a speech on the uncharted waters that is to come in the wake of the tariff war. It's the elder statesman warning of the dangers ahead but calming nerves with assurance of how we can navigate through this if we remain united the way we weathered crises in the past. Generally a good rallying call, but I think Lee did not provide an understanding of specifics of the dangers and opportunities for Singapore.

I put on Kishore Mahbubani's hat and present the possible outcome scenarios of the tariff war which comes with the dangers and opportunities.

Scenario 1 : A Full Decoupling

This is the "nuclear option" where China and US ban imports and exports between them. The economic outcome is MAD - mutually assured destruction. The 125% / 145% tariffs lobbed at one another is just high drama. Both Trump and Xi certainly comprehend this is just sabre rattling. It will never happen. Let's just entertain this scenario and see what it means.

Winners:
Short-term local industries, neutral countries like Vietnam, India, Mexico, and commodity exporters (Australia, Brazil, Russia).

Losers:
Global supply chains, multinational companies, global consumers (higher prices), and the stability of emerging markets exposed to both USD and RMB volatility.

Risks:
The biggest danger is global fragmentation: two financial, trade, and tech ecosystems running parallel, forcing all other countries to "choose a side" or pay higher transaction and risk premiums. Already President Xi has warned countries not to play sides when they negotiate with US.

What it means for China:
The U.S. is one of China’s biggest customers — about 15-17% of China’s total exports go to the U.S. A total ban means (1) factory closures in which China is vulnerable because it has a very integrated supply chain, means across the entire supply chain closure, massive unemployment in export-heavy regions causing social instability, (3) collapsed tax revenue for local governments at a time when China is having massive local debt burden of possibly US$44 trillion. This means, unlike the US, it does not have the financial resilience to bail out the country, (4) in tech and components - China has made progress to be tech self-reliant, but still relies heavily on U.S.-origin technology in advanced semiconductors, software, aerospace parts. Without legal access, domestic industries like telecom, aviation, and AI would be crippled. China's 1,300 Boeing planes will run out of spare parts.

China will try to accelerate it's Dual Circulation Strategy (away from export-driven to consumption-driven economy) but it will be a chaotic push for self-reliance based on domestic consumption (which it has been unable to achieve since 2015).

What it means for United States:
The U.S. imports from China a huge volume of goods. End consumer goods are elastic, replaceable. Component goods cannot be replaced in quick time. A sudden ban would cause retail shortages, price spikes and serious manufacturing disruptions. It will increase dependence on alternate suppliers like Vietnam, Mexico, or India — at higher costs.

What it means for the world:

Trade disconnection:
- Domestic manufacturers in both countries fill gaps.
- Other emerging markets (Vietnam, India, Mexico) attract supply chain relocations.
This leads to :
- Supply chain inefficiencies.
- Global price inflation for tech, consumer goods, energy.

Financial decoupling :
- Alternative financial systems (CIPS for China, SWIFT++ for U.S.) get accelerated development.
- Non-U.S. allies of China deepen RMB settlement.
This leads to :
- Financial fragmentation.
- Increased transaction costs.
- The currency pair USD/RMB may become rare, leading to global liquidity crunch.

Tech split:
- Local tech ecosystems (chips, AI, cloud services) become self-reliant.
- Nations like India, ASEAN, and EU tech firms could fill gaps.
This leads to :
- Slower innovation pace due to loss of global collaboration.
- Higher R&D costs.
- Bifurcated technology standards (5G, semiconductors).

Financial system realignment:
- RMB may gain share in Asia and Africa for trade settlements.
- Dollar remains dominant for commodities and hedging.
This leads to :
- RMB liquidity shortage in global markets.
- USD remains irreplaceable for derivatives and reserves, causing stress for RMB users.

Strategic realignment:
- Regional trade blocks tighten: USMCA, EU, RCEP, BRICS+.
- Military-industrial self-sufficiency could grow in both U.S. and China.
This leads to :
- Global political polarization hardens.
- Increased military tension.
- Risk of new Cold War-style standoff.

In the short term China would likely take the harder hit, but in the long run, both would suffer deep damage. The U.S. would face a decade of rebuilding domestic industries or finding trusted suppliers, while China would have to overhaul its entire growth model away from trade.

Scenario 2 : Economic Cold War

Trade becomes fully politicized. Both countries erect strong economic walls around tech, finance, data, and raw materials — not unlike the U.S.-Soviet Cold War, but economic, not military.

- Global tech standards split into “U.S. bloc” vs “China bloc.”
- Cross-border investments decline sharply.
- Military tensions influence economic choices (e.g., Taiwan blockade or South China Sea incidents leading to sanctions or blockades).

Winners:
Defense contractors and national-security-centric industries.
Countries that can balance both sides (e.g., Brazil, Saudi Arabia) profit from playing middleman.

Risks:
Severe global recession possible.
Global institutions like WTO lose relevance.

Scenario 3 : Controlled Decoupling War

Both sides gradually reduce mutual dependencies, especially in tech, finance, and supply chains, but avoid a total split. Strategic industries (like semiconductors, EVs, and AI) are prioritized for national self-reliance.

- U.S. reshoring manufacturing to allies (Mexico, Vietnam, India).
- China boosts its “dual circulation” strategy: self-reliance in tech, domestic consumption focus.
- Tariffs remain but get more targeted — fewer blanket taxes, more “strategic weaponization.”

Winners:
- Neutral countries (Southeast Asia, India) benefit as supply chains diversify.
- Domestic industries in both nations protected from foreign competition.

Risks:
Higher costs for consumers globally.
Lower global growth due to supply chain inefficiencies.

Scenario 4 : Managed Rivalry

Both sides accept the reality of long-term rivalry but maintain pragmatic cooperation in specific areas: climate change, global finance, and basic trade in non-strategic goods.

- Tariffs are negotiated down, but non-tariff barriers (e.g., security reviews, tech blacklists) increase.
- Joint efforts on issues like carbon emissions, pandemic response, or AI ethics to prevent catastrophic outcomes.
- Occasional flare-ups over Taiwan, the South China Sea, or human rights, but no full-scale economic severance.

Winners:
- Multinational companies able to operate in both systems.
- Global consumers enjoy more stable prices.

Risks:
- Fragile balance: any geopolitical misstep (Taiwan, cybersecurity attacks) could reset the situation to “Cold War” mode.

Scenario 5 : Reconciliation & Global Cooperation

Very unlikely, but who knows what can happen when American politics gyrate from Republican nationalism to Democrat globalism. Both US and China de-escalate for economic self-interest, recognizing the cost of conflict. A new rules-based global trade deal (possibly WTO 2.0) emerges, re-integrating supply chains.

- Tariffs rolled back significantly.
- New global tech standards co-authored by the U.S. and China.
- Multilateral forums (G20, WTO) regain power.

Winners:
- Global economic growth accelerates.
- Developing countries benefit from integrated trade.

Risks:
- Political resistance in both countries from nationalist factions.
- Requires major trust rebuilding — which seems unlikely in the near term.

CONCLUSION

Right now, the world is drifting between Controlled Decoupling and Cold Peace, with the real risk of Economic Cold War if geopolitical tensions spike. Full cooperation is the least likely path unless both economies take significant damage and need to reset.

There are 3 issues that are central to the US-China tariff war which I call (1) The Taiwan Factor, (2) The India Factor and (3) The RMB Factor. Yet these hardly come up in any talk or discussion on the tariff war. For example, every scenario is shaped by the risk of a Taiwan crisis which could shift quickly into a military war. I will do a follow-up blog on each of these separately.

The final question is what should Singapore do? I will also do a separate blog on this.

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THE US-CHINA TARIFF FACEOFF IS NOT 'WHO DARES WINS' BUT WHO HAS A MORE RESILIENT ECONOMIC STRUCTURE

When two elephants fight, it is the grass that suffers."
Old African proverb

At the world's most expensive poker night, Trump threw down tariffs like a man betting with someone else's chips. Xi raised, ever the oriental gentleman who cares more for face than chips. Trump, never one to back down from a bluff, or a brawl, doubled down like a casino regular who doesn't read the odds, only headlines.

More than 100 countries have now reached out to the White House to negotiate. With the stroke of a tariff pen, Trump has got these countries to the negotiating table. If Trump had relied on FTAs alone, the US will still be waiting in line behind bureaucrats and trade lawyers one hundred years from now. Say what you like of Trump, he gets the job done, or at least for the moment, he has the chance of getting the job done in relative quick time.

Trump being Trump, revels in characteristic un-presidential glee in telling to the face of his detractors that the countries are "coming to kiss his ass". It's the kind of anti-intellectual trash talk that earns him the epistemic snobbery of the elitist class. For the Chinese, it's disrespect that cuts deep into their psyche of a century of humiliation (百年国耻) in their history. The Great Hall of the People must have reverberated with thunderous "never again!".

So the table is now left with two players. Who will win the tariff war? All sorts of pundits including industrialists and economics Phds have offered their opinions. I see majority of Singaporean commenters have their money on China, no doubt conditioned by exposures to the zeitgeist of a US embroiled in economic and cultural decline, massive debt, dysfunctional judiciary, one half of the country wanting to make the country great facing the other half wanting to destroy it, and fractious politics, compared to a united rising China capable of impressive massive projects in quick time, technological advancements, the E-Yuan digital payment system replacing USD and SWIFT

But is the reality so clear cut?  Both sides have their strengths and weaknesses. As in a battle scenario, let's do a SWOT analysis. Instead of looking at the strengths and weakness of each country, let's examine by issues, this way there is less repetition.

Consumer strength:

The U.S. has one of the world’s largest and most affluent consumer bases. In 2023 Americans spent US$19 trillion on goods and services. Global output of goods and services in 2022 was US$56 trillion. Americans are responsible for 34% of the world's consumer expenditures. despite only comprising 4% of world population. The US is the consumer of last resort to the world. It is the driver of demand for the world's goods and services. Chinese manufacturers rely heavily on American consumers to buy their exports. 

It's generally said millions of Chinese have been lifted out of poverty. Yes China now has a huge middle income demographic which is a fundamental pillar of stability. However, it has been unable to increase domestic consumption due to two problems. One is a huge disparity of income distribution between the rural and urban population. A huge rural population do not have high disposable income. The urban middle income class has been hit hard by the real estate industry collapse and caught in mortgage debt trap. Furthermore, China has no adequate social safety net and no national hospitalisation and pension schemes. This has left the huge middle income base with a very low propensity to consume. The government had tried unsuccessfully to switch from export dependency to a domestic economy for years. The US export market remains very important to China's economy.

Score : 1 for US.

Import dependency:

This is the real heart of the trade war debate: it's not just about the numbers, but about what is being traded. The rhetoric I hear often from China hawks is if Xi Jinping shuts down all exports to the US, the Americans are dead. Let's unpack this.

Main product US buys from China which are hard to replace:
Electronics - Eg. phones, computers, TVs. China is the world’s electronics assembly hub. U.S. companies like Apple depend heavily on Chinese factories. Moving supply chains is slow, expensive, and complex.
Machinery & Electrical Parts - These are embedded in almost everything from cars to data centers. Chinese supply chains are highly efficient.
Furniture, Toys, Clothing - China’s scale and cost advantages are tough to beat. Alternatives (Vietnam, Bangladesh, Mexico) exist, but production shifts take years.

Main product China buys from US and whether it is easy or hard to replace:
Soybeans, Corn, Pork - China can switch to Brazil, Argentina, and local alternatives if necessary. That’s exactly what happened during the height of the Trump 1.0 trade war.
Crude Oil, LNG (natural gas) - China has global alternatives: Russia, Middle East, South America. Energy markets are liquid and globally priced, so substitution is easier.
Aircraft (Boeing) - Harder to replace (Airbus is the only real alternative) — but China could slow purchases or delay contracts as leverage, which in fact, it has already announced delayed delivery.
High-tech Equipment and Semiconductors - Difficult to replace, especially for advanced chips and design software. U.S. controls choke points like Nvidia GPUs and semiconductor design tools (EDA). This gives the U.S. real leverage over Chinese tech.

Short term:
China is in a stronger position because it exports mass-market goods that the U.S. can't quickly replace without hurting its own consumers. Americans cost of living will rise.

Score : 1 for China

Long term:
The U.S. holds the high ground, especially if it uses export controls on technology (semiconductors, AI chips, aviation). These are strategic chokepoints that hurt China more than tariffs hurt the U.S. In the longer run, reshoring bears fruit and manufacturing returns to US, lowering tariff-related costs.

Score : 1 for US.

Note on rare earth:
There is an often lauded claim China will destroy the US once it bans export of rare earth which are several metal elements needed in high end electronic goods. China is the largest exporter of processed rare earth elements. However it imports a sizeable quantity of unprocessed rare earth from US. Rare earth is actually not rare but its mining has environmental issues which is why advanced countries with strict regulations do not produce them. The US is probably just one year away from self-sufficiency. See my earlier blog on rare earth here

Export dependency:

China exports US$440 billion of goods to US which is 14% of their aggregate export and 2.6% of GDP.. These are predominantly in high end electronic goods and parts which means there is no ready alternative markets. For the factories that produce these, their US buyers are probably the mainstay of their business. Banning sales to US, or the 125% tariff, means shutting down. To continue means loss of economies of scale. These are huge operations, so the impact on unemployment will be catastrophic. There will also be serious repercussions in the whole domestic supply chain. 

China is an export-based economy with a weak domestic consumption. It's 14% export to US is a crucial factor although publicly they try to play down the importance of the US market.

US exports US$154 billion to China which is about 8% of total exports and 0.4% of its GDP. The major exports are soya beans, crude oil and gas. The market for oil and gas is huge  so it is not too big a problem for the US. In the previous tariff war, soya bean farmers needed massive subsidies to tie over.  In Trump tariff war 2.0, if EU cave-in, which they surely will, then their removal of tariffs against US agricultural products means American farmers have a ready alternative market. US also sells airplanes and spare parts to China. US has the edge since there is basically no competitor. China may delay delivery for new planes, but spare parts must continue for flight operation. Boeing can always work around the delivery dates because lead time is long and their books are full.

Score ; 1 for US

Manufacturing :

China is a manufacturing powerhouse. It has deep supply chains, cheap labor (though rising), advanced automation in factories, and infrastructure making it difficult to replace in global manufacturing.

The US relies on Chinese manufacturing for everything from electronics to consumer goods. The US hollowed out their manufacturing capacity long ago. Reshoring of manufacturing is Trump's objective but there is a long time gap to realise the ambition. This means in the short term, US has to rely on imports of manufactured goods and parts. Tariffs will raise prices for U.S. consumers in the short term. US cost of living will be hit hard.

Short term : Score 1 for China.

Long term :
Assuming US reshoring works out, its high labour cost, shortage of labour and strength of USD may not make their products competitive. If tariff remains to protect domestic production, the American consumers suffer.
Score : Unknown.

Technology :

US dominates in advanced sectors: semiconductors, software, aerospace, AI, and biotech. The U.S. controls many of the tech choke points China depends on (e.g., advanced chip designs, operating systems). China is strong in application, US still holds the edge on the IP side.

Score : 1 for US

Dollar hegemony :

The U.S. dollar is the world’s primary reserve currency, giving America financial leverage that no other country has, especially in global transactions and sanctions. It has the ability to ride out a storm in the financial markets that these tariffs may cause.

Score : 1 for US

Weaponisation of Treasury securities :

China holds about US$785 billion in US Treasury securities in its foreign reserves. This is the second largest holding after Japan. There is much talk China may weaponise this by dumping in the market to destroy the USD. It is a double-edged sword that will hurt not just both sides but the global community. China's sovereign wealth funds China Investment Corp has a portfolio of US$1.33 trillion (Mar 2025) and Central Huijin Investment Ltd has US$0.9 trillion. Although China has for a few year now made moves to divest from USD, it is currently still holding massive USD assets. Causing a USD devaluation will not only mean massive losses for China, but a cheaper dollar will make US exports more competitive.

China may continue to unwind their dollar holdings but not in a massive dump. Although China has made strides to get its trading partners to price products in RMB, in global trade, USD still dominates, and in the financial derivatives markets which are several times bigger than the markets of real goods, USD dominates and RMB is insignificant. What this means is China cannot decouple from the USD. It still has to maintain substantial USD in its foreign reserves to provide liquidity.

Score : 0-0

Debt Load :

This lies at the heart of global power economics. We examine the debt situation and assess the vulnerability of the countries to a tariff war. 

The US has a massive US$36 trillion in national debt which is now close to 133% of GDP. The debt is in the form of Treasury securities which are held by Federal Reserve (built up from their QE exercises), US banks and pension funds,  foreign governments, other investors. For as long as USD remains the major world reserve currency, and the papers provide a reasonable interest, demand will always be there. Let me explain the nature of the beast which is something most people do not understand. In international trade, there will be countries with surplus vs the US. Because of their trade surplus the country sucks in USD. This reserves will be deployed  buying up US assets, which may be real estate, US companies, or Treasury securities. To put it another way, the US government creates the asset in the form of securities for the surplus countries to park their USD reserves. This is the inherent weakness in the existing system of international trade. The country whose currency is used as world reserves currency, provides the equilibrium for the trade imbalance that must surely arise. Had it not been for Treasuries, US physical assets would have been gobbled up by foreigners, including the Statue of Liberty. There is much talk about dedollarisation, but there is no end in sight. In the short to medium term, US debt does not present a problem with regards to the tariff. In fact, if the tariff war brings global apprehension as to the uncertainties, it drives investors to US Treasuries, not away from it.

On the other hand, China has a very serious debt problem which no one talks about, not even Jeffrey Sachs in his many public engagements. China is poor on data which are estimates. It has a domestic debt of about US$36 - US$44 trillion which is about 211% to  259% of GDP. These debts are carried by :

- Local Government Financing Vehicles (LGFVs) - US$15-US$20 trillion.

- State-owned enterprises - US$9-12 trillion.

- Shadow banking + corporates (huge real estate developers) - US$12 trillion.

Unlike the US debt, China's debt is problematic. The LGFVs, state enterprises, shadow banking, real estate developers, all depend on cash flow from land sales, exports, and economic growth — all of which tariffs directly threaten. Since all these are domestic debt, the government can print RMB. The local government cannot do that, it will have to be Public Bank of China. Large scale bail out will cause Yuan devaluation (inflation), capital flight and threaten financial stability.

To assist in comparing vulnerability, following bullet points help:

* Debt size : 

US - $36 trillion.

China - $36-$44 trillion (RMB denominated.

* Debt structure : 

US - centralised.

China - fragmented (local govt, corporates, shadow babking. 

* Currency control :

US - Issues world reserves currency.

China - Prints RMB, less globally accepted.

* Crisis flexibility:

US - can borrow easily in a crisis (Flight to safety effect).

China - limited capability, relies on domestic savings, or print RMB.

* Trade exposure:

US - export is only 11% of GDP.

China - export is 20% of GDP. China’s economy is almost twice as export-dependent as the U.S. So when tariffs go up, the impact on factories, jobs, local tax revenue, and debt repayment is much more severe in China than in the U.S.

In a tariff war, the U.S. debt is a long-term fiscal sustainability question.

China’s debt is a short-to-medium term financial stability risk.

Score : 3 for US

Politics:

US domestic division can weaken long-term strategic focus, especially on foreign policy consistency. Trump faces a Democrat opposition willing to burn the house down to see him fail and a dysfunctional judiciary that tries to checkmate his every move. 

The Chinese government can act quickly and decisively on economic policies — subsidies, currency controls, tax breaks — without the gridlock seen in democracies.

Score: 2 for China

RESILIENT ECONOMIC STRUCTURE:

This gets right to the heart of why the U.S. and China have different shock absorbers when it comes to global disruption, sanctions, or trade wars.

* Service share of economy:

A higher service share of the economy can buffer tariff shocks in the export sector.

US - 77% of GDP

China - 53% of GDP

* Goods (industry + agriculture):

US - 20% of GDP

China - 46% of GDP

* Export dependency:

A high export dependency exposes the country to instability from tariff shocks.

US - 11% of GDP

China - 20% of GDP

* Domestic consumption:

High domestic consumption can absorb tariff shocks better. Easier to substitute with domestic production.

US - 68%-70% of GDP

China - 55% of GDP

* Financial sector size:

Strong financial sector can remain stable in the face of financial stress from tariffs.

US - Very deep capital markets, diversified, global

China - Although growing, it is state-heavy.

* Innovation base:

Can control choke points in various sectors of the economy.
US - Mature, leader in tech, AI, R&D

China - Expanding, tech self-sufficiency drive.

It is not a matter of who dares win, but of the country's economic structure which provides resilience to economic shocks such as tariffs. Do not be influenced by propaganda or rhetoric from many experts, including professors like Jeffrey Sachs. Walk through all these data points listed above and form your own opinion.

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TEMASEK & GIC HOLD US$11.2B IN US-LISTED CHINESE EQUITIES IN DANGER OF DELISTING

Trump has threatened to delist Chinese companies listed on New York Stock Exchange and NASDAQ. These counters are American Depository Receipts (ADR) and non-ADR listings. These US$-denominated listings allow Americans to invest in Chinese stocks with no foreign exchange risk and allows  Chinese companies to  raise capital. 

From their Q4 2024 13F filing, Temasek had 9 ADRs worth US$1,099m and 1 non-ADR worth US$164m while GIC had 2 ADRs worth .US$8,146m and 1 non-ADR worth US$1,044m.

ADRs often use a Variable Interest Entity (VIE) which is a special legal workaround structure to circumvent Chinese restrictions on foreign ownership in sensitive sectors. Investors in ADRs do not own shares in the actual operating company in China. Instead they own shares in an offshore shell company which has contractual rights to the cash flows of the real business in China. These VIEs are often domiciled in Cayman Islands. There's growing concern over the VIE structure's legal framework. Technically, investors do not own equity in the Chinese operating companies.

In the case of Chinese companies listed directly in US exchanges, investors own direct equity stakes  with voting rights, dividend rights and better legal standing. However enforcement of rights across US-China borders may be challenging.

What happens in a forced delisting?

Some counters have dual listings, a primary listing in US and a secondary listing in Hongkong or Shenzen Exchange. (Alibaba, JD Com and Net Ease). Investors may convert ADRs to actual shares to trade in HKEX but this requires heavy legal processes and conversion fees subject to agreements by brokers or custodians. It's not that straightforward.

ADRs or shares may move to OTC (over-the-counter) but this will result in huge discounts due to loss in liquidity. Wholesale investors like mutual funds or pension funds that have rules prohibiting trading in OTCs will be forced to dispose at deep discounts. This brings more gloom and doom.

It is not known if Temasek and GIC has internal rules that forbid OTC trades. Most probably not, but if they do, they need to dispose of them in private buyouts which will be at very deep discounts.

Investors may bring the shares private and list elsewhere. A very lengthy and expensive proposition.

Whatever way the investors chose to proceed, a delisting means loss of liquidity, serious valuation losses, heavy legal and other expenses ahead, and narrow exit paths guaranteed.

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UNCLE SAM DOES NOT PRINT MONEY - OTHERS, INCLUDING SINGAPORE, PRINTS THE USD

"The US national debt of US$36 Trillion is testimony that the statement 'the US government prints money' is a fallacy"

One of the most widely perpetuated and commonly held misconception is that the US government prints money. It is shocking to hear this repeated by many familiar with finance and economics. I am sure you have read, heard and seen numerous videos of finance experts and Phds repeating this nonsensical line. The layman may be forgiven, but it is time to understand the truth. 

Of course every government prints the notes and coins. The serious money is about digital money, the credit balances in customers' accounts in banks. The "money printing" fallacy refers to the government, with the click of a mouse, creates a credit balance in its own bank account, so viola it has the money to spend. The US government's banker is the Federal Reserve where it maintains the Treasury General Account (TGA). The reality is, like everyone else, the government has to put money into it's account before it can spend. All federal government revenue goes into this account and all federal government payment flows out of this account. If the government just "clicks" money into existence, why is there a national debt. It's such a low level logic that is so amazing people do not stop to ask themselves.

Except for North Korea of which I know nothing, the fact of the matter is digital money is created by the banks in the country, not the government. Banks create money simply by using their customers' deposits to lend to others. Their borrower takes the money and deposits into their account which then allows a second round of bank lending. This snowballing has a multiplier effect to the supply of money. This is called fractional banking. The government controls the banks by imposing a reserve or liquidity ratio which curtails banks from onlending the full sum of deposit money. Banks are required to maintain a certain percentage of customers' deposit money in their reserves account with the central bank. This is for liquidity purposes to ensure banks have sufficient liquid cash to meet customers' daily withdrawals. For bank viability the regulators look at other metrics such as capital adequacy.

Where proceeds of the loan goes to is varied depending on each borrower's instructions. All it boils down to is banks create money in the fractional banking process simply by the click of a mouse, that is, "printing" money, to disburse the funds.

A broad measure of money supply is M3. As at 30 Nov 2023 the M3 of the dollar is estimated at US$21 trillion. Although that is a massive figure, it is hardly enough to provide the liquidity needed to grease world trade and financial transactions. Recent estimates put about 80%-90% of global transactions involve USD. This may come as a surprise to many who has been exposed to the publicity of dedollarisation and the internationalisation of the RMB. The business world does not revolve around the trading of physical goods and services alone, it is inextricably entangled with the whole shebang of derivatives such as futures, options, swaps, foreign exchange, etc. It involves not just outright trading, but investing, hedging and speculating activities. As much as the world trade in physicals is, all the financial markets within which those physical goods are traded is a few hundred times much larger. In these derivatives market, the RMB plays a negligent role. 

WTO estimated world trade in goods and services for the whole year 2023 was about US$33 trillion. BIS (Bank for International Settlements) Triennial Survey for 2022 estimated daily FX turnover was US$7.5 trillion daily and for the year about US$1.873 quadrillion. Assuming 80% is in USD that would mean trade of US$26.4 trillion compared to FX of US$1.5 quadrillion (there are 15 x "0" in a quadrillion!).

Let's take a look at another commodity vs derivatives comparative. Daily global oil consumption is 100 million barrels. Assuming US$80 barrel that would be US$8 billion per day. Futures and derivatives market is estimated 3 to 5 million contracts (Brent futures + WTI). Each contract is for 1,000 barrels so we have 5 billion barrels per day on the high end side. Based on US$80 per barrel total value is about US$400 billion. However this is the notional value. The upfront capital requirement is based on the margins which is about 5 to 10%. Again taking the high end, that means about US$40 billion daily. Physical US$8 billion compared to derivatives of US$40 billion. Oil is primarily traded in USD. There may be some transactions now in RMB but the derivatives and futures are still US$.

Just to get another sense of dollar transactions. I had a stint managing the back office of a bank. Our payments can hit US$1 billion on most days. Assuming just 50% is USD that would be US$500 million daily. We were just a small offshore branch. Imagine the larger banks and multiply that by the hundreds and thousands of banks all over the world.

Apart from trade, investments, speculation in financial markets, a massive amount of USD change hands domestically - people buy stuff, pay rent, pay salaries, remit cash for whatever purposes, etc. This is the "real economy". To get a sense of how much money is required to enable the economy, economists use the metric "velocity of money". Basically this says how many times a dollar is recycled in a country. The US is about 1.3; Singapore is about 0.81 (2023). 

Another way is looking at USD settlements. Ballpark figure culled from Fedwire, CHIPS, ACH, ATMs and estimated dollar notes, is about US$6 to US$8 trillion daily. 

That is all to say the M3 money supply of US$21 trillion is not enough to grease the wheels of global economy. So where else is the money supply coming from? The answer is the USD circulating offshore. According to BIS data (2023) there is about US$12-US$15 trillion in the Euromarket which refers to the USD-denominated deposits in banks outside US. This includes interbank lending, corporate deposits and sovereign holdings. There is another US$18-US$20 trillion in cross-border claims by non-US banks, much of these is held in jurisdictions like London, Singapore, Hongkong, Luxembourg and Cayman Islands. Then there is the shadow banking holdings or dealings, mostly hedge funds and money-market funds which account for another US$5-US$10 trillion. So ballpark figure is US$25-US$35 trillion.

So as can be seen, the USD ecosystem offshore is actually bigger than the domestic scene. Non-US banks with dollar deposits do what banks do with their customers' deposits - they lend out. Money never sleeps. So fractional banking of USD takes place offshore and dollar supply increases. This offshore money printing by offshore non-US banks is unregulated and there is no reserve requirements. 

Singapore banks record foreign currency transactions in the Asian Currency Unit which is heavily weighed in USD. This is a different set of books that segregate foreign transactions to avoid impacting domestic monetary policy. So to those Singaporeans who like to mouth sarcastically and erroneously the US prints their currency, consider for a moment that in fact, USD is actually also "printed" in Singapore.

There are those that say the Fed "prints" money when they do Quantitative Easing. This is when Fed buys government securities from the market. When the Fed buys securities, it pays for them simply by crediting the selling banks' reserves accounts. It pays for money which it does not have. Yes, this is the quintessential money printing. However, QE is only a temporary means to provide liquidity to the market. Excess liquidity is later sanitised by Quantitative Tightening when the Fed sell securities and banks' reserves accounts are debited.

There are other exceptional situations where the Fed "prints" money by crediting banks' reserve accounts. thus giving them the money to use. This is during financial crisis where Fed rescue packages take the form of short term easy credits. Banks are provided funds simply by the Fed crediting their reserve accounts. Again, these are short term in nature.

Then there are those who carelessly say the Fed buys Government securities at the Treasury auction. They pay for this by crediting the Treasury's TGA account, thus "printing" money. The fact is by law, the Fed cannot purchase government securities at the primary market. The Fed only purchases government securities in the open secondary market and only for the purpose of managing liquidity. Purchasing at the primary market is tantamount to monetising debt, that means, the Fed "prints" money for the government to spend. This never happens.

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TRUMP'S TARIFFS - THE GREAT RESET TO GET OUT OF THE TRADE IMBALANCE TRAP

The US isn't crashing. It is diving in order to fly again.

On takeoff, a plane may stall if pitched too steeply into the airflow. In aviation lingo, it took too high an 'angle of attack'. When this happens, the wings lose lift. This is very dangerous because without lift, the plane will drop out of the sky like a giant rock. The correct recovery maneuver is usually to lower the nose (a kind of dive), reduce angle of attack, and regain airspeed, which restores lift. So technically, when the plane is about to fall, the pilot goes against human instinct by executing a dive in order to make the plane fly again.

This is the best analogy to explain the US economy and Trump's tariff. The US economy is on the operating table, the symptoms are the massive national debt of US$36 trillion, persistent budget and trade deficits, the diagnosis is it is stalling as it is caught in the Trade Imbalance Trap. Tariffs are the shock therapy. The tariffs may make the economy dive in the short term but will provide the lift in the longer term when capital returns, reshoring of manufacturing sector takes place and employment goes up.

A plane takeoff is the most critical moment of the entire flight and stalling happens more often than you would expect. That's why first class experienced pilots are paid the salary they command.

When a plane stalls at takeoff which is due to pilot taking too high angle of attack, it is not a mechanical problem but an aerodynamics issue. The experienced pilot makes a dive, regains lift and adjusts the angle of attack. The inexperienced pilot grapples with his instruments to determine a mechanical failure and crashes the plane.

The analogy of the plane is to stress the need for understanding the real underlying causes of a crisis.

The existing framework of international trade is not harmonious. It leads to some countries achieving trade deficits while others accumulate surpluses. This is also called current account deficits or surpluses. Both trade deficits and surpluses are problematic if they are persistent and massive. Economists call this the Trade Imbalance Trap. This blog covers only the trade deficit problems.

When countries are hit with the trade deficit trap, economists and politicians are quick to blame unfair trade practices. US is no different with the blame game. It’s not just about who’s exporting more or less. It's about deep structural imbalances in how the U.S. and the global economy operate. A deep dive into the core of the U.S. trade deficit trap requires peeling back the layers of politics, economics, and global finance.

Trade deficit trap of US is something economists knew all along. But all Harvard Phds in Economics simply kick the can down the road for a hundred years. No one dares to make the plane dive when it is falling. It goes against instinct. That's why the US needs Trump, an out-of-the box thinker, to make the dive.

But Trump also plays the blame game of unfair trade practices. He has drawn sharp criticisms from many Phds in Economics that he does not know what he is doing. However, as he has stressed, there is design in his madness. His agenda for the tariffs is the reshoring of manufacturing sector. He is addressing one of the underlying structural weakness in the US economy. Assuming his plan works, manufacturing returns, jobs are created. Will that solve the trade deficit problem? In my opinion, no, because other structural problems have not been resolved. However, the tariffs offer a respite. Trump has just pressed the Reset Button. (Actually I used "Reset" days ago when I started my draft. But I see some publications have now gotten ahead of me using the word). It attempts to level the playing field. As far as US is concerned, it has a fresh start in international trade. But if underlying structural problems are not resolved, trade deficits will build up again. That's why in my analogy of the US economy patient, I said tariff is the shock therapy, it is not the cure.

A snap-shot view of a country's developmental trajectory is useful:
- Agricultural economy (poor, backward)
- Industrialisation, using cheap labour force and FDI.
- Exports rise due to cost-competitiveness. Growth fueled by external demand.
- Surplus Trap follows. Country is saving more than it consumes.
- People's income improves. Rise of the middle class. Domestic consumption rises. Inflation driven by higher labour cost. Currency appreciates.
- Looses competitiveness. Needs to increase productivity, innovate, move up the value chain.
- Middle Income Trap - If it remains non-competitive and fail to restructure, it is stuck here.
- Capital leaves. Manufacturers relocate to cheaper countries or outsource. Unemployment up.
- Exports down.
- Trade Deficit Trap follows. It is consuming more and saving less.
- Takes on more and more foreign debt to pay for net-imports.
- Currency tumbles and debt becomes more expensive.
- Debt Trap follows.

Examples of countries stuck in the Middle Income trap - Malaysia, Thailand, South Africa, several Latin American countries.

Examples of countries that escaped the Middle Income Trap - South Korea, Taiwan and Singapore.

In the 70s to 80s Singapore began to move up the value chain into electronics, petrochemicals, precision engineering, and financial services. That's when our cost base took a steep step up and million dollar salaried CEOs became common. Example Perm Sec Goh Chee Wee walked through the PAP revolving door to a S$5m job as CEO of ComfortDelgro, built on the back of thousands of taxi drivers who suffered back pains and kidney issues from long hours in the driver's seat. His lucrative pay would have been as well kept a secret as Ho Ching's but for his spat with the press. He exercised his imperial powers to ban a journalist from his prescon which generated some heat for him. The policy to shift from low-cost manufacturing and labour-intensive industries to higher value-added ones was a strategic move. Singapore succeeded in the move up the value chain, but it did not come easy. Manufacturers had to cope with dramatic changes in the supply chain. For example, Seagate was in the high end electronics sector but it relied on a vast chain of low-end labour-intensive vendors. The change in policy forced the supply chain further and further north, first into Johore Bahru, then Malacca, then Penang and Thailand. Manufacturers prefer to be closer to the supply chain, and soon Singapore lost its niche as the biggest disk drive producer in the world. I experienced this first hand in my short stint working in JB. In today's lingo we can say Lee Kuan Yew was a 'disruptor' and that economic shift was a Trumpian move. Singapore succeeded because Lee never had to contend with a subversive opposition, militant anti-establishment activists, partisan subversive judiciary, treacherous deep state, leftist captured media, a multitude of protesters-for-rent, woke-ideologues, leftist and Democrat-controlled or created NGOs, and dark money from philantro-capitalists, all of these that work against Trump..

To provide perspective, here is a snapshot on history of international trade from 1500 onwards::
* 1500-1800 Age of exploration and Mercantilism - trade was a zero sum game, one country's win is another's loss. Nations maximise exports and minimise imports to accumulate wealth in gold and silver. This led to colonies, tariffs and government control to boost national power.
* 1800-1914 Industrial Revolution Free Trade Idealism - age of steamships, railroads, telegraphs revolutionised logistics; gold standard and Pax Britannica; Britain pushed for Free Trade.
* 1914-1945 Interwar Protectionism - WWI disrupted trade routes and currency systems; Great Depression (1930) and trade collapsed; protectionism rises; trade barriers (tariffs) worsened the economic crisis.
* 1945-1990 Post WWII Multilateralism - The West rebuilt global trade with institutions (GATT 1947 [General Agreement on Tariffs and Trade], IMF, World Bank, Bretton Woods system [USD pegged to gold and all other currencies pegged to USD]) formation of EU; Multeralism (blocs work together on common issues); promotion of open markets and lowering tariffs; Japan and Germany rose as export powerhouses; Singapore, South Korea, Taiwan and Hongkong rose as the Asian Tigers.
* 1990-2008 Globalisation & WTO - Cold War ended; GATT was replaced by WTO (1995 broader rules, stronger enforcement); China joined WTO (2001) and became a major global trader; container shipping & digital communication revolutionised logistics; MNCs from the West offshore production to cheaper countries and globalised supply chains; global trade grew tremendously. 2000-2010 surge in FTAs which are preferred custom-tailored contracts over slower WTO. 
* 2008-present day Trade Imbalance Backlash - 2008 financial crisis created doubts on globalisation; trade imbalance friction; rise of populism in developed countries driven by job loss and inequality; Brexit; shift towards protectionism and reshoring; Trump-US-China Trade War I; Covid-19 exposed vulnerabilities in supply chains; Ukraine War sanctions and weaponisation of USD and SWIFT exposed further vulnerabilities.
* Today - Trade less global more strategic; growth of regional agreements, digital trade and climate-linked policies (like carbon tax); supply chain resilence strained; Technationalism; and future of US-China tariff war.

Few things to highlight from the historical snapshot:

1. Advanced countries have first-mover advantage with industrialisation, productivity, innovation, high valued goods. Eventually cost catches up and they became non-competitive. Manufacturers outource or relocate factories to cheaper cost countries. Globalisation and international trade liberation became the great drivers for economic growth in the 1990s.
2. Industrialisation created some moguls of industry. Moving from low value labour-intensive industries to high-value industries propelled a small segment of the population in a country to great wealth. Globalisation propelled a very much smaller segment of the population to unimaginable wealth. Today, 1% of the global population owns 48% of the world's wealth.
3. Advanced countries want globalisation and free trade when it suited them -- when they are strong and want market access, when they are not competitive cost-wise and they pursue offshoring strategies.
4. Imbalance in trade is inevitable. Some countries have trade deficits, some have surpluses. Deficit countries have high domestic consumption and low savings. Surplus countries have low domestic consumption and high savings. There are complex structural differences in the two economies.
5. Several Western countries have deficit current accounts (USA, UK, France, Greece, Spain, Italy, Canada, Australia, New Zealand). Before Trump, none of these democrat-socialist-liberal countries have the political will to take tough medicine. They chose instead to stick to globalisation and one-world socialist ideology by opening borders and bringing in illegal immigrants for cheap labour, ignoring social costs and security risks.
6. Trump chose to rebalance trade. He sees decades of weak American leadership led to a state where the MFN (most valued nation) rates other nations levy on US is much higher than what the US charges them. On top of that there are other unfair trade practices aimed at making their exports cheaper - currency manipulation, VAT and export subsidies. Many opined Trump's objectives from geopolitical moves to attempts to crash China, or for stock market manipulation. Trump has been consistent for 40 years about using tariff to level the playing field.
7. Powerful billionaire globalists behind global corporations who gained massive wealth with globalisation do not want to stop the gravy train and are naturally united behind Western liberal governments. They make massive political donations to democrat-socialist-liberal politicians. A strange bedfellowship of capitalists and socialists.
8. Trump-MAGA-conservative fair trade policy is anti-globalism which sets the stage for a black-eye clash with the Democrat-billionaire capitalists-liberal who are deeply committed to a one-world "end of history" ideology via globalism. This is what the political battles in the US is all about. The Left and globalists are so committed they are calling for violence and the assassinations of a sitting president and destroying their judicial system with subversive judges usurping the Executive's authority. It is no longer a stage show of the chaos in a two-party democracy, but constitutional conservatives facing off leftist-progressive liberals in full outright hatred mode reminiscent of Stalinist-Leninist-Maoist-Pol Pot madness.. 

The US is in the Trade Deficit Trap. It is a high cost base and manufacturing industries have hollowed out. For example, of their worldwide factories, Nike only has 6.4% of them in US employing only 0.5% its total manufacturing workforce. Other big manufacturers that have moved offshore include GM, Ford Motor, Caterpillar, Apple, Whirlpool Corp, IBM, HP, GE, etc. Detroit, once the motor vehicle capital of the world, has been reduced to a population of unemployed motor vehicle workers. The 2024 election saw a strange case of union workers supporting Trump and union leaders on the Biden ticket. Workers want manufacturing jobs back.

The US is actually in a Double Deficit Trap. Apart from Trade Deficit, its persistent Budget Deficit compounds the deficit in its Current Account. Americans consume more than they produce, so they borrow to fund the net import. The budget deficit also forced the US to borrow. This double borrowing has caused national debt to balloon to US$36 trillion.

Apart from US. the UK, Singapore and Japan also have massive national debt but they are not having runaway inflation and currency depreciation like Argentina and Zimbabwe. UK (2024) with US$3.8T debt and Debt-to-GDP ratio 95%, Singapore (2024) debt of US$0.9T, debt-to-GDP ratio of 173%, and Japan (2024) debt US$8.7T Debt-to-GDP ratio 254%. The reason is it is all domestic debt. These are debts in its own domestic currencies. UK is still a very strong financial centre so with enough GBP liquidity for it to borrow. As for Singapore, the domestic borrowings are for special purposes which cannot be spent, they are all parked in investments. In the case of Japan it has one of the highest savings rates in the world, the borrowing are all domestic.

Basically, the US is now in a Debt Trap because the national debt is so high it can barely pay off interest. US (2024) GDP is US$30T and the Debt-to-GDP ratio is 124%. But it is not turning into a banana republic anytime soon because their debt is all in USD. With the huge national debt and massive money supply, why does the USD retain its strength? This is because the use of USD as global reserve currency allows it to export its currency which foreigners use to buy US assets, mostly in government securities. French Finance Minister Giscard d'Estaing coined the term "Exorbitant Privilege" which allows the US to:
- Borrow cheaply from the rest of the world.
- Run persistent trade deficits without suffering currency collapse.
- Pay for imports with its own currency.
- Invest abroad and earn higher returns on its foreign assets than what foreigners earn on US debt. (In case you don't understand this, imagine the Singapore government pays 3% on CPF loans and GIC making 6% investing those pension funds.)

The dilemma of the US:
Nevertheless, US is in a trap when the only two options open offer paradoxical outcomes. Let me explain.
A. It can reduce trade deficit in several ways such as reduce consumption (lower fiscal spending), weaken the dollar (lower interest rate), restrict imports (tariffs), reshore production (bring manufacturing back), etc. All these actions will (1) undermine confidence in the dollar if it devalues, (2) disrupt global supply chains which raise costs at home, (3) trigger inflation, (4) cause capital flight.
B. Or it can keep the status quo, i.e. kick the can down the road and continue to let the deficits roll. This will fuel the domestic political backlash and increase dependency on foreign capital, i.e. piling on more debt. Dedollarisaton is the final consequence.

To understand how the world get to where it is today, we need to see the macro economics, or the bigger picture. Imagine every country keeps an account called Balance of Payment (BOP) which records the cashflow of dealings with the rest of the world. The first part is called the Current Account which records flow of goods and services. The second part is called the Capital Account which records capital (loans, investments) flows. If a country imports more than it exports, it has a net deficit in the Current Account. To pay for this it has to borrow, so capital flows in which is recorded in the Capital Account. It then has a net credit or surplus in the Capital Account. The BOP is balanced, or zerorised. On the other hand a country that exports more than it imports has a surplus or credit in the Current Account. It has to park the foreign currencies earned in the respective trading countries. As it moves foreign currencies out, it results in a debit in their Capital Account, thus balancing their BOP. It's more complicated, but this is the basic.

Capital flows from surplus to deficit countries. The consequence is surplus countries gobble up the assets of deficit countries. This is obviously untenable in the long run. The solution to the Trade Imbalance Trap that is inherent in the current international trading system is twofold. (1) A new international reserve currency model is needed. (2) Deficit currency needs to consume less and save more, whilst surplus countries to save less and consume more.

Surplus countries like Singapore too have their own sets of problems which I have not addressed here. Kenneth Jeyaratnam has an excellent recent post in Facebook that ties in with my article here and connects the dot to the Singapore situation. Click the link here to Kenneth's post. It is worth reading.

The US trade deficit is the burden America carries for being the world's financial anchor, consumer of last resort, and safe haven. It has the responsibility to provide the liquidity the world needs which involves loosing control of its currency supply through fractional banking in offshore financial markets. Escaping it requires deep structural changes - higher national savings, reduced consumption (balanced or surplus budget), reshoring manufacturing, export revitalisation, all of which are domestic responsibilities, AND a new global reserve model which is an international effort.

Whether you like or hate Trump, you should be aware he is trying to cut consumption by shrinking an over bloated Federal Government, and cut waste and financial abuse. He is also trying to reshore manufacturing through tariffs. Both of these steps are in line with the sentiments of this article. Just like the pilot executing a dive when the plane is stalling, Trump's actions will take the US economy on a dive in the short term. Reshoring takes time and so the economy can only reshape in 2 to 3 years time. I stated earlier, the Tariffs is only a therapy, not a cure. In the long term, if structural changes do not occur, and USD remains world reserve currency, history will repeat itself.

Whether Trump's audacious acts on tariffs can turn out well depends on two things. One is whether he has political capital to ride out the storm before the benefits of reshoring takes effect. A huge storm there will be as Democrats are prepared to burn the country down in order to stop him at every turn, nitpicking at every small mistake and making it into molehills. As it is they are building a bonfire out of claims of insider trading of stocks due to the tariff flip-flops. Two is whether a triggered financial market may meltdown and blow the situation into another financial crisis. The market is not the economy, but it always has the potential to impact. The eye in the storm this time is the bond market, particularly in Treasuries. This has nothing to do with Trump but I see online chats by people who have never been in the trenches pointing three fingers at him. This is complicated stuff but let me try to clear the mystique as best as I can.

Understanding the bond market scare:

For quite some time the bond market has been under a slow-burning risk that could explode under stress. And when it does it could affect anything from mortgage rates to global currencies. The bond market, especially Treasuries, has been facing a perfect storm of :
1. Rising interest rates - The Fed has been raising rates to fight inflation. When interest rates rise, bond prices fall. Banks, investors, and central banks the world over that have a USD bond portfolio are holding huge unrealised losses.
2. Weaker demand - China and Japan, historically large buyers, have scaled back on US Treasury bills. The Fed is currently not a net buyer as it is doing quantitative tightening liquidity to fight inflation.
3. Over supply - The massive US debt of US$36T has led closer and closer to an oversupply situation. The government securities (Treasury bills, Treasury notes, Treasury bonds) are of varying maturities. In 2025 a massive number of these reach maturity and need to be rolled-over. Treasury bills alone could be as high as US$6T. Due to the demand-supply gap, investors demand higher yields. Higher yields means lower prices means more losses.

The bond market has been sitting tight with massive unrealised losses under rising interest rate scenario, waiting for the sparkle of hope of the Fed lowering the interest rates.

So what caused the massive bond market shock on April 10? Trump's tariff concerns have already been circulating for days. The interest expectations and risks have already been factored in by the market. So it is not the cause. What caused market reaction was the March 2025 US Consumer Price Index which came out on April 10. The year-on-year CPI of 2.4% was down from February's 2.8%. The year-on-year increase of 2.8% was the smallest 12-month increase since 2021. The March CPI decreased by 0.1% which is the first monthly decline since July 2022. So inflation cools, Fed is done hiking rates, rate cut may come sooner. That's bullish for bond holders because their fixed coupons become more attractive and prices go up. There was in fact a rally in the bond market.

As big as the cash or spot market of bonds is, it pales into comparison with the derivatives market of bond futures, options, swaps based on interest rates or bond prices. These markets are extremely highly leveraged. Many hedge funds take up massive positions in the basis trades (aka spread trades, aka relative value trades,) In basic terms, they are betting on price differences between short term vs long term bonds, treasuries vs corporate or mortgage bonds, different maturity yield curves, different countries' bonds, etc.

The speculators are called steepeners (those who bet long rates would rise more than short rates) and flatteners (those who bet short rates will rise more than long rates) When the curve flattens or steepens unexpectedly, these types of spread bets unwind violently. When volatility spikes, the spread widens or collapses unpredictably. Even a small swing of 10-15 basis points can wipe out positions because these business is extremely leveraged. On April 10, CPI dropped, the yields fell, with long term yields falling more sharply than short term yields, flattening the curve.

The April 10 bloodbath was not in the directional bond market but in the spreads trades. The players are the huge hedge funds who are leveraged up to their eyeballs. The leveraged positions of the bond spread trade in US Treasury market in early 2025 has been estimated to be about US$800 billion to US$1 trillion. Given the market size, high leverage, and violent reaction to a small sudden interest rate change expectation, it is easy to see how margin calls can create a liquidity crisis in the bond market and cause turmoil, and can lead to a systemic meltdown in the broader financial market. 

In essence, the tariffs was the background risk. The April 10 CPI surprise caused the yield curve to flatten sharply. Leave Trump and his tariff policies out of it.

The US is running on a currency-consumption treadmill -- it must keep running to stay stable but the more it runs, the harder it is to stop.

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