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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