Deputy PM Winston Peters likes nothing more than to portray himself as the only wise old head while everyone else is losing theirs. Yet this time, his “old master” routine isn’t working. What global trade is experiencing is more than the usual swings and roundabouts of market sentiment.

President Donald Trump has plunged the world’s two largest economies into conflict in ways likely to damage both China and the US, and alter the wider patterns of international trade. Countries are being forced to deal with the fact that essential products will have to be sourced through different supply chains in future. New Zealand needs to be actively engaged in these development orders (a) to safeguard our interests, and (b) to take advantage of the options now opening up. “Waiting for the dust to settle,” as Peters advises, would merely ensure that New Zealand gets left in the dust.

Over the past week, much of the focus has been on whether the US or China is better placed to sustain a long conflict. Obviously, the US plays a dominant role in global trade. The Obama administration for example, rescued the global economy from the GFC virtually single-handed, via extensive use of quantitative easing. Yet the surprising conclusion being reached by many observers is that China is probably better placed to prevail in the current crisis.

How come? It is not simply that Trump seems to mis-understand who stands to suffer the most from his tariffs on imports. US customers will have to pay more for the essentials, and foreign suppliers will seek other markets elsewhere. Sourcing these goods and services at home will be very costly – there’s a reason why they were outsourced in the first place – and will take decades.

In addition, Trump and his minions continue to treat global trade as a zero sum game in which any trade surplus with the US is being treated by the White House as a sign the US is being ripped off. In reality, trade tends to be more like a positive sum game with mutual

benefits, where if you do well, so do I.

Escalation dominance

More to the point, Trump has made the further tactical mistake of assuming that the US enjoys what game theorists call “escalation dominance” over China, and over all of the other countries caught up in the upsurge in “reciprocal” tariffs.

According to the RAND think tank definition “escalation dominance” means “A combatant has the ability to escalate a conflict in ways that will be disadvantageous or costly to their adversary, while the adversary cannot do the same in return.” Adam Posen, writing in Foreign Affairs magazine says this is exactly what US Treasury Secretary Scott Bessent meant last week when he claimed:“ I think it was a big mistake, this Chinese escalation, because they’re playing with a pair of twos. What do we lose by the Chinese raising tariffs on us? We export one fifth to them what they export to us, so this is a losing hand for them.” This is factually wrong.

In Bessent’s view, the US having a trade deficit gives it a strategic advantage. Yet as Posen explains at length, the opposite is far more often the case. The fact that the US imports more goods and services from Beijing than it exports to it actually makes the US more vulnerable in a trade war. Posen explains:

Blocking trade reduces a nation’s real income and purchasing power; countries export in order to earn the money to buy things they do not have, or are too expensive for them to make at home...in 2024, Us exports of goods and services to China were $199.2 billion, and imports from China were $462.5 billion, resulting in a trade deficit of $263.3 billion.

Point being, the tactical advantage lies with the surplus economy, not the deficit one. Yes, China will lose sales to the US, but that is only money and the adjustment is therefore relatively easy. China can cut back spending, draw down on savings, spead the impact across the

entire society and seek to source fresh sales (and money) domestically, or from other countries – which China has been energetically doing for some time, in anticipation of Trump’s return.

The United States by contrast is the deficit economy, and in this fight it will be giving up goods and services that it cannot produce competitively, or at all, at home. ( The US appears to have done no preparation for the trade war that Trump has just initiated.) Like other countries with overall trade deficits, the US is spending more than it is saving. That situation is sustainable only when trade continues to flow relatively freely.

In trade wars [deficit countries]give up or reduce their supply of things they need (since the tariffs make them cost more) and these are not nearly as fungible or easily substituted as money. Consequently, the impact is felt in specific industries, locations, or households that face shortages, sometimes of necessary items [such as the pharmaceuticals, or cheap semi-conductors made in China] which are irreplaceable in the short term.

Deficit countries also import capital [After Japan, China is America’s second biggest creditor] which makes the United States more vulnerable to shifts in sentiment about the reliability of its government, or about its attractiveness as a place to do business...the result [of Trump’s capriciousness] will be reduced investment in the United States, raising interest rates on its debt.

There is no sign that Washington is taking any of this logic on board. As the South China Morning Post pointed out yesterday, the US is about to target China’s semi-conductor industry with a special round of tariffs next week, in order to punish China for reacting in the only way it can, to a situation the US has engineered:

Having denied Chinese firms access to advanced foreign semi-conductors, Washington is launching a probe into ‘subsidised’ domestic production.

At the same time, the US is trying to insulate Silicon Valley in general (and Apple in particular) from the consequences of its own actions, by cutting them some (limited) tariff slack for the components they require, until such time in the misty future as the US can re-adjust to making all it needs at home. The pattern of a big gesture, and then a scramble to mitigate its effects is damaging to US prestige, and to business confidence worldwide. We keep being told how business craves certainty. Well, Wall Street and Silicon Valley are now having to adjust as best they can to the fact that Trump has turned the entire global economy into a perpetual uncertainty machine.

In conclusion, Posen uses a striking analogy to describe how the White House is systematically under-mining – not re-building – the productive capacity of the United States:

The Trump administration is embarking on an economic equivalent of the Vietnam War – a war of choice that will soon result in a quagmire, undermining faith at home and abroad in both the trustworthiness and the competence of the United States – and we know how that turned out.

Footnote One. In case you missed this...China has been using a speech that Ronald Reagan made back in 1987 to highlight the shortcomings in Trump’s tariff policies. Reagan, the Great Communicator, makes a very good case against the use of tariffs in developed economies. Yet it is truly weird to see Reagan’s speech being circulated on X by the Chinese Embassy in Washington. All part of China’s attempt to portray itself as the new and best champion of a multilateral trading system governed by WTO rules.

Ronald Reagan vs. #tariffs : 1987 speech finds new relevance in 2025pic.twitter.com/CuAMw1eQXN

— Chinese Embassy in US (@ChineseEmbinUS) April 7, 2025

Footnote Two: Trade issues aside, Trump’s aggressive actions have been a political gift to China’s President Xi Jinping. Xi has been facing economic challenges at home, including high rates of youth unemployment and a chronic slump in the real estate sector, once an engine for China’s growth. Much of the blame for China’s problems can now be conveniently shunted off abroad:

“Yes, Beijing will face difficulties in the short term—perhaps even the long run,” says Foreign Policy columnist Howard W. French. “But Trump’s behaviour distracts Chinese people from Xi’s own shortcomings, and lends force to Beijing’s long-standing propaganda about the superiority of its political system.”

Core values, first love

The world news being so negative right now – trade wars, more IDF atrocities in Gaza etc – I thought I’d end with two songs of positivity, with both of them being live performances. Sunny War has been kicking around Los Angeles for a long time as a folk punk virtuoso. This track features her crystalline guitar picking on a song about not killing your spirit with overwork, and keeping faith with your own true self.

This next track is an old favourite from Sufjan Stevens, from back when he was still wearing the angel wings. As Stevens said at the time, “The Predatory Wasp Of The Palisades” was inspired by his first sexual experience (he was 16) at a summer camp in the Mississippi Palisades, a park in north-western Illinois. Offhand, I can’t think of a song that better conveys the terrors and exhilaration of first love, and its legacy in memory:

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