The World Split in Two

When Donald Trump was elected, we wondered aloud whether tariffs would become the long-term trade policy of the United States. In these pages, we suggested that the world may split in two—a reality now taking form deep into the Biden Administration, which has preserved many of the same policies.

One world two systems

Americans seem to think our leadership is trying to decouple from China, as if we were the ones who first filed for divorce. But the reality is China has been positing for a decoupling for some time. China’s 2025 Plan clearly states the country’s goals to be independent from U.S. technology. Its “dual circulation” policy seeks to create a separate ecosystem to supply the largest consumer base in the world.

China entered the World Trade Organization in 2001, making promises to curtail state-run industries and currency manipulation. For years, the U.S. government accused the Chinese of reneging on their agreement.

Yet tariffs have had a surprising effect. While those industries impacted by tariffs are marked by significant reductions in import volume, nontariff items have increased sharply. Total Chinese imports are roughly the same as in 2018.

Total U.S. Imports from China

Efficiency vs. Resilience

Global supply chains have shifted from being “long” which is efficient and slow, to being “short” which is adaptive and costly. Efficiency has given way to supply chain resilience. Companies have decided they are willing to pay a price for the comfort of having multiple suppliers onshore. Others such as Tesla have moved toward vertical integration to ensure constant supply, controlling every step in the value chain.

Yet there are still risks. A recent McKinsey report found 180 product categories with 70% of imports coming from one country.

Reserve Currency

One reason the U.S. is a dominant economy and superpower is because 60% of the world’s reserves are held in U.S. dollars—the world’s reserve currency. For example, oil contracts are sold in U.S. dollars.

America’s critics point to a loaded deck as a result of the Bretton Woods Agreement, reached in New Hampshire in 1944 at the conclusion of World War II. To the victor goes the spoils. But there are mounting concerns that U.S. debt puts the dollar as the reserve currency at risk.

There is also a flipside to being the world’s reserve currency—its stable demand ensures that the dollar trades at a premium, almost guaranteeing the U.S. will maintain a negative trade deficit.

Democratized Finance

DeFi (democratized finance) tools such as blockchain and crypto are popular with nefarious actors who would like to see options that supplant the U.S. as the reserve currency. Terror states and syndicates would love to have platforms to trade weapons, drugs or secrets on the black market.

It’s amusing that the two most prolific kings of crypto are both in prison for their malfeasance. Proponents suggest that cryptocurrencies (some now known as shitcoins) will decentralize financial transactions, remove middlemen, and eliminate exorbitant fees. But the industry was built with a lack of oversight or controls.

Yet the underlying blockchain technology that fuels DeFi has many useful applications, and in light of the FTX collapse, a new chapter in this story is about to be written. Many cryptos have recovered of late, with Bitcoin trading at over $40,000.

Once coins become democratized through ETFs, their value is more likely to be unleashed.

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