Vol.167 Macro Conversations 83 | Changes in the Dollar, U.S. Treasuries, and the China–U.S. Trade War (Recorded Apr. 9)

Summary

• The cards have been reshuffled. Compared with the 2018 trade war, China’s share of exports going to the U.S. has fallen from roughly 20% to 14%, while China has spent the past six months largely restoring domestic unity and the U.S. is facing deeper internal divisions. Feng Shu’s view is that Trump had to secure the home front while pushing back abroad, yet he rushed out a tariff policy that intensified domestic fractures: “I suspect he clearly didn’t anticipate this outcome.”
• China’s negotiating leverage comes from a fundamental shift in public opinion. In 2018, there were still many voices arguing for keeping a low profile and negotiating proactively; that is no longer the mainstream across China’s broad social-media ecosystem. After two completely different U.S. administrations, seven years of sanctions, a trade war, and a technology war, people have realized that “you cannot get the outcome you want by making concessions—the possibility has already been disproven.” Russia and Huawei are two examples of each carving out room to survive under maximum pressure.
• China may believe that he needs our concessions more than we need to offer them. Deals between Trump and smaller countries can ease stock-market concerns, but not recession and inflation concerns. To declare victory on tariffs, he ultimately cannot avoid a structural deal with China, the world’s most important manufacturing power—while his voter base of workers and farmers, major financial backers and campaign donors, and other interest groups including traditional energy, Musk, and Wall Street figures may all see their interests harmed.
• The weak link in the dollar’s grand loop is U.S. Treasuries. The U.S. exports dollars to the world through a roughly $900B-plus trade deficit, then recycles them through financial products; if the deficit genuinely narrows, global demand for dollars will “decline as balance improves.” The most sensitive question is whether Treasuries can retain their hub status. China’s reserves once had little choice but to go into Treasuries; they now include substantial gold, which Feng Shu believes was “probably planned in advance” and is related to China’s hard line this time. If Treasuries run into trouble, the entire financial loop anchored on them could break.
• The dollar needs to weaken moderately, à la the Plaza Accord, to narrow the deficit, but expectations of depreciation are themselves a risk. Markets panicked over the Fed’s emergency meeting because an emergency rate cut signaled recession rather than a liquidity boost; recession and potentially tight money could trigger financial panic and capital “running out of the U.S.” The practical framework is to watch renminbi exchange-rate expectations in the short term, and over five to ten years, track the dollar’s share and standing in trade and reserves, along with Treasuries and the dollar exchange rate—“one or two days, or one or two months, may simply reflect short-term tension and panic.”
• The U.S. structural bind is institutional DNA. After shifting from manufacturing to finance and seigniorage in the 1970s, it found money “too fast to make”; in the internet era, companies could reach 100B in five, three, five, or seven years, and today VC still prefers AI applications over the manufacturing Trump wants to encourage. “Once you’ve grown used to making money too quickly and too easily, going back is not easy.”
• Dalio’s framework is more convincing. This is not the end of globalization—it is very difficult to end—but a turning point in the world order. Historically, turning points have often appeared as wars; this one may instead emerge as “a very large-scale economic and financial transformation.”

Deep dive

1. This Is Not 2018: Four Major Differences

• Feng Shu’s opening framework has four parts. First, the trade structure has changed: China’s exports to the U.S. have fallen from roughly 20% of total exports to 14%. Second, “the cards have been reshuffled”: in 2018, China faced its greatest internal pressure and needed unity most; today, the U.S. is confronting major internal divisions, while China has “largely put domestic unity in place over the past six months.”
• Third, after seven years, China has “if not the most experienced, then certainly one of the countries with the most lessons and experience”; it has tried countless approaches and endured repeated tests. Fourth, the popular base is completely different: standing firm will “undoubtedly” affect the economy, employment, and foreign trade, but social-media opinion today is broadly united against a common enemy and relatively cohesive, a stark contrast with the noise six years ago.
• Feng Shu also noted that China’s oil imports fell year on year in 2024. Industrial output expanded without an increase in total energy imports, suggesting that most incremental energy demand may have been met by new energy.

2. Trump Didn’t See This Coming Either

• Feng Shu’s core inference is that Trump “had to push back abroad while first securing the home front.” He has been replacing officials and wants to alter the systems around the Supreme Court and state law; from the standpoint of securing his administration, he should first have resolved internal alignment. Instead, he pushed a policy that generated “such deep divisions,” with Fed officials and a former Treasury secretary taking positions different from his, while Musk had “a lot of criticism” of the tariffs. “I suspect he did not really have confidence in or anticipate this.”
• The evidence can be seen in his behavior during the pandemic: calling it the “China virus” during the critical period for reelection, declaring himself “the president who understands viruses best,” shifting his own precautions back and forth, and still talking about the China virus in public speeches before winning the election. “This probably reflects, in part, his attitude toward and changing view of the issue at each point in time.”
• When the tariffs were announced, he “certainly hoped for an immediate victory, with China quickly accepting very low tariffs.” But deals with smaller countries can only ease stock-market concerns, not concerns about recession and inflation. To declare victory on tariffs, he ultimately has to resolve the trade structure with China. China’s calculation may be: “He needs our concessions more than we need to make them.”

3. Did We Change, or Did the U.S. Change?

• 李翔’s question is worth recording. Feng Shu’s answer: after seven years, most people have realized that “you cannot get the outcome you want by making concessions; the possibility has already been disproven.” Russia and Huawei are the extreme cases: under maximum pressure, after exhausting every available method, each carved out its own room to survive or develop.
• 李翔 added another angle: perhaps the U.S. changed. “The speed of America’s decline may have exceeded what many people imagined.”
• Feng Shu closed with Dalio’s framework: this is not the end of globalization—“I think globalization is very difficult to end”—but a turning point in the world order. Historically, turning points have often appeared through wars and other physical challenges; “this time, it may simply take the form of a very large-scale economic and financial transformation.”

4. The Dollar’s Grand Loop and Treasuries as Its Anchor

• The mechanism comes first. After leaving gold, the U.S. exported dollars to the world by buying more and selling less through its trade deficit; countries then recycled those dollars by purchasing U.S. services, especially financial products. If the world is viewed as one national system, the additional dollars created by the U.S. did not produce large-scale inflation, much as excess Chinese money flowed into property and completed its own cycle. If the roughly $900B-plus deficit genuinely shrinks, global demand for dollars will “decline as balance improves.”
• The most sensitive question is whether Treasuries can maintain their broad role as the hub. China’s reserves once had little choice but to go into Treasuries; they now include substantial gold. “I think this was probably planned in advance,” and it is related to China’s decision to stand firm in this trade war.
• Treasuries “cannot be allowed to run into trouble.” If they do, fiscal deficits and government spending face problems, while more assets are built on Treasuries as the anchor for a baseline return. “If this financial loop breaks, the impact could last quite some time.”

5. The Dollar Needs to Weaken, but Expectations of Weakness Are a Panic Trigger

• To reduce the deficit and stimulate exports, “the dollar at minimum cannot be excessively strong”; it needs to weaken moderately against major currencies, just as it did around the Plaza Accord.
• Expectations of depreciation are a double-edged sword. The market’s tension over the past two days came from fear of an emergency Fed rate cut: such a cut signals not the good news of more liquidity, but that “the economy may face enormous challenges and a recession.” A U.S. recession and potential funding stress can both create financial panic and capital outflows—“this capital outflow is not from China; it is capital running out of the U.S.” This is one manifestation of a change in the financial order, though still only a short-cycle, small-loop phenomenon.
• The observation framework is straightforward: in the short term, watch renminbi exchange-rate expectations, where disagreement is currently intense. Over a five-to-ten-year horizon, track the dollar’s share of trade and reserves, Treasuries, and the dollar exchange rate. “One or two days, or one or two months, may simply reflect short-term tension and panic, or anxiety.”

6. The U.S. Institutional DNA: Once You Get Used to Easy Money, Going Back Is Hard

• 李翔 asked whether there is a better option from the standpoint of U.S. policymakers. Feng Shu’s historical answer is that it is difficult. The core question is whether there is truly a social system and set of ideas that can serve as the only effective and sustainable way to drive long-term growth; that may be impossible. The U.S. “was born at the right point in history and carried the right social genes.” Its biggest challenge is that it cannot accept there may be something worth learning or changing—much as companies rarely think that way at their peak. China, by contrast, believed in the 1990s that “everything from the West was worth learning”; by the end of 2023, it had shifted toward “doing things its own way and relying on itself.”
• The 1970s were America’s turning point: it shifted from manufacturing to services and finance just as fiat credit and cross-border financial flows were “newly unleashed,” with seigniorage added on top. “Making money became too fast.” The clearest example comes from venture-capital history, in the Chinese edition translated by 田轩. Before the 1980s, U.S. VC, like China today, was “going hard on hardware”: running factories, managing workers, and overseeing the entire upstream and downstream chain. Once the internet arrived in the 1990s, it became “purely asset-light, with nothing there,” and a company could reach 100B in five, three, five, or seven years. “Once you’ve grown used to making money too quickly and too easily, going back is not easy.” Today, U.S. VC still prefers AI applications over the energy and manufacturing projects Trump wants to promote.
• 李翔 asked whether America’s past success in neutralizing challenges from Germany and Japan—autos, consumer electronics, and chips all at one point lagged Japan—was driven by the two commanding heights of finance and technology, and whether that framework no longer holds. Feng Shu’s answer: at the time, globalization and fiat credit were “newly unleashed capabilities, with very strong dominance.” The problem today is that they have “been used too aggressively”; it is difficult to say whether they still possess the power and influence they had when first unleashed.

7. Reshoring Manufacturing Does Not Solve America’s Real Problems

• The divergence began with the pandemic. The U.S. saw that it could not even produce basic items such as masks, let alone ventilators. China saw that sudden shocks could hit fundamentals such as energy and agriculture. The two countries moved in different directions as a result. But for the U.S., reshoring manufacturing is difficult: “If we’re unemployed today, would you rather drive for a ride-hailing service or work in a factory?”
• 李翔’s blunt rebuttal was that asking Americans to return to the lifestyle of manufacturing’s peak—“996 or something like a sweatshop”—is unrealistic. Manufacturing also cannot be fully automated. Even with high automation, it would not solve the urgent problems of widening inequality and unemployment. His view is that the U.S. should “keep moving forward, expanding the frontier of human technology, rather than come back and compete with China for manufacturing.”
• Feng Shu’s closing framework has three parts. First, there must be a way to create incremental wealth. Second, aggregate distribution must be reasonable and fluid: if wealth flows “entirely in one direction within the loop, it will always accumulate enough contradictions to force the system to change.” Third, there must be channels for upward and downward mobility across classes. None of this is easy. “The institutional inertia created by the genes that made America excellent at that historical moment is especially difficult to repair; China went through an extremely painful process of dismantling and rebuilding after an extremely successful period.”