Blain’s Morning Porridge May 12^th 2025: The USA just surrendered to China

Trump has not read Sun Tzu. “In the midst of chaos there is opportunity.” 

Trump blinked. 42 days after “Liberation Day” China gets a 10% base tariff level, putting it on better trade terms than the EU?  It was a ramble of conflicting narratives, but the reality is the US may just have averted a catastrophic trade induced crash – it will likely still experience a stagflationary shock.

“It’s very good for the USA, and very good for China,” blufftered Trade Kommissar Jamieson Greer- trying to pretend the USA under Trump had done a great deal. It is a great deal – for markets. Stocks are up, bonds are down. Markets trade the here and now – not tomorrow. Gold is taking a tumble. Much of the trade uncertainty that was roiling markets will now dissipate – but for how long?

No so good for Europe. Bessent comments suggest the EU is the USA’s new trade enemy – that has massive future implications.

This mornings’ press conference was a classic: Let’s be honest about what happened – the USA started a trade fight. China slapped them back. Greer sounded offended when he reminded us they were the only country to retaliate – everyone else wanted to negotiate – hence the ratcheted up to the 145% tariff bill. Yet, by retaliating – China is now on same broad terms as the USA’s no 1 ally, the UK? Classic bully story. Bully hits someone. Someone hits back. Bully stands down.

There were so many conflicting narratives being proposed by the Bessent/Greer double-act. Apparently, it’s all about Fentanyl – Bessent cited the Chinese willingness to support the US crushing the Mexican gangs flooding the USA with Fentanyl. Or it’s about how the terrible state of US/China trade was due to the last 4 years of the Biden administration allowing trade negotiations to “atrophy”. Or maybe it was about about the deal being part of rebalancing of US supply chain weaknesses post Covid.

There is no need for Bessent providing “framing and context” the reasons for the deal, or telling us there was a plan, or how much this is going to change the world, or telling us the neither China nor the USA wanted a decoupling. We get it. Trade war with China only ever had one loser – the USA.

What a load of bollchocks…..

The reality this morning is Scott Bessent has stepped the USA back from the brink of a China trade war it is still going to lose. It threatened to be massively destructive in the short-term. In the Long-term, China will still get everything it seeks in terms of outcompeting the west across basic and tech goods. Chinese EVs to outsell Telsa in California? Don’t bet against it. Trump has simply accelerated the end of the USA’s period as Global Hegemon.

This morning’s step down  will confirm the growing global realisation Trump is a dog that barks, but only bites much smaller dogs. He threatens, he postures, he steps back from the fight every time. His repeated climb downs, and his now increasingly desperate need to be seen to be doing deals, means fewer and fewer folk are scared by him.

It also raises the fundamental issue – the USA can’t afford a trade war. The USA is indebted to the tune of $36 trillion. Trump is promising the big beautiful bill to cut taxes. But as DOGE’s failure showed, he can’t cut spending. The US Military costs nearly $1 trillion per annum and is the only substantive item that could be cut – which he can’t as he has stirred up global tensions. In the Treasury market there is the truth about the US – watch what happens next.

More to the point, a trade/inflation shock is still going to occur as a result of his actions. The upside is it might be slightly less damaging that initially feared. He is unlikely to deliver any of his MAGA promises to voters – except on immigration, which I expect he will big-up to deflect from his trade and economic failures.

Trump’s predictable unpredictability is something markets are starting to game – the likelihood that Trump makes noise but will be forced to back off is now well understood. That means that no matter how uncertain, rutted and sticky the market crease is –  it is playable!

However, such trading strategies are essentially short-term. We still have to deal wth rising conflict and the long-term consequences of uncertainty. A seasoned sceptic like myself will expect the market to do its usual – get over-ecstatic about the short-term noise, and block out the increasingly unstable long-term implications and consequences.

On the back of this morning’s US backdown on China trade, we’re back into Risk-On territory for markets – are they right to think the worst is over and things only get better from here? As always, such questions are seldom entirely binary; somethings will be better than feared, and much won’t be nearly as successfully resolved as we expect.

The reasons Trump was forced to blink were multiple – assuming people were able to speak to him (and I’m told it’s not easy for even Bessent to garner his attention) he would have been shown a host of reasons the defacto China embargo was about to crash the US economy. The reality is the dislocations to global trade Trump has already triggered won’t be unravelled overnight by this deal. Fed Chair Jerome Powell was absolutely clear in his “wait and see” message last week – No Chance of Interest Rate Cuts until its clear how the economy is reacting to the political uncertainty engendered by Trump’s policies.

Over the weekend the data coming out of West Coast US ports was scary: Los Angeles reported 35% fewer cargo movements from China. The Port of Seattle simply said there wasn’t a single container ship moored up in harbour – an exceedingly rare event. It means a cascading crisis through as ports, trucking and then retail are hit by fewer and fewer goods moving through the economy.

The reality is any deal between China and the USA will be for show. It will take months for the stops to be unblocked. And will Chinese manufacturers trust the USA in the future? Unlikely. Will India?

Bessent might be right about Europe being the enemy. It is larger and as rich as the USA. It would make a fine new China trade partner. Someone last week described the UK trade deal as a Potemkin Village – nothing but a facade rather than a real deal. Any trade deal reached in the space of a few days is likely to be smoke and mirrors, a papier-mâché simulation of a real deal – much as its now apparent the UK deal was last week.

Long-term Trump has initiated a fundamental, world-wide reappraisal of Global trade. Businesses may be saying the right Trump friendly things about moving resources and production to the US, but you can bet boardrooms are looking for new, more stable, more predictable markets. The likelihood US politics will tumble into either increased polarisation between left/right, or autocracy making outrageous demands for finance – all mean it makes sense to look elsewhere.

There is a further level of consequences to add re the trade destabilisation – trade between Asia and the US may be slowed, but its still happening elsewhere.

Whatever the market chooses to believe, the reality is all in a map my chum Will Nutting sent me last week in his Nutstuff commentary. Will and I disagree about much, but the map was very simple: half the global population, and an increasing share of global wealth, resides in South East Asia. They are the ones doing deals between themselves and their major commodity and resource suppliers – and they are pricing these deals in their own currencies, and its increasingly likely they will use digital stable-currencies (not Bitcoin) in the future.

That means the volume of dollar proceeds from global trade being placed into banks where they are invested in US Treasuries is falling and falling fast. De-dollarisation isn’t just due to Trump being a muppet, but a long-term consequence of the changing financial ecosystem. The era of the dollar giving the US unfair advantage is nearly over. In Treasury prices there is truth.

Finally, there is the Ukraine “Peace” conference on Thursday. You can guess how the discussions in Turkey will play out. Zelensky has successfully called Trump’s bluff multiple times – the whole of Europe is backing his call for a ceasefire. Trump still looks determined to support Russia. Zelensky will meet Putin in Turkey and whatever is said – which will likely be a diatribe of historical lies and unacceptable demands from Putin –  the Orange Ogre will probably tell Zelensky he should accept, get angry and abusive, then walk away when he doesn’t.

Europe will perceive it as yet another betrayal – widening the gulf across the Pond, and Xi and Putin will be delighted. The war will carry on and thousands more will die.

Out of time, and back to the day job (from North Wales this week… long story…)

Bill Blain

Author of the Morning Porridge

Founder Windshift Capital

Partner Shard Capital