To The Moon

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A New Trade War Era

The global economy has entered a new phase of turbulence as tariffs reshape international trade. What began as targeted measures aimed at China has broadened into a worldwide tariff war, one that is now straining relationships not just with rivals, but with allies as well. The result is a fractured trading environment where countries are forced to rethink long-standing strategies of specialization and export-led growth.

The central question: who can withstand the shock, and who will crumble under pressure? While emerging economies grouped under the BRICS umbrella appear to be weathering the storm with surprising resilience, advanced economies like Germany and even the U.S. itself are facing existential dilemmas about their growth models.

BRICS: Resilient Through Scale and Diversification

Contrary to what many in Washington anticipated, BRICS economies have not collapsed under the weight of tariffs. Brazil, for example, was recently slapped with a 50% tariff on certain exports, yet its broader economy has not fallen apart. Why? Because the collective economic heft of the BRICS bloc provides internal demand and alternative trade routes that cushion the blow.

The “Global South,” often dismissed as fragmented in past decades, now represents a majority of global population and a rising share of GDP. This diversification of markets provides a buffer against U.S. pressure. Countries that plan ahead, spread their risks, and diversify their trade partners are proving to be the ones least vulnerable to tariff shocks.

China: From Dependency to Independence

China offers the clearest case of how foresight and structural reform can reduce vulnerability. In 2006, exports to the United States represented over 7% of China’s GDP. At that time, Washington had significant leverage. Today, that dependence has dropped to just 2.8% of GDP—a remarkable transformation in less than two decades.

This shift allows Beijing to adopt a more confident stance in trade disputes. With annual GDP growth still above 5%, even a complete cessation of U.S. purchases would not derail the Chinese economy. In fact, China could even benefit through trans-shipment trade, where goods are exported to third countries and then redirected to the U.S., effectively bypassing tariffs. The rise of Southeast Asia as a trans-shipment hub—Vietnam, Malaysia, and Thailand in particular—has only reinforced China’s insulation from U.S. pressure.

Why China Has Leverage Over the U.S. Today

Beyond diversification, China’s leverage comes from its industrial dominance. The country has built a comprehensive ecosystem: skilled labor, cheap energy (including heavy reliance on coal and expanding renewables), and integrated supply chains. This makes it difficult for any competitor—Germany, Japan, or the U.S.—to replicate China’s cost structure.

Moreover, China is not simply a supplier of low-value goods anymore. Its dominance spans across critical industries from electric vehicles to solar panels, telecommunications equipment, and increasingly, aerospace. The breadth of this industrial base ensures that tariffs do not cripple it as they might a more narrowly focused economy.

Germany: The Silent Victim of Tariff Wars

While China adapts, Germany is stumbling. Long considered the industrial powerhouse of Europe, Germany now finds itself squeezed on multiple fronts. The first blow came in 2022 with the loss of cheap Russian gas, a cornerstone of its industrial competitiveness. Energy-intensive sectors such as chemicals, steel, and automotive manufacturing immediately felt the pinch.

The second blow came with U.S. tariffs of 15% on German exports, which effectively raised the cost of its high-value goods—cars, machinery, and specialized equipment—in the world’s largest consumer market. Germany’s GDP contracted by 0.3%, and the trajectory points toward prolonged weakness.

A Double Squeeze: U.S. Protectionism and Chinese Competition

Germany’s plight is worsened by the fact that it cannot compete effectively with either the U.S. or China under current conditions. In the American market, protectionism favors domestic champions such as Tesla, GM, and Ford. Trump has repeatedly made clear his intention to replace imported German cars with American-made vehicles. On the other side, China offers cheaper production costs and a growing dominance in industrial exports, leaving German firms squeezed out of global markets.

This dual squeeze exposes the fragility of the German model, which for decades relied on cheap Russian energy and open export markets to thrive. Those conditions no longer exist.

Germany’s Last Resort: Deficit Spending

The only remaining tool Germany can deploy is fiscal policy. Forecasts for a modest return to growth in Q4 (+0.1%) are based entirely on the assumption of aggressive deficit spending. Already, Germany has suspended its traditional fiscal restraint, projecting a budget deficit of 3.3% of GDP this year and 3.8% going forward.

Massive sums are being allocated: €10 billion for railways alone, with additional spending on defense, infrastructure, and subsidies for industries under strain. Yet this approach is more a band-aid than a cure. Fiscal spending can temporarily prop up demand, but it cannot change the structural disadvantages Germany faces in terms of energy costs and industrial competitiveness.

Europe’s Strategic Miscalculation: The Energy Trap

Perhaps the most damaging policy choice for Europe was the decision to replace Russian gas with U.S. liquefied natural gas (LNG). The EU committed to purchasing $750 billion of U.S. energy over three years—an astonishing figure that locks Europe into high-cost imports.

Unlike pipeline gas, LNG requires energy-intensive liquefaction, trans-oceanic shipping, and re-gasification. This makes it substantially more expensive. By embracing this option, Europe voluntarily handicapped its own industries. Instead of pursuing energy pragmatism with its neighbors, Europe tethered itself to an overpriced supply chain thousands of miles away.

This decision will weigh on Europe’s competitiveness for years to come, ensuring that industries like steel, automotive, and chemicals remain at a permanent disadvantage compared to rivals in China, the U.S., and even India.

The U.S.: Moving Toward State Capitalism

Ironically, the United States is not emerging from the tariff war unscathed. Consider Boeing, once the jewel of American manufacturing. The company has not secured a major Chinese order since 2017, with Airbus capturing the lion’s share of new deals. Boeing is now lobbying Beijing to buy 500 aircraft, a deal that would be life-saving for the company but politically fraught.

At the same time, Washington is toying with the idea of taking partial ownership stakes in key corporations—Palantir, Boeing, and defense contractors like Lockheed Martin. In doing so, the U.S. edges closer to China’s model of state capitalism, where strategic industries are effectively arms of the government.

This shift raises long-term questions: will foreign buyers, especially China, be willing to purchase from companies that are essentially extensions of the U.S. government? The answer is likely “only reluctantly.” Meanwhile, China’s COMAC is gaining momentum as a domestic aircraft supplier, delivering 48 planes in 2024—a symbolic but important milestone.

South Korea and Japan: Cornered Allies

Beyond Europe, America’s Asian allies are also caught in the crossfire. South Korea has pledged over $300 billion in investments into U.S. industries, including more than $100 billion from private firms. Japan has committed even more—over $500 billion. Yet both countries continue to face the same 15% tariff on their exports, essentially paying for the privilege of accessing the U.S. market.

At the same time, Chinese competition is eroding their traditional industrial advantages. In shipbuilding, for example, South Korea once dominated global orders. Today, China commands more than 50% of new ship contracts—double Korea’s share. In semiconductors, Chinese subsidies are accelerating local production, threatening Korea’s and Japan’s leadership.

Faced with this dual challenge, both Korea and Japan are increasingly forced to “fold” to U.S. demands, channeling investments into America in exchange for tariff protection against Chinese competition.

The Global Shakedown: Deficit Spending as the New Norm

The broader picture is one of coercion rather than cooperation. The U.S. is leveraging tariffs not only to penalize rivals but to extract investments and concessions from allies. The strategy is straightforward: raise trade barriers, force industries to relocate or invest domestically, and use deficit spending to cover the domestic shortfalls created by disrupted trade flows.

This approach, however, is dangerous. U.S. deficits already stand at 7% of GDP. Germany is headed toward 4%. Other G7 economies are likely to follow. What we are witnessing is the normalization of deficit spending as a substitute for export-led growth. In the past, governments turned to deficits during crises; now, they are deploying them as routine policy tools in the face of tariff-induced stagnation.

What This Means for Investors

For investors, this new landscape presents both risks and opportunities:

1. Safe-Haven Assets Rise – Gold and the Japanese yen are likely to remain strong as trade uncertainty drives capital toward safety.

2. U.S. Industrials Benefit Short-Term – Domestic players like Tesla, GM, and Ford stand to gain from tariff protection. But long-term, inefficiency and higher consumer prices may erode competitiveness.

3. China as a Net Winner – With diversified markets, lower energy costs, and state-backed industrial policy, China emerges more resilient. COMAC’s rise in aerospace is just one example of this trajectory.

4. Europe’s Decline is Structural – German industries face permanent disadvantages due to energy costs, meaning investors should approach European equities with caution.

5. Deficit Spending Trade-Off – The global shift toward government-driven demand may support markets in the near term, but raises longer-term risks of inflation, debt crises, and currency instability.

Conclusion: A Fractured Global Order

The tariff war has reshaped global trade in ways that will reverberate for decades. The U.S. seeks to pull industries and capital back within its borders through coercion. China adapts and thrives by leveraging diversification and industrial dominance. Germany stumbles into decline, while Japan and South Korea are cornered into costly concessions.

The result is a global economy less open, more fragmented, and increasingly reliant on deficit spending to paper over structural weaknesses. Whether this experiment ends with renewed U.S. dominance or a fractured world order remains to be seen.

What is clear is that the rules of globalization as we once knew them no longer apply. Tariffs are no longer tactical tools—they are now the defining feature of economic strategy. And the ripple effects will shape not only trade flows but the future of investment, industry, and global stability.