Posted originally on Apr 14, 2025 by Martin Armstrong 

The U.S.-China trade war is an ongoing economic conflict that began in January 2018, characterized by the imposition of tariffs and trade barriers by both countries. Recently, tensions escalated as the U.S. raised tariffs on Chinese goods to 145%, prompting China to retaliate with tariffs of 125% on U.S. imports, affecting global supply chains and market stability.

Trump’s decision not to grant China the same reprieve as other nations explained: “China wants to make a deal, they just don’t know how quite to go about it.” I disagree. If I were China, I would do a full embargo, and the Achilles’ heel in this trade war is more than just the manufacture of values for municipalities – the big ones, steel and aluminum, but also medicines. Personally, I would put a full embargo on everything, and without the medicines, people would be screaming, and their lives would be put in danger. I have dealt with Asia for some 40 years. You do not do this sort of thing publicly. It is an insult and a loss of face that forces China not to yield.

The developing U.S.-China trade war keeps ratcheting up. China has suspended exports of rare earth minerals. Meanwhile, Commerce Secretary Lutnick said that the electronics the Trump administration exempted from reciprocal tariffs could be subject to different levies in the future. This is not good. You do not air your dirty laundry in public.

Beijing’s perspective is dramatically different. Xi Jinping has taken the view that his country would lose face if it simply capitulated to what it calls America’s “unilateral bullying.” The danger with this trade war is that publicly, it only supports fervent nationalism, and that feeds into what will become World War III. China has been quietly preparing for a trade war for quite some time. Trump’s actions may spark negotiation in Western circles, but in Asian circles, they create the image that the US doesn’t want to negotiate. My concern is that Xi is brilliant. This trade war is playing into his domestic approval of anti-Americanism. Like the Russian sanctions that boosted Putin’s approval rating calculation, sources say, China is also seeing a rise in popular support to strengthen its position by preparing not just to fight back. Trump’s trade war with China is definitely strengthening Xi’s own position.

All of my sources have said that Xi fully understands that China has entered a period of protracted struggle in both trade and geopolitics with the United States and Europe. This became painfully obvious, and Europe and the Biden Administration confronted Russia. Xi has taken the position that China needs to prepare for these confrontations ever since the Biden Administration put sanctions on Russia and then threatened China if it dared to help Russia. The Neocon Antony Blinken expressed “serious concern” about China’s support for Russia’s defense industry. He went as far as to threaten Xi that he would impose sanctions if China helped Russia.

The Neocon Antony Blinken threw down the gauntlet and views the world only in his desire for imperial power. He never understood the economy, and this insanity of threatening China and removing Russia from Swift undermined the economy and split it in half, with the formation of BRICS for geopolitical security. I don’t believe Trump understands the damage that the Biden Administration inflicted upon the entire world. Now, go after China with a trade war to bring back manufacturing to America; this is pushing China over the edge.

China previously owned 10% of the US national debt. This is what Trump has not considered. Before this trade war began, in January, foreigners sold a net $13.3 billion of U.S. notes and bonds that had more than one year to maturity. As we approach sovereign debt defaults, I have warned that it may start with Japan and be followed by Europe. We saw almost $50 billion was sold in December 2024 in anticipation of a Trump trade war. Last November saw almost $35 billion dumped following the election.

Canada was the largest net seller in January. The UK needed the cash and was the biggest seller last December. I know some have made the outrageous claim that Japan sold US debt, and that made Trump pause the tariffs for 90 days. These people have ZERO understanding of the markets and even less about Trump. The tariffs over 10% are political, and it is part of his art of the deal. Japan is in economic trouble with its own debt crisis, and selling US debt had nothing to do with the tariffs – this is about creating a real debt crisis.

That said, China has the capacity to dump US debt in a big way, and that would send US rates higher on the long-end. U.S. stocks rallied with Trump pausing the tariffs, yet this was cyclically on point, which our computer had forecast months in advance. People just try to come up with some fundamentals to explain each move in a market, whether true or false. Our computer is projecting that 2025 will be the low in Chinese interest rates both on the 2-year and 30-year.

While stocks rallied, Treasury yields rose so much that lower rates benefited stocks. China has been quietly selling U.S. debt, which began over a year ago. This was not something new out of the blue in response to new tariffs. Bond markets were flashing warning signs based on the hidden risks behind the entire dynamics of trade and geopolitics.

Behind the scenes, U.S. Treasury yields have been rising during the overnight sessions, indicating foreign market selling. Nevertheless, the prospects of war in Europe are reflected in our models, for they do not support a collapse in the bond markets, implying that war will bring still capital inflows.

When we look at the Baltic Freight Index, 2025 was a Double Directional Change, indicating that we would have this trade war. We have a Directional Change in 2026 and a Panic Cycle in 2027, with the culmination of this war extending into 2028. This might also be influenced by the war starting in Europe.