The "Trump Trap": How US Geopolitical Strategy is Backfiring

It’s fascinating how history often rhymes, especially when it comes to global economics and politics. We often hear about the US economy growing and its financial markets soaring, and the core reason is surprisingly simple: they leverage crises. Whether it’s a crisis they created or one that just happened, the US has a knack for using these moments to roll out new stimulus policies and innovative techniques. These aren't always immediate economic boons, but they certainly tend to heat up the financial markets in a hurry.

Think about it: when internal troubles, external attacks, or any kind of shock hits, the US government often uses it as an excuse to inject more money into the system. This strategy quickly gains consensus, even among opposing political parties, because it’s framed as necessary to quell domestic issues and drive growth. Historically, during such times, Democrats and Republicans don't fight much over these "money-printing" policies. It creates a continuous momentum for growth and stock market rallies, making market participants believe everything is resolved.

However, for economists looking at sound policy, this path isn't ideal. This philosophy of growth through leveraging crises is deeply embedded in the US market and its economic thinking. And guess what? We're seeing another "level-up" of this very dynamic right now.

The Geopolitical Boomerang

I’ve been observing how America’s current geopolitical strategy is, in a way, trapping itself. We need to look at Trump’s geoeconomic policies to understand why. We saw a similar trap during his first term: the US thought it was pressuring and controlling adversaries, but it often resulted in a bigger boomerang effect.

A prime example was between 2018 and 2019 when China, pushing its "One China" policy, asserted its claim over Taiwan. In response, the US imposed some of the highest tariffs on China globally. But here’s the trap: the more the US pressured China with tariffs, the stronger China became, especially by forging closer ties with countries like Russia, Iran, and other emerging nations. China even started promoting its Belt and Road Initiative and pushing for trade settlements in yuan, effectively giving legitimacy and justification for movements away from the dollar. This was the "Trump Trap" of the first term, inadvertently empowering China and other emerging economies to seek alternatives to the dollar.

This led to a situation where emerging economies, including Brazil, started questioning their reliance on the dollar due to high tariffs and dollar-denominated debt. They began to consider ditching the dollar, which inadvertently created an opening for China to expand the influence of its yuan. The more these policies were implemented, the more the US found itself in its own snare. This phenomenon contributed to a gradual decline in US capital expenditure from 2018 to 2019. American companies found it harder to sell goods to China, and their sales channels in emerging markets also shrank. Even domestic consumers were hesitant to spend, as imported goods became more expensive.

Naturally, businesses started reducing production and scaling back capital investments. While tech giants saw massive growth, the manufacturing sector experienced a downturn, a "crowding out" effect that ultimately hobbled the US economy. And now, we're seeing a similar pattern emerge.

The Current Crisis: Oil, Chemicals, and Inflation

This time, the US Treasury Secretary has declared that China will compensate for the current crisis, signaling a "China pivoting" strategy. Simultaneously, despite rising inflation, the Treasury Secretary is advocating for lower interest rates. If you read between the lines, it suggests a belated attempt to pivot towards China, pressuring them while also intensifying pressure on Iran, hoping to achieve some diplomatic agreement.

One might ask, why didn't the US secure China's cooperation or neutralize them first before implementing these policies? The simple answer is that China has grown too powerful since Trump’s first term for the US to easily control or persuade. Back then, the US had allies to side with, but now, strong-arming China only leads to retaliatory measures, like restricting rare earth exports or cutting off trade with the US. This means the US entered this current policy phase without a clear strategy for China, unable to easily play its cards.

The recent geopolitical strategy, particularly concerning the conflict with Iran, seems to have largely failed. While pressuring China and attempting to counter-blockade the Strait of Hormuz might offer some short-term solutions, the initial misstep of not pivoting to China first has allowed the situation to escalate. If the US had addressed China first, perhaps by discussing nuclear issues with Iran in a limited, localized conflict that avoided civilian casualties, the current widespread damage to oil facilities in the Middle East could have been mitigated.

Instead, the US is now playing catch-up, leading to a zigzagging policy approach—down, then up, then down again. Negotiations are similarly stalled, with Iran taking a hardline stance on nuclear issues, insisting on uranium enrichment, while the US demands complete disarmament, including missile capabilities. With no immediate resolution, the US administration is left with limited options. Only now, in a second round of negotiations, is the US beginning its "China pivot." The point is clear: if the US had neutralized its biggest adversary first, the conflict wouldn't have spiraled this far.

While belated efforts to manage the situation are somewhat positive, the damage to oil facilities is significant. Saudi Arabia, Qatar, UAE, Iraq, and Bahrain have all seen substantial hits to their oil infrastructure. We're talking about 3 to 6 million barrels of production being halted, which is about 20% of the top 10 exporting countries' daily output of 30 million barrels. Before the conflict, average oil prices were around $65 a barrel. A 20% reduction in supply means prices should naturally rise by at least 20%, or even more, potentially reaching $90 a barrel. Even if the conflict ends, it takes at least six months to repair these facilities, making $80-$90 a barrel the new normal.

The Ripple Effect: From Oil to Everyday Goods

But there's another layer to this problem. The US is pushing for reshoring, manufacturing growth, and energy efficiency, all of which require significant investment in infrastructure like power grids and wiring. And what do these need? Chemical materials. For example, Dow, a major US chemical company, recently announced price hikes for PE resins—used in films, containers, and packaging—by $0.30 in April and an additional $0.20 in May. Why? Because oil is a fundamental input for so many products: plastics, rubber, coatings, and even the insulation in electrical cables and car suspension components.

With rising oil prices and increased transportation costs, companies like Dow have no choice but to raise prices to maintain their margins. And it's not just Dow; ExxonMobil and Nova Chemicals are also gradually increasing their chemical material prices. This ripple effect extends to ink and coating prices, which are also seeing increases of around 10%. This means the rising cost of oil is now broadly impacting the entire industrial sector through chemical byproducts.

If you look at the price index for chemical-related products in the US, you'll see a clear trend. There was a sharp jump in 2020 due to shortages when the US, in another self-inflicted trap, stopped buying Chinese goods. While that surge had somewhat stabilized, prices are now climbing steeply again. The US consistently creates these self-made shortages in essential chemical materials whenever it clashes with China or implements restrictive policies. For instance, during the Biden administration, the refusal to buy Chinese-produced polysilicon led to domestic shortages.

While rising chemical prices alone don't cause economic recession, they are a significant indicator. Historically, every time chemical prices have jumped—marked by the shaded areas on economic charts—it has coincided with diplomatic friction, financial instability, or other multifaceted issues leading to economic crises. While chemical prices aren't the sole determinant of market instability, their sudden surge signals broader financial and economic anxieties, supply shortages, and rising labor and supply costs for manufacturers. This is certainly not a good sign for the US economy.

The Illusion of Stability: CPI, PPI, and Consumer Fatigue

So, what about inflation and the risk of an economic downturn? While it's hard to definitively say we're headed for a full-blown recession, the probability is certainly increasing. Historically, spikes in Brent crude oil prices have often preceded economic downturns. We saw it in the late 90s with financial instability and oil shocks, and again in the mid-2000s when surging demand led to supply crises and economic turmoil. The current oil price surge is not significantly different from these past periods.

However, the US has a history of developing "tricks and skills" to support and revive the economy during crises. So, we need to consider the current scenario. Brent crude has surged, and basic chemical material prices have jumped. How will this impact inflation and the broader economy? Looking at the March CPI data, the year-over-year increase was only 3.3%, which seems manageable. But a closer look reveals that energy prices soared by 12.5%, while manufacturing goods (including automobiles), which make up nearly 20% of the CPI, only rose by 1.2%. Service prices also remained around 3%. This might make the market feel reassured, especially since PPI also didn't show a major shock. Many might assume that if the conflict ends, everything will be fine.

But the key lies in the PPI. Last year, when tariffs were implemented, the PPI saw spikes in warehousing and transportation costs. This was because businesses anticipated higher tariffs and pre-ordered goods, storing them in warehouses and increasing demand for shipping. This time, however, we're not seeing the same surge in those sectors. Why? Because we often interpret these situations too simplistically: shock leads to inflation, which leads to stagflation.

I've always argued that we need to consider demand alongside price shocks. When Trump first took office, there were constant warnings that tariffs would lead to inflation. But I suggested it might not happen, not because inflation would be controlled, but because demand would drop first. We're seeing a similar phenomenon now. With oil and other costs expected to rise, manufacturers and sellers are reducing their demand for warehousing and transportation services. This is why the PPI isn't rising as much, even with surging energy prices, and the CPI also appears relatively stable.

While a 3% inflation rate might seem stable from a financial perspective, the reality for consumers is different. Their purchasing power has been eroding for the past four to five years. After paying social security, unemployment insurance, taxes, rent, and medical expenses, many Americans have little disposable income left. It's a constant treadmill. So, when this latest price shock hit, wholesalers and manufacturers reacted quickly. They realized that consumer spending, already weak from last year's tariffs, would shrink further. With reduced real income, there's no need to stockpile inventory. This means less demand for transportation and warehousing, keeping PPI and CPI from soaring.

In the past, a price shock would lead to sustained inflation, suppressing the economy and raising questions about stagflation and interest rate hikes. But now, with demand already weakened from last year, even if prices rise, the US economy, while not collapsing due to fiscal support, is likely to slow down, moving from 3% growth to the 1-2% range.

In essence, the US economy is experiencing short cycles of slowdowns followed by brief upturns. But beneath this, consumer spending growth has been steadily decelerating since 2022-2023. This indicates consumer fatigue. Even with a 2% inflation rate, the burden of rising costs on a million dollars or ten million dollars annually is substantial. Consumers, already strained by tariffs, are now facing another price shock. Manufacturers and wholesalers are not building up inventory, which makes CPI and PPI look good on paper, but it ultimately signifies a weakening US economy.

The core issue is that the Trump administration created its own geopolitical traps. Based on the first term, it's likely they'll continue to print money as much as possible. If the US injects more money this time, it will lead to another "level-up." For individuals, protecting personal wealth in this environment might necessitate global investments.