Strategic Drift and Economic Coercion: Reassessing U.S. Containment Policy in a Multipolar World

Strategic Drift and Economic Coercion: Reassessing U.S. Containment Policy in a Multipolar World

Olusegun A. Obasun

Segunobasun Consult

DOI: https://dx.doi.org/10.47772/IJRISS.2025.907000122

Received: 25 June 2025; Accepted: 01 July 2025; Published: 02 August 2025       

 ABSTRACT

This paper examines the strategic trajectory of U.S. economic policy in response to China’s rise and argues that efforts to contain Beijing have produced unintended and counterproductive outcomes. Once the architect of a liberal international order rooted in openness and interdependence, the United States has increasingly adopted coercive economic measures—such as tariffs, export controls, investment restrictions, and friend-shoring—to preserve its global primacy. Beginning with the Trump administration and deepening under Biden, this shift toward economic nationalism reflects a growing concern that China’s technological and manufacturing dominance poses an existential threat to U.S. hegemony.

However, this paper contends that such containment strategies have backfired. Rather than halting China’s ascent, they have accelerated its drive for technological self-reliance, catalyzed alternative trade and investment regimes, and intensified the fragmentation of the global economy. Moreover, sweeping tariffs, such as the April 2, 2025, “Liberation Day” escalation, have exposed structural vulnerabilities in the American economy, destabilized financial markets, and undermined international confidence in U.S. leadership.

Drawing on a political economy framework, the paper critiques the strategic mistakes embedded in U.S. policy—particularly its failure to align trade actions with domestic capacity-building and global coalition-building. It proposes an alternative roadmap anchored in phased industrial strategy, multilateral coordination, and institutional foresight. Without a strategic recalibration, Washington’s efforts to contain China may only accelerate the emergence of a multipolar global order it seeks to forestall.

Keywords: Economic Statecraft. Strategic Miscalculation, Economic Containment. Trade Decoupling, U.S.–China Rivalry. Industrial Policy. Services Trade Surplus, Economic nationalism

INTRODUCTION

U.S. containment strategies—though framed as efforts to protect economic and technological leadership—have backfired by accelerating China’s rise, undermining U.S. global credibility, and fragmenting the liberal economic order. Without strategic recalibration, the United States risks weakening the very system it seeks to preserve. For much of the post–Cold War era, the United States presided over an international order designed to entrench liberal norms, institutionalize economic openness, and sustain its primacy as the world’s preeminent power. However, the dramatic rise of China—as a peer competitor in terms of economics, technology, and geopolitics—has challenged the foundational assumptions of this order. Since the early 2010s, U.S. foreign policy has shifted from engagement to containment, increasingly characterized by coercive economic strategies aimed at limiting Beijing’s rise. From the Trump administration’s unilateral tariffs and export controls to the Biden administration’s emphasis on “friend-shoring,” industrial policy, and multilateral tech restrictions, Washington has pursued a course that prioritizes strategic insulation over systemic adaptation.

This paper argues that these containment measures constitute a series of profound strategic miscalculations. Rather than preserving U.S. global dominance, they have inadvertently strengthened China’s domestic resilience, accelerated the fragmentation of global trade, and diminished American credibility as the guarantor of the liberal international order. These failures are not merely tactical but stem from a deeper misunderstanding of how globalization, power, and economic interdependence function in an increasingly multipolar world.

Over the past two decades, the United States has adopted an increasingly adversarial posture toward China, rooted in the belief that its rise poses an existential threat to U.S. hegemony (Allison, 2017; Friedberg, 2018). This anxiety has only intensified as China has lifted nearly 900 million people out of poverty, evolved into a global manufacturing hub, and rapidly scaled its technological capabilities in sectors ranging from semiconductors and artificial intelligence to green energy and quantum computing (Lee & Lim, 2020). At the heart of Washington’s response is a persistent narrative that views trade deficits as evidence of exploitation by a mercantilist China. Yet this view reflects a fundamental misreading of global trade structures and the logic of value chain specialization (Bown & Irwin, 2019).

The U.S. response—spearheaded by the Office of the U.S. Trade Representative and codified through Section 301 investigations, tariff escalations, and export bans—has emphasized economic coercion over cooperation. These measures were intended to curb China’s technological rise, deter intellectual property theft, and protect domestic industries. Instead, they have had the opposite effect. Beijing has intensified its drive for indigenous innovation, restructured its supply chains, expanded its influence through initiatives like the Belt and Road, and strengthened ties across the Global South (Kennedy, 2020; Rolland, 2017). Rather than isolating China, U.S. actions have catalyzed the emergence of alternative trade regimes, parallel technology ecosystems, and new diplomatic blocs that challenge Western norms and institutions.

Moreover, the American fixation on bilateral goods deficits obscures broader structural realities. The U.S. continues to benefit from service surpluses, global dollar demand, and financial capital inflows (International Monetary Fund [IMF], 2023). The trade imbalance in goods is not primarily a function of Chinese policy manipulation but a reflection of America’s own economic transition toward post-industrial specialization and decades of intentional manufacturing outsourcing (Autor et al., 2020). Efforts to reverse these structural dynamics through tariffs and reshoring are not only economically inefficient and inflationary but risk deepening domestic inequality and global instability (Rodrik, 2020; Irwin, 2022). The April 2025 “Liberation Day” tariffs, an aggressive protectionist measure by the U.S. against China’s green technology overcapacity, backfired, ultimately exposing the fragility of the American economic model. As this paper demonstrates, a more coordinated, sequenced, and multilateral approach to industrial revival and supply chain realignment would have advanced strategic objectives without destabilizing the international economy.

This paper’s core argument is that U.S. containment strategies—while intended to reassert economic leadership—have instead proven counterproductive, accelerating global multipolarity and undermining U.S. credibility. In essence, U.S. efforts to contain China through unilateralism and economic nationalism have failed to arrest its rise—and may, paradoxically, have hastened the transition to a more fragmented and multipolar world order. By undermining alliances, weaponizing interdependence, and failing to invest in domestic capacity before imposing restrictions, Washington has weakened the very instruments of influence it once wielded with confidence. This paper argues that a new approach is necessary: one that incorporates adaptive competition, strategic multilateralism, and a nuanced understanding of economic sovereignty in the 21st century. Without such recalibration, the United States risks not only strategic exhaustion but the erosion of its global leadership.

METHODOLOGY

This paper draws on qualitative analysis of policy documents, official statements, secondary literature, and trade and investment data to examine the consequences of U.S. containment policy toward China. It integrates insights from global economic institutions (e.g., IMF, WTO), think tanks, and media reporting to construct a narrative that links strategic decisions to global economic outcomes. The emphasis is on process-tracing and thematic synthesis, focusing on areas where containment efforts have produced unintended geopolitical and economic effects. The author acknowledges using ChatGPT for drafting assistance and language refinement to enhance the manuscript’s clarity. The AI tool was employed solely to improve readability and structure sentences without influencing the study’s analytical, interpretative, or conceptual contributions.

Theoretical Framework

This paper uses a political economy lens rooted in the following key conceptual tools:

Strategic Containment: Traditionally used in Cold War foreign policy, containment now encompasses economic, technological, and institutional measures designed to limit a rival’s growth. The paper evaluates how this strategy has evolved in the U.S.–China context and the tensions it creates within a globally interdependent economy.

Economic Statecraft and Weaponized Interdependence: Following Farrell and Newman (2019), this concept examines how the U.S. uses control over financial networks, digital infrastructure, and chokepoints in global supply chains as tools of coercion—and how these mechanisms have produced diminishing returns against a diversifying China.

Economic nationalism provides a second interpretive frame. Rooted in the belief that economic policy should serve national power and autonomy, this paradigm has reemerged in the U.S. through policies like reshoring, industrial subsidies, and trade protectionism and weaponization. These measures reflect a zero-sum logic, where China’s gains are perceived as America’s losses. However, in an era of profound economic interdependence, such policies often generate unintended consequences, including inefficiency, inflation, and retaliatory countermeasures that undermine the very goals they seek to achieve.

Global Political Economy (GPE) emphasizes the interplay between markets, states, and global institutions. It critiques zero-sum thinking and highlights how economic interdependence and global supply chains complicate unilateral actions. This perspective allows us to analyze how U.S. strategies disrupt not just bilateral relations with China but also affect global capital flows, trade, and technological diffusion.

Outsourcing and Global Economic Strategy

The liberalization of trade relations between the United States and China in the 1990s marked a pivotal turning point in the evolution of global economic architecture. Spearheaded by the Clinton administration, the decision to grant China Permanent Normal Trade Relations (PNTR) in 2000 and support its accession to the World Trade Organization (WTO) in 2001 catalyzed a wave of corporate offshoring. Outsourcing became the cornerstone of U.S. corporate globalization strategy since the late 20th century, allowing firms to transfer manufacturing and service operations to lower-cost regions, particularly China, Mexico, and India while concentrating high-value activities such as R&D and branding within the U.S. economy. As Thomas Friedman (2005) argues in The World Is Flat, globalization has “flattened” the competitive landscape, enabling firms to optimize resource allocation across borders.

For many American firms, the allure of China’s vast, low-cost labor force and rapidly expanding industrial capacity proved irresistible. American firms adopted outsourcing to achieve cost efficiency, scalability, and market responsiveness (Gereffi & Fernandez-Stark, 2016). Manufacturing was outsourced to China and Mexico due to lower labor costs and robust supply chain ecosystems. India became the destination for services, particularly IT and customer support, owing to a large, English-speaking talent pool (Dossani & Kenney, 2007). According to Friedman (2005), “The core idea was not just about saving money—it was about refocusing on where the competitive edge lies: technology, patents, and branding.” This reallocation allowed American firms to lead in sectors like semiconductors, cloud computing, and biotechnology by investing more in intellectual property and innovation (Pisano & Shih, 2009).

The Domestic Fallout of Outsourcing: Policy Failures and Strategic Consequences

The Clinton administration’s trade liberalization agenda was driven by the belief that integrating China into the global economy would not only boost efficiency and lower costs for American consumers but also promote political liberalization in China. However, this ideological wager ignored the deeply uneven domestic consequences. While U.S. multinationals reaped the benefits of cheap labor and expanded global supply chains, America’s industrial heartland—particularly the Midwest—suffered severe economic and social dislocation. Outsourcing accelerated job losses in U.S. manufacturing, decimating once-thriving factory towns and contributing to long-term regional decline. Between 2001 and 2013, trade with China alone resulted in over 3 million job losses, most concentrated in the manufacturing sector (Scott, 2014). As Autor, Dorn, and Hanson (2016) show, the “China Shock” led to hollowed-out communities, rising income inequality, and eroding political trust, particularly in regions already vulnerable to deindustrialization.

The surge in Chinese imports following China’s accession to the WTO produced far more acute local economic shocks than U.S. policymakers had anticipated (Pierce & Schott, 2016). While globalization generated real aggregate gains, these were asymmetrically distributed: capital owners and multinational corporations thrived, while blue-collar workers absorbed the costs. Manufacturing employment as a share of the U.S. labor force declined sharply, creating a vacuum that was quickly filled by populist anger and electoral backlash (Rodrik, 2018). In hindsight, the Clinton-era trade liberalization embedded structural vulnerabilities into the U.S. economy—particularly in strategic sectors such as semiconductors, pharmaceuticals, and defense manufacturing—while accelerating the rise of a geopolitical rival. Crucially, deindustrialization was not an inevitable byproduct of globalization, but the result of policy failure. Successive administrations pursued tax incentives that favored offshoring, failed to strengthen labor protections, and neglected to invest in domestic industrial renewal. As Rodrik (2015) observes, the U.S. experienced “deindustrialization without development”—a dismantling of labor-intensive sectors without replacing them with robust, regionally distributed alternatives. The resulting economic divergence deepened inequality, eroded social cohesion, and fractured the political landscape.

Reversing this trajectory demands a coherent industrial strategy. Policy must prioritize reshoring key supply chains, incentivizing domestic production, upgrading labor standards, and investing in regional innovation ecosystems. Restoring America’s productive base is not only vital for equitable growth but also essential for rebuilding national unity and reinforcing geopolitical resilience.

Financial Gains and Corporate Performance

The globalization model underpinned the rise of American corporate giants such as Apple, Google, and Amazon, which built global value chains while retaining control over proprietary technologies. According to the U.S. Bureau of Economic Analysis (2022), U.S. multinational corporations earned more than $6 trillion in overseas revenue in 2020, much of it enabled by outsourcing and offshoring. Furthermore, research shows that firms engaged in global outsourcing typically report higher productivity and profits (Antras & Helpman, 2004). This reinforces the view that outsourcing has been financially successful from a corporate standpoint.

Technological Advancement and Innovation Capacity

By outsourcing routine and labor-intensive jobs, U.S. firms have redirected capital and expertise into R&D and product development. The National Science Board (2022) reports a steady increase in U.S. R&D investment, especially in AI, aerospace, and pharmaceuticals—sectors largely untouched by offshoring. This shift underlines the U.S. transition to a post-industrial innovation economy, in line with the Schumpeterian model of creative destruction—where old production methods are phased out for newer, more efficient ones (Schumpeter, 1942).

The Strategic Pivot under Trump and Continuity Under Biden

President Trump’s embrace of economic nationalism, though deeply controversial, marked a decisive pivot away from the neoliberal globalization consensus that had governed U.S.–China economic relations since the Clinton era. Trump’s “America First” doctrine aimed to unwind this integration. His administration launched a full-spectrum campaign to reverse the outsourcing trajectory, using tools such as Section 301 tariffs on over $370 billion worth of Chinese goods, Section 232 tariffs on steel and aluminum, and the blacklisting of Chinese tech giants like Huawei and ZTE. These measures were justified on grounds ranging from intellectual property theft to national security concerns. However, the underlying logic was clear: reclaim strategic industries, discourage offshoring, and reindustrialize the U.S. economy. The CFIUS reforms (via FIRRMA) blocked Chinese investments in critical tech sectors, while early restrictions on semiconductor equipment and dual-use technologies signaled the start of a targeted tech decoupling.

Trump also withdrew from multilateral frameworks like the Trans-Pacific Partnership (TPP), favoring bilateral leverage and greater control over trade policy. Executive orders promoting “Buy American” and “Hire American” further embedded protectionism into federal procurement and immigration policy. Collectively, these actions constituted what might be called a “counter-globalization industrial policy”, aimed at disrupting the U.S.–China economic symbiosis forged during the Clinton-Bush-Obama years. The COVID-19 pandemic added urgency to this pivot. Global shortages of essential goods—from masks to microchips—exposed the fragility of hyper-globalized supply chains. The crisis validated longstanding concerns about over-reliance on offshore production and galvanized bipartisan calls for strategic autonomy and domestic resilience (Bonadio et al., 2021).

Crucially, President Biden did not reverse this trajectory. Instead, his administration refined, expanded, and multilateralized the strategy. Through landmark legislation, such as the CHIPS and Science Act and the Inflation Reduction Act (IRA), as well as continued export controls targeting Chinese technology sectors (Goodman & Rappeport, 2022).  , Biden advanced a more sophisticated industrial policy aimed at rebuilding domestic capacity in semiconductors, clean energy, and advanced manufacturing. These acts came with stringent “China guardrails,” restricting recipients from expanding advanced facilities in China and excluding Chinese inputs from green tech subsidies.

Meanwhile, Buy America rules were expanded, and new federal procurement standards discouraged contracts with Chinese firms in telecoms, AI, and green tech. Collectively, these moves reflect a shift from integration to insulation. The notion of “friend-shoring”—moving production to politically aligned countries—and selective industrial policy in strategic sectors is now considered prudent, not reactionary (Baldwin, 2022).  (Baldwin, 2022). Importantly, many economists and technocrats who once opposed such measures have begun to shift their views. In the face of intensifying geo-economic rivalry, selective decoupling—especially in high-tech and defense sectors, as well as industrial policy—is now viewed not as protectionist regression but as a necessary tool of economic statecraft. The goal is no longer just to contain China but to build domestic and allied capacity for technological competition and systemic resilience.

In sum, while Trump initiated the strategic rupture, Biden institutionalized it—not by abandoning globalization outright but by redefining its terms. The bipartisan convergence on decoupling, reshoring, and techno-industrial sovereignty marks a foundational shift in the U.S. global economic strategy: from liberal interdependence to managed, strategic competition.

April 2, 2025: A Tariff Escalation with Global Reverberations

On April 2, 2025, the U.S. administration declared “Liberation Day” and announced a sweeping tariff targeting nearly all U.S. trading partners, including a 10% base rate on all imports and punitive rates up to 145% on Chinese goods. These measures, intended to protect domestic industries and reduce trade deficits, have instead triggered immediate market turmoil, disrupted global trade, and intensified geopolitical tensions—particularly with China. Below, we examine the multifaceted impacts of the tariffs, highlighting the economic and geopolitical consequences.

1. Financial Market Turmoil and Capital Flight

U.S. Capital Market Disruptions

The immediate aftermath of the tariff announcement saw a significant downturn in U.S. financial markets. On April 3, the S&P 500 fell by 4.84%, marking its steepest one-day percentage loss since June 2020, and further dropped by 5.97% on April 4, 2025; the Dow Jones Industrial Average dropped by 1,679 points, a 3.98% decrease on April 3 and plunged by 2,200 points or 5.5% on April 4. The Nasdaq Composite declined by 5.97%, its largest single-day drop since March 2020, and on April 4, it plunged 5.8%, entering bear market territory. Over two days, U.S. stocks lost more than $6.6 trillion in value—the largest two-day loss in history. Consumer confidence plummeted, with the University of Michigan Consumer Sentiment Index falling to 50.8, down from 57.0 in March. This decline reflects growing consumer concerns amid escalating trade tensions and market volatility.

U.S. Treasury Market Disruptions

The abrupt implementation of reciprocal tariffs in early April 2025 triggered volatility across global financial markets, including the U.S. Treasury market, prompting a flight to safety among investors. The yield on the benchmark 10-year U.S. Treasury fell below 4.2%, down from 4.6% in February, as investors fled equities and sought the relative safety of government bonds. This yield decline reflected a surge in demand for Treasuries amid fears of a prolonged trade war, economic slowdown, potential recession, and escalating trade tensions with China. However, longer-duration bonds were sold off aggressively due to inflation fears and funding concerns. Initially, yields on long-term Treasury bonds fell amid recession fears, but they soon spiked as investors anticipated higher inflation and fiscal instability. This volatility undermined the traditional “safe haven” status of U.S. government debt, leading to capital outflows and increased borrowing costs for the U.S. government (Brookings Institution, 2025).

A sharp decline in foreign purchases of Treasuries, particularly by major holders like Japan and the UK, heightened fears of a debt crisis (LGT, 2025a). This exodus forced the Federal Reserve to intervene with emergency asset purchases to stabilize the Treasury market, marking a crisis of confidence in the U.S. fiscal position. Mounting funding costs compelled the Trump administration to reverse tariffs on all countries except China by April 9 in an attempt to restore confidence and prevent further economic fallout (MarketWatch, 2025).

Investor Confidence and the U.S. Dollar

The tariffs eroded investor confidence in U.S. financial markets. Contrary to standard economic models, the U.S. dollar depreciated unexpectedly as foreign investors rebalanced their portfolios away from U.S. equities and bonds (CEPR, 2025). Investors shifted assets from U.S. equities to Asian and Middle Eastern markets reflecting a broader decoupling trend from Western-led capital markets, with Asian equity-focused ETFs seeing net inflows of $8.45 billion, while U.S. equity funds experienced $43.5 billion in outflows (Reuters, 2025a).

2. Domestic Economic Impact

GDP Contraction and Inflation

According to the IMF, U.S. GDP growth projections were revised downward from 2.1% to 1.4% for 2025, while China’s was adjusted from 4.9% to 4.3%, signaling mutual harm (IMF, 2025). Long-term projections from the Penn Wharton Budget Model estimate a persistent 0.4% reduction in U.S. output and a 5% decline in wages, equating to a $22,000 lifetime loss for middle-income earners (Penn Wharton Budget Model, 2025).

Inflationary Pressures and Consumer Strain

Tariffs raised input costs for businesses, which were passed on to consumers. The sudden tariff escalation significantly increased input costs for American businesses, especially in manufacturing, retail, and logistics. Many companies relied on Chinese intermediate goods within their supply chains, and the absence of affordable alternatives made substitution difficult in the short term. Unable to fully absorb the rising costs, firms passed them on to consumers, sparking a broad-based increase in prices across multiple sectors. This price inflation coincided with a high-interest rate environment, as the Federal Reserve had continued its tightening cycle to rein in earlier inflationary trends. Elevated borrowing costs—impacting mortgages, auto loans, and credit card debt—amplified the financial burden on households. At the same time, ongoing global supply chain disruptions, particularly in energy, microchips, and shipping, further constrained the availability of goods and pushed prices upward.

Amid rising interest rates and persistent supply chain disruptions, inflation significantly eroded real wages, thereby constraining household consumption and weakening overall demand. Although nominal wages showed modest gains in early 2025, they failed to keep pace with rising prices, leaving most American households with diminished purchasing power. As everyday essentials became more expensive, families were forced to reduce discretionary spending, delay major purchases, and dip into savings—if available—to maintain their standard of living.

This contraction in household consumption—historically the bedrock of U.S. economic growth—had a chilling effect on broader demand. Retail sales slowed, consumer confidence plummeted, and sectors dependent on consumer spending, such as travel, entertainment, and hospitality, experienced notable downturns. According to revised Bureau of Economic Analysis figures, personal consumption expenditures (PCE) growth slowed to just 0.4% in Q2 2025, down from 1.2% in the previous quarter.

3. Trade Disruptions and Supply Chain Realignments

Port Activity Decline

The tariffs disrupted global supply chains, leading to a 30–40% drop in container volumes between the U.S. and China. The Port of Los Angeles, a critical hub for U.S.-China trade, experienced a significant downturn of a 35% decline in cargo volumes from Asia compared to the same period the previous year, with a tripling of canceled ship arrivals (NPR, 2025; The Guardian, 2025). Major U.S. exporters and logistics firms reported a severe slowdown in shipments and revenue.

Impact on U.S. Corporations

Major U.S. corporations like Amazon faced increased costs due to tariffs on imported goods, compounded by slowing consumer demand. American agricultural and technology exporters also suffered from China’s retaliatory tariffs and shifting procurement to alternative suppliers (Financial Times, 2025a).

China’s Strategic Diversification and Supply Chain Weaponization

China responded swiftly with a 34% retaliatory tariff on U.S. goods and imposed export controls on critical minerals and technologies (ABC17NEWS, 2025). The Chinese stock market mirrored global declines, with the CSI 300 index dropping by 6.3% (LGT, 2025b). However, China managed to mitigate some impacts by increasing exports to Southeast Asia and the EU, with Chinese exports rising 8.1% year-over-year (Business Insider, 2025).

Equally, China intensified its diversification away from U.S. trade reliance. Supply chains were purged of U.S. components, and exports of critical inputs—such as rare earth minerals and pharmaceutical precursors—were restricted, squeezing American industries (Financial Times, 2025a). This “supply chain weaponization” has become a central pillar of China’s counterstrategy.

Expanding Global Trade Networks

China hosted summits with Latin American and Caribbean nations to broaden trade relations and reduce dependency on Western markets (Reuters, 2025a). Additionally, efforts to reduce dollar-denominated trade have gained momentum (Capital Ethiopia, 2025).

4. Geopolitical Ramifications

Strained International Relations

The unilateral tariffs strained ties with allies and trading partners. U.S. pleas for China to resume trade talks were met with silence or conditional responses, reflecting Beijing’s growing leverage. Simultaneously, EU officials expressed concern over the extraterritorial effects of the U.S. trade measures (Financial Times, 2025).

China’s Diplomatic Offensive

Beijing launched a diplomatic campaign to court the Global South and European nations, relaxing sanctions on EU officials and framing itself as a more stable trade partner (Financial Times, 2025b). These efforts undermined U.S. influence in key multilateral arenas.

Bilateral Economic Statecraft: U.S. Interactions with China and the European Union

International trade balances offer a snapshot into the intricate economic relationships between nations, revealing patterns of exchange in both tangible goods and intangible services. Over the past decade, the United States has experienced significant shifts in its trade balance with China, Europe, and the rest of the world. During this period, the U.S. has faced persistent goods trade deficits, particularly with major partners like China and the European Union. However, these deficits have been partially offset by growing surpluses in the services sector, especially in digitally enabled services, where the U.S. holds a competitive advantage.

Examining the trade dynamics between the United States and two of its major economic partners, China and the European Union, unveils a nuanced picture characterized by both deficits and surpluses across different sectors, ultimately shaping the overall adjusted trade balance. While trade tensions and protectionist policies have introduced challenges, the U.S.’s strength in services continues to play a crucial role in its trade dynamics.

U.S. Trade Balances with China and the EU: Goods Deficits, Services Surpluses, and Strategic Implications

Between 2018 and 2024, the U.S. goods trade deficit with China declined by 28%, falling from $301 billion to $217 billion. This drop was driven by tariffs, supply chain diversification, and shifting global trade patterns (Econovis, 2024). However, this decline masks a broader trend: during the same period, the overall U.S. trade deficit increased by 37%, from $635 billion to $872 billion, due to rising deficits with other countries. In 2023 alone, the U.S. registered a goods trade deficit of approximately $295.4 billion with China (MoneyWeek, 2025), underscoring continued reliance of the American economy on Chinese manufacturing and the flow of goods from East to West despite ongoing decoupling rhetoric.

This picture shifts when accounting for services. The U.S. maintained a services trade surplus of approximately $55 billion with China in 2023, reflecting the global strength of the U.S. service sectors, including finance, education, technology, and tourism (MarketWatch, 2025; WSJ, 2023). Adjusting for this surplus, the net trade deficit with China stood at approximately $240.4 billion—still substantial, but less extreme than goods-only figures suggest. However, this service surplus faces growing headwinds from rising bilateral tensions, investment restrictions, and Chinese regulatory pushback.

A similar dynamic defines U.S.-EU trade. Data from Consilium (2025) indicates a goods deficit of €157 billion in 2023 for the U.S. in its trade with the EU In 2024, the U.S. goods trade deficit with the European Union reached $235.6 billion, with $370.2 billion in exports and $605.8 billion in imports (BEA, 2025). This imbalance reflects the strong inflow of European manufactured goods into the U.S. market. However, the U.S. again posted a sizable services surplus—about €109 billion in 2023—largely driven by sectors such as financial services, intellectual property, tech services, and entertainment exports (Consilium, 2025; White House CEA, 2024). This substantial surplus in services, bolstered by the U.S.’s comparative advantage in high-value-added services, partially offsets the goods deficit, reflecting the competitive edge of American service industries in the European market. Consequently, when adjusted for this surplus, the U.S.-EU net trade deficit narrows considerably to approximately €48 billion, significantly smaller than the U.S.-China gap.

Trade with the Rest of the World: Shifting Deficits and Surpluses

As the U.S. reduced its goods trade deficit with China, deficits with other countries surged. From 2018 to 2024, the U.S. goods trade deficit increased by 14.0%, reaching $1.21 trillion in 2024 (U.S. Bureau of Economic Analysis, 2025}. The U.S. has continued to generate moderate surpluses in the services sector, especially in Latin America and parts of Asia, though not at the scale seen with Europe or China (The Wall Street Journal, 2023), particularly in digitally-enabled services. However, geopolitical tensions and protectionist policies have introduced uncertainties in these trade relationships.

Table 1: U.S. Trade Balance Snapshot (2015–2024)

Note: Figures are approximate and sourced from various U.S. government reports.

U.S. Services Trade Surplus: Digital and Financial Services Drive Growth

The United States has consistently maintained a robust trade surplus in services, in stark contrast to its well-known deficit in goods. This surplus is primarily driven by digitally delivered and financialized services such as cloud computing, software licensing, financial services, intellectual property (IP) royalties, media streaming, and professional consulting. In 2024, the U.S. services trade surplus reached $293.3 billion, up from $278.4 billion in 2023 (BEA, 2025).

Digitally-enabled services have become the fastest-growing component of global trade. According to the White House Council of Economic Advisers, U.S. exports of these services have outpaced the growth of both goods and traditional services exports over the past 25 years (White House CEA, 2024). American firms dominate global markets in cloud infrastructure (Amazon Web Services, Microsoft Azure), digital payments (Visa, MasterCard, PayPal), streaming content (Netflix, Disney+), and enterprise software (Google, Oracle, Adobe), reinforcing U.S. strategic economic leadership.

This digital and financial advantage also reshapes how trade balances—especially with China—should be assessed. While headlines often focus on the U.S. goods trade deficit with China, which stood at approximately $382 billion in 2022, this narrative omits a critical offset: the growing U.S. services surplus. In 2023 for instance, the U.S. recorded a $15 billion service surplus with China, despite limitations on U.S. digital platform access in China (BEA, 2024).

When financial services, intellectual property royalties, and digital platform revenues are considered—most of which remain underreported in traditional trade accounting—the scale of the U.S. advantage in value-added exports becomes clear. If these financialized and digital flows were fully captured, the apparent trade imbalance with China and other partners would diminish significantly and, in some cases, reverse.

The U.S. Services Advantage: A Hidden Surplus

Global Strategic Dominance in Financial Services: The financial services sector—including banking, insurance, asset management, and fintech—is pivotal in reinforcing U.S. economic strength and geopolitical influence. In 2023, the United States exported approximately $1.03 trillion in services and imported $748 billion, resulting in a services trade surplus of $278 billion—the highest since 2019 (Council of Economic Advisers, 2024). Financial services exports contributed significantly, totaling $175.5 billion, with an additional $25 billion from insurance services (Select USA, 2024). Major U.S. firms, such as JPMorgan Chase, Goldman Sachs, BlackRock, and fintech companies like PayPal and Stripe, lead global markets. The U.S. dollar’s status as the world’s primary reserve currency further amplifies this advantage by facilitating cross-border transactions and investment flows. The U.S. maintains a services trade surplus of approximately $55 billion with China, primarily driven by sectors like tourism and education (MarketWatch, 2025). In 2023, the EU had a services trade deficit of €109 billion with the U.S., indicating a significant U.S. surplus in this sector (Consilium, 2025).

Tech Dominance: U.S. firms hold a substantial portion of the global digital services market and are major drivers of innovation. According to the White House Council of Economic Advisers (2024), U.S. exports of digitally-deliverable services account for more than half of global exports (CEA, 2024). The OECD and UNCTAD note that the U.S. is the largest single exporter of digitally-deliverable services, far ahead of the EU, China, and India. U.S. firms dominate cloud infrastructure, with Amazon and Microsoft alone controlling over 50% of the global market share in that sub-sector (Statista, 2024a). Apple’s App Store, Microsoft’s Azure, and Visa’s payment systems generate massive offshore revenues—often booked in low-tax jurisdictions but ultimately benefiting U.S. GDP. While U.S. companies dominate commercial and B2B digital services, countries like India and Ireland also play large roles in outsourced IT and back-office services. In consumer-facing platforms. China (with companies like Alibaba, Tencent, and ByteDance) has significant internal dominance, though it has a smaller global footprint outside Asia.

IP Royalties: According to the World Trade Organization (WTO, 2023) and U.S. Bureau of Economic Analysis (BEA) data, the U.S. consistently earns over $100 billion annually in charges, including from Chinese manufacturers, for the use of intellectual property (IP), which includes: Licensing of patents, Trademarks, Franchises, Copyrighted software and technology. For example, in 2022, U.S. exports of IP charges were approximately $123 billion (BEA, 2023). Chinese manufacturers and tech firms pay U.S. firms for licensed technologies, often embedded in Smartphones, semiconductors, software, and industrial equipment. Nuances to consider is that China does not account for the majority of the $100+ billion. While China is a key payer, major contributors also include the EU (e.g., Ireland, Netherlands, and Germany), Japan, and South Korea. The IP revenue figure includes a wide range of sectors, from pharmaceuticals and biotech to entertainment and software—not just tech used by Chinese manufacturers.

Education & Tourism: The United States benefited significantly from international education and tourism, both of which are substantial contributors to its economy and global trade profile. During the 2023–2024 academic year, over 1.1 million international students that enrolled in U.S. Colleges and universities contributed approximately $43.8 billion to the U.S. economy. Chinese students have historically been the largest group, with over 290,000 enrolled in U.S. institutions in the 2018–2019 academic year. While exact figures for 2023–2024 are not specified, it is reasonable to infer that Chinese students contribute a substantial portion of this $43.8 billion. This spending supported over 378,000 jobs across various sectors, including higher education, housing, dining, retail, and transportation (NAFSA, 2024). Notably, states like California, New York, and Massachusetts were among the top beneficiaries, with California alone earning $6.4 billion from international students in 2023 (ApplyBoard, 2024).

In 2023, international tourists made approximately 66.5 million visits to the United States, spending an estimated $155 billion. On average, each international visitor spent over $4,000 per trip, contributing to the U.S. economy through expenditures on accommodations, dining, entertainment, and other travel-related services. According to the U.S. National Travel and Tourism Office (NTTO), about 2.8–2.97 million Chinese tourists spent approximately $15 billion, with an average spend of $11,849 per visitor, in the United States in 2019, making them the top spenders among international visitors that year. However, due to the COVID-19 pandemic and subsequent travel restrictions, Chinese tourist arrivals and spending have significantly declined. In 2023, Chinese arrivals to the U.S. remained 60% below 2019, and spending had not returned to pre-pandemic figures. This influx of spending played a vital role in supporting the U.S. travel and hospitality industries, which are key components of the nation’s service exports.

The Impact of the U.S.–China Trade War

The U.S.–China trade war, initiated in 2018 and reignited in various phases, marks one of the most consequential economic confrontations in the 21st century. While the initial intent was to rebalance trade, protect intellectual property, and curb China’s technological rise, the long-term outcomes have been complex, affecting not only the two superpowers but also the global economy as a whole. Let us assess the economic impact of the trade war on the United States, China, and the broader international system.

1. Economic Impact on the United States

Short-Term Gains, Long-Term Costs

In the early stages, the U.S. administration justified tariffs on Chinese imports by highlighting the short-term boosts in specific industries, such as steel and aluminum. However, these gains proved marginal and unsustainable. According to Fajgelbaum et al. (2020), while targeted sectors saw temporary protection, the broader U.S. economy experienced a net welfare loss due to retaliatory tariffs and increased input costs.

Inflationary Pressures on Consumers

Tariffs imposed on Chinese goods raised prices for American consumers. A study by the Peterson Institute for International Economics estimated that by 2020, tariffs were costing the average American household approximately $1,300 annually (Clausing & Lovely, 2025). This burden worsened inflationary pressures in the post-COVID period, with essential goods—including electronics, machinery, and consumer appliances—becoming significantly more expensive.

Supply Chain Disruptions and Strategic Setbacks

The forced decoupling of U.S.–China supply chains has led to inefficiencies, particularly in technology-heavy sectors like electronics and green energy. The semiconductor industry, which relies on both U.S. intellectual property and Chinese assembly lines, was severely disrupted (Miller, 2024). U.S. companies also faced challenges realigning supply chains, leading to delays and cost overruns.

Loss of Market Share in China

Retaliatory tariffs imposed by Beijing have hurt U.S. exporters, particularly in the agricultural sector. Before the Phase One agreement in 2020, soybean exports to China—the United States’ largest agricultural customer—dropped dramatically, leading to an increase in farm bankruptcies (Zhang, 2020). Many of these losses were not fully recovered even after partial tariff rollbacks.

2. Economic Impact on China

Economic Resilience Amid Slowing Growth

While China’s GDP growth has decelerated—averaging around 5% post-trade war, compared to 6.5% before—it has shown remarkable resilience. Beijing responded by boosting domestic consumption and redirecting exports toward ASEAN, Africa, and partners of the Belt and Road Initiative (BRI) (International Monetary Fund [IMF], 2023a). The “dual circulation” strategy marked a pivot toward internal economic rebalancing.

Technological Self-Sufficiency Drive

Perhaps the most transformative outcome of the trade war has been China’s push for technological independence. U.S. sanctions on Huawei and chipmakers catalyzed investments in local semiconductors and AI. By 2023, firms like SMIC had begun producing 7nm chips domestically, and Huawei launched smartphones powered by its own Kirin processors, signaling early success in decoupling from U.S. technologies (Lee, 2023).

Export Diversification and Strategic Hedging

China significantly reduced its reliance on U.S. markets. By expanding trade with emerging economies and securing long-term energy and infrastructure agreements, it diversified its risk exposure. China’s exports to ASEAN now exceed those to the U.S., reinforcing a shift in global trade patterns (Voronoi, 2024).

3. Global Economic Consequences

Global Trade Slowdown and Fragmentation

The World Trade Organization and the International Monetary Fund (IMF) have warned that U.S.–China tensions could reduce global GDP by 1–2% over the long term due to supply chain fragmentation and investment uncertainty (International Monetary Fund [IMF], 2025). As major economies and multinationals reconfigure sourcing strategies, global trade has become less efficient.

Currency and Financial Market Volatility

The tit-for-tat tariff rounds caused repeated bouts of market volatility. Emerging markets heavily reliant on Chinese and American demand—such as Germany, South Korea, and Brazil—faced sharp capital flow reversals and foreign exchange volatility (Eichengreen, 2022). Meanwhile, the U.S. Treasury market suffered from reduced foreign demand as China reduced its holdings, redirecting capital toward gold and alternative reserve assets (Bloomberg, 2025).

The “China+1” Strategy and Incomplete Decoupling

Multinational corporations have begun adopting the “China+1” strategy, relocating parts of their supply chains to Vietnam, India, and Mexico to hedge against geopolitical risks. However, full-scale decoupling proved economically infeasible due to China’s embedded role in global manufacturing. As Baldwin, Freeman, and Theodorakopoulos (2022) note, the global value chain is “stickier” than previously assumed, limiting diversification speed and scope.

DISCUSSION

U.S. Policy and China’s Economic Ascendance: An Analysis

The United States’ struggle to contain China’s ascent must be understood not merely through geopolitical or military lenses but also through the cumulative effects of internal economic mismanagement and a series of strategic policy poor choices. While American administrations across both parties have frequently invoked China as a looming threat—economically, technologically, and militarily—the reality is that many of the forces undermining U.S. global dominance are self-inflicted. This section examines how structural shifts in the American economy, underinvestment in human capital, financial overreach, and a misreading of the global value chain have compromised the country’s strategic posture and accelerated global economic recalibration.

The Evolution of American Capitalism and the Strategic Hollowing of the Domestic Economy

Post-industrial U.S. capitalism has become increasingly centered on intangible assets—intellectual property, digital platforms, branding, and finance—while physical manufacturing has been outsourced to lower-cost labor markets, particularly in East and Southeast Asia. Technology conglomerates such as Microsoft and Cisco became emblematic of a new economy rooted in intellectual property and global networks (Rifkin, 2000). Microsoft’s valuation surged from under $100 billion in the 1990s to over $3.38 trillion by May 2025 (CompaniesMarketCap, 2025), underscoring a broader shift in value creation away from labor-intensive production toward capital-intensive, high-margin digital sectors.

This model created massive shareholder wealth for technology and finance giants like Apple, Alphabet, and BlackRock but did little to expand broad-based employment or reduce inequality. As Piketty (2014) emphasized, when returns on capital outpace growth in labor income, inequality becomes structurally entrenched. The U.S. failed to counterbalance these dynamics with redistributive policies, progressive taxation, or worker participation mechanisms. This neglect contributed to declining real wages for most Americans, fraying the social contract, and weakening domestic demand—ironically undermining the long-term viability of capitalist growth itself.

Successive administrations failed to develop policies that could harness this new economic paradigm for the national interest. Instead, tax codes, regulatory frameworks, and trade policies were reshaped to facilitate capital accumulation rather than broad-based productivity or workforce adaptation. Mazzucato (2018) critiques this model as one in which the state socializes risk through innovation and infrastructure funding while the private sector privatizes rewards, often without reinvestment in productive capacity or labor resilience.

This structural reorientation away from production toward asset management and financial engineering has weakened the United States’ strategic economic base. The military-industrial complex remained robust, but the industrial base that had historically supported both warfighting capacity and middle-class employment was allowed to atrophy. This was not a passive outcome—it was a result of deliberate policy choices that prioritized globalization without a national industrial strategy in place.

Military Overreach and the Cost of Primacy

The American commitment to global military supremacy has carried significant opportunity costs. Since the end of the Cold War, the U.S. has spent over $14 trillion on defense-related expenditures (Hartung, 2021). While often justified in terms of deterrence and stability, this militarism has diverted attention and resources away from critical areas of domestic renewal such as education, infrastructure, and public health. This militarized grand strategy, largely unchallenged across administrations from Clinton to Trump 2.0, reflects a flawed assumption: that force projection can substitute for internal strength. Even as the U.S. fought wars in Iraq, Afghanistan, and elsewhere, domestic indicators of health—life expectancy, labor force participation, and educational attainment—either stagnated or declined. Joseph Stiglitz and Linda Bilmes (2008) highlighted how these wars, financed through deficit spending, created a ballooning fiscal burden without delivering commensurate strategic returns.

Rather than recalibrating priorities in the face of rising multipolarity, Washington doubled down on military spending, reinforcing a strategic dependency on force rather than diplomacy, economic statecraft, or coalition-building. This failure to adjust has hampered U.S. flexibility in addressing complex global challenges, including climate change, pandemic resilience, and economic reordering.

Financialization and the Failure to Reform After Crisis

The 2008 global financial crisis represented a seismic shock to the credibility of the American economic model triggered by deregulated financial markets, speculative bubbles, and the commodification of risk through mortgage-backed securities. The crisis cost the global economy an estimated $19.2 trillion and plunged millions into unemployment (PBS, 2012). The aftermath revealed a stark misalignment between elite and public interests. Government bailouts shielded banks while austerity policies deepened public suffering.

The crisis not only accelerated inequality but also undermined the legitimacy of U.S. economic leadership abroad, inviting skepticism about the liberal capitalist model. Yet, despite its scale, the crisis did not lead to meaningful structural reform. Instead, the bailouts of “too big to fail” institutions—rationalized as necessary to preserve systemic stability—only reinforced a regime in which private sector gains were preserved at public expense. Rather than penalizing malfeasance or rebalancing economic priorities, the U.S. response re-legitimized financialization as the cornerstone of American power (Reinhart & Rogoff, 2009). Krugman (2009) criticized the Obama administration’s tepid stimulus and failure to hold Wall Street accountable, noting that the post-crisis recovery enriched capital holders while leaving working Americans behind.

This decision had strategic consequences. By failing to pivot away from Wall Street-centric economic governance, the U.S. continued to underinvest in physical infrastructure, technological manufacturing, and human capital—all areas where China was surging ahead through its state-directed initiatives. The juxtaposition of America’s crisis-driven bailout strategy with China’s post-2008 infrastructure and industrial stimulus revealed a growing asymmetry in developmental statecraft.

The Human Capital Crisis: Strategic Neglect and Skills Mismatch

Another profound misstep has been the underinvestment in human capital at a time when technological acceleration demands continuous learning, reskilling, and adaptability in the labor market. OECD reports (2019) consistently rank the U.S. below many of its peers in educational outcomes, especially in STEM competencies and vocational training. The World Economic Forum (2018) has similarly warned of a widening “skills gap” in the U.S., which threatens to exclude a large segment of the population from participating in the knowledge economy. This skills gap has fueled underemployment, wage stagnation, and political disenchantment in deindustrialized regions.

Despite bipartisan recognition of the need for workforce development, actual policy action has been piecemeal and insufficient. Rather than deploying national resources to retrain displaced workers, policymakers relied on market solutions that largely failed to achieve their objectives. Federal job training programs remain underfunded and often misaligned with the needs of employers. Moreover, healthcare and student debt burdens disproportionately affect younger workers, discouraging risk-taking and perpetuating economic immobility. The result is a bifurcated labor market where a highly compensated elite coexists with a growing precariat, eroding economic cohesion and amplifying sociopolitical polarization.

Strategically, this failure weakens the U.S. not only economically but geopolitically. A nation unable to equip its population for 21st-century challenges is poorly positioned to sustain its global influence, particularly against a rising peer competitor like China, which has made STEM education and industrial upgrading a national priority.

The Misdiagnosed U.S.–China Trade Imbalance

Perhaps the most glaring external miscalculation is the misinterpretation of the U.S.–China trade deficit. Public discourse, dominated by zero-sum narratives, has failed to account for the asymmetry in value creation. While China assembles products like the iPhone, the U.S. captures most of the value through intellectual property, software ecosystems, and financial returns (Dedrick, Kraemer, & Linden, 2011; Xing, 2020). Apple earns over $500 in profit per iPhone, while Foxconn retains only about $8–$10 (Investopedia, 2023). Moreover, U.S. firms dominate high-margin services trade—such as cloud computing, digital advertising, licensing, and entertainment—which traditional trade metrics often fail to capture. When these are included, America’s “deficit” shrinks dramatically (Peterson Institute for International Economics, 2022). The insistence on manufacturing revival as the antidote to Chinese competition reflects an outdated understanding of comparative advantage. Rather than doubling down on low-value sectors, U.S. policy should have invested in services innovation, regulatory frameworks for data governance, and strategic support for digital infrastructure.

The Politics of Deficit Hysteria

The framing of the trade deficit as an existential threat has enabled misguided policies that have often harmed U.S. consumers and producers alike. Protectionist tariffs under the Trump and Biden administrations aimed to revive domestic manufacturing but instead triggered retaliatory measures and disrupted global supply chains. According to the Peterson Institute (2022), when factoring in services exports, licensing, royalties, and financial flows, the actual economic imbalance with China is far less severe than headline figures suggest. Moreover, American firms operating in China generate substantial offshore profits, particularly in finance, tech, and services. These flows, while not reflected in bilateral trade data, constitute a form of strategic rent that the U.S. continues to extract. Thus, the deficit obsession has blinded policymakers to the real opportunities—and vulnerabilities—within a deeply integrated global economy.

China’s Calculated Ascent: Strategic Patience and Industrial Mastery

While the U.S. privatized strategic industries and defunded public R&D, China pursued a calculated strategy of absorbing technological know-how and climbing the value chain, adopting a long-term industrial policy that involved subsidizing strategic sectors, building domestic champions, and demanding technology transfer from foreign firms (Kennedy, 2017). Its willingness to accept low-margin assembly roles has created employment, built infrastructure, and facilitated the diffusion of technology. Firms like Huawei, BYD, and CATL, which are competing globally in cutting-edge sectors, exemplify China’s ascent in high-tech manufacturing, electric vehicles (EVs), and 5G, signaling a growing capacity to compete in innovation-driven markets (Lee & Zhang, 2023).

While the U.S. excels at disruptive innovation, China is mastering the art of incremental upgrading and scale execution—a combination that increasingly threatens to unsettle U.S. leadership in sectors from semiconductors to AI. Ironically, U.S. capital helped fuel this transformation—through IPO facilitation, licensing, and outsourcing. This strategic patience contrasts sharply with America’s short-termism, where quarterly earnings, electoral cycles, and market sentiment often dictate policy decisions. Wall Street’s short-term gains were prioritized over long-term geopolitical risks, a misalignment that now complicates containment strategies. The strategic vacuum created by decades of market fundamentalism has become one of the greatest liabilities of U.S. economic statecraft.

Dual Vulnerabilities: Fragile Giants on Diverging Paths

It is essential to acknowledge that both the U.S. and Chinese models entail systemic risks. America’s financialized economy is susceptible to asset bubbles, regulatory capture, and widening inequality. China, meanwhile, faces overcapacity, demographic decline, and potential debt crises stemming from over-investment in real estate and state-owned enterprises (Freeman, 2021). Strategically, this dual fragility necessitates a more realistic framework for global competition—one that emphasizes resilience over dominance. The goal should not be to “defeat” China through zero-sum confrontation but to restore the domestic vitality and institutional competence that once underpinned American influence.

Reclaiming Strategic Coherence: From Hegemony to Renewal

The path forward for the United States must involve a fundamental reorientation of its strategic priorities. This includes reducing the military-industrial footprint, reinvesting in education and infrastructure, rebuilding domestic manufacturing capacity in critical sectors, and reforming financial regulation to serve long-term national interests. As Schwab (2020) and Mazzucato (2018) both argue, the future belongs to nations that can align public and private sectors toward shared objectives. For the U.S., this means rediscovering the civic, social, and productive pillars of capitalism—not as a nostalgic return to the past but as a deliberate reimagining of future competitiveness. If America is to sustain its global leadership in an age of multipolarity, it must first correct the strategic missteps that have weakened its foundations. The time for course correction is not in some distant future—it is now.

Export Controls and the Contradictions of U.S. Trade Strategy

The Biden administration has dramatically expanded the scope of export controls and trade restrictions aimed at curbing China’s technological rise. Between 2022 and 2024, successive waves of semiconductor and AI-related controls barred China from acquiring high-end chips and chipmaking equipment. The expanded Foreign Direct Product Rule effectively prohibited even non-U.S. firms from supplying China if their products were built with U.S. tools or software. In 2023, a landmark executive order introduced outbound investment screening, restricting American capital and expertise from flowing into sensitive Chinese sectors such as quantum computing, AI, and advanced semiconductors.

Washington also ramped up efforts to internationalize these restrictions. It pressured key allies—such as the Netherlands and Japan—to coordinate export controls, especially on advanced lithography tools essential to semiconductor fabrication. By May 2024, the Biden administration unveiled sweeping new tariffs: 100% on Chinese electric vehicles, 50% on solar cells, and substantial duties on lithium-ion batteries and critical minerals. These measures were framed as both a response to China’s “non-market excess capacity” and a protective shield against the deindustrialization that devastated the U.S. heartland in the 1990s.

Yet this assertive strategy has exposed a fundamental contradiction in U.S. trade policy. Even as Washington restricts the export of high-value technologies to China in the name of national security, it continues to lament a growing trade deficit with Beijing. This metric has long been cited as evidence of unfair economic practices. The paradox is stark: the U.S. cannot simultaneously choke off its own exports to one of its largest markets and then complain about the resulting trade imbalance. At the heart of this contradiction lies the tension between geopolitical ambition and market logic. The semiconductor export controls—especially those initiated in October 2022 and tightened in 2023—were driven by the imperative to prevent advanced technologies from enhancing China’s military or surveillance capacities (Semiconductor Industry Association [SIA], 2023). U.S. firms like Intel, Nvidia, and Qualcomm were barred from selling leading-edge chips and tools used in AI, supercomputing, and chip fabrication to Chinese clients.

However, the economic costs have been significant. Industry estimates suggest U.S. firms stand to lose over $100 billion in potential revenue due to diminished access to the Chinese market (SIA, 2023). China accounts for nearly one-third of global semiconductor demand, and decades of commercial integration have made it a key source of revenue and research and development funding for U.S. tech companies. Severing these ties risks stalling innovation and weakening America’s long-term technological edge. Ironically, this self-imposed contraction in high-value exports has exacerbated the very trade deficit U.S. officials cite as justification for more aggressive trade actions. While U.S. exports to China have declined sharply—due to both export controls and retaliatory Chinese sanctions—imports of consumer electronics, industrial goods, and critical inputs remain robust. The result is a widening trade imbalance, largely driven by U.S. policy choices (U.S. Bureau of Economic Analysis [BEA], 2024).

This dissonance—fixating on the U.S.-China trade deficit while simultaneously restricting its own high-value exports—underscores what many analysts identify as the strategic incoherence of post–Cold War U.S. economic statecraft. The simultaneous pursuit of economic decoupling and trade balance reflects a lack of alignment between national security priorities and economic objectives. The current approach undermines U.S. competitiveness, accelerates technological bifurcation, and alienates allies, without significantly altering China’s strategic trajectory.

To restore coherence, U.S. policymakers must recalibrate their approach. A more targeted export control regime—distinguishing between purely military end-uses and dual-use commercial applications—could mitigate economic fallout without compromising national security. At the same time, a renewed commitment to multilateral coordination and rules-based engagement would reduce the risks of fragmentation and retaliatory escalation. Absent such a rebalancing, the United States risks strategic drift: sacrificing economic dynamism and global influence in pursuit of an ill-defined containment strategy. What is needed is not retreat from competition, but a realignment of policy tools with clearly defined goals—anchored in economic realism, strategic clarity, and diplomatic cooperation.

Would a Revised Calculation Sustain the “Unfair Trade” Argument?

The persistent narrative that China engages in “unfair trade” with the United States centers on the bilateral trade deficit, particularly in goods. However, a more comprehensive assessment—one that includes services trade, structural economic roles, and domestic policy contradictions—undermines the sustainability of this claim. A revised calculation does not support the “unfair trade” argument for three key reasons.

1. Net Benefit to the U.S. Economy

Despite running a consistent goods trade deficit, the U.S. economy benefits significantly from its dominant position in global services. According to a 2023 Brookings Institution study, every dollar of U.S. service exports generates approximately $2.30 in domestic economic activity, compared to only $1.60 for goods exports (Obstfeld, 2025). This multiplier effect reflects the high value-added nature of services such as finance, education, technology, and entertainment—sectors in which the U.S. leads globally. Including services in trade balance calculations reveals that the U.S. derives substantial economic value from international trade, reducing the salience of a goods-only trade deficit.

2. Structural Economic Realities

China’s trade surplus in goods is less an indicator of manipulation than a reflection of its structural role in the global economy. China specializes in high-volume, low-margin exports as the world’s leading manufacturing hub. Meanwhile, the U.S. economy is structured around high-margin services and intellectual property-intensive industries (Freeman, 2021). This division of labor creates a mutually beneficial dynamic: the U.S. consumes affordable goods while exporting high-end services and capital. Thus, framing this interdependence as “unfair” disregards global trade’s functional symbiosis.

3. Selective Criticism and Policy Inconsistencies

The U.S. frequently criticizes China’s use of industrial subsidies—particularly in sectors like steel and solar panels—as evidence of unfair competition. However, this stance overlooks comparable practices at home. U.S. bailouts of the financial sector during the 2008 crisis and the regulatory protections granted to tech monopolies through intellectual property regimes amount to de facto subsidies (Rodrik, 2018). Such selective scrutiny undermines the credibility of American trade grievances and reveals a double standard in applying free trade principles.

Strategic Miscalculations, Economic Contradictions, and the Path Forward in U.S.–China Trade Policy

1. Business Implications: Value over Volume

One of the most overlooked elements in the U.S.–China trade relationship is the structural asymmetry between where value is created and where it is captured. The dominant narrative in U.S. political discourse frames the trade deficit as inherently damaging, yet this perspective is incomplete. In reality, U.S. firms extract substantial value not through manufacturing but through intellectual property (IP), financial arbitrage, and service exports. The most profitable sectors—tech platforms, asset management, cloud computing, and branded software—reside within the U.S., even when production is offshore. The strategic business approach has been, and continues to be, to use China for scale and the United States for monetization. This underscores a critical lesson for businesses: profitability follows control over intangible assets rather than physical volume. As global supply chains become more digitized and data-intensive, the dominance of American firms in platform capitalism means that the real trade balance is tilted less against the U.S. than bilateral goods deficits suggest (Baldwin, 2016).

2. Services Trade and the Politics of Misleading Deficit Narratives

U.S. political discourse around trade deficits—especially during the Trump administration—has focused disproportionately on goods trade, often casting large deficits with countries like China as signs of economic decline or unfair competition. This framing, while politically expedient, obscures a critical and underappreciated dimension of the U.S. economy: its substantial and growing surplus in services trade. The United States consistently runs large surpluses in high-value service sectors, including finance, intellectual property licensing, higher education, tourism, legal services, and cloud computing (Evenett & Fritz, 2023). In 2023 alone, services exports to China exceeded $55 billion (MarketWatch, 2025). International education contributed more than $43.8 billion annually to the U.S. economy, while inbound tourism added roughly $155 billion (NAFSA, 2024; U.S. Travel Association, 2024). These surpluses, though less visible in traditional trade statistics, play a significant role in offsetting goods trade deficits and reflect America’s enduring structural advantages in the global economy.

However, despite this structural advantage, services trade remains underemphasized in public debates and policymaking. There are several reasons for this persistent imbalance in focus:

1. Political Salience: Manufacturing job losses are visible and emotionally resonant. They serve as powerful political symbols in regions hit hard by deindustrialization. Politicians often amplify goods trade deficits to connect with disaffected voters, even though the broader economic picture—marked by strong services exports—is more favorable to the U.S.
2. Statistical Challenges: Unlike goods, services are intangible and often delivered digitally, making them more challenging to quantify accurately. Complex valuation, cross-border delivery, and data limitations mean that services trade is frequently underreported or misunderstood, skewing both public perception and policy focus.
3. Strategic Framing: Emphasizing goods deficits provides a rationale for protectionist measures such as tariffs, investment restrictions, and reshoring initiatives. This framing enables policymakers to justify interventionist policies aimed at revitalizing domestic manufacturing, even if these policies neglect or even harm the U.S.’s competitive strengths in services.

This selective focus creates a misleading narrative that overstates American vulnerability while understating its enduring economic power. As Adam Tooze (2021) argues, the U.S. occupies a structurally privileged position in the global economy, largely due to its dominance in global finance, intellectual property, and digital services. Yet, these strengths are often excluded from political and media discourse, reinforcing public misperceptions and enabling protectionist agendas that may not reduce trade deficits but could disrupt global supply chains and U.S. innovation pipelines.

These dynamics also highlight a broader feature of U.S. economic engagement: persistent structural deficits in goods are frequently offset by robust surpluses in services. This is evident in both U.S.-China and U.S.-EU trade relations. However, escalating geopolitical tensions, regulatory pushback abroad, and unilateral trade restrictions threaten to erode these surpluses. Should these pressures persist, the U.S. could face not just temporary imbalances, but systemic vulnerabilities—especially if key sectors, such as education, finance, and tech services, lose access to foreign markets.

A more accurate understanding of trade must go beyond headline goods deficits. It requires incorporating the full spectrum of economic exchange, particularly services, into trade analysis. Safeguarding the U.S. advantage in these areas demands stable diplomatic relations, open market access, and continued investments in innovation. Only then can U.S. trade policy move from reactive deficit fixation to a strategically coherent, globally competitive posture.

3. Ethical Contradictions and Geopolitical Fallout

The United States’ reliance on coercive economic strategies raises ethical and geopolitical questions. Export controls and sanctions, while designed to secure national interests, have often alienated neutral and allied countries, particularly in the Global South. These nations are increasingly resistant to pressure that forces alignment in U.S.–China rivalry. The result has been the emergence of alternative institutional groupings—such as BRICS+—and a move toward bilateral trade in non-dollar currencies (Tooze, 2021). By attempting to impose reshoring through global compulsion, the U.S. risks undermining the very multilateral order it once championed. The ethical dilemma also lies in the use of critical materials—such as rare earth elements (REEs)—for military versus humanitarian purposes. As Mathews (2025) notes, any prolonged interruption in REE imports could force reallocation from civilian applications, such as MRI machines and clean energy infrastructure, toward defense production—a trade-off fraught with moral and political risk.

4. Strategic Standoff and the Limits of Zero-Sum Thinking

The current U.S.–China standoff reflects not only strategic shortcomings but a dangerous convergence of nationalism and economic determinism. Both sides frame concessions as existential losses—Trump’s administration refused engagement to avoid appearing weak, while Chinese officials invoked 5,000 years of continuity to resist perceived humiliation. The symbolic stakes have come to outweigh the material costs. While both nations have taken steps to de-escalate, such as the agreement in Switzerland to pause reciprocal tariffs, the underlying strategic rivalry remains unresolved. Unless future negotiations move beyond face-saving gestures toward genuine structural reform, the standoff risks crystallizing into a protracted economic Cold War.

American Power in a Multipolar World: Strategic Adjustments

The cumulative effect of U.S. policy missteps in attempting to contain China’s rise—through tariffs, technology bans, and coercive decoupling—has exposed the structural weaknesses within the American political economy. These strategies have not only failed to derail China’s strategic ascent but have, paradoxically, hastened global fragmentation, eroded investor confidence, and diminished Washington’s standing as a credible steward of the liberal international order. Reversing globalization and reclaiming industrial sovereignty does not require economic nationalism or shock therapy. Rather, it demands a sequenced, multilateral, and institutionally coherent strategy anchored in resilience, inclusion, and strategic foresight.

1. Redefine Trade Metrics and Narrative

U.S. trade policy remains hindered by outdated conceptions of economic imbalance, often measured through bilateral goods deficits that ignore America’s global strengths in services, finance, and intellectual property (Bown, 2020; Baldwin, 2016). A more holistic assessment of global value chains—including digital services and licensing revenues—would reposition U.S. trade strategy around its structural advantages, allowing for more balanced negotiations and realistic expectations.

2. Avoid Self-Defeating Decoupling

Rather than curbing China’s technological development, blanket restrictions have accelerated Beijing’s pivot toward indigenous innovation and expanded South-South industrial cooperation (SIA, 2023; Gracelyn, 2025). The overuse of export bans and unilateral Entity List designations has fragmented supply chains and diminished Washington’s ability to shape global standards. Constructive interdependence, not economic isolation, is key to maintaining strategic leverage.

3. Build Strategic Capacity through Industrial Policy

Strategic autonomy requires rebuilding domestic capacity, especially in foundational sectors like semiconductors, green energy, and critical minerals. The CHIPS and Science Act, while a step in the right direction, must be scaled into a comprehensive National Industrial Strategy that includes regional manufacturing clusters, public-private R&D consortia, and workforce development pipelines (U.S. Department of Defense, 2021; IEA, 2022).

4. Democratize Value and Reform Corporate Governance

Domestic legitimacy cannot be sustained without addressing rising inequality and the misallocation of corporate gains. Legislative action should incentivize long-term reinvestment over short-term shareholder returns, mandate employee ownership schemes, and strengthen antitrust enforcement in sectors such as technology and finance that are prone to monopolization (Tooze, 2021). This is not just economic policy—it is a national security imperative.

5. Redistribute Digital Wealth and Expand Economic Inclusion

The digital economy has exacerbated wealth concentration. Progressive taxation on digital platforms and financial speculation should fund universal broadband access, public data trusts, and vocational reskilling programs, particularly in regions affected by deindustrialization and automation (NAFSA, 2024). A digitally inclusive society enhances competitiveness and fortifies democratic resilience.

6. Reconstruct the Social Contract

To compete globally, the United States must first be coherent domestically. Universal healthcare, subsidized education, portable benefits, and living wage guarantees are foundational to rebuilding trust in institutions and enabling broad-based prosperity. Community wealth-building initiatives—such as cooperatives and public banks—can decentralize economic power and restore civic agency (Tooze, 2021).

7. Lead a Values-Based Global Strategy

U.S. global leadership must be grounded in legitimacy, not coercion. This involves recalibrating trade diplomacy to focus on shared value creation rather than deficit reduction and leading multilateral coalitions on AI, digital governance, and environmental regulation (European Commission, 2023). Credibility abroad depends on consistency at home: democracy must be shown to deliver equitable, sustainable outcomes—not just for elites, but for all citizens.

8. Realign Defense Spending with Human Security

A strategic shift away from military overreach toward human-centric security priorities is long overdue. Reallocating defense resources toward climate resilience, pandemic preparedness, and cyber defense will better prepare the nation for 21st-century challenges (U.S. Department of Defense, 2021). Diplomacy and development, not perpetual conflict, must become the cornerstone of national security.

9. Embrace Interdependence as Diplomatic Leverage

Rather than weaponizing interdependence, the United States and China must recognize their mutual vulnerabilities as a basis for cooperation. China’s strategic restraint in the context of rare earth sanctions (Lee & Wen, 2012; Jerry, 2025) and the systemic risks associated with total decoupling present an opportunity to establish rules-based frameworks that ensure stability without compromising sovereignty.

Comparative Economic Asymmetries: U.S. vs. China

To clarify these structural asymmetries, the following visuals summarize key contrasts between the U.S. and China across trade balances and strategic economic indicators. These comparisons underscore the mismatch between policy intent and underlying economic realities.

To better understand the structural dynamics of strategic competition, it is essential to examine the underlying asymmetries that define U.S.–China economic relations. The following tables highlight how a narrow focus on goods trade deficits obscures broader economic realities and how technological, resource, and service sector dependencies shape leverage in the evolving multipolar order.

Table 2: U.S. Trade Position – Goods Deficit vs. Services Surplus (2023 Estimates)

 Sources: U.S. Bureau of Economic Analysis (2024), WTO Trade Statistics, IMF World Economic Outlook.

Table 3: Structural Asymmetries in U.S.–China Economic Competition (2023–2024)

Sources: OECD (2024), WTO, IMF, U.S. BEA, Chinese National Bureau of Statistics, Semiconductor Industry Association, USGS.

These comparative indicators reinforce the argument that U.S. policy must be grounded not only in threat perception but in a nuanced understanding of asymmetries in innovation, trade composition, and global influence strategies.

China’s Structural Constraints

While U.S. policy missteps have arguably strengthened China’s strategic posture, it is important not to overstate Beijing’s position. China’s rise, though significant, is constrained by a set of deep structural challenges that limit its capacity to sustain long-term dominance without reform. Demographically, China is facing a historic population decline, with fertility rates falling below 1.1 and the working-age population shrinking—conditions that strain public finances and reduce labor force dynamism (United Nations, 2023). Economically, the country is grappling with persistent overcapacity in sectors such as real estate, steel, and green technology, which have led to inefficient capital allocation and mounting local government debt (Rogoff & Yang, 2023).

Moreover, China’s innovation model remains heavily reliant on state subsidies and techno-nationalist planning, which, while effective in scaling technologies, often underperforms in fostering broad-based entrepreneurial dynamism and global standard-setting. As the U.S. and its allies strengthen export controls on advanced semiconductors and AI hardware, China’s technological ambitions in areas such as high-end chip fabrication remain partially dependent on foreign tools and expertise (Semiconductor Industry Association [SIA], 2023). Additionally, institutional opacity, capital controls, and ongoing political centralization under Xi Jinping have introduced new risks to foreign investment, legal predictability, and internal policy agility.

Recognizing these structural limits is essential to recalibrating U.S. strategy. China is neither ten feet tall nor immune to the systemic vulnerabilities of rapid development. A more effective U.S. posture would combine industrial revitalization and strategic coordination with a clear-eyed understanding that Beijing’s ascent is conditional, contested, and constrained. Strategic competition must, therefore, be tempered by realism—not escalation.

Rethinking U.S. Economic Statecraft- Strategic Roadmap

The cumulative failures of current U.S. containment strategies underscores the need for a fundamental rethink of U.S. economic statecraft. . Rather than reacting through coercive trade measures and unilateral sanctions, Washington must adopt a proactive and multilateral framework grounded in resilience, innovation, and inclusive growth. The following roadmap offers a recalibrated approach for strategic competition in a multipolar world:

Phase Industrial Policy Strategically:

“Invest in domestic capacity before implementing restrictive trade policies. Use metrics of industrial readiness to time tariffs rather than deploying them politically.”

A phased, sector-specific reindustrialization strategy—sequenced alongside domestic capacity-building—would have avoided the abrupt market shock. As Rodrik (2020) notes, industrial policy must prioritize capability development over coercion. The Inflation Reduction Act (IRA) and CHIPS and Science Act provided a blueprint for strategic investment in critical sectors, yet the premature application of tariffs undermined their intended impact. A more effective approach would have tied tariffs to clear industry readiness benchmarks and sunset provisions, ensuring policy predictability and economic resilience (Irwin, 2022).

Align Macroeconomic Tools with Trade Strategy:

“Coordinate fiscal and monetary policy to anticipate market reactions. Instruments like “reshoring bonds” can absorb shocks while signaling a long-term commitment to industrial renewal.”

The U.S. failed to align its trade interventions with macroeconomic and financial coordination mechanisms. The Federal Reserve was not adequately positioned to pre-empt or offset the market shock triggered by sudden tariff escalation. The result was a sharp repricing of inflation risk, flight from U.S. assets, and increased volatility in Treasury markets. Rather than operating in policy silos, the U.S. could have launched coordinated monetary-fiscal signaling—backed by dedicated industrial policy instruments such as “reshoring bonds”—to anchor investor expectations and channel capital into strategic sectors without crowding out broader fiscal space (Goodman & Rappeport, 2022; Lardy, 2023).

Pursue Friend-shoring through Alliances:

“Rebuild trust and coherence within global supply chains by engaging trusted partners through bilateral and multilateral trade frameworks.”

Washington should have prioritized friend-shoring and multilateral supply chain resilience over unilateral decoupling. By leveraging platforms such as the U.S.–Mexico–Canada Agreement (USMCA) and the Indo-Pacific Economic Framework (IPEF), as well as transatlantic industrial partnerships, the U.S. could have diversified its economic ties away from China without triggering inflationary shocks or diplomatic backlash. Baldwin (2022) highlights that strategic redundancy, rather than autarky, is the optimal model in an era of globalized interdependence. Moreover, coordinated industrial diversification with allies like Japan, South Korea, and the Netherlands would have constrained China’s technological ascent more effectively than unilateral coercion.

Target with Precision, Not Punishment:

“Focus export controls narrowly on national security-sensitive sectors. Avoid sweeping sanctions that undermine diplomatic goodwill and provoke retaliatory innovation.”

Export controls—especially in the areas of semiconductors and AI—should have been calibrated and multilateral rather than sweeping and unilateral. The extraterritorial reach of the Foreign Direct Product Rule (FDPR) and broad Entity List designations provoked international concern, accelerated China’s investment in indigenous innovation, and pushed neutral countries toward technological nonalignment (Segal, 2023; Zenglein & Holzmann, 2019). A more measured approach would have focused on narrowly defined dual-use technologies, coordinated through the Wassenaar Arrangement on Export Controls for Conventional Arms and Dual-Use Goods and Technologies (often simply referred to as the Wassenaar Arrangement (WA)) or a new “Tech Trade Compact,” thereby preserving U.S. influence without alienating allies or fragmenting global standards.

Institutionalize Economic Foresight:

“Establish a National Economic Security Council to assess the cross-border impacts of economic measures before they are deployed.”

The April 2025 tariff shock suffered from a lack of institutional oversight and anticipatory economic governance. Major trade actions were deployed as symbolic gestures, often without rigorous macroeconomic impact assessments or global consultation. The creation of an interagency National Economic Security Council (NESC)—tasked with evaluating the economic and geopolitical ripple effects of proposed sanctions, tariffs, and investment controls—would have embedded foresight into the decision-making process. This body could have modeled cross-border capital flows, coordinated with the Federal Reserve and Treasury, and harmonized trade policy with the imperatives of global economic stability.

Ground Strategy in Realism:

“Recognize China’s internal vulnerabilities as part of a more calibrated, competitive coexistence. Policymaking should balance deterrence with engagement and containment with cooperation.”

A realistic U.S. strategy toward China should acknowledge both China’s strengths and internal vulnerabilities. Rather than treating China as an unstoppable monolith or framing the competition in absolute zero-sum terms, U.S. policymakers should adopt a strategy of competitive coexistence. —balancing deterrence (to check aggressive actions or coercive economic behavior) and engagement (to address shared global challenges such as climate change, pandemics, and financial stability). Similarly, the U.S. must balance containment—where necessary, in areas such as strategic technologies or military posturing—with cooperation, especially in multilateral forums where U.S.-China collaboration remains vital for global governance. This more nuanced, realism-based approach avoids overextension and better positions the U.S. to manage long-term competition without fueling unnecessary escalation or global fragmentation.

The strategic roadmap presented in this paper offers not just a corrective to recent policy failures but a foundation for a renewed vision of American global leadership. By embracing strategic multilateralism, investing in domestic capability, and acknowledging mutual vulnerabilities in the global system, the United States can reclaim its position. Not as an enforcer of hegemonic dominance but as a credible steward of stability, innovation, and shared prosperity. Leadership in the 21st century will not be defined by coercion or exclusion but by the ability to convene, adapt, and collaborate. The imperative now is to move beyond defensive containment and build a durable economic order that reflects interdependence, democratic values, and strategic foresight.

CONCLUSION

The Reckoning and the Rebound

The emergence of China as a peer competitor has illuminated profound structural weaknesses within the American political economy. Across successive administrations, U.S. policy has consistently misjudged the nature and implications of globalization, treating it as an arena for domination rather than adaptation. Rather than investing in inclusive prosperity and strategic domestic industries, American leaders embraced a deregulatory orthodoxy that prioritized financialization, shareholder primacy, and short-term capital mobility (Stiglitz, 2019; Rodrik, 2011). The result has been an economy that is technologically advanced at the frontier but hollowed out in its industrial core—globally dominant in services and finance yet increasingly unequal, polarized, and strategically incoherent at home.

These miscalculations were not predetermined. They were rooted in ideological choices that systematically devalued state capacity, industrial policy, and economic resilience. The outsourcing of critical manufacturing, the erosion of supply chain sovereignty, and the neglect of public investment have together produced a paradoxical condition: a superpower with diminishing domestic foundations for long-term strategic competition (Tooze, 2021). The consequences are now visible: stagnating wages, a fraying social contract, and a weakening of democratic legitimacy. Without addressing these foundational deficits, efforts to contain China’s rise are likely to remain ineffective, if not self-defeating.

Compounding the problem is the U.S. fixation on bilateral trade deficits, which oversimplifies the complex interdependencies of the global economy. When services, digital exports, and intellectual property flows are considered, the U.S. trade position looks far more robust than headline figures suggest (Autor et al., 2020). The service sector surplus with China and the European Union, particularly in finance, education, and intellectual property licensing, offsets some of the goods trade imbalance. Yet, this broader context is often overlooked in favor of politically expedient narratives that portray globalization as a zero-sum contest in which the United States is being exploited.

Looking ahead, the challenge for the United States is not simply how to constrain China’s rise but how to reinvent the basis of American strength in an increasingly multipolar world. A zero-sum containment strategy rooted in Cold War logic is both outdated and counterproductive. Instead, the U.S. must adopt a forward-looking approach centered on strategic resilience, democratic renewal, and cooperative leadership. This includes rebuilding industrial capacity through targeted investment in clean energy, quantum computing, and next-generation manufacturing while also expanding public goods—such as education, healthcare, and infrastructure—to ensure broadly shared prosperity (Atkinson, 2020; Mazzucato, 2018).

Equally important is restoring multilateral credibility. Trade policy must shift from punitive tariffs and unilateral sanctions toward transparent rules-based cooperation that includes reforming the World Trade Organization (WTO), forging green technology alliances, and engaging emerging economies with inclusive development agendas. The long-term viability of American power depends not only on relative strength vis-à-vis China but also on the legitimacy and appeal of the model it offers to the world.

In sum, strategic competition cannot substitute for strategic coherence. Without a revitalized domestic foundation and a reimagined global strategy, the United States risks drifting into a prolonged war of attrition with no clear winner—only mounting costs. The path forward lies not in nostalgia for unipolarity but in the bold reinvention of economic statecraft suited to 21st-century realities. Reclaiming global leadership requires more than confrontation—it requires transformation.

Executive Summary

 This paper reevaluates the effectiveness of U.S. economic containment strategies toward China, arguing that current approaches, rooted in economic nationalism and unilateralism, have been counterproductive. While intended to defend U.S. technological leadership and geopolitical primacy, these policies have accelerated China’s drive for self-reliance, catalyzed the development of alternative global trade networks, and exposed structural weaknesses within the American economy. By tracing the evolution of U.S.–China economic relations from trade liberalization to techno-nationalist decoupling, the paper identifies critical strategic miscalculations: over-reliance on coercive trade tools without sufficient domestic capacity-building; failure to align military expenditure with economic resilience; and a persistent misunderstanding of trade imbalances that ignores U.S. strengths in services, intellectual property, and financial markets. Drawing on a political economy framework, the analysis highlights how export controls, sweeping tariffs, and overuse of economic sanctions have weakened alliances, fractured global supply chains, and diminished American credibility. The April 2025 “Liberation Day” tariffs exemplify these failures, triggering capital flight, inflation, and market instability without achieving strategic gains.

Policy Recommendations:

1. Reframe Trade Metrics: Adopt a more holistic approach that encompasses services, licensing revenues, and digital exports to better capture the U.S.’s comparative advantages.
2. Strategic Industrial Policy: Move beyond short-term reshoring and adopt a national industrial strategy focused on semiconductors, green energy, and critical infrastructure, paired with workforce investment.
3. Recalibrate Export Controls: Shift from blunt bans to tiered frameworks that distinguish between military and commercial technologies, ensuring innovation without sacrificing national security.
4. Rebuild Domestic Legitimacy: Address inequality and deindustrialization through worker ownership models, progressive taxation, and inclusive digital infrastructure.
5. Lead Multilaterally: Re-anchor U.S. global leadership in multilateral rules-based governance—particularly in AI, trade, and environmental standards—rather than economic coercion.
6. Shift from Military Primacy to Human Security: Redirect defense spending to address climate, health, and cyber resilience, which underpin long-term strategic strength.

Absent strategic recalibration, the United States risks accelerating the very multipolarity it seeks to contain. This paper argues for a forward-looking, adaptive strategy that leverages U.S. strengths while rebuilding the domestic foundations of global leadership.   

REFERENCES

1. ABC17NEWS. (2025, April 4). Dow plunges 2,200 points as tariff tumult rocks markets. https://abc17news.com/money/cnn-business-consumer/2025/04/04/china-imposes-34-reciprocal-tariffs-on-imports-of-us-goods-in-retaliation-for-trumps-trade-war/ABC17NEWS
2. Allison, G. (2017). Destined for War: Can America and China Escape Thucydides’s Trap? Houghton Mifflin Harcourt.
3. Antràs, P., & Helpman, E. (2004). Global Sourcing. Journal of Political Economy, 112(3), 552–580. https://doi.org/10.1086/383099
4. ApplyBoard. (2024, April 15). The Evolution of International Student Enrolment in Major US States. https://www.applyboard.com/applyinsights-article/the-evolution-of-international-student-enrolment-in-major-us-states
5. Arner, D. W., Barberis, J., & Buckley, R. P. (2016). Fintech and market structure in financial services: Market evolution and regulatory response. Journal of International Economic Law, 19(2), 269–283. https://doi.org/10.1093/jiel/jgw027
6. Autor, D. H., Dorn, D., & Hanson, G. H. (2016). The China Shock: Learning from Labor-Market Adjustment to Large Changes in Trade. American Economic Review, 106(10), 2121–2168.
7. Autor, D., Dorn, D., & Hanson, G. (2020). When Work Disappears: Manufacturing Decline and the Falling Marriage-Market Value of Men. American Economic Review: Insights, 2(4), 161–178.
8. Baldwin, R. (2016). The Great Convergence: Information Technology and the New Globalization. Harvard University Press.
9. Baldwin, R. (2022). The Great Convergence: Information Technology and the New Globalization. Harvard University Press.
10. Baldwin, R., Freeman, R., & Theodorakopoulos, A. (2022). Hidden Exposure: Measuring U.S. Supply Chain Reliance. Brookings Institution. https://www.brookings.edu/wp-content/uploads/2023/09/Baldwin-et-al-session_16820-BPEA-FA23_WEB.pdf
11. Bank for International Settlements. (2022, October 27). Triennial Central Bank Survey: Foreign exchange turnover in April 2022. https://www.bis.org/statistics/rpfx/2022/rpfx2022.pdf
12. Bonadio, B., Huo, Z., Levchenko, A. A., & Pandalai-Nayar, N. (2021). Global Supply Chains in the Pandemic. Journal of International Economics, 133, 103534.
13. Bown, C. P., & Irwin, D. A. (2019). Trump’s Assault on the Global Trading System. Foreign Affairs, 98(5), 45–60.
14. Brookings Institution. (2025). What’s going on in the US Treasury market, and why does it matter? https://www.brookings.edu/articles/whats-going-on-in-the-us-treasury-market-and-why-does-it-matter/?utm_source=chatgpt.com
15. Bureau of Economic Analysis (BEA). (2023). U.S. International Trade in Services. U.S. Department of Commerce. https://www.bea.gov/data/intl-trade-investment/international-trade-services
16. Business Insider. (2025, May 9). US-China cargo volume plunged in April as customers reacted ‘very, very fast’ to tariffs, says Maersk CEO. https://www.businessinsider.com/maersk-us-china-container-cargo-plunge-trump-tariffs-empty-shelves-2025-5Business
17. Capital Ethiopia. (2025). Diversifying Beyond U.S. Markets in Response to Trump’s Tariffs. https://capitalethiopia.com/2025/05/07/chinas-strategic-pivot-diversifying-beyond-u-s-markets-in-response-to-trumps-tariffs/?utm_source=chatgpt.com
18. CEPR. (2025). Tariffs, the dollar, and equities: High-frequency evidence. https://cepr.org/voxeu/columns/tariffs-dollar-and-equities-high-frequency-evidence-liberation-day-announcement?utm_source=chatgpt.com
19. Claessens, S., & Yafeh, Y. (2012). How does corporate governance affect bank capitalization strategies? World Bank Policy Research Working Paper No. 6054.
20. Clausing, K., & Lovely, M. E. (2025, February 3). Trump’s tariffs on Canada, Mexico, and China would cost the typical US household over $1,200 a year. Peterson Institute for International Economics. https://www.piie.com/research/piie-charts/2025/trumps-tariffs-canada-mexico-and-china-would-cost-typical-us-household
21. CompaniesMarketCap. (2025). Microsoft (MSFT) Market capitalization. Retrieved May 19, 2025, from https://companiesmarketcap.com/microsoft/marketcap/
22. Consilium. (2025). EU-US trade: facts and figures. https://www.consilium.europa.eu/en/infographics/eu-us-trade/
23. Council of Economic Advisers. (2024). What Drives the U.S. Services Trade Surplus? Growth in Digitally-Enabled Services Exports. https://bidenwhitehouse.archives.gov/cea/written-materials/2024/06/10/what-drives-the-u-s-services-trade-surplus-growth-in-digitally-enabled-services-exports/
24. Council of Economic Advisers – The White House. Wikipedia+2The White House+2Trump White House Archives+2. Retrieved from https://www.whitehouse.gov/cea/Wikipedia+2The White House+2Trump White House Archives+2
25. Dedrick, J., Kraemer, K. L., & Linden, G. (2011). Who profits from innovation in global value chains? A study of the iPhone and notebook PCs. Industrial and Corporate Change, 19(1), 81–116.
26. Dossani, R., & Kenney, M. (2007). The Next Wave of Globalization: Relocating Service Provision to India. World Development, 35(5), 772–791.
27. Eichengreen, B. (2022). Capital flow reversals and currency crises: Do capital flow types matter? The Review of International Economics, 30(1), 1–20. https://doi.org/10.1111/roie.12753
28. Fajgelbaum, P. D., Goldberg, P. K., Kennedy, P. J., & Khandelwal, A. K. (2020). The return to protectionism. The Quarterly Journal of Economics, 135(1), 1–55. https://doi.org/10.1093/qje/qjz036
29. Financial Times. (2025a). Chinese companies purge supply chain of foreign parts amid US trade war. https://www.ft.com/content/8e018bd6-17ae-4ac9-b43b-c625a65c2651?utm_source=chatgpt.com
30. Financial Times. (2025b). China’s diplomatic charm offensive. https://www.ft.com/content/1f83c330-9e00-4935-b069-
31. Freeman, C. (2021). China and the global value chain: The evolving role of a manufacturing giant. Journal of International Trade Studies, 45(2), 178–195.
32. Friedberg, A. L. (2018). A Contest for Supremacy: China, America, and the Struggle for Mastery in Asia. W. W. Norton.
33. Friedman, T. L. (2005). The World Is Flat: A Brief History of the Twenty-First Century. Farrar, Straus and Giroux.
34. Gereffi, G., & Fernandez-Stark, K. (2016). Global Value Chain Analysis: A Primer (2nd ed.). Duke Center on Globalization, Governance & Competitiveness.
35. Goodman, P., & Rappeport, A. (2022). With the CHIPS Act, Washington Rethinks Industrial Policy. The New York Times.
36. Gracelyn, B. (2025). Rare Earth Leverage: The Political Economy of China’s Resource Monopoly. Strategic Resources Quarterly, 12(2), 34–52.
37. Hartung, W. D. (2021). Profits of War. Costs of War Project, Brown University. https://watson.brown.edu/costsofwar/files/cow/imce/papers/2021/Profits%20of%20War_Hartung_Costs%20of%20War_Sept%2013%2C%202021.pdf
38. Helpman, E., Melitz, M. J., & Yeaple, S. R. (2004). Export Versus FDI with Heterogeneous Firms. American Economic Review, 94(1), 300–316.
39. Investopedia. (2023, September 15). The Cost of Making an iPhone. https://www.investopedia.com/financial-edge/0912/the-cost-of-making-an-iphone.aspx
40. International Energy Agency (IEA). (2022). The Role of Critical Minerals in Clean Energy Transitions. https://www.iea.org/reports/the-role-of-critical-minerals-in-clean-energy-transitions
41. International Monetary Fund. (2023a, October 18). Transcript of Press Briefing on Regional Economic Outlook for Asia and Pacific. https://www.imf.org/en/News/Articles/2023/10/18/tr101823-transcript-of-press-briefing-on-reo-for-asia-and-pacific-singapore-october-2023
42. International Monetary Fund. (2025, April 2). IMF Data Brief: Currency Composition of Official Foreign Exchange Reserves. https://data.imf.org/en/news/4225
43. International Monetary Fund. (2025, April 22). The Global Economy Enters a New Era. https://www.imf.org/en/Blogs/Articles/2025/04/22/the-global-economy-enters-a-new-era
44. IMF. (2023). World Economic Outlook: Balancing Inflation and Growth. International Monetary Fund.
45. Irwin, D. A. (2017). Interview: Douglas Irwin. Econ Focus, Federal Reserve Bank of Richmond. https://www.richmondfed.org/publications/research/econ_focus/2017/q3/interview
46. Irwin, D. A. (2022). Clashing over Commerce: A History of US Trade Policy. University of Chicago Press.
47. Jerry, D. (2025). China’s REE Restrictions: From Economic Retaliation to Strategic Signaling. Journal of Global Affairs, 19(1), 21–40.
48. Johnson, C. (1982). MITI and the Japanese miracle: The growth of industrial policy, 1925–1975. Stanford University Press.
49. Kane, T. (2022). The dynamics of U.S. venture capital and fintech investment. Brookings Institution. https://www.brookings.edu
50. Kennedy, S. (2020). China’s Innovation Drive and Its Implications. CSIS Reports.
51. Kirshner, J. (2014). Currency and coercion: The political economy of international monetary power. Princeton University Press.
52. Krugman, P. (2009). The Return of Depression Economics and the Crisis of 2008. W. W. Norton & Company.
53. La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. W. (1998). Law and Finance. Journal of Political Economy, 106(6), 1113–1155. https://doi.org/10.1086/250042
54. Lardy, N. R. (2023). The state strikes back: The end of economic reform in China? Peterson Institute for International Economics.
55. Lee, J., & Lim, H. (2020). China’s Technological Catch-Up Strategy. Asian Economic Papers, 19(3), 1–29.
56. Lee, J., & Zhang, M. (2023). China’s climb up the global tech ladder: Innovation, EVs, and patent power. Journal of East Asian Economic Studies, 34(1), 45–67.
57. Lee, K.-F. (2023). AI Superpowers: China, Silicon Valley, and the New World Order. Houghton Mifflin Harcourt.
58. LGT. (2025a). Trump tariff shock deepens as China retaliates. https://www.lgt.com/global-en/market-assessments/market-view/trump-tariff-shock-deepens-as-china-retaliates-259090LGT
59. LGT. (2025b). US tariffs ignite global market turmoil. https://www.lgt.com/global-en/market-assessments/market-view/us-tariffs-ignite-global-market-turmoil-255408LGT
60. Mancheri, N. A., Sprecher, B., Bailey, G., Ge, J., & Tukker, A. (2021). Effect of Chinese policies on rare earth supply chain resilience. Resources, Conservation and Recycling, 167, 105–233.
61. MarketWatch. (2025). U.S.-China trade war is heating up – and $650 billion in goods and services is at stake. https://www.marketwatch.com/story/cell-phones-clothes-tvs-toys-this-is-all-the-stuff-the-u-s-buys-from-china-68c84faf
62. Mazzucato, M. (2018). The Value of Everything: Making and Taking in the Global Economy. Penguin.
63. Miller, C. (2024, January 2). The U.S.-China Chip War: Who Dares to Win? Citi. https://www.citigroup.com/global/insights/the-u-s-china-chip-war-who-dares-to-win
64. MoneyWeek. (2025). What will the unravelling of US-China trade mean for the economy? https://moneyweek.com/economy/global-economy/us-china-trade-decoupling
65. NAFSA. (2024). International Student Economic Value Tool. https://www.nafsa.org/
66. Navarro, P. (2020). Death by China: Confronting the Dragon – A Global Call to Action. Pearson.
67. NPR. (2025). In the wake of tariffs, cargo at the Port of LA is down 35%. https://www.npr.org/2025/05/07/nx-s1-5389955/los-angeles-port-tariffs?utm_source=chatgpt.com
68. Obstfeld, M. (2025, March). The U.S. Trade Deficit: Myths and Realities. Brookings Institution. https://www.brookings.edu/wp-content/uploads/2025/03/3_Obstfeld.pdf
69. OECD. (2024). China’s EV Industry and Global Trade Patterns. Organisation for Economic Co-operation and Development.
70. Organisation for Economic Co-operation and Development (OECD). (2019). Education at a Glance 2019: OECD Indicators. https://www.oecd.org/en/publications/2019/09/education-at-a-glance-2019_892e172e.html
71. PBS. (2012, January 27). How Much Did the Financial Crisis Cost? FRONTLINE. https://www.pbs.org/wgbh/frontline/article/how-much-did-the-financial-crisis-cost/
72. Penn Wharton Budget Model. (2025). The Economic Effects of President Trump’s Tariffs. https://budgetmodel.wharton.upenn.edu/issues/2025/4/10/economic-effects-of-president-trumps-tariffs?utm_source=chatgpt.com
73. Peterson Institute for International Economics. (2022). Annual Report 2022. https://www.piie.com/microsites/annual-report-2022
74. Peterson Institute for International Economics. (2025). Clausing & Lovely. See Reference #8.
75. Peterson, J. R., & Schott, P. K. (2016). The Surprisingly Swift Decline of US Manufacturing Employment. American Economic Review, 106(7), 1632–1662.
76. Piketty, T. (2014). Capital in the Twenty-First Century. Harvard University Press.
77. Pisano, G., & Shih, W. (2009). Restoring American Competitiveness. Harvard Business Review.
78. Reinhart, C. M., & Rogoff, K. S. (2009). The aftermath of financial crises. American Economic Review, 99(2), 466–472. https://doi.org/10.1257/aer.99.2.466
79. Reuters. (2025a). China hosts Latin American, Caribbean nations amid US trade war talks. https://www.reuters.com/world/china-hosts-latin-american-caribbean-nations-amid-us-trade-war-talks-2025-05-12/?utm_source=chatgpt.com
80. Reuters. (2025b). Investors looking beyond US scoop-up Asian funds. https://www.reuters.com/business/investors-looking-beyond-us-scoop-up-asian-funds-2025-05-09/Reuters
81. Rifkin, J. (2000). The Age of Access: The New Culture of Hypercapitalism, Where All of Life Is a Paid-For Experience. Tarcher/Putnam.
82. Rodrik, D. (2015). Premature deindustrialization. Journal of Economic Growth, 21(1), 1–33. https://doi.org/10.1007/s10887-015-9122-3
83. Rodrik, D. (2018). Straight Talk on Trade: Ideas for a Sane World Economy. Princeton University Press.
84. Rodrik, D. (2020). Why Does Globalization Fuel Populism? Annual Review of Economics, 13.
85. Rodrik, D. (2020a). Why industrial policy is back. Project Syndicate. Retrieved from: https://www.project-syndicate.org/onpoint/industrial-policy-is-back
86. Rogoff, K., & Yang, Y. (2023). Rethinking China’s growth (78th Economic Policy Panel Meeting Background Paper). Economic Policy Unit, Oxford University. Retrieved from https://www.economic-policy.org/wp-content/uploads/2023/10/Rogoff-Yang.pdf
87. Rolland, N. (2017). China’s Eurasian Century? National Bureau of Asian Research.
88. Here’s the trigger. https://www.marketwatch.com/story/stocks-are-at-a-risk-of-a-drop-of-nearly-20-says-goldman-sachs-heres-the-trigger-414d31d0MarketWatch
89. Schumpeter, J. A. (1942). Capitalism, Socialism and Democracy. Harper & Brothers.
90. Schwab, K. (2020). Stakeholder Capitalism: A Global Economy that Works for Progress, People and Planet. Wiley.
91. Scott, R. E. (2014). Trade with China Cost 3.2 Million U.S. Jobs. Economic Policy Institute. https://www.epi.org/feature/trade-with-china-cost-3-2-million-u-s-jobs/
92. Segal, A. (2016). The hacked world order: How nations fight, trade, maneuver, and manipulate in the digital age. Hachette UK.
93. SelectUSA. (2024). Financial Services Industry. International Trade Administration. https://www.trade.gov/selectusa-financial-services-industry
94. Semiconductor Industry Association (SIA). (2023). 2023 State of the U.S. Semiconductor Industry. https://www.semiconductors.org/resources/2023-sia-state-of-the-u-s-semiconductor-industry-report/
95. Statista. (March 2025). Comparison of the NYSE and Nasdaq by Market Cap and Listings as of 2023. https://www.statista.com/statistics/1277195/nyse-nasdaq-comparison-market-capitalization-listed-companies/
96. Stiglitz, J. E., & Bilmes, L. J. (2008). The Three Trillion Dollar War: The True Cost of the Iraq Conflict. W. W. Norton & Company.
97. The Guardian. (2025). LA’s bustling ports hit by Trump tariffs: ‘Everyone in the US will feel this’. https://www.theguardian.com/us-news/2025/may/04/los-angeles-ports-trump-tariffs?utm_source=chatgpt.com
98. The Wall Street Journal. (2023, December 15). The Countries Driving America’s $1.2 Trillion Trade Deficit in Goods. https://www.wsj.com/economy/trade/us-trade-import-export-deficit-charts-490a7bce
99. Ting-Fang, C., & Li, L. (2023). China’s Chip Independence Drive Accelerates under U.S. Tech Sanctions. Nikkei Asia.
100. Tooze, A. (2021). Shutdown: How COVID Shook the World’s Economy. Viking.
101. United Nations. (2023). World population prospects 2023: Summary of results. Department of Economic and Social Affairs, Population Division.
102. U. S. Bureau of Economic Analysis. (2022, November 18). Activities of U.S. Multinational Enterprises, 2020. https://www.bea.gov/news/2022/activities-us-multinational-enterprises-2020
103. U. S. Travel Association. (2024). Economic Impact of the U.S. Travel Industry. https://www.ustravel.org/sites/default/files/2024-03/National%20Data_0.pdf
104. Voronoi. (2024, May 29). China’s Exports to ASEAN Surpass U.S. and EU. https://www.voronoiapp.com/economy/-Chinas-Exports-to-ASEAN-Surpass-US-and-EU-1408
105. Wall Street Journal. (2024). Services Exports Complicate the U.S. Trade Picture. https://www.wsj.com/economy/trade/us-exports-services-trump-tariff-calculations-fe481e2b
106. White House. (2024). Remarks by President Biden on Tariffs and American Manufacturing. Executive Office of the President.
107. World Bank. (2023). World development indicators: Financial markets. https://data.worldbank.org
108. World Economic Forum. (2018). The Future of Jobs Report 2018. https://www.weforum.org/publications/the-future-of-jobs-report-2018/
109. Xing, Y. (2020). How the iPhone widens the U.S. trade deficit with China. Frontiers of Economics in China, 15(4), 642–658. https://doi.org/10.3868/s060-011-020-0026-8
110. Zenglein, M. J., & Holzmann, A. (2019). Evolving Made in China 2025: China’s industrial policy in the quest for global tech leadership. Mercator Institute for China Studies.
111. Zhang, W. (2020). Trade wars and agricultural exports: Lessons from the U.S.–China soybean dispute. Applied Economic Perspectives and Policy, 42(3), 546–563.
112. Zhao, S. (2019). Rethinking the Chinese World Order. Journal of Contemporary China, 28(116), 1–14.