The Trade War Endgame: PART 1

I. Introduction: Echoes of the Past? The US-China Trade War and the Cuban Missile Crisis

The world held its breath in October 1962. For thirteen days, the United States and the Soviet Union stood on the precipice of nuclear war, locked in a terrifying dance of brinkmanship over the placement of Soviet missiles in Cuba. It was a moment that would become known as the Cuban Missile Crisis, a stark demonstration of how quickly geopolitical tensions could escalate into a potentially catastrophic confrontation. A young and determined President John F. Kennedy stared down Nikita Khrushchev, the Soviet leader, a man of volatile bluster and cunning strategy.

President John F. Kennedy (photo by Paul Schutzer, Getty Images)

The crisis was a culmination of Cold War tensions, ideological clashes, and a spiraling arms race. When U.S. spy planes discovered Soviet nuclear missile sites just 90 miles from American shores, it triggered a nerve-wracking standoff. Kennedy's response was a naval blockade of Cuba, a move designed to prevent further missile shipments and force the Soviets to withdraw the weapons already in place. The world watched, paralysed, as Soviet ships steamed towards the blockade line, and nuclear war seemed chillingly possible.

This period was marked by intense diplomatic manoeuvring, secret backchannel negotiations, and a palpable sense of dread. The leaders of the two superpowers engaged in a high-stakes game of "chicken," each testing the other's resolve, with the fate of the world hanging in the balance. Ultimately, a combination of firmness and diplomacy, threats and concessions, led to a resolution. The Soviets agreed to remove the missiles from Cuba, and the U.S. secretly agreed to remove its own missiles from Turkey.

Women on strike during the Cuban Missile Crisis in 1962 (photo by Phil Stanziola, Library of Congress)

The Cuban Missile Crisis serves as a chilling reminder of the dangers of escalation, the importance of clear communication, and the potential for miscalculation in international relations. It is a historical event that provides a valuable lens through which to examine other high-stakes geopolitical situations, including the one we face today: the escalating trade war between the United States and China.

II. Escalating Tensions: The US-China Trade War

The US-China trade war began as a flicker of economic discontent, but it quickly spiralled into a dangerous dance of escalating tariffs, each side responding to the other's moves with increasing severity. It started with a targeted blow: the US, citing concerns over intellectual property theft, slapped initial tariffs of 25% on specific Chinese goods. China, in turn, retaliated, targeting key American exports with tariffs of up to 25%, a warning shot fired across the bow.

But this was just the opening salvo. The tension mounted as the US, under President Donald Trump, raised the stakes, increasing tariffs on a wider range of Chinese products, moving from initial percentages to even higher levels. The message was clear: this was more than a minor dispute; this was a fundamental challenge to the established order. China, refusing to back down, countered with its own escalating tariffs, targeting American farmers and industries, a direct hit to the heartland. As Sun Tzu wrote in The Art of War, "In the art of war, when ten times the enemy's strength, surround them; when five times, attack them; if double, be prepared to divide them."

In this trade war, both sides seemed to be calculating their relative strength and probing for weaknesses, but neither side was willing to back down. Trump's approach, as outlined in The Art of the Deal, often involved employing "leverage." As he stated, "The key to the art of making deals is having leverage," and tariffs became a primary tool to exert that leverage.

A key aspect of this escalating conflict was the apparent reluctance of US President Donald Trump and Chinese President Xi Jinping to engage in direct, sustained negotiations. Diplomatic channels remained strained, with both leaders seemingly prioritising a show of strength over compromise. As President Trump famously stated, "The worst thing you can possibly do in a deal is seem desperate. That makes the other guy smell blood, and then you're dead," a philosophy that seemed to drive his approach to the trade war, often characterised by what Sun Tzu described as "attacking the enemy's plans" and disrupting their alliances. The world watched as these two economic giants edged closer and closer to the brink, each seemingly determined to prevail, consequences be damned.

Adding another layer of complexity to this economic confrontation, the authors of Unrestricted Warfare, Qiao Liang and Wang Xiangsui, offered a Chinese perspective on American power:

They argued that the US possesses significant "soft power," which, in international relations, refers to the ability to influence other nations or actors through attraction and persuasion, rather than coercion or payment. This includes cultural influence, political ideals, and diplomatic appeal. They argued that the US possesses this "soft power," which China lacks, giving the US an advantage in areas beyond traditional military might.

However, they also pointed to perceived weaknesses in the American economy, such as "overconsumption" and "a huge trade deficit," which they believed could be exploited. These assessments added a strategic dimension to the trade war, with each side potentially seeking to capitalise on the other's vulnerabilities.

III. Game Theory and the Trade War: Playing Chicken

Imagine a scene straight out of a Hollywood thriller: two muscle cars, engines roaring, speeding directly towards each other on a narrow road. Behind the wheel of each car are drivers locked in a deadly game of nerve. This is the classic "Game of Chicken," a scenario that perfectly captures the high-stakes dynamics of the US-China trade war.

Steve McQueen in the iconic film, Bullitt (1968) featuring a 1968 Ford Mustang 390 GT fastback. (Still image from movie, Warner Bros.)

In this perilous game, the first driver to swerve and veer away is labeled the "chicken," losing face and perhaps some pride. But they live to drive another day. The other driver, the one who holds steady, is seen as the victor, demonstrating their courage and resolve. However, if neither driver swerves, disaster strikes. A head-on collision ensues, resulting in catastrophic damage – a lose-lose scenario of the highest order.

The potential outcomes of this game can be illustrated in a simple payoff matrix:

China
Swerve (Concede) Don't Swerve (Escalate)
US Swerve (0, 0) (-1, +1)
Don't Swerve (+1, -1) (-10, -10)

• (0, 0): Both sides swerve. Neither gains an advantage, but both avoid disaster.
• (-1, +1) or (+1, -1): One side swerves, the other doesn't. The side that doesn't swerve gains a relative advantage (economic or otherwise), while the side that swerves loses face.
• (-10, -10): Neither side swerves. Both sides crash, resulting in a catastrophic outcome.
  

This game highlights the concept of brinkmanship, a strategy of escalating tensions to the very edge of disaster in the hope that the other side will back down first. It's a dangerous strategy, relying on a mix of calculated risk-taking, psychological warfare, and a belief that the opponent is rational enough to avoid mutual destruction.

The US and China: Two Trains on a Collision Course?

Now, let's apply this "Game of Chicken" to the US-China trade war. In this context:

• For each country, the "swerve" action could involve significantly scaling back tariffs, making major concessions on key issues, or agreeing to binding commitments to resolve the trade imbalance. For example, the US could agree to reduce tariffs on Chinese imports in exchange for China agreeing to purchase more US agricultural products and strengthen intellectual property protections.
• The "don't swerve" action means continuing to escalate the conflict: increasing tariffs, imposing further restrictions on trade and investment, and potentially engaging in other forms of economic retaliation. We've seen this in the back-and-forth tariff increases, with each side raising levies on the other's goods.
  

The potential "rewards" of the other side swerving are significant. For example, if the US were to back down, China might gain a continued advantage in international trade, preserving its export-oriented growth model and potentially securing access to key technologies. Conversely, if China were to swerve, the US might achieve its goals of reducing the trade deficit, protecting its intellectual property, and forcing China to alter its economic practices.

But the stakes are incredibly high. The "crash" scenario in this trade war is not just about bruised egos. It represents a severe economic downturn, potentially a global recession, or even depression. As Ray Dalio, the founder of Bridgewater Associates, has warned, the consequences of a continued escalation could be dire, potentially leading to "something worse than a recession." He has specifically expressed concern about the trade war's potential to trigger a breakdown of the global monetary order, which could be "like 2008, [or] even more severe."

Peter Thiel, the entrepreneur and investor, has also spoken about the possibility of an impending economic "reset," a fundamental and potentially disruptive realignment of the global economic system. Whilst Thiel's views encompass a broader range of factors than just the trade war, the conflict between the US and China certainly plays a significant role in the conditions that could lead to such a reset.

The potential economic fallout threatens to involve:

• A collapse in global trade: As tariffs rise and supply chains are disrupted, international trade could grind to a halt, harming businesses and consumers worldwide.
• Stock market crashes: Investor confidence could plummet, leading to major stock market declines, wiping out savings and triggering financial instability.
• Widespread economic hardship: Job losses, business closures, and reduced economic growth could lead to significant social and political unrest.
• Increased geopolitical instability: Trade tensions could spill over into other areas of the relationship, leading to increased tensions and the possibility of other conflicts.
  

In this high-stakes game, both the US and China are betting that the other will blink first. The question is, who will swerve, and who will hold steady? Or are we destined for a crash that could have devastating consequences for the entire world? This dangerous game is further complicated by the personalities and strategies of the two key players. Chinese President Xi Jinping, often described as an INTP (Introverted, Intuitive, Thinking, Perceiving) in MBTI personality theory, is seen as a strategic and long-term thinker, focused on maintaining stability and control whilst gradually expanding China's influence. His approach is often characterised by patience and a willingness to make calculated moves over extended periods. As Xi Jinping has stated, "We must maintain the strategic focus, maintain patience, and 'keep a low profile and bide our time' while striving for achievement."

In contrast, US President Donald Trump, who exhibits traits of an ESTP (Extroverted, Sensing, Thinking, Perceiving), is known for his more impulsive and unpredictable style. He thrives on action and immediate results, often employing aggressive tactics and bold statements to achieve his objectives. His approach to negotiations, as detailed in his book The Art of the Deal and reflected in his trade war strategy, often involves creating disruption and uncertainty to gain leverage. To that end, he has stated, “I play with people’s expectations. I like to keep people off balance,” and this unpredictability has been a hallmark of his approach to the trade war.

However, some analysts argue that beneath this seemingly short-sighted and volatile style lies a long-term strategy and that there is “a method to the madness”. They contend that, rather than being short-sighted and volatile, President Trump is addressing a critical issue: China's practice of selling off US debt and bonds, which has contributed to a slow degradation of the dollar over time.

Proxy wars served to strengthen the dominance of the US dollar to hedge against inflation in the 21st century in which gave it the pejorative nickname: the "petrodollar". Image created by Vadim Ghirda, AP

Historically, the US has offset this decline through a policy of engaging in proxy wars, such as providing extensive military and financial aid to Ukraine in its conflict with Russia, or supporting Israel in its ongoing conflicts in Gaza. This financial assistance to these proxy wars has, in effect, elevated and strengthened the dominance of the dollar, a phenomenon that became particularly pronounced in the wake of Middle Eastern conflicts, leading to the term "petrodollar."

President Trump appears to be shifting away from this approach, seeking to establish a more peaceful world order and potentially force China (and other nations) to alter its financial practices, such as currency manipulation to make their exports cheaper, and running massive trade surpluses that could be damaging to the US economy in the long run, eventually leading to the printing of more money, and therefore exacerbating inflation, in which proxy wars had been utilised to hedge against inflation.

The contrasting styles of these two leaders, one favoring long-term strategic manoeuvring and the other a seemingly short-sighted but potentially long-term approach centred on tactical disruption and unpredictability, add a volatile element to this already precarious situation.

IV. Economic Realities: Imports, Exports, and Trade Deficits

The US-China trade relationship is one of the most complex and consequential in the world, characterised by deep interdependence and significant imbalances. As the authors of Unrestricted Warfare argue, "In the future, warfare will transcend the traditional boundaries of the military sphere and extend into various non-military fields such as finance, trade, and technology."

This perspective highlights a key aspect of China's strategy in the trade war: viewing it as a battlefield where economic tools are weapons. China's approach often involves a combination of strategic economic manoeuvring, targeted retaliation, and the cultivation of long-term advantages.

US Economy

The United States imports a vast array of goods from China, heavily relying on its manufacturing capabilities. Key import sectors include:

• Electronics: Smartphones, computers, and other electronic devices form a significant portion of US imports from China.
• Machinery: Industrial machinery, including computers, and components.
• Consumer Goods: Clothing, footwear, furniture, and toys.

In terms of exports to China, the US focuses on:

• Agriculture: Soybeans, corn, and other agricultural products.
• Aircraft: Commercial aircraft and parts.
• Technology: Semiconductors and other advanced technologies.
  

Despite these exports, the US has a substantial trade deficit with China. In 2024, the US imported $438.9 billion in goods from China, while exporting only $143.5 billion in return, resulting in a deficit of $295.4 billion. This deficit has been a major point of contention, with US policymakers arguing that it reflects unfair trade practices by China. Factors contributing to this deficit include lower labour costs in China, which make its manufactured goods more competitive, and Chinese industrial policies that favor domestic production.

The US has had a growing trade deficit with other nations since 1992. Image from advisorperspectives.com

However, the US possesses certain advantages that could help it better withstand the pressures of a prolonged trade war. Its "soft power," derived from its cultural influence, political ideals, and diplomatic appeal, remains a significant asset. This soft power is reinforced by a network of strong alliances with key players in East Asia (Japan, South Korea), Europe, Canada, and Australia. These alliances provide the US with diplomatic and economic support, allowing for greater flexibility in its trade policies and the potential to redirect trade flows. The US dollar's position as the world's reserve currency also gives it more leverage.

China's Economy

China's economy also depends on trade with the US, but the structure is different. It imports:

• Technology: Semiconductors and advanced technology.
• Agricultural Products: Soybeans and other agricultural goods.
• Energy: Oil and other energy resources.

China's exports to the US are concentrated in:

• Electronics: Computers, smartphones, and telecommunications equipment.
• Textiles: Clothing and apparel.
• Manufactured Goods: Machinery, furniture, and toys.
  

In comparison with the growing US trade deficit, China's trade surplus with other nations continues to soar towards $1 trillion.

China maintains a significant trade surplus with the US. In 2024, China exported goods worth $438.9 billion to the US while importing $143.5 billion, resulting in a surplus of $295.4 billion. This surplus is driven by its large-scale manufacturing sector, which benefits from economies of scale and lower production costs.

However, China faces its own set of economic challenges. Its ambitious Belt and Road Initiative (BRI), aimed at expanding its trade and influence through infrastructure projects, has faced setbacks. While the BRI has the potential to expand markets for Chinese goods, create new investment opportunities, and boost China's geopolitical influence, several African nations, including Zambia, Angola, and Djibouti, have defaulted on loans related to BRI projects, creating a strain on the Chinese economy. These defaults have raised concerns about the long-term viability of BRI and its potential to contribute to China's economic stability.

China's Belt and Road Initiative, a global trading route that links Africa, Asia and Europe has had many setbacks with several African nations defaulting on their loans, straining the Chinese economy. The viability of this ambitious project remains unclear. Image by The Mount Kenya Times.

As the trade war unfolds, both nations seek to navigate a path that allows them to appear strong without conceding ground. President Trump's views on negotiation and strength provide a glimpse into the US mindset:

These approaches highlight the delicate balance both sides must strike. Ultimately, the US has maintained that it is up to China to make a deal, reflecting a stance of unwavering resolve.

V. The Looming Shadow: Stock Market Crash and Global Economic Instability

The US and China, once inseparable, are now locked in a bitter, high-stakes divorce. For decades, their economies were entwined in a passionate embrace, a whirlwind of mutual dependence that fuelled unprecedented growth and prosperity. This deep integration created a global economic engine unlike any seen before, with each partner relying on the other's strengths: America's insatiable demand and China's boundless supply. But now, that very interconnectedness has become a battleground, a vulnerability that could trigger a chain reaction of catastrophic consequences.

Imagine a once-loving couple, now consumed by resentment and mistrust. The intricate network of financial arteries that once carried the lifeblood of capital between them – New York and Shanghai, London and Hong Kong – is now hardening, threatening to rupture. This system, built on a foundation of trust, stability, and the free flow of goods and services, is buckling under the weight of escalating conflict.

Each new tariff, each new restriction, is like a venomous barb hurled across the dinner table, slowly poisoning the atmosphere. Investor confidence, the fragile heart of this relationship, begins to wither. Uncertainty becomes the new norm, replacing the predictability that both sides once craved. Fear spreads like a contagion, as the once-steady hands of fund managers and individual investors alike begin to tremble, questioning the future of their once shared fortune.

The unthinkable becomes thinkable: a stock market crash. But not just a correction, not a mere downturn. We're talking about a potential freefall, a plunge into the abyss that makes the 2008 financial crisis look like a lovers' spat. Trillions of dollars, representing years of shared prosperity, could vanish in days, hours, minutes. Fortunes built over generations, the spoils of their once harmonious union, wiped out in the blink of an eye.

Imagine the scenes: panic in the streets, as ordinary people realise their shared dreams have evaporated. Bank runs, as trust in the very institutions that were meant to safeguard their assets collapses. A domino effect of defaults, as businesses large and small buckle under the weight of frozen credit markets, each blaming the other for their downfall. The global financial system, once a symbol of their intertwined power, teeters on the brink of collapse.

The consequences of this economic Armageddon would extend far beyond Wall Street and the City of London. A stock market crash of this magnitude would trigger a cascade of global economic devastation, as the world is forced to reckon with the fallout of this divorce:

• Global Recession/Depression: The world's largest economies, the US and China, would be crippled, their once-shared prosperity turning to ash, dragging the rest of the world down with them. Global trade, the foundation of their intertwined existence, would plummet, as nations erect protectionist barriers, like angry neighbours building fences, in a desperate attempt to salvage what they can of their own economies.
• Mass Unemployment: As businesses fail and demand evaporates, tens of millions, perhaps hundreds of millions, would lose their jobs. The very workers who built this globalised world, who fuelled its factories and filled its ports, would be cast aside, unemployment rates soaring to levels not seen since the Great Depression, leading to widespread social unrest and political instability.
• Currency Wars: Nations would engage in a desperate race to devalue their currencies, each seeking a Pyrrhic victory in a shrinking global market. This "beggar-thy-neighbour" policy, reminiscent of scorned lovers slashing at each other's prized possessions, would further destabilise the international financial system and erode what little trust remains.
• Social and Political Upheaval: Economic desperation breeds social unrest. We could see widespread protests, riots, and even revolutions, as people lose faith in the promises of their governments and the very idea of global cooperation. Political systems, both democratic and authoritarian, would be tested to their breaking point, as the social contract frays and the bonds of society threaten to snap.
• Increased geopolitical instability: As nations, like jilted lovers, scramble for resources and markets in a desperate struggle for survival, existing tensions could erupt into open conflict. The risk of war, even between major powers, would increase dramatically, turning the economic divorce into a bitter and bloody battle for the spoils. As Sun Tzu warned, "In the midst of chaos, there is also opportunity—and the opportunity to seize." In this chaos, many nations may see an opportunity to advance their own interests, leading to further instability.

This is the ultimate crash in the game of chicken. The economic devastation and societal collapse outlined above represent the catastrophic collision that both sides are desperately trying to avoid.

Yet, history offers glimmers of hope. During the Cuban Missile Crisis of 1962, the world stood on the brink of nuclear annihilation. US President John F. Kennedy and Soviet leader Nikita Khrushchev, locked in their own high-stakes game of chicken, ultimately found a way to de-escalate. Through a combination of brinkmanship, diplomacy, and back-channel negotiations, they reached a compromise: the Soviets removed their missiles from Cuba, and the US secretly agreed to remove its own missiles from Turkey. Both leaders were able to find a way to step back from the abyss and, perhaps more importantly, to allow their nations to "save face."

Soviet Leader Nikita Khrushchev and President John F. Kennedy shaking hands in Vienna, after they found a way to compromise during the Cuban Missile Crisis. Both leaders avoided the "crash" in the chicken game that would've led to nuclear war. Photo from the Digital Public Library of America.

The question now is whether the US and China can learn from this historical example. Can they find a path to de-escalation and compromise, allowing both sides to claim victory in some form, or are we destined to repeat the mistakes of the past and drive the world towards a devastating crash? As Sun Tzu pondered, "The supreme art of war is to win without fighting." In the context of this trade war, is such a victory even possible?

By Sierra Choi

Also see TRADE WAR ENDGAME: PART 2

Disclaimer: This article represents the opinions of the author in order to stimulate discussion and dialogue and intended for educational purposes only.