The Tradewar Endgame: PART 2

VI. Strategies in the US-China Trade War: Pivot to Southeast Asia and Shifting Alliances in East Asia

As the world holds its breath, the US-China trade war intensifies, with both sides actively manoeuvring to fortify their positions and mitigate potential losses. These strategies extend beyond the realm of tariffs and trade negotiations, reaching into the complex arena of diplomatic outreach and the cultivation of new alliances.

At the forefront of this diplomatic chess game is President Xi Jinping, who has been actively engaged in a campaign across Southeast Asia. His strategic outreach seeks to forge stronger economic and political ties with nations in this vital region, pursuing a multi-faceted agenda:

• Diversification of Trade Partners: China aims to lessen its dependence on the US market, forging crucial alternative markets for its exports and reducing its vulnerability to American pressure.
• Strengthening Regional Influence: China seeks to position itself as the dominant economic and political force in Southeast Asia, carefully and deliberately enhancing its regional influence and subtly countering US presence.
• Securing Supply Chains: Southeast Asia's strategic importance lies in its wealth of resources and its potential as an alternative manufacturing hub for China, offering a way to circumvent disruptions in the US-China trade relationship.

Peter Thiel, the entrepreneur and investor, has highlighted the potential for the US to reduce its dependence on China by pivoting manufacturing to countries like Vietnam. He argues that Vietnam's growing economy, strategic location, and relatively lower labour costs make it an attractive alternative for US companies seeking to diversify their supply chains. This strategy aligns with the US goal of reducing its trade deficit with China and fostering greater economic self-reliance.

The Golden Hands Bridge in the Ba Na Hills, Da Nang, Vietnam (Photo from Shutterstock)

President Xi’s recent “Asian Family” tour across Southeast Asia likely stemmed from an awareness of the US's intended manufacturing pivot towards Vietnam, coupled with his desire to garner regional support for China. However, China's territorial disputes with Vietnam, the Philippines, and Malaysia undermine its diplomatic tour goals. Despite outward displays of deals and agreements, a key weakness of the “One China” policy is that China's neighbours often view it as an unscrupulous land-grabbing nation, driving Southeast Asian nations towards the US as a security partner.

South Korea has historically sought to balance its relationships with both the US and China, maintaining a neutral stance to maximise its economic and security benefits. However, recent developments, including a statement made by former South Korean President Suk-Yeol Yoon in November 2024, prior to his impeachment, indicating a desire for a stronger alliance with China, have the potential to significantly alter the geopolitical landscape. As President Yoon stated at the APEC summit in Lima, Peru, "The United States and China are, for Korea, very important cooperation partners. Therefore, I do not believe that it is a case of choosing one country or the other." To the US and its Indo-Pacific allies’ surprise, President Yoon also affirmed South Korea’s commitment to the “One China Policy” which would also integrate Taiwan with China. This shifting of alliances would radically alter power structure in East Asia, if South Korea were to align with China’s interest as the dominating force in the region.

South Korean President Suk-Yeol Yoon's impeachment and removal from office comes right at a time when he had affirmed South Korea's commitment to China's "One China" policy, which would've radically altered the power structure and alliances in East Asia. (Photo from AFP)

However, President Yoon's subsequent, unanimous impeachment in April 2025 successfully removed him from power and introduced uncertainty about the direction of South Korea's foreign policy. The stance of the next South Korean president will be crucial in determining whether the nation aligns more closely with the US or China. However, given the US's longstanding security alliances in the region and its significant economic ties with South Korea, a continued and potentially strengthened alliance with the US is the more likely outcome.

VII. The Decoupling Debate: Gold, the Dollar, and Inflation

For much of the 20th century, the global financial system rested on an uneasy alliance between paper and precious metal, between the boundless potential of the US dollar and the finite, glittering allure of gold. This relationship, forged in the aftermath of World War II, was known as the Bretton Woods system.

Under this system, the US dollar was established as the world's reserve currency, its value pegged to gold at a fixed rate. Like a high-wire act, this arrangement required a delicate balance: the world's confidence in America's ability to maintain its gold reserves. As long as that confidence held, the system functioned, fuelling global trade and economic expansion.

But beneath the surface, tensions were building. The Vietnam War, with its staggering costs, strained the US economy. Dollars flowed out of the country, and foreign governments began to question whether the US had enough gold to back its currency. The once-steady flow of gold began to look more like a trickle, and the whispers of doubt grew louder.

A controversial decision, the decoupling of gold from the US dollar in 1971 would lead to accelerated inflation in the coming decades which would shrink the middle class of America, and make it harder for average Americans to afford a high standard of living. (AI generated image from Imagen 3)

Then, in 1971, the unthinkable happened. President Richard Nixon, facing a run on US gold reserves and a looming crisis of confidence, made a decision that would forever alter the course of monetary history. In a televised address to the nation, on August 15, 1971, Nixon declared, "I have directed the Secretary of the Treasury to temporarily suspend the convertibility of the dollar into gold." The word "temporarily" hung in the air, a thin veil over what would become a permanent severing of ties.

It was a moment of profound rupture, a financial earthquake. As Nixon put it, "The effect of this action, in other words, will be to stabilise the dollar." But what followed was anything but stable.

The consequences of this decoupling were far-reaching and are still debated today. One of the most persistent arguments is that it unleashed the spectre of inflation. With the dollar no longer anchored to the discipline of gold, the argument goes, the government was free to print money at will, leading to a surge in the money supply and a corresponding rise in prices. This revealed a fundamental tension: the illusion that money, in the form of debt, can expand infinitely, while the world's supply of gold remains stubbornly finite. This concept isn't new; indeed, the collapse of the Roman Empire has been attributed, in part, to the unsustainable accumulation of debt.

The inherent limit of gold reserves contrasts with the potentially infinite nature of debt. The separation of gold from the dollar illustrated the complexities of inflation, debt, and the broader economic system, highlighting a substantial weakness in financial frameworks. (AI generated image from Imagen 3)

This transition, while perhaps a necessary step to accommodate global economic growth, is argued by some to have had a detrimental effect on the average American's standard of living. As the value of the dollar declined, Americans found themselves increasingly burdened by debt, struggling to keep pace with the rising cost of living. This wasn't simply a matter of the rich getting richer and the poor getting poorer, as some politicians often frame it; rather, a massive hole had opened up in the financial system itself, and we were all, to varying degrees, chained to it.

The decoupling of the dollar from gold was a momentous decision with lasting consequences. As we grapple with the complexities of inflation, debt, and economic instability today, we are left to ponder a fundamental question, echoing the words of Plato: "The measure of money... should be the mean between excess and defect." In a world of finite resources and infinite financial possibilities, what is the true measure of value, and how do we achieve a sustainable and equitable economic order?

VIII. Navigating the Future: The Rise of Credit-Based Transactions and a New Economic Model

Imagine a world where your ability to purchase a home, invest in a new business, or trade with a company across the globe isn't primarily determined by the amount of currency in your bank account, but by your verified reputation and the strength of your commitments. This isn't a futuristic fantasy; it's a concept with roots stretching back centuries.

The current financial system inherently risks trapping nations and populations in an endless cycle of debt. In contrast, a well-designed credit-based system, operating in parallel with existing financial structures, could offer a mechanism for generating and distributing value more equitably, potentially mitigating the burden of perpetual indebtedness. (AI generated image by Imagen 3)

Even in ancient Mesopotamia, long before the advent of coinage, complex systems of credit and debt existed. Farmers extended credit to each other for seeds and tools, merchants trusted each other to deliver goods across vast distances, and rulers issued debt obligations that were honoured across generations. These early transactions were not based on physical currency, but on elaborate systems of record-keeping (cuneiform tablets detailing agreements and obligations), social reputation, and the credible promise of future repayment or reciprocal exchange. While not as digitally connected, these systems foreshadowed aspects of what a modern credit-based transaction model could look like.

The WIR Group in Switzerland offers another compelling example. During the hyperinflation crisis in 1930s Germany, businesses faced a severe shortage of liquidity as the Reichsmark plummeted in value. In response, they created their own complementary credit clearing system, the WIR, which allowed them to trade goods and services with each other using a unit of account tied to the Swiss franc. This system effectively bypassed the hyperinflating Reichsmark, enabling businesses to continue operating and mitigating the worst effects of the crisis. It demonstrated the resilience of credit-based systems in times of monetary instability.

Credit-Based Transactions: Individual and SME Scale

To illustrate how a credit-based system could work, let's consider two examples: Marcus and Anya.

Marcus, an engineer in South Korea, has designed a revolutionary new type of water filtration system. Anya, a businesswoman in Brasil, wants to build a network of sustainable farms in the Amazon rainforest.

In a traditional financial system, Marcus and Anya might face significant hurdles. Marcus, with his advanced technological expertise, would need to secure a large loan from a bank, which would require substantial collateral and a proven track record. As a young entrepreneur, he may not have either. Anya would face similar challenges, along with the added complexity of navigating international finance and currency exchange.

However, in a credit-based system, things work differently. Marcus and Anya's creditworthiness is determined not only by their past achievements but also by the viability of their projects and their commitment to delivering results.

Imagine a credit-based system in which entrepreneurs and innovators could gain direct access to essential resources, goods, and services based on mutual agreement and the perceived value of their contributions, circumventing the traditional need for loans and external funding to initiate their projects. This direct resource allocation within a credit network could foster greater economic complexity by enabling a wider range of ventures and collaborations to emerge organically, driven by inherent value rather than monetary capital. (AI generated image from Imagen 3)

Marcus, for example, has a strong reputation for innovation and successful project completion, verified through a decentralised network of engineers and scientists. His digital identity is linked to a transparent record of his past projects, technical expertise, and peer reviews. Because he is using this advanced technology and has a great reputation, instead of seeking a loan, he issues a "credit obligation" on a global platform, detailing the specifications of his water filtration system, the projected impact, and the resources he needs. Investors, both individuals and organisations, can then choose to "extend credit" to Marcus, not in the form of currency, but as a commitment of resources, materials, and specialised services.

Anya's project is evaluated for its environmental and social impact by a consortium of NGOs and indigenous communities. Her reputation for ethical business practices and community engagement is impeccable. Because she is taking on a project that is backed by several NGOs, instead of taking on debt, she enters into "mutual credit agreements" with other entities in the network. A sustainable energy company commits to providing her with solar panels, a logistics firm agrees to transport her equipment, and a cooperative of farmers promises to supply her with organic fertilisers – all in exchange for her commitment to provide them with a share of the farm's future harvest and carbon credits.

In this system, money is not the central intermediary. Instead, credit is a measure of trust and a tool for coordinating productive activity. Marcus and Anya gain access to the resources they need not because they have money, but because they have a credible plan and a network of partners who believe in their ability to deliver.

Credit-Based Transactions: Trade Between Nations

A credit-based system can also be used to facilitate trade between nations on a global scale, creating a more balanced and sustainable international economic order.

Consider a scenario where the United States wants to acquire high-speed rail technology from China, while China needs a large supply of grain from the United States. Instead of relying solely on dollar-denominated transactions, which can be affected by exchange rate fluctuations and trade imbalances, the two countries could establish a mutual credit agreement.

The US could issue "credits" to China, representing China's commitment to deliver a specified amount of high-speed rail technology over a set period. China could then use these credits to acquire grain from US companies. This arrangement would:

• Balance Trade: By linking the exchange of goods directly through credit, the need for large currency transfers is reduced, mitigating trade imbalances.
• Reduce Dependence on Dollar: The reliance on the US dollar as the primary settlement currency is lessened, promoting a more multi-polar financial system.
• Promote Long-Term Cooperation: The credit agreement fosters a long-term economic relationship based on mutual benefit and shared development goals.

Stabilising Currencies and Preventing Hyperinflation

Furthermore, a well-designed credit-based system can contribute to the stability of currencies and mitigate the risk of hyperinflation in several ways:

• Reduced Speculative Pressure: By providing an alternative means of exchange and value transfer, credit systems can reduce the speculative demand for national currencies, making them less prone to volatile fluctuations.
• Tying Value to Real Goods and Services: Credit is typically extended for specific productive purposes, linking it to the creation of real goods and services. This provides an inherent stability, as the value of the credit is tied to tangible economic activity rather than abstract financial speculation.
• Decentralised Control: Unlike national currencies, which are controlled by central banks, credit systems can be more decentralised, with creditworthiness and transaction validation distributed across a network of participants. This reduces the risk of a single point of failure or mismanagement leading to hyperinflation.
• Strengthening National Currencies: By operating alongside traditional currency systems and facilitating trade and investment based on the productive capacity of participating entities, credit-based mechanisms can actually enhance the stability and value of national currencies. This is because they create a complementary system that reduces the strain on any single currency, lessens the risk of sudden capital flight, and promotes a more balanced and sustainable global economic environment. In essence, credit systems and national currencies can work together, each playing a vital role in a more resilient and robust financial ecosystem.

Shifting the Metrics of Power and Wealth

A credit-based system has the potential to shift how we measure a nation's power and wealth. Instead of focusing primarily on Gross Domestic Product (GDP), which can be a misleading indicator of overall well-being, a credit-based approach would place greater emphasis on factors that more accurately reflect a nation's long-term prosperity and stability:

• Economic Complexity: This measures the diversity and sophistication of a nation's productive capabilities, reflecting its ability to produce a wide range of high-value goods and services. A nation with high economic complexity is more resilient to economic shocks and better positioned for long-term growth.
• Standard of Living: This encompasses factors such as access to healthcare, education, clean water, and a healthy environment, along with measures of income equality and social mobility. A high standard of living indicates a nation's ability to provide for the well-being of its citizens and foster a stable and prosperous society.

By prioritising these factors, a credit-based system would incentivise nations to invest in sustainable development, education, innovation, and social progress, rather than simply pursuing short-term economic growth at all costs. This would foster a more balanced and sustainable global economy, where true wealth is measured in terms of human well-being and long-term prosperity.

XI. Conclusion: A Delicate Balance on a Shifting World Stage

The world stands at a critical juncture. The escalating trade war between the United States and China, reminiscent of the high-stakes game of chicken played during the Cuban Missile Crisis, presents a significant threat to global economic stability. The path forward requires a delicate balance of strategic manoeuvring and diplomatic finesse to avoid a potentially catastrophic "crash."

Every generation faces its own unique economic challenges. Just as the Nixon administration's decision to decouple the dollar from gold in 1971 marked a radical shift, and the 2008 financial crisis exposed deep flaws in the global financial architecture, we find ourselves today at a new frontier. The decisions made by today's leaders, particularly US President Donald Trump and Chinese President Xi Jinping, will shape the economic landscape for decades to come.

However, this moment of crisis also presents an opportunity. Leaders like Presidents Trump and Xi have the potential to reshape the global economic system, moving away from the volatile boom-and-bust cycles of the past and towards a more sustainable and equitable model. A transition towards a credit-based system of trade, operating in parallel with existing currency-based mechanisms, could be a key step in this direction. By prioritising trust, reputation, and productive capacity, such a system could foster greater economic stability, reduce reliance on traditional reserve currencies, and promote long-term cooperation.

The path forward will not be easy. Significant challenges remain, including the need for robust risk assessment mechanisms, effective dispute resolution systems, and a comprehensive global regulatory framework. But the potential rewards – a more resilient, inclusive, and prosperous global economy – are well worth the effort.

Here are some historical examples of boom-and-bust cycles:

• The Tulip Mania (1634-1637): In the Netherlands, the price of tulip bulbs skyrocketed to exorbitant levels before collapsing, causing a severe financial crisis.
• The South Sea Bubble (1720): In England, speculative investment in the South Sea Company, which held a monopoly on trade with South America, led to a massive bubble and subsequent crash.
• The Roaring Twenties and the Great Depression (1920s-1930s): The United States experienced a period of rapid economic growth and prosperity in the 1920s, fuelled by speculation in the stock market. This was followed by the stock market crash of 1929 and the Great Depression, the worst economic downturn in modern history.
• The Dot-Com Bubble (1990s-2000s): The rapid growth of the internet and technology sector led to a surge of investment in dot-com companies, many of which had unsustainable business models. The bubble burst in 2000, causing significant losses for investors.
• The 2008 Financial Crisis: A combination of factors, including lax lending standards, the securitisation of subprime mortgages, and a lack of regulatory oversight, led to a housing bubble in the United States. When the bubble burst, it triggered a global financial crisis, resulting in bank failures, bailouts, and a severe recession.

These are just a few examples of the many boom-and-bust cycles that have occurred throughout history. These cycles can cause significant economic hardship, leading to job losses, financial instability, and social unrest. As the philosopher George Santayana observed, "Those who cannot remember the past are condemned to repeat it." By understanding the patterns of previous economic crises, we can take steps to prevent them from happening again.

Ultimately, the decisions made by the US and China in the coming months will determine whether the world descends into a period of economic turmoil or emerges stronger and more united. The lessons of the Cuban Missile Crisis, the insights of game theory, and the potential of emerging technologies offer a roadmap for navigating this high-stakes game. The time for bold leadership and decisive action is now.

A transition towards a credit-based system of trade, operating in parallel with existing currency-based mechanisms, could potentially mitigate these cycles. By focusing on the exchange of value based on productive capacity and reputation, rather than solely on currency fluctuations, the system could:

• Reduce Speculative Bubbles: By tying economic activity to real-world production and delivery of goods and services, a credit-based system could discourage the kind of speculative excesses that often lead to market crashes.
• Promote Long-Term Investment: With a focus on reputation and the ability to deliver on commitments, a credit-based system could encourage investment in projects that generate sustainable value over time, rather than short-term gains.
• Enhance Economic Stability: By diversifying the means of exchange and reducing reliance on volatile currency markets, a credit-based system could make the global economy more resilient to shocks and downturns.

Ultimately, this shift could pave the way for a more stable and equitable economic system, one that is less prone to the boom-and-bust cycles that have plagued capitalist economies for centuries. As Chinese President Xi Jinping said, "We must uphold the concept of common development, and no country should be left behind in the process of global development."

By working together, the United States and China can lead the way in creating a new economic paradigm that benefits all nations and promotes a shared future of prosperity and stability.

This shift towards credit-based systems would represent a fundamental change in how we perceive and utilise value. By embracing this change and developing robust frameworks for trust, reputation, and technological innovation, we can create a more resilient, inclusive, and sustainable global economy, where the flow of resources is not limited by the scarcity of currency, but enabled by the boundless potential of human collaboration and enterprise.

History is replete with moments where visionary leaders redefined the global order. President Trump and President Xi now stand at such a precipice. By pursuing a path of collaboration and innovation, and by working towards a new economic framework, they can leave a legacy that will be remembered for generations. The opportunity is at hand to construct a world in which economic stability and shared prosperity are not a utopian dream, but an achievable reality.

By Sierra Choi

Also see TRADE WAR ENDGAME PART 1

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