The Emergence of Two Divergent Trade Blocs

How a China-oriented trade bloc and a US-oriented one will differ and implications for the world

Trump’s tariff playbook is now clear. There are three parts to a “deal” Trump imposes on US’s submissive trading partners:

1. Zero tariff on US imports in exchange for an arbitrary non-zero “reciprocal” tariff Trump puts on them (ranging from 10 to 50%)

2. Lump sum purchase, usually several hundred billion dollars, of US goods from energy to weapons – campaign contributors’ payoff from “the leader of the free world”

3. Investment into US, again usually several hundred billion dollars, in unspecified industries over a vague period of time. In Japan’s case, 90% of profits from such “investments” accrues to the US

Needless to say, every piece of the “deal” is based on vigorous analysis and deliberations, and is totally realistic and executable. For example, Europe only needs to increase its annual LNG purchase from the US by a mere 400% to deliver on the purchase target.

If it’s more than what they can consume, the Europeans can learn from the Indians who resell distressed Russian oil at a huge markup to some unsuspecting third parties (the Europeans themselves in this particular case). A win-win for everyone.

Little mentioned by the press, Trump also finalized tariffs on all major African countries from 10% for Egypt (with whom the US runs a $2 billion annual surplus) to 30% for South Africa and Algeria.

In contrast, in June this year, China announced it removed all import duties for 53 African countries – the continent can now export to China tariff free.

While China and the US have agreed to extend the trade truce by another 90 days, a managed decoupling is fast becoming a reality. China’s exports to the US fell by 22% year to date and its imports from the US dropped by 19%.

Despite its export decline to the US, China’s total export grew 7.2% for the first 6 months of the year, handily beating consensus forecast of 4.8%. China’s export value reached $1.8 trillion in the first half of 2025 with a trade surplus of $586 billion, bigger than the annual GDP of Sweden, Norway, or Vietnam.

China’s full year trade surplus is projected to exceed $1.3 trillion, the highest recorded trade surplus in world history and roughly the size of the economies of Turkey, Indonesia, Spain, or the Netherlands.

As the Trump regime turns increasingly protectionist in hope of reindustrializing the US, China takes a sharply divergent path and focuses on expanding trade and investment in the global south. In the coming decade, there will emerge a China-oriented trading bloc versus a US-oriented one.

While ideologues with severe IQ deficit in Washington and Brussels will no doubt label such trade bloc as “democratic alliances” vs. “authoritarian axis”, rational thinkers should focus on how the two trade blocs will have fundamentally different economic structures and the associated long-term implications.

With that understanding, one can reason which trade bloc and economic model will eventually prevail. Sovereign nations should then choose their alignment based on economic, technological, and political self-interests.

To start, let’s look at the US-oriented trade bloc. Most immediately, it is clear this bloc will have structurally higher costs -

- Consumers will face strong inflation pressures

o Trump tariff is an indirect tax on US consumers as importers inevitably pass on the higher tariffs that they themselves won’t absorb

o An expanding list of China-sourced low-price high-quality products is removed from consumer choices. For example, Chinese EVs are already unavailable in the US and Canada due to 100% import tariff; EU has imposed 45% tax on Chinese EVs. In contrast, Chinese import tariff on US and European cars has trended down over the years and is now at 10 to 25% depending on engine displacements

o Similarly, low-cost Chinese green energy products such as solar panels and wind turbines are tariffed out of the US market despite the fact China produces 80% photovoltaics and 65% wind turbines in the world

o When China fully decouples with the US, consumer goods from electronics to vitamins need to be sourced from higher cost domestic or foreign suppliers

o If Chinese goods continue to enter the US through transshipment via third countries, additional overhead such as transit costs, additional insurance, and middleman’s margin will lead to higher prices

o If transshipment is stopped, countries such as Mexico, Malaysia, and Vietnam will continue to source raw materials and intermediate products from China for the goods produced in their countries for export to the US. We already have such dynamics in the clothing, footwear, and electronics exports from Vietnam to the US

- Manufacturers will have structurally higher operational costs

o US and US-aligned businesses are expected to incur higher input costs across the value chain as they continue to depend on China-aligned suppliers for critical minerals, raw materials, parts, components, and capital goods for domestic production

o For example, steel is a critical input for a large variety of manufacturing businesses. The US produces less than 80 million tons of steel in 2024 while China produces over 1 billion tons. However, US has imposed a 50% steel and aluminum tax, driving up input costs for domestic manufacturers such as car makers

o As China decouples from the US, US businesses will need to find alternative and likely higher-cost capital goods and raw material supplies from ships, containers, telecom gear, robots, rare earth elements, to Active Pharmaceutical Ingredients

o Across product categories and supply chains, US manufacturers will face higher costs and lower margins

o US producers also face much higher energy costs and inferior domestic infrastructure such as power plants, ports, rails, and bridges compared with Chinese producers. US industrial companies, on average, pay 3 to 5 times more for electricity than their Chinese counterparts. AI hyper-scalers in the US already face severe energy shortage as electricity consumption skyrockets for data centers but generation capacity has barely increased over the last 2 decades

o Below chart shows China’s electricity generation versus other major economies – China already produces more than twice the electricity in the US or US, EU, Japan, and India combined. On top of that, China is growing its generation capacity far more rapidly. The recently announced super hydropower dam on Yarlung Tsangpo River will be the world’s largest hydro dam with an annual generation capacity of 60 gigawatts (Gw), more than the entire electric capacity of the UK

o With significantly higher infrastructure, energy, raw material, parts/components, and labor costs, US and US-aligned manufacturing businesses are likely to further lose global competitiveness across industries

o The above analysis has not included the many trillions of dollars fixed asset investments needed for reindustrialization such as factories, mines, and power plants. Such fixed costs will be amortized into the final price consumers bear

o The reverse of reindustrialization may well be the outcome of Trump’s policies as another wave of US businesses could be forced to relocate to lower cost production bases

- Inflation will be further exacerbated from loose monetary policy and weakening exchange rate

o One clear policy direction from the Trump regime is a return to the ultra-loose monetary policies that successive US administrations have pursued to stimulate the economy

o Quantitative easing is needed to sustain the asset bubble in the equity and property markets today; it’s also needed to pay for the tax cuts and deficit expansion from the Big Beautiful Bill (BBB)

o By all indications, Trump will appoint a Fed chair willing to do his bidding when Jerome Powell’s term expires next May

o In the long run, loose monetary policy will lead to not just higher inflationary pressures, but also lower exchange value for the dollar and an erosion of the dollar’s reserve currency status

o US consumers, already the most indebted in the world, will further lose purchasing power

o The key lever in Trump’s tariff war – the overconsumption of US consumers – will lose its potency as economic growth and real income stall

- Higher costs will extend beyond consumer and industry and apply to the military as well

o As we have witnessed in the May air war between Pakistan and India, Chinese made fighter jets, J-10C, shot down at least three French Rafale jets. Pakistan acquired J-10C at $40-50 million apiece while India bought the Rafale for over $200 million

o Another example is the 12-day war between Israel and Iran when Israel had to sue for peace, after Iran overwhelmed its air defense with cheap missiles and drones. Israel and the US spent $500 million a day in expensive interceptors to shoot down only a portion of Iranian missiles

o Earlier in the year, the US was forced to abort its attacks on the Yemen Houthis after spending hundreds of millions in missiles, interceptors, and ammunition, and losing numerous $30 million RQ-9 Reaper drones and $70 million F/A-18 Super Hornets

o As the renowned economist Professor Michael Hudson pointed out, the US military is a “spending army”, not a “winning army”. The US-aligned bloc will pay through its nose for the overpriced, overengineered “wonder weapons” from the US military industrial complex that don’t win wars

o While the US continues to extract tributes from its client states in the form of mandated purchase of its overpriced energy and weapons, China will supply its aligned countries with low-cost, high-performance fighter jets, war ships, missiles, drones, air defense systems, ammunition, and military robots

Let’s switch gear and look at the China-aligned trade bloc. In contrast to the high-cost overhead-laden US bloc, the Chinese sphere will enjoy not only lower costs for goods, but also democratized access to capital, technology, and infrastructure that will drive long-term sustainable productivity growth.

- Trade growth with non-western countries far outpaces trade with the west

o China is expanding trade with ASEAN, Russia, Africa, the Middle East, and Latin America at a much faster pace than trade with the west

o In the first five months of 2025, trade between China and ASEAN reached $421 billion, a 9.1% increase year-on-year. ASEAN is now China’s largest trade partner, representing 17% of China’s total foreign trade, compared with 13% with the EU and less than 10% with the US

o China Russia bilateral trade reached $245 billion in 2024, more than double that of 2020

o In the first 5 months of 2025, China-Africa trade hit $134.2 billion, a 12.4% increase year on year

o China’s trade with the Middle East reached $400 billion in 2024. In comparison, US trade with MENA (Middle East North Africa) stood at $141 billion for 2024

o China is now the largest trading partner for Latin America with total trade exceeding $500 billion in 2024, twice the size of US trade with Latin America (ex Mexico)

o China’s export and import with the US fell by 20% in 2025. Trade with the US is expected to represent 7-8% of China’s total trade this year, down from 11.5% in 2024, and less than 5% in 2-3 years as decoupling accelerates

o In short, the US is simply not that important a market to China in the long run. As the US restricts technology trade, there is increasingly little China wants to buy from the US.

- China demand growth will offset loss of US demand for the China-aligned trade bloc

o Chinese consumers have the world’s highest saving rate at over 40% disposable income, far higher than the average less than 10% in the US

o Chinese household debt is far lower than US households. Only 18% of Chinese homeowners have mortgages on their homes and home ownership in China exceeds 90%

o Student debt doesn’t exist in China and less than 5% of cars are sold on credit

o Latent Chinese consumer demand is massive. As the impact from the housing bubble burst get absorbed over time, Chinese household consumption is poised to rebound, especially when Beijing appreciates the RMB, a necessary step to further internationalize the currency

- Democratize access to capital, technology, and infrastructure for productivity growth

o China is accelerating outbound investment in infrastructure and digital connectivity across the global south through the Belt and Road Initiative (BRI) and the Digital Silkroad program, with investments reaching new record in 2025

o China is accumulating trade surplus at a historical high (estimated $1.3 trillion in 2025). At the same time, Beijing has reduced its US Treasury holding to less than $750 billion, the lowest point in over a decade

o Beijing now holds a foreign currency reserve of $3.3 trillion, the highest in the world. These funds are being used to purchase gold and strategic reserves such as oil, grain, and critical minerals, and Chinese trade development banks are loaning part of the reserve to the BRI countries

o In an ironic twist, Chinese banks are extending US$ loans to global south countries at a lower interest rate than the borrowing cost for the US government

o A 2024 World Bank study found China’s overseas lending for BRI projects carried a weighted average interest rate of 4%

o The table below shows the 10-year government bond yield. As you can see, the US government is borrowing from its creditors at 4.28%, higher than Ghana or Bolivia’s BRI project funding

o Said another way, the governments in African and Latin America can borrow US dollars from Chinese banks at a lower interest rate than the AAA-rated US government can borrow the same US dollars from US domestic investors

o Such democratization goes beyond access to capital. Chinese AI companies from DeepSeek, Zhipu, Alibaba, to Huawei are making their foundational models open source and charge a fraction of the closed US AI systems such as OpenAI (NOT open, despite the dishonest name), X, or Gemini

o Open sourcing of critical future technologies like AI makes it possible for nations to develop true digital sovereignty

o Huawei is not only making its Pangu AI model open source, it has also open sourced its CANN and MindSpore AI software development toolkit, its Ascend AI chip software ecosystem, and its Harmony OS operating systems

o Moonshot’s Kimi K2 reasoning model, one of the highest performing frontier AI models in the world, costs $0.15 per million input tokens and $2.5 per million output tokens. In contrast, GPT-4 Turbo is available for legacy applications at $10 per million input tokens and $30 per million output tokens

o In the embodied AI (i.e. humanoids) market, humanoids from China’s Unitree or UBTech cost just 1/3 to 1/4 of similar offerings from Tesla or Boston Dynamics

o In addition to democratizing access to capital and technology, Beijing BRI initiative continues to invest heavily in infrastructure developments from ports, bridges, railroad to hospitals and schools, laying the foundation for long term sustainable productivity growth

In the coming years, we will witness accelerating decoupling of the world trade system. Two emerging blocs will form and one will win out.

My money is on the trade bloc that embodies a win-win framework of positive sum collaboration and advances the democratization of capital, technology and infrastructure.

This is what true democracy is, rather than the sham one-person one-vote “democratic governance” that serves the power elite to perpetuate exploitation and polarization.