If you’ve been following the headlines, you’ll be aware that the US and China appear to be locked in a struggle for global economic dominance. I started thinking more seriously about this after a one-sided debate with my dad (thanks, dad!). He rattled off stats and bold claims about the US and China, and I didn’t really push back because I wasn’t fully caught up on the details. I’m sure this situation is familiar to many readers.

Just to be clear, I’m not trying to take sides, be overly political, or make predictions. I simply wanted to research and share some observations. I think a lot of people feel the same way, confused by the constant headlines and wondering why the US government keeps talking about China while deploying tariffs, sanctions, and subsidies with such messy, reactive execution. I also want to dispel financial nihilism and explore things in more detail to more clearly understand half-truths vs. facts.

The short version: the US is trying to balance short-term protectionism with long-term reindustrialization, using tariffs and reshoring to buy time to rebuild domestic capabilities and reassert economic dominance.

There are a lot of nuances and caveats I want to unpack to help explain where things stand and get a whiff of what direction things are going, so let’s jump in.

Tariffs: Buying Time, But Burning Bridges

The US has actually been deploying tariffs since 2018, starting with Trump’s steel and aluminum tariffs which were maintained under the Biden administration, which also added more against Chinese EVs, solar panels, and semiconductors. The idea seems pretty straightforward: slow China’s rise and protect US industries.

In the long term, tariffs erode US soft power and reserve currency dominance. They also motivate global trade partners to hedge against the US and explore non-dollar alternatives. Many are doing this already and we’ll get into why reserve currency dominance is so important in a bit.

The Reshoring and Rebuilding Trend

The US is also trying to reindustrialize. Both major parties in the US have taken actions in different ways to achieve this.

The CHIPS Act and Inflation Reduction Act (IRA) represent America’s carrot-based attempt to rebuild critical domestic manufacturing and supply chains. In 2023, the US committed over $280 billion in semiconductor incentives and clean energy support. The Trump administration of 2018-2020 used more of a stick-based approach to convince major manufacturers to onshore to the US… and that stick-based approach continues to this day through tariffs.

Additionally, recent data from the Federal Reserve Bank of St. Louis (aka FRED) indicates that total construction spending on manufacturing facilities in the U.S. reached a seasonally adjusted annual rate of $234.1 billion in March 2025, a significant increase from approximately $70 billion in early 2021. This surge suggests that the U.S. is making substantial investments in domestic manufacturing infrastructure, although it’s difficult to say whether or not the US can fully reverse decades of offshoring (FRED, 2025).

Even though major structural changes are in place to promote reshoring, execution always matters. We haven’t yet seen the actual impact on manufacturing output and employment. Furthermore, in economics class back in the day, the first thing we learned about was the benefits of comparative advantage, which reshoring/onshoring kind of flies in the face of, given all the specialization from the globalization that has already occurred.

It will be interesting to see how these long-term, strategic bets pay off.

Debt and the Trade Deficit: Both Important, But not the Same

Two other topics get thrown around a lot in the midst of these discussions: national debt and the trade deficit.

US debt now stands at over 123% of GDP (CBO, 2024). But America has always run large deficits, buffered by global demand for dollars. The US can still issue debt in USD and print money if needed, but uncontrolled debt can accelerate dedollarization (countries trying to move away from the dollar) which can negatively impact the reserve currency status and the ability for us to raise large amounts of money to fund our military, infrastructure, R&D and social programs (… although I really don’t believe I’ll ever be able to withdraw from Social Security in my lifetime).

Britain is a cautionary tale, having lost reserve currency status after WWI and WWII due to debt and weakening economic power. The pound sterling devalued in 1949 and in 1967. The US emerged stronger from both crises, and the dollar was cemented as the global standard under the 1944 Bretton Woods agreement. Unique case, but 1967 wasn’t that long ago (Nike was born around then!).

Another major topic of discussion is America’s persistent trade deficit. The US has run a trade deficit every year since 1975, with the gap widening dramatically after China joined the World Trade Organization in 2001 (U.S. Census Bureau, 2025).

In 2024, the US trade deficit stood at over $140.5B, and if you strip out services and just talk about goods trade deficit, it was at $1T. While this is often portrayed as a weakness, it’s also been a structural feature of our dollar based system. The US consumes more than it produces, exporting dollars to the world, and in return foreign governments and investors recycle those dollars into US assets like Treasury bonds. This “exorbitant privilege” keeps US borrowing costs lower than they would otherwise be. The downside is something we see today and what our government has been trying to address: long term decline of domestic manufacturing, which explains the more recently intense push toward tariffs, industrial policy, and reshoring.

The combination of high debt and persistent trade deficits has become a key talking point for political leaders. They see the decline of US manufacturing and the massive trade imbalance (especially with China) as signs of weakness and vulnerability. Trump’s approach has been to use tariffs as both a negotiation tool and a blunt-force attempt to reverse these trends and bring manufacturing back to American soil.

In many ways, the America’s economy is trapped in a strange cycle. It runs trade deficits to satisfy global demand for dollars, which allows the US government to borrow cheaply and fund its domestic spending. Trump’s argument seems to be that this bargain is no longer working for average Americans, as jobs have been outsourced and local industries have been gutted.

I want to clarify that I don’t agree with the execution or the economic theory of benefits of tariffs. Again, in economics 101, we learned that tariffs aren’t actually good for consumers since you’re really just passing the costs of goods over to the consumers. Other critics also point out that trying to reverse this system too abruptly could destabilize the very global dollar dominance that makes US debt sustainable. In an inflationary environment, this can make things even worse.

This tension explains why trade deficits and debt are so politically charged. It also explains why tariffs, reshoring, and “America First” policies are back in the conversation.

A Note on the Middle Class

It’s worth mentioning that a big reason why all of this even matters is the impact on people’s lives. The long-term trends of globalization and offshoring have been good for consumers (lower prices), investors, and high-skill knowledge workers, but have been pretty brutal for large parts of the traditional American middle class.

Wages stagnated for many non-college-educated workers, which partly explains the political energy behind tariffs and reshoring efforts. A recent report from Pew Research Center shows the middle class has shrunk from 61% of US adults in 1971 to 50% in 2023. Some of that is positive (many households moved upward into upper-income brackets), but inequality has widened, and the lower-income share also grew slightly (Pew Research, 2024). The US economy increasingly looks like an hourglass: a bigger upper class, a squeezed middle, and a persistent lower tier.

Reserve Currency

I mentioned earlier that the US has a special power with reserve currency dominance and I’ll jump into that now.

The dollar’s role as the world’s reserve currency gives the US enormous leverage. Today, about 58% of global reserves are held in USD (down from 71% in 1999) (IMF COFER, 2024), and roughly 88% of global foreign exchange trades involve dollars (BIS, 2022). Commodities, oil, and global trade flows run through USD, making US Treasuries the world’s safest and most liquid asset.

Issuing debt in its own currency gives the US the unique ability to borrow cheaply, run persistent government fiscal deficits, and fund military and social programs without risking a currency collapse. When global markets panic, they run to dollar assets. We saw this during the COVID crisis and again after Russia’s invasion of Ukraine.

In contrast, countries like Argentina and Turkey must borrow in foreign currencies or offer much higher yields to attract investors. This reflects their higher default risk and economic instability and severely limits their financial flexibility.

Cracks in the Dollar

There are some signs of dedollarization that puts this reserve currency strength at risk. Russia, China, India, and Brazil are diversifying into gold, yuan, euros, and other assets (World Gold Council, 2024). China and Russia are settling energy trades in yuan and rubles. China and Brazil partially conduct trade in yuan. India and Russia have trialed non-dollar oil trades. Central banks globally are quietly stockpiling gold as a hedge.

China and older BRICS nations—Brazil, Russia, India, and South Africa—have been pushing for non-dollar trade to reduce reliance on the US financial system. Asia’s Regional Comprehensive Economic Partnership (RCEP), which includes China but not the US, also illustrates how global trade is starting to fragment.

Still, it doesn’t seem like there is a clear alternative. The euro remains structurally weak given that there isn’t a unified federal budget or fiscal policy, creating constant tension and risk of fragmentation. The Chinese RMB is non-convertible, with tight capital controls maintained by the People’s Bank of China. Gold is impractical for modern global commerce as a medium of exchange: you can’t easily move it quickly, it can’t earn interest, and it doesn’t do any productive work. So it seems that, for now, the US Treasury market remains a safe haven.

That said, recent moves in long-term Treasury yields show that markets are starting to price in a little more uncertainty. This doesn’t mean people think the US will outright default. The US issues debt in dollars and can always print more if needed. But rising deficits, unpredictable fiscal policies, inflation volatility, and occasional political debt ceiling drama have all raised what economists call the “term premium.” Investors want a bit more compensation for holding long-term US debt because the future looks messier than it used to. Still, I wouldn’t say the US is going to default.

The Scorecard: US vs. China

The US still represents roughly 25% of global GDP and leads in AI, biotech, intellectual property, and finance. Deep capital markets, global acceptance, and legal stability anchor the dollar’s appeal. But government debt is high, and poorly executed negotiation moves hurt the credibility angle, and some regions are already diversifying out of caution.

China holds the advantage in other areas. China leads in global GDP by purchasing power (PPP, $30.3T vs. $25.5T for the US) (World Bank, 2024). China also dominates global manufacturing with 41% share compared to the US’s 13%. Additionally, China also holds over $3.2 trillion in FX reserves and maintains strong productivity and labor force growth.

China’s weaknesses include a debt-to-GDP ratio of over 335% when including corporate and government debt, plus strict capital controls that limit RMB convertibility. Its highly centralized decision-making structure also creates risks of inefficiency, resource misallocation, and overproduction bubbles.

A caveat about this perceived weakness is that most of China’s debt is owed internally so that gives the government a large amount of control over creditors and debt restructuring. They are not at the mercy of foreign investors that might cause a sudden run. They also use much of the debt on infrastructure, housing and manufacturing, real assets that can be productive for the country.

Both Sides Playing for Time: Is It Working?

From what I understand, the US is attempting to slow down China’s rise in some critical areas, but some data indicates that China continues to find ways to advance.

The US is targeting tariffs and restrictions at critical tech and energy sectors while allowing lower-risk trade to continue. The goal is to buy time to reshore industries and strengthen domestic supply chains, all the while keeping some of the benefits of comparative advantage.

Similarly, China is following a dual circulation model: internally focusing on supply chain independence (semiconductors, EVs, AI, energy, pharma) while externally expanding markets into Southeast Asia, Latin America, Africa, and the Middle East.

In EVs, China has surged ahead. BYD, Xpeng, and Nio overtook Tesla in global deliveries in late 2024 (Counterpoint Research, 2025). China’s EV ecosystem is vertically integrated since they own battery, motor, and rare earth supply chains.

In AI, US export controls slowed Chinese access to NVIDIA’s H100/A100 chips, but China is pivoting fast with domestic players like Huawei’s Ascend and Biren chips. China’s huge internal dataset and demand also give it an edge for training large models (SCMP, 2025).

The Next 5–10 Years: Managing Contradictions

On a personal note, I still remember my time at Tufts (many years ago) when the prevailing narrative was that China’s economy, while growing rapidly, was still distant second to the US. It’s been fascinating to watch China burst onto the stage during the 2008 Olympics, and since then, how explosive growth has propelled China to near-parity with countries that had a century-long head start, lifting 800 million people out of poverty (World Bank, 2022).

I used to hope that the global system might evolve into something closer to the liberal view of shared growth, cooperation, and stability under global norms. I even took a class where I and my fellow bright-eyed students debated global harmony. It took one game of simulated Diplomacy to see how quickly things can devolve into betrayals, shifting alliances, and an “all against all” mentality.

The modern world increasingly resembles what realists predicted: a fragmented, multipolar system of rivalry, with middle powers hedging to protect their own interests. But, I still hold the hope that there is a future of peace and prosperity for people in all countries, harmony even amongst the major powers.

Neither country has a clear blueprint to “win.” China risks stifling innovation through over-control and over-planning. The US risks damaging its alliances and punishing its own consumers by leaning too hard on unpredictable tariffs and export controls. Major players like Japan, South Korea, Germany, and the ASEAN nations are already carefully balancing their relationships with both sides.

The eventual winner may not be the one with the biggest GDP, but the one that best manages its internal contradictions, adapts to shifting global leanings, and maintains resilience in the long term. For now, the U.S. has bought itself time. Whether it can convert that into sustainable advantage is unclear.

I realize that ultimately, a lot of my views are from a Western-centric lens, and limited to what I think and have read. I’d love to hear other thoughts. Do you believe the U.S. can maintain its lead? Will China’s strategy ultimately succeed? Are we headed for a long-term balance of competing powers?