The Empire Strikes Back : The Liberation Day
Part- I : Decoding the Trump Tariffs
For decades, the United States played by its own rules - printing dollars, running trade deficits, and letting the world bank-roll its spending spree.
Manufacturing? Outsourced.
Debt? Skyrocketing.
Military? Heavily reliant on foreign supply chains.
But now, with rising geopolitical tensions, America is suddenly panicking about self-reliance.
From semiconductors to strategic metals, the U.S. is waking up to the harsh reality that its biggest economic rival, China, controls a major chunk of its critical industries - including defence. And what’s the solution? Tariffs. Protectionism. An economic war that could spiral out of control.
But here’s the twist - while the U.S. tries to “punish” the rest of the world, it might end up punishing itself instead. Inflation, trade disruptions, and retaliatory tariffs could push the global economy into turmoil.
And if the world starts losing faith in the dollar, Washington’s worst nightmare might just become reality.
So, why is the U.S. doubling down on tariffs? What does it mean for the global economy? And how will India navigate this shifting landscape?
Context: How the U.S. Got Here – A Brief Economic History
I. The 1971 Epochal Point – End of the Gold Standard & Birth of the Dollar System
Before 1971, the U.S. dollar was backed by gold under the Bretton Woods Agreement (1944). This system ensured stability - every dollar in circulation was theoretically exchangeable for gold at a fixed rate of $35 per ounce.
The problem? The U.S. spent aggressively - Vietnam War, Great Society welfare programs - while the world, especially Europe and Japan, amassed massive dollar reserves.
In 1971, under Nixon’s shock move, the U.S. abandoned the gold standard (effectively defaulting on its gold obligations). The dollar became a purely fiat currency, allowing unlimited printing.
II. Petrodollar System – The Great U.S. Economic Gamble
To sustain dollar demand, the U.S. struck a deal with Saudi Arabia in the 1970s - OPEC would price oil in dollars, forcing the world to hold and trade in USD.
This system allowed the U.S. to run massive trade deficits while maintaining global monetary dominance.
The world’s surplus dollars flowed back into U.S. Treasuries, giving Washington cheap funding for its military-industrial complex and social programs.
III. The Great Financial Crisis (2008) – The Crack in the System
The 2008 Global Financial Crisis (GFC) exposed the vulnerabilities of a debt-driven U.S. economy. The Federal Reserve (Fed) responded by printing trillions - Quantitative Easing (QE).
While it bailed out Wall Street, it also weakened global confidence in the U.S. financial system.
Nations like China, Russia, and others started looking for alternatives to the U.S.-led system.
IV. 2013 Onwards – The Shift to a Multipolar World
China’s rise: Through its Belt & Road Initiative (BRI), China has been challenging U.S. hegemony by securing trade routes and resources.
De-dollarization begins: Russia, China, and others started diversifying reserves into gold and shifting trade to alternative currencies.
U.S. overstretch: Continuous military engagements (Iraq, Afghanistan, Libya) without conclusive victories have drained economic resources.
V. COVID-19 – The Final Blow to U.S. Economic Dominance
The pandemic broke the illusion that the U.S. economy was invincible.
The U.S. government printed $6 trillion in stimulus, leading to record-high inflation.
Supply chains collapsed as the U.S. realized it was overdependent on China for critical goods - medical supplies, semiconductors, rare earth metals.
Labour market disruptions: Millions left the workforce, worsening wage inflation and leading to higher production costs.
VI. The Russia-Ukraine War & Its Economic Lesson
The West unleashed unprecedented sanctions on Russia, but the ruble survived.
Russia built self-reliance - from food to energy to military production - showing the world that Western sanctions can be resisted.
This was a wake-up call for the U.S.: It cannot afford to be dependent on adversaries for defense-critical imports.
VII. The Manufacturing Crisis – The Real Problem
Decades of offshoring (China, Mexico, Southeast Asia) = Hollowed-out U.S. industry.
The U.S. cannot manufacture enough weapons fast enough in a war scenario.
Tax revenues are shrinking - threatening defense, healthcare, and pensions.
Inflation is soaring, and the Fed can no longer print dollars indefinitely without severe consequences.
VIII. The Fiscal Deficit – The U.S. Living Beyond Its Means
The U.S. government is like a teen who has just got a new platinum credit card - burning through $7 trillion a year while only earning $5 trillion in taxes.
That’s a $2 trillion deficit (over 6% of GDP!), an alarming figure even when the economy is supposedly at full employment.
The gap is funded by borrowing, and as interest rates rise, the cost of servicing that debt eats into everything else - defense, pensions, healthcare.
Imagine maxing out your credit card and borrowing to pay it back - that’s the U.S. Treasury in a nutshell.
Result of decades of American Revelry = National debt soared past $36.5 trillion, making deficit financing a ticking time bomb.
Now, given this backdrop, let’s zoom in on the crisis of the moment - because let’s be honest, there are many ticking time bombs in the global economy - thanks to its deliberate (or not) intertwining with the US economy.
It is America’s trade deficit.
America’s Trade Deficit: The Ultimate Credit Card Hack - But at What Cost?
Since the 1980s, the U.S. has been running on a simple yet risky formula: print money, buy or import goods, export inflation, and frankly - let other countries hold its debt.
This strategy worked because the world needed dollars - thanks to oil being traded exclusively in U.S. currency (the petrodollar system - remember?), and China’s export-heavy economy accumulating massive dollar reserves.
As a result, the U.S. could import more than it exported, leading to a growing trade deficit - the gap between what America buys from the world and what it sells.
But here’s the catch: this setup comes with serious risks. Over the years, manufacturing moved to China, Mexico, and other low-cost countries including (albeit in some capacities) to India, Vietnam, Bangladesh etc, leaving America dependent on foreign goods while its industrial base weakened.
Jobs disappeared, entire towns hollowed out, and the economy shifted towards finance, tech, and services rather than making tangible products. Meanwhile, the rest of the world took the dollars they earned from U.S. imports and used them to buy U.S. Treasury bonds, effectively lending money back to America to keep the cycle going.
This worked as long as other countries trusted the dollar and continued recycling their earnings into U.S. debt. But now, with China, Russia, India and even Saudi Arabia exploring alternatives to the dollar, that trust is starting to shake.
But what happens if the world loses trust in the dollar? So what- let people use what they want.
No?
Well, that is because things can get real messy - and fast.
First, the government has to offer higher interest rates to convince people like a risky borrower - (which it is to be fair) to lend it money, making everything from mortgages to business loans pricier.
Second, if fewer people want its bonds, rolling over that debt gets trickier - cue spending cuts or, worse, money printing (hello, inflation!).
Speaking of inflation, if the dollar weakens, imports get expensive, and suddenly, your Amazon cart looks like a luxury wish list.
But it’s not just about economics - America’s global influence is tied to the dollar. If countries like China, Russia, India and Saudi Arabia push alternatives, U.S. sanctions lose bite, and financial diplomacy becomes a dull knife in a sword fight.
And let’s not forget market chaos - stocks, real estate, and retirement funds could take a hit, making the "strongest economy in the world" look more like a house of cards in a windstorm.
The bottom line?
If the world stops playing along, America might have to face something it hasn’t in a long time - fiscal and geopolitical reality.
Looks like the Trump administration has seen that reality, and is spooked.
Their actions suggest they are actively trying to bring about chaos - which is….intriguing and scary at the same time.
From Globalization to Retaliation: Trump’s Tariff Gambit
First, let us listen to/read some interesting quotes from the Trump Administration:
JD Vance at the recent American Dynamism Summit: “Look, for example, at ship building. Now if you go back to World War II, America constructed thousands of so-called Liberty ships to carry troops, cargo and other things, building them at a pace of three ships every two days, three ships every two days. Now we build about five commercial ships across an entire year in the United States of America, and as a result, the United States today accounts for 0.1%, one-tenth of 1% of global ship building.”
Vice President JD Vance Delivers Remarks at the American Dynamism Summit
Now, why is the U.S. Vice President suddenly obsessed with shipbuilding?
Well, my friends, that's where history comes sailing in.
Literally.
There’s an interesting saying - Control the seas, Control the world.
The moment an empire loses its naval dominance, its decline is all but guaranteed. There is precedence. I Hate History, So I Asked ChatGPT: “Do Empires Really Sink Without Their Navies?”
Here is what it gave me:
Athens (5th Century BC) – Ruled the Aegean with naval dominance, lost the Peloponnesian War, and crumbled.
Rome (5th Century AD) – "Mare Nostrum" was once theirs. Naval decline made them vulnerable to barbarian invasions.
Byzantine Empire (15th Century) – Controlled trade routes until Ottoman fleets outmaneuvered them. Constantinople fell in 1453.
Spanish Empire (16th-17th Century) – Had the most powerful armada, but lost naval supremacy to England and the Dutch. Declined into irrelevance.
French Empire (19th Century) – Napoleon ignored naval power, Britain ruled the seas, and France lost its empire.
British Empire (20th Century) – "The Empire on which the sun never set" shrank after WWII drained resources and the U.S. took naval supremacy.
United States (20th - 21st Century) – Still the dominant naval force.
It had given security guarantees to Japan, Germany and Europe post WWII, Middle East after 1971, and Ukraine after the break-up of Soviet Union. Which it has betrayed. And then there is JD Vance throwing out hard facts on dwindling US maritime capacity. So….you get the drift right?
Then, this is something very significant that Scott Bessent said pre-election:
And more significantly, what Marco Rubio said should be getting more attention:
“So it’s not normal for the world to simply have a unipolar power. That was not - that was an anomaly. It was a product of the end of the Cold War, but eventually you were going to reach back to a point where you had a multipolar world, multi-great powers in different parts of the planet. We face that now with China and to some extent Russia, and then you have rogue states like Iran and North Korea you have to deal with.”
The world is - a - changin’. The US, under this Trump’s administration, has probably recognized that it cannot be the sole big daddy and police the entire world. It is becoming economically expensive and physically tough.
And thus to bring about a change in the world order, Trump seems to have set in motion the dominos - the consequences of which, we can only loosely predict.
And in this context, to be fair to Trump - he is doing what is best for America.
Because it looks like America has only two options. And both are bad.
1. Live in denial and play politically safe. Face a devastating defeat in a Kinetic Warfare with China/Russia in 5-10 years time.
Look, the US is dangerously dependent on its biggest rival, China for over 40% of semiconductors which are used in American defense systems. Critical metals like vanadium, beryllium, indium, and titanium (Hi Greenland!) - all essential for advanced weapons - are sourced from the very nation the U.S. sees as its biggest threat. Even the F-35 fighter jets, Navy and missile programs rely on Chinese supplies.
Now, imagine a conflict breaking out with Dragon Bear (China + Russia). The U.S. wouldn’t just be fighting a war - it would be scrambling to keep its defense industry alive. Cut off from Chinese components, supply chains would collapse, weapons production would stall, and America’s military advantage could vanish mid-war. And one thing we have learnt is the US can start a war but cannot finish them.
2. Bring about a Global Financial Reset.
Which means - Fight and Live to See Another day.
The recent tariff war is just the beginning of the chaos which will ensue.
Trump from the outside sure is acting like that one kid we all knew - the moment he got out in cricket, he’d grab his bat, pout, and threaten to walk away.
The U.S. - the very architect of the global economic playbook - is now crying foul, accusing everyone else of cheating by just playing by the rules -> America wrote.
Wild, innit?
Plus, here’s the kicker - we all by now know that this “Liberation Day” comes at a steep price. Cutting off cheap Chinese imports, reshoring industries, and ramping up domestic production won’t be painless. It means higher costs, supply chain disruptions, and - most importantly - higher inflation for Americans.
And yet, the U.S. is charging ahead.
But. Why?
Because the alternative - remaining dependent on a geopolitical rival - is even worse. But here’s where things get interesting…
When the U.S. imposes tariffs, other nations hit back with their own. A global trade war doesn’t just hurt China - it shakes up markets, disrupts economies, and creates ripple effects everywhere, from Wall Street to Dalal Street.
So what happens next? How do Trump’s tariffs reshape the U.S. economy, global trade, and India’s growth story? Stay tuned for the next blog, where we will do some war-gaming.
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Some amazing work shivam bhai as always!
very well explained Shivam!