Beijing has launched a “go out” strategy designed to remake global norms and institutions. China is transforming the world as it transforms itself. This meant entering the WTO and using it for its benefit, becoming a voice for free trade at the Davos Conference, pressing the IMF to include the Yuan in the SDR basket and pressing to have the proper votes at the IMF board, amongst the most visible changes. The United States shut the WTO arbitration court and is losing the technological lead in at least five branches of production. The end result is that the trade war finally has shaken up the theoretical frameworks established after WWII and consolidated more modern views while indicating US weakness in the face of another more dynamic economy. Tariffs do not resolve these issues. New international institutions appear to be required to solve the problems posed and the ensuing crises. Theoretically it means the end of WWII institutions and the surge of new ones. These will, more likely, not be US-led in a slow and conflict-filled process.

The contest for supremacy of the inter-state world-system has a place when the hegemonic nation is experiencing a context of structural vulnerability. The articulation of a world-system enters a phase of instability when the financial system assumes the central role in the accumulation of international capital. The hegemonic siege represents a rival states project of dispute for world power. However, to achieve the hegemonic State’s role in the international system, it is not enough to dispute the dimensions that make up power. There must be a definitive blow. An act of confrontation -most of the time, warlike- will end the change of hegemony.

In this way, the article aims to characterize the systemic dimensions in dispute from a historical perspective that defines the Chinese siege hegemonic on American power in the potential conformation of the world-system of the 21st century. In the last decade, China has disputed the first place in the productive, commercial, energy, and technological fields. However, the lack of direct -or indirect- confrontation leads to the fact that the United States maintains the world-system’s weakened leadership. In metaphorical terms, China experiences an economic and geopolitical challenge that consists of the power to break down the “walls” that keep the American “fortress” in place -in military, political-institutional and monetary terms-, to establish a final assault on the power that will transform the prevailing world-system.

For over 15 years, the United States has been locked in an escalating and seemingly endless trade war with political allies and adversaries. Whatever the cause, the consequences of U.S. trade deficits3 have been stark. The deficits helped hollow out American industrial capacity and substantially reduced job creation. This paper makes no political prognosis about changes in U.S. trade policies, but Covid-related supply-chain disruptions have exacerbated these tensions.

The paper shows why reducing American trade deficits requires American policy changes, rather than actions by its trading partners, as is commonly assumed. The only feasible policies to “re- shoring” manufacturing and reduce trade deficits must reverse the policies and incentives that initially drove off-shoring and the deficits. That means reducing the financial inflows that are the root cause of trade deficits. Any other policies are futile and must logically fail. But directly reducing such inflows has been previously unacceptable to American elites and policymakers.

Trade imbalances must equal their financing. That is an immutable identity. But the direction of causality has changed in recent decades. Today, U.S. trade deficits are caused by large and persistent inflows of foreign financing (savings). Because the economics profession’s balance- of-payments theories are based on outdated premises, they mislead policymakers and the public.

Some countries deliberately seek trade surpluses to stabilize and grow their own economies. While U.S. officials complain, those countries walked through doors that the American Government opened and adamantly refused to allow to shut. The best examples are perverse tax incentives for financial inflows, such as 26 CFR §1.895-1 and 26 U.S.C §871(h)(1) that increase the trade deficit. The United States even attracts these inflows by helping foreigners conceal their American income from their home tax authorities.

Effective American policies to reduce U.S. trade deficits will reduce trade surpluses elsewhere. That will implicitly force structural adjustments to reduce the Global Savings Glut at its sources.