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The U.S.-China trade war has been a focal point of the global news cycle, but economic forecaster Martin Armstrong believes a surprise turn in the Russia-Ukraine war is likely the next exogenous event to take investors by surprise. In a recent interview with Financial Sense, Armstrong provided his view on tariffs, US-China relations, a red-state re-industrialization, and much more.

Cultural Missteps in Trade Negotiations

Armstrong argues that the U.S. approach to trade negotiations with China is fundamentally flawed due to cultural misunderstandings. “Negotiating in Asia is completely different. You don’t do this publicly. You should pick up the phone and negotiate privately. Once you do it publicly, China would be perceived as weak to their own people if they back down.” Publicly visible confrontations, such as former House Speaker Nancy Pelosi’s Taiwan visit, escalate tensions, forcing China into a defensive posture. Armstrong believes this cultural disconnect has exacerbated US-China relations and the current trade war, undermining potential resolutions.

Potential Mid-May Surprise

Armstrong cautions that, around mid-May, there is a possibility that European leaders—under pressure from mounting sovereign debt concerns—could seek to create a situation that might be attributed to Russia, sometimes referred to as a “false flag” event. In his view, the aim of such a development would be to offer Europe a justification to intensify its stance in the conflict with Russia, potentially helping to unify public opinion and pave the way for a stronger military response, which could even involve NATO or other international actors. Armstrong references figures such as French President Macron, suggesting that some European leaders may view Russia’s substantial natural resources as strategically important, and that a shift in the balance of power could potentially benefit Europe’s financial standing, despite the considerable risks that such actions might entail.

Who Holds the Upper Hand?

When asked whether the U.S. or China has the advantage, Armstrong underscores the interconnectedness of their economies. The U.S. boasts the world’s largest consumer market, accounting for roughly 25% of global consumer spending, which has historically driven growth in China, Europe, and Japan. “What has made the U.S. the financial capital of the world? It’s the fact that we have the largest consumer-based economy,” he notes. This consumer power gives the U.S. leverage, as China relies heavily on American markets.

However, China’s role as a key supplier, particularly for critical goods like pharmaceuticals, grants it significant counter-leverage. “Take medicines—many come from China. If they use that as leverage and say, we’re not sending any, you’ll see people with blood pressure medicines screaming,” Armstrong warns. He concludes that both nations are locked in a delicate balance, with neither able to claim outright dominance. The mutual dependence underscores the futility of the trade war, which he sees as detrimental to both economies, especially given China’s existing recessionary pressures.

Barriers to U.S. Re-Industrialization

Armstrong is skeptical about the feasibility of Trump’s re-industrialization goals, particularly through tariffs alone. He identifies taxation and regulation as primary obstacles. The U.S. is the only country taxing worldwide income, which disadvantages American companies in global bids. “A German company bids, but an American company is 35% higher just on taxes,” he explains, citing his testimony before the House Ways and Means Committee.

Regulatory burdens further complicate matters. Opening a mine in the U.S. takes nearly 30 years, rendering such ventures unprofitable. He recounts his experiences advising multinational companies to relocate to countries like Ireland or Montenegro for tax advantages and regulatory stability. “Democrats say companies move offshore for cheaper labor—no, it’s taxation and regulation,” he asserts.

Political constraints also hinder reform. Armstrong recalls his 1990s efforts to mediate between Republicans advocating for tax reform, only to encounter partisan gridlock. “You’d have to repeal the 16th Amendment, and if you can’t, you’re stuck,” he laments, proposing a 15% tax cap and the elimination of worldwide taxation as viable steps. Without such changes, he believes re-industrialization will be limited, primarily benefiting red states with lower taxes and regulatory burdens, like Florida and Texas, where companies like Tesla have relocated.

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