We think it is important to understand the motivation behind his actions. What are the challenges and opportunities he has to deal with, in terms of both the risks and laying a pathway for the future. Why the tariffs and what the likely outcome is.
And after all the analysis is done and assumptions are made, we believe tariffs may well not be very important. The most critical task for the US is whether it can continue to outpace and outperform other nations to sustain a faster growth rate through innovation and technology — because, as we will show, this may well be the only way for the US to be able to sustain its financial obligations and remain a Great Nation. It is why the current contestation over artificial intelligence (AI) and digital technologies in general are so critical for the US, China and others.
Cost of a persistent trade deficit
The persistent trade deficits since 1982 (see Chart 1) mean Americans have been consistently buying more than the country exports (excluding services). It means a loss of American jobs, wages and tax revenue to the US government and domestic investments to foreign nationals.
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But, critically, it also means rising foreign holdings of US debts. Total gross debt of the US has now already exceeded the combined debts of the European Union (EU), Japan, the UK and Canada. And when the US’ share of global gross domestic product (GDP) is falling while its debts to foreigners are rising (see Chart 2), and in an environment in which interest rates are on the rise, it means elevated credit risks for US bonds. Case in point: the recent sovereign rating downgrade by Moody’s. This inevitably means that US inflation and interest rates must rise, translating to weaker US asset prices (not just bonds but also equities and properties). This, in turn, will slow economic growth and income, wealth and standard of living for Americans. Slower GDP growth will raise the debt-to-GDP ratio, further weakening its credit standing.
See also: Not investing in AI is not an option
The US can internalise this through the Federal Reserve’s purchase of bonds at below-market interest rates, which either erodes American purchasing power or pins the pain on foreign holders (through default or, more likely, forcing foreign state holders to “term out” their existing Treasuries, or UST, to 99 years or perpetual. In banking, this is referred to as debt restructuring and, as we will explain later, with 51% of the UST due for repayment within three years and with rapidly rising interest rates, this may become necessary).
The Trump administration attributes this problem to several factors, including unfair trade practices such as tariff and non-tariff barriers imposed by foreign nations on US goods; intentional or strategic undervaluation of currencies against the US dollar (USD); and the Triffin effect stemming from the USD’s role as the world’s dominant and reserve currency — that is, the demand for USD assets as well as for the greenback as a reserve currency and the preferred currency for payments and transactions inflated the value of the USD, thus disadvantaging American exporters. The heightened demand for USD in times of crisis is another reason for its overvaluation.
Of course, it also reflects the gap between savings and investment in the US — driven by a higher rate of consumption relative to savings — relative to the rest of the world. And this, to Trump, is yet another reason to extract payment from the rest of the world, where US consumers serve as a large marketplace for the rest of the world to sell their products.
There is no question that the role played by the USD has benefited global trade, payments, finance and global economic growth. The hegemony of the USD has obvious benefits to the US, too, such as lower interest costs relative to its borrowings and the ability to borrow when needed and in crises. And although the Trump administration may believe there is also an “exorbitant cost” to the US, any threat to or a diminishment of the USD’s global role will have severe consequences for the US — economically, politically and militarily. For now, and in the next couple of decades, USD assets will likely continue to be dominant. There is no other option, and USD assets are deeply embedded in the global financial system. Inevitably, however, its role is likely to diminish over a longer period of time. This is a complicated topic that deserves a separate article.
Cost of a persistent fiscal deficit
The other major challenge for the US is government spending, which exceeded revenue in all but four of the last 50 years (see Chart 3). Consequently, public debt is mounting on persistent and widening fiscal deficits (see Chart 4). One reason for this is the fact that the US spends vastly more on its military than any nation in absolute terms. Relatively, it spends about 4% of its GDP, twice that of its major allies. The underwriting of this global peace has a cost to the US — which Trump believes its allies must repay. Those who argue that Trump is treating its allies unfairly in imposing tariffs is missing the point.
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The fact is that regardless of military spending, few politicians — whether on the left or right — ever reduce government spending. The left tends to borrow and spend to fund progressive social programmes focused on equality, inclusivity and the environment. The right often prioritises tax cuts or, in some cases, allocates spending towards financing a war or invading another sovereign nation. Of course, there are also necessary expenditures, such as during the Covid-19 pandemic. Regardless, “kicking the can down the road” is almost always the solution for democratically elected governments, instead of cutting spending to reduce government debt and avoid upsetting your voters and getting booted out in the next election.
A slow, gradual rise in debt (especially if used to expand productive capacities, whether factories, education, healthcare or infrastructure) when interest rates are low or falling, and when the economy is growing, makes sense. This was indeed the case when the UST 10-year yield was declining sharply, from a high of more than 15% to near 0.5% by 2020 (see Chart 5). In fact, yield has been less than 2.5% for most of the periods since 2011, until 2023.
Perhaps for political expediency — as the world shifted to the left from around 2000 (more spending on social programmes, redistribution, progressive taxation, DEI — scan the QR code below to read our article titled “Better to be equal and poor or unequal but richer?”, Feb 10, 2025), many (from leading economists and central bankers to finance ministers and, of course, politicians) argued for debt-financed stimulus spending with little concern for overall debt. The most extreme form would be the Modern Monetary Theory. A major reason for this is based on the belief of “forever low” interest rates, along with the rationale that ageing demographics, a weak trend in global growth and rising inequality push down real interest rates.
US debt-to-GDP rose from 63% in 2007 to 100% by 2012 and 122% by 2022 (see Chart 4). Absolute total federal debts rose to US$36 trillion, from less than US$10 trillion in 2008. But what is more shocking is the debt maturity profile (see Chart 6). Twenty-nine per cent of the US$36 trillion ($46.4 trillion) will come due within one year and 51% within three years. Only 19% have maturities beyond 10 years. This would certainly be seen as extremely imprudent if one is running a private business. Clearly, the US Treasury Department and the Fed made the colossal mistake of not issuing more of the longer-tenure UST in the last decade. Because interest rates were falling, raising money using short-tenure UST was cheaper then. If any other country had made this mistake, its currency would have come under attack.
Rising interest rates are now the most critical challenge
This may now be the Achilles heel for the US. Interest rates are on a rising trend again. An ageing population saves, but the elderly “dissave”. New investments are needed for technology, for digital, for AI. But, most importantly, the huge stimulus spending worldwide (not just in the US, but also EU, Japan and China), especially following the pandemic, reduces savings, increases inflation and causes real interest rates to rise. Real interest rates may fall after a crisis (such as the global financial crisis [GFC]) as investment demand falls but tends to revert to normal over time.
Chart 7 captures the essence of this risk. Despite the rise in total debt, the ratio of interest payments-to-government revenue fell until 2022, from a high of over 25% to a low of 12%. Suddenly, with the rise in interest rates, it is now about 21.5%. We know total debt will continue to rise, and substantially, too, based on Congressional Budget Office (CBO) projections. The extent of how much interest rates will rise in the US (the 10-year UST yield is now 4.5%, three times higher than it was in 2016), especially in view of the fact that refinancing these short-tenor UST will have an immense impact on the US fiscal deficit, its ability to spend, including on its military, and on its future cost of borrowings. Moody’s projects that interest servicing could consume 30% of federal revenue by 2035. If interest rates were to spike, an even more adverse scenario could quickly unfold. It may have adverse repercussions on the US as an economic, political and military superpower. It is certainly going to diminish the USD’s hegemony, as Kenneth Rogoff is quoted as saying in The Economist: “This time really is different for the dollar.” It is certainly not the MAGA ambition that Trump promised Americans.
Let us now look at the impact on the US government’s fiscal position if interest rates were to rise higher than current expectations.
Chart 8A shows the federal government expenditure by major categories. The sharpest rise comes from transfer payments. Chart 8B is the breakdown of transfer payments, mainly Social Security and Medicare. If anything, these costs are likely to grow exponentially in the coming years. The Department of Government Efficiency was set up largely to try to rein in these costs but it has had limited success so far; even Elon Musk has left DOGE, with tasks largely unfinished. It goes to prove that cost-cutting in the public sector is a “devil’s task” — it is extremely unpleasant, morally questionable and designed to cause conflict or suffering.
The second-largest item of expenditure is government consumption. Chart 8C shows that 65% is defence spending of almost US$852 billion. Defence spending represented 12% of total government spending and less than 3% of US GDP in 2024. This is the lowest level of US defence spending since 1945 (see Chart 8D). Defence spending as a percentage of GDP was 16% during the Korean War, 11% during the Vietnam War and 5% during the Iraq invasion. It explains why Trump wants to avoid US involvement in military conflicts. A doubling of military expenditure would cost another US$1 trillion, which the US can hardly afford at present.
Interest payment of US$1,124 billion in 2024 accounts for 16% of total government expenditure. CBO, which has a projection of US revenue, outlays and interest costs (see Chart 9A), shows a very gradual rise in interest servicing costs-to-revenue, reaching 20% by 2030 — despite projecting a higher growth rate in total federal expenses than revenue growth. In other words, the projection is for interest rates to stay low and lower. Therefore, there is no risk to US debt.
The assumptions are contained in the table on forward projections (see Table). But if we change only the projections for interest rates, starting at the present rate of 4.5%, and increasing to 5.5%, 6.5% and then top out at 7.5%, net interest costs to revenue will rise to 31% by 2030 and close to 50% by 2035. It means an inevitable default on US debts.
Now, we are not saying we expect interest rates to rise to this high level. We did this exercise to illustrate the vulnerability of high US debt and to contrast that with the very bullish CBO estimates of low future interest rates.
But even if real interest rates were to revert to their long-term trend of 2% plus inflation rates of, say, 4% (owing to tariffs or supply disruptions or other black swan events), it would still drive nominal interest rates to 6%. Assuming a rate of 5.5%, US net interest cost as a share of revenue will rise to 25% by 2030 and 33% by 2035.
At this rate, a stagflationary environment becomes highly likely. The last GFC was 17 years ago. There will be little room for the US to carry out a Keynesian stimulus or for the Fed to print more money. Such a financial crisis will ripple through the rest of the world.
Seen in this light, it is clear why Trump needs the revenue from tariffs from other nations, why he wants other nations to share the cost of defence and why he must keep US interest rates low — meaning, inflation must also be low — and the USD from falling.
Trump’s ultimate decision is therefore predictable and constrained
This is why regardless of what is publicly articulated, Trump and his administration will ensure they do not upset the capital markets. Threatening the Fed chairman and the independence of the Fed itself, tanking the bond market and the USD and causing yields to rise have always been followed with quick reversals. China’s selling down its UST in reserves and going into a retaliatory tariff war with the US was never an option for Trump — thus the quick “deal” with China on terms far more favourable than the one with the UK, and likely other countries as well.
What Trump needs is simple, and we have already previously articulated it in our diagrammatic MAGA pathway. The US needs to lower interest rates, get more revenue (especially from foreigners) and generate robust economic growth — hence the “Liberation Day” tariffs.
As we articulated in our article titled “Trump’s ‘big’ blunder — and no, it is not tariff per se” on April 14, 2025 (scan the QR code to read the full article), Trump’s attempt to shock and awe other nations around the world with ridiculous levels of tariffs in order to get them to yield concessions to the US through “deals” backfired when it spooked the stock and bond markets — forcing him to quickly suspend the new tariffs announced.
What’s next? The US will set a universal base tariff of 10% for all countries, plus country-specific tariffs to account for both tariff and non-tariff barriers imposed on US exporters. At a 10% to 20% tariff for almost all countries, the US will achieve its goal of generating revenue for the government, without any nation taking retaliatory measures (no nation will dare to, now that China has already secured a deal with the US). As we have explained previously, this optimal tariff theory works for a country that has market power when tariff rates are set at reasonable levels, of less than 20% (see our April 14 article for a more in-depth explanation). (Note: A recent article by Adrien Auclert, Matthew Rognlie and Ludwig Straub titled “The Macroeconomics of Tariff Shocks”, dated April 24, 2025, argues that the unilateral optimal tariff rate could be even lower and, indeed, likely cause a recession.) Basically, however, foreign suppliers have varying degrees of supply elasticity. The short-term supply curve is the marginal cost, not the average cost. So, US consumers will still be able to get their supply at the same or marginally higher price, but the import value will fall. The exporters get less, and the US government gets the tariffed amount. Since the US imports about US$3.3 trillion worth of goods, assuming the average effective tariff imposed on the rest of the world is 15%, this will generate revenue of some US$500 billion for the US government. This amount plus another US$160 billion from DOGE savings represent 12.7% of last year’s total US federal government revenue — a meaningful and sustainable source that will grow as the US economy grows. This is MAGA, using tariffs to extract a payment from the rest of the world for the US to underwrite global peace and prosperity. Or to quote Trump, “I am a Tariff Man. When people or countries come in to raid the great wealth of our Nation, I want them to pay for the privilege of doing so.”
While Trump may have articulated tariffs as a means to redirect investments into the US and create jobs, the reality is that it will pay for the tax cuts that he wants. Redirecting investments in a world of complicated supply chains will take a long time, long after Trump would have left office. But tariffs that will raise consumer prices to create jobs for Americans — not to cut taxes for corporations and the rich — are saleable and popular.
A tax cut, coupled with deregulation, will stimulate investments, improve US competitiveness and strengthen exports and future economic growth (thereby lowering debt to-GDP and raising federal revenue). Reducing trade deficits would lower US foreign indebtedness and, in turn, help bring down long-term interest rates. Voilà! The MAGA objectives are achieved, but largely financed by foreigners, both allies and adversaries alike.
Conclusion
The reality is that both Trump and the tariffs are likely to be irrelevant in the bigger scheme of the longer-term global economic outlook. As we have shown, the amount of revenue collected from the tariffs is large and will move the needle slightly — but will not change the final outcome. Neither will there be any significant shift in global trade or investments. The US will continue to have current account deficits — which are likely to grow even larger over time, reflecting the growth in investments, while savings lag. Because it leads in technology and innovation, and hence productivity, capital will continue to flow to the US. This is probably the most important assumption. Will AI and digital technology be able to advance total factor productivity in the US by 2% (says the likes of McKinsey) or only 0.5% (says Daron Acemoglu, “The Simple Macroeconomics of AI”)? Because, ultimately, adding this to the underlying long-term real growth rate of 2% is what makes the difference to the US economy, to the per capita income of Americans, to inflation and to the sustainability of US fiscal deficits. But this will take place over the medium to long term.
The most imminent risk, as we have highlighted, is the rise in interest rates — reflecting fear over financial sustainability, over excessive fiscal spending and exponentially expensive total debt, and over global inflationary pressures, disruptions to supply chains and any possible tariff war. As we previously wrote in our article titled “We repeat … the secular declines in inflation and interest rates have ended” dated May 13, 2024 (scan the QR code to read the full article), the decades of falling and low interest rates have ended. For the US, while its share of the global economy has fallen gradually since the end of World War II, foreign holdings of US debt have risen sharply, exceeding the US’ share of global GDP. Meanwhile, even as USD hegemony remains intact and likely for a long time to come, the role of the USD has diminished — in trade, in settlements and in the foreign exchange reserves of nations. All these lead to expectations of higher interest rates in the US. It will not take much higher than current interest rates for the capital markets to freak out and cause financial panic. This, in turn, will push interest rates even higher, triggering both economic and financial market meltdowns globally.
One can only assume that this scenario must already be under consideration and therefore some kind of US debt restructuring is quietly in the works. It will not be the first time this has happened for US debt. The problem is that capital markets react to expectations, and any possibility of this risk is itself enough to cause a financial crisis.
The Malaysian Portfolio traded marginally higher, up 0.1% for the week ended May 28. Shares in United Plantations gained 1.1%; Insas Bhd – Warrant C was unchanged from the previous week; and Kim Loong (-0.4%) closed lower. Total portfolio returns now stand at 186% since inception. This portfolio is outperforming the benchmark FBM KLCI, which is down 16.7% over the same period, by a long, long way.
Meanwhile, the Absolute Returns Portfolio gained 1.5% last week, lifting total returns since inception to 24.7%. The biggest gainer was US Steel Corp, whose shares rose 26.9% on news that Trump had given the green light for Nippon Steel’s US$14.9 billion offer for the company. Other notable gainers include CrowdStrike (+7.8%) and Goldman Sachs (+2.5%). Shares in Alibaba Group Holding (-6.1%), Tencent Holdings (-2.9%) and Trip. com (-1.4%) ended in the red.
On the other hand, Tong’s AI Portfolio fell 1.4%, sending total portfolio returns since inception to -0.9%. The top three gaining stocks were Intuit (+14.3%), Twilio (+2.9%) and Datadog (+2.3%); while the biggest losers were Workday (-10.7%), Cadence Design Systems (-9.1%) and RoboSense Technology (-7.5%).
Disclaimer: This is a personal portfolio for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy/sell stocks, including the particular stocks mentioned herein. It does not take into account an individual investor's particular financial situation, investment objectives, investment horizon, risk profile and/ or risk preference. Our shareholders, directors and employees may have positions in or may be materially interested in any of the stocks. We may also have or have had dealings with or may provide or have provided content services to the companies mentioned in the reports.
