Dealing with a Two-Shock International System

Dealing with a Two-Shock International System

by
Danny Quah
May 2025

If we’ve grown used to the China Shock—“a tsunami of Chinese manufactures that compete ferociously with our own”—let’s also call the Trump Administration’s continuing turmoil what it is: the America Shock.

The China Shock is a supply shock. This throws up a tsunami of high-quality, low-priced products against which manufacturers in the rest of the world see considerable competitive challenge.

The America Shock is a demand shock. This puts up trade barriers so that companies the world over, not just Chinese ones, face ever greater obstacles selling what they produce.

For the 80% of humanity who lives in neither China nor the US, it is not for us, just as when we confront all other shocks, to approve or disapprove. It is to ask, What is the smartest thing to do in a two-shock world?

A supply shock that brings to bear added competitive pressure is not something anyone relishes in the short term. Significant parts of America’s narrative on the China Shock is one of China’s “stealing our jobs, hollowing out our industries, turning into ghost towns what were once thriving American middle-class communities.” It is not just America that sees this threat. America’s reaction has been to push back against the China Shock. For the rest of us, that won’t be geostrategically optimal.

Think about what America tells the rest of the world when we face those same competitive pressures, not least from America’s companies. Almost all economic thinking argues that economies having to deal with added competition work harder, innovate more, figure out ways to improve their way of doing things, raise productivity, and increase efficiency. This is what business schools teach their students to go out and practice. Choosing not to keep up means Schumpeterian creative destruction. A supply shock endures. In the long run, a supply shock is good for everyone when they have dealt constructively with it.

This isn’t painless, but it’s how the world has worked for millennia. It is not for us to approve or disapprove. Most of all, this is not a question of fairness. The question is, What is the smartest thing to do in response? It does not matter how that supply curve shifted, how it was that added competitive pressure came about. No one who asks if the playing field is truly level ever succeeds in re-tilting that playing field. The way to deal with competition is not to complain but to innovate.

America’s renewed protectionism is not just against China but against everyone who the Trump administration sees having trade relations with the US and is economically successful and so somehow must have cheated. (Yes, we’re looking at you, Heard Island and McDonald Islands). This is a demand shock. It is not only China but all the rest of the world that no longer sees, at the margin, strong, elastic demand for what it produces.

Most demand shocks are transitory. This time, however, America could well retreat longer-term to its historical, romanticized vision of being satisfied unto itself, surrounded only by friends and fish. America’s retreat from the globalization principles of “economic efficiency, comparative advantage, and political convergence” has been a longer-term trend that extends well before Trump 1.0 and continued uninterrupted between Trump 1.0 and 2.0.

The optimal response to a demand shock depends on what we estimate to be its elasticity and duration. Should the rest of the world accommodate and haggle? Is there a deal to be made still? Or should we write off our losses and look elsewhere for new markets?

Regardless whether America’s trade actions or its security recalibration are ultimately rolled back, “Liberation Day 2025” shows that, whoever you are, your nation can have the US act against you. It doesn’t matter if you have zero tariffs on US imports, allow the US to run a trade surplus against you, are a democracy, are not the People’s Republic of China, have outstanding security and economic treaties with the US (perhaps even signed by President Trump), or be in a centuries-old special relationship with America. The Trump administration might well say it is looking only for good deals, but that word “deal” is quickly turning to ashes in our mouths. A deal means an agreement whose terms are kept to over an agreed-upon length of time.

There is no deal in this demand shock. What we see instead is the deliberate fraying of the world’s multilateral rules-based system. The brutally large fact of the matter, beyond the madness of day-to-day announcements emerging from the Trump administration, is that the US is actively undermining the rules-based multilateral system that it built. This is after two decades of America’s warning the rest of us that China was gaining the strength to soon become a dangerous revisionist disruptor of world order.

We were all looking at supply, when we should have been watching demand.

Yes, of course, there are strategic security and economic reasons to America’s actions. Those reasons do not overturn the harm that these actions are having on the international economic system, nor to the standing of the US in world order. It is sometimes thought that that last is controlled by how powerful the US is or how strong a military the US has. It isn’t. For the US (or for any other Great Power) it is the rest of the world that has ownership on America’s standing and respect.

Obviously, we shouldn’t lash out at America in retaliation. But neither should we acquiesce and appease. Not responding with pushback does not mean quietly giving in to bullying. There is clear blue water between these two extremes. When we encounter a bully, the two gravest errors we can make is to give in and then encourage the bully to ask for yet more, and to not resolutely stand in unison but instead give in to the temptation to defect.

Even as we continue to want the US to be in the international economic system along with all the rest of us, we need to look also to building one without it. There is no point saying we shouldn’t because it won’t be as good without America. Of course we want the US (and any other Great Power) alongside us as we deal with the grand challenges of our time. But the US has already withdrawn from the Paris Agreement, the World Health Organization, and in effect the World Trade Organization.

You can’t depend on what you cannot have. You can’t just sit on the inventory of goods you’ve produced, refusing to do something else with it, but hoping against hope that demand will return.

The world no longer has a truly global multilateral system because the original architect has withdrawn. That demand shock and marketplace destruction will almost surely continue. But the world can at least look to new variants in pathfinder multilateralism, keeping the best of the earlier system and building out new structures that work, if only for specific coalitions of states.