Bill Clinton’s chief strategist James Carville famously said: “I used to think that if there was reincarnation, I wanted to come back as the President or the Pope… But now I would want to come back as the bond market. You can intimidate everybody.” His words ring truer than ever as the bond investors took aim at the foundations of US economic power. The sustained sell-off in US treasuries stems from anxiety over chaotic trade policy, vast national debt (debt-to-GDP is at 122%) and a sense that the US can’t be fully trusted. Faith in the dollar and US debt as the ultimate safe haven is decidedly “yippy”; look no further than the divergence between yields and the dollar. Typically, they move together – higher yields attract capital, boosting the currency. Yet since the latest tariff push, yields have soared while the dollar has plunged. We may be about to see a reconfiguration of global financial power if confidence continues to erode, and the outlook for US AI dominance is equally fragile.
Last week, we explored how despite exemptions, tariffs will inflate datacentre costs and slow AI compute roll-out. Despite the perceived U-turn, high tariffs targeting China persist and as of Friday the total tariff burden had actually increased (125% in both directions) on the basis of US import volumes. Now, with the trade conflict focusing squarely on China, the question is, can America maintain its AI power when its economic stability is under strain, and can it maintain a coherent and effective policy to achieve its dominance goals?
The signs are not good. Trump has a long-held belief in tariffs but perhaps an even greater love for “the deal”. The administration has shelved planned restrictions on exporting powerful new H20 Nvidia GPUs (H100 equivalents) to China after high-level lobbying, including a $1 million Mar-a-Lago dinner between Nvidia’s CEO and Trump, sweetened further by promises of US investment. Meanwhile DOGE has weakened staffing capacity to monitor critical exports, and the Biden CHIPS Act that offered a carrot, not just a stick, to encourage semiconductor on-shoring is being gutted. Regulation is under review, and the administration is pushing for more AI adoption across the federal government, but at the same time universities and research funding is under fire, and China continues to lead on churning out STEM PhDs 2:1. Perhaps in an indication of the appreciation of this area, Trump’s education secretary referred to AI as “A-one” during a recent panel discussion.
Unless a deal is done with China in the coming days (and that may be the idea) the big tech firms will continue to suffer. Furthermore, the bond market situation means additional drag on the industrial complex. Borrowing costs will rise making investments in infrastructure and R&D more expensive. With business and consumer confidence collapsing, reduced demand may also develop. DeepSeek is rumoured to be ready to drop it new model R2 in the coming weeks, if it’s as big a perceived challenge to US labs as R1, it could significantly worsen the situation for the US tech industry.
Takeaways: This is code red for US AI. Continued extreme tariffs and a recession will cripple America’s ability to fund essential AI infrastructure and innovation. Simultaneously, despite tough trade rhetoric, the administration is allowing chips to flow into China, the target of their trade war. Although China will also suffer economically, it maintains greater centralised economic control and capacity to absorb setbacks. More importantly, China is ahead on self-sufficiency (AI chip self-reliance with the Huawei Ascend series and home-grown AI capabilities). It’s hard to see this contradictory, self-sabotaging strategy doing anything other than making America the main loser in its own performative game.