While the outgoing U.S. government sounds dire warnings that the borrowing limit will be reached next Tuesday (January 21, 2025), and that the country’s financial system could experience major problems, America’s President-elect Donald Trump is reaching out to Chinese and Russian leaders to stop the bloodshed in Europe and Middle East.

The road from precarious ceasefires to sustainable peace will be long and hard. Trump knows that, and he understands that the only way credible peace settlements can be achieved is from positions of a peaceful and cooperative modus vivendi among the world’s three largest economic and military superpowers.

The good part is that Trump seems to be knocking on open doors. To see that, one only has to take a look at China’s readout of Trump’s telephone conversation last Friday (January 17, 2025) with President Xi Jinping.

Xi told Trump that “China and the United States share extensive common interests and broad space for cooperation … the two countries can become partners and friends, contribute to each other's success, and enjoy common prosperity.” Pointing out that China and the U.S. will inevitably have differences, Xi said that they can be resolved based on “principles of mutual respect, peaceful coexistence and win-win cooperation.”

Seek friends with benefit

According to the same readout, Trump agreed. And on his platform Truth Social he stated that he had a “very good” telephone call with Xi, that he expected to “solve many problems together, and starting immediately,” pledging that “President Xi and I will do everything possible to make the World more peaceful and safe!”

Trump’s approach to China is very different from views expressed by Marco Rubio, the next secretary of state, during his Senate confirmation hearing last Wednesday. In his view, China will remain the “biggest threat” to American prosperity in the 21st Century.

Similar differences between Trump and his national security team are also increasingly apparent regarding the war in Ukraine. In a significant departure from Trump’s claim that he would quickly put an end to what Russia calls a “special military operation,” it now seems that it could take most of this year to come to an appropriate peace settlement.

Negotiations between Trump’s advisors and Russian officials are already under way. Moscow is seeking a solution within broad changes of the European security architecture, originally built and underwritten by the U.S. Apart from that, Russia intends to keep acquired territories in a Ukraine that is neutral, demilitarized and “denazified.” Lifting of a huge web of sanctions is also one of Russia’s conditions.

Trump’s relationship with closely allied China and Russia – and the rest of the BRICS world -- will require long overdue adjustments of an American foreign policy that truly serves the country’s security, trade and financial interests.

But Washington must realize that its quest for leadership and negotiations from positions of strength cannot rest on a weak, unbalanced and heavily indebted economy.

Use diplomacy instead of tariff wars

America’s external sector (exports and imports), about one-third of the economy, produces a deficit equivalent to 4% of GDP. That is a drag on growth, employment and incomes guaranteed to get worse in a trade war with America’s largest trade partners – China, European Union, Canada and Mexico, which account for two-thirds of U.S. trade deficits.

Instead of getting into such a quagmire, Washington needs diplomacy to square its trade accounts. Otherwise, a tariff war will lead to accelerating inflation, falling asset prices and a virtually impossible credit easing to finance huge budget deficits (8% of GDP) and a soaring public debt of $36.2 trillion.

Tax cuts should be another policy issue to avoid – unless the Department of Government Efficiency can offset lower tax revenues by public spending cuts. Such a revenue neutral outcome would leave some space for the Federal Reserve to support economic activity and avoid declining asset prices.

The announced deportation of illegal immigrants is a consequence of major policy failures to protect the borders and cooperate with Mexico and Canada. Legal immigrants should not be shut out, but that issue must be a matter of an active labor market policy.

The U.S. has ample labor force. Last month, 101.1 million people – nearly 40% of the total civilian labor force -- were not in labor markets because they are virtually unemployable. Apart from that, 4.4 million people were working part time because they could not find full time jobs, and another 5.5 million were no longer looking for a job, or were discouraged to seek employment, because they thought there were no jobs available for them.

Washington has a big problem here. Investments are needed in vocational training, education and science to significantly increase the stock and quality of human capital. Without that, the U.S. will be relegated to a slow economic growth due to inadequate growth of productivity and skilled labor supply.

America First and MAGA are calls to action that need peace and strong economic policies.