Lesotho, the China Strategy, and the Lingering Risks

A few weeks ago, I was scratching my head over the Trump administration’s tariff plan. The reason?

Lesotho.

I did some digging and found that we export just $3 billion to Lesotho. I wasn’t surprised; Lesotho’s GDP is just $2 billion, and its poverty rate is high. I asked ChatGPT  what we sell them: delivery trucks, vaccines, and food processing equipment.

I thought, why are we crushing Lesotho with a 50% tariff? It still looked like the end game might be about balancing trade deficits. But we couldn’t possibly get Lesotho to import another $230 billion worth of goods from us. And I assumed that they were just selling us diamonds, their largest export, which I knew we can’t mine in the U.S. It just didn’t make sense.

I decided to see how much we make off the diamond trade – I knew we imported rough diamonds and exported finished diamonds. I was surprised to learn that we’re the second-largest exporter of finished diamonds. But when I learned that we only import about $172 million worth of diamonds annually, knowing that we import more than $230 billion worth of goods from Lesotho, I wondered what else we buy from them.

Again, I asked ChatGPT. The answer: primarily textiles, but also electronics, machinery and equipment. I thought, “What electronics, machinery and equipment can a poor country like Lesotho manufacture that the U.S. would want to buy?” Having been to poor countries in sub-Saharan Africa, I couldn’t picture modern factories there producing those kinds of goods. Once again, I asked ChatGPT.

The response was primarily components that we assemble into finished products like computers and phones, or parts for things like boilers and nuclear reactors. Nuclear reactors? Computer components?

Knowing that China has made significant investment in many poor African nations, particularly those rich with natural resources, I asked, “Does China invest in Lesotho?” The answer?

“Yes, China has been a significant investor in Lesotho, contributing to various sectors including infrastructure, agriculture, and manufacturing … Chinese enterprises dominate Lesotho’s textile industry, owning 35 out of 41 factories. These factories employ over 40,000 workers and are a major source of export earnings.”

Bingo. That’s when I realized the punitive tariff on Lesotho was part of a strategy related to China.

Lesotho, I learned, is part of China’s Belt and Road Initiative (BRI). To summarize the BRI, it is central to China’s plan to undermine America’s global influence and economic dominance, undercut our trade alliances with other countries, end the dollar’s role as the global reserve currency, and become the new dominant superpower.

Through the BRI, China has made investments in countries large and small throughout Africa and Asia, but also Europe and Latin America. Its key objectives are to increase trade and investment between China and participating countries (but also shift production from China to other countries to expand trade beyond BRI participants); build infrastructure like roads, railways, ports, pipelines, and digital networks (the latter of which can be used to facilitate cyber-espionage); and expand China’s global influence through economic partnerships.

There are two main components: the Silk Road Economic Belt, a series of overland routes connecting China with Central Asia, Russia, and Europe; and the 21^st Century Maritime Silk Road, sea routes linking China to Southeast Asia, Africa (where more roads and railroads are being built), and Europe via major ports.

Projects include roads, power plants, fiber optic cables, and the Gwadar Port in Pakistan, a key strategic gateway to the Persian Gulf; railways in Laos, Indonesia, Kenya, Ethiopia, and Europe; the Piraeus Port near Athens, Greece; and energy projects in Argentina.

Criticisms have included debt trap diplomacy (China burdens countries with unsustainable debt to gain political leverage); lack of transparency and environmental standards; safety issues and project failures; and most importantly, geopolitical motives that transcend economics.

Imagine if the BRI is successful long-term. What if China replaced us as the largest shareholder in the IMF and the World Bank, and thereby could impose sanctions on other countries for alleged bad behavior and promote economic policies that align with its interests? China could sanction the U.S. for any false allegation it chose to levy, and use its influence to leverage BRI countries to support those sanctions. We could be cut off from exporting oil, or have to give up our nuclear arsenal, or have to close military bases in foreign countries.

This is not the stuff of tin foil hats. The BRI is about dominance over the U.S., but not through direct confrontation. It’s about replacing U.S. leadership in global finance by using yuan in BRI loans and trade. (China has recently done major energy deals trading in yuan.) It’s also about replacing our leadership role in technology (5G, AI) and infrastructure (ports, railways, energy). Ultimately, China wants to create a world where China, not the U.S., makes the rules, where other countries turn to Beijing, not Washington. It’s the 21st century Cold War.

Is there a military component? Not overtly (yet). However, the building of strategic ports (dubbed the “String of Pearls”) can be used for refueling, resupply, or as future naval bases. And China already has its first foreign military base in Djibouti. Its navy is expanding blue-water capabilities. The BRI has a “Digital Silk Road” component that has installed Chinese-controlled communications networks in several countries that can facilitate espionage or information control, which can be used for military purposes.

What does this have to do with the tariff plan?

I believe that the Trump administration wants to derail the BRI, and the tariff plan may be central to that.

There are two threats to King Dollar: Triffin’s Dilemma and the BRI. The tariff plan can resolve both. Here’s how it might play out with regard to the BRI.

Many companies are already deploying a “China+1” strategy, diversifying manufacturing out of China and into countries like India, Vietnam and Mexico. That’s increasing due to the tariff plan; Apple is planning to move more production to India. This will reduce dependence on China, slow its growth, and reduce its leverage.

As we forge key trade partnerships, especially for strategic industries like semiconductors, pharmaceuticals, rare earths, and defense manufacturing, we further reduce dependence on China, while continuing to encourage domestic investment in those sectors.

We restrict the transfer of technology to China. We’ve already banned high-end chip exports, limited AI hardware and software sales, and blocked Chinese investment in strategic U.S. companies, and we’re tightening further. Other countries like Japan and the Netherlands are joining the effort.

We can start targeting BRI countries, especially in Africa and Asia. Indonesia, Malaysia, and Lesotho are nations with BRI ties that are already in trade talks with us. Other countries with looser BRI ties, like Vietnam, are also in talks with us. Vietnam recently imposed its own anti-dumping tariffs on China, fearful that with the U.S. market effectively closed, China would turn to them as a place to dump cheap goods.

How is a country like Lesotho important in all this? It’s a domino effect. That 50% tariff would crush Lesotho. So, in spite of the heavy investment by China, Lesotho is clamoring for a trade deal. The U.S. is its third-largest export market – it sells nearly ten times as much in goods to the U.S. as it does to China, so it’s in its best interest to move our way.

If Lesotho inks a deal with us, other small African BRI countries might follow, like Botswana, or Eswatini (the only African country that recognizes Taiwan), or … Djibouti, home of China’s sole foreign military base. There’s a Cold War parallel here: U.S. success in Grenada and El Salvador in the early ‘80s was a sign that the USSR might be vulnerable.

This might then pressure mid-tier, regionally important BRI partners like Kenya, Vietnam, and Indonesia through things like strategic investment offers or debt relief packages contingent on limiting Chinese projects. Another Cold War parallel: Poland’s Solidarity movement showed that resistance was possible, and other countries followed.

The end game would be to slow or reverse BRI expansion. Countries might begin to default on China-backed debt, and China’s vision of a new global order could stall out, much as the USSR collapsed without direct military conflict with the West.

Now, it could very well be that the end game is nothing more than trade deals. But given what’s happening with the Panama Canal negotiations (wresting control from China), returning the U.S. military to a position of combat readiness and modernizing materiel like fighter jets, looking at strategic geographic alliances with countries like Canada and Greenland (I don’t believe we really want to “own” them, I believe the objective is to form EU-like trade and security partnerships), and the focus on rare earths, it seems like the tariff plan may be part of a larger plan as it relates to China.

Lesotho is the 164^th-largest economy in the world, ranked by GDP. China is second-largest. But there may be a strategic link between the two, and it may have started with a 50% tariff on one of our smallest trading partners.

Either way – whether or not the tariff plan is about disrupting the BRI – the China piece of the puzzle is about more than just trade. At a minimum, it’s also about addressing all of China’s other misbehavior, like IP theft, espionage, other unfair trade practices, etc. It’s also about reducing dependence on China for key infrastructure manufacturing.

I believe that the trade agreements with key strategic partners will get done within the 90-day “pause.” If not, it’ll be extended. In the meantime, I believe de-escalation with China will continue, because the current situation is unsustainable. And I believe a deal will get done with China before year-end.

There are two lingering medium-term risks, and by medium-term, I mean through 2028. The first is the risk that, even though we’ll have forged new agreements with our trading partners, the nature of the rollout and the persistent comments about being “ripped off by friend and foe” will damage relationships and undermine trust. It may be that this was all part of the broader China strategy, and key trading partners were clued in behind the scenes that we’d use that tariff calculation and accuse them of “ripping us off.”

I don’t believe that’s the case; someone would have leaked. I also don’t believe the President was thinking that strategically. I believe this is just another example of his often ham-handed rhetoric. (Fed Chairman Powell would agree.)

The other risk is that the market has lost some confidence due to its perception of an erratic process of executing and communicating the strategy. As one respected business commentator put it, it’s like we’re all in a pickup truck cab, and President Trump is driving down a bumpy dirt road after dark with the headlights off. No one can tell where we’re headed, but he’s saying, “Don’t worry, I’ve got this, I know where I’m going.” But everyone is still worried.

That could result in an “uncertainty discount” in the market throughout the remainder of his term: even though the market will recover, it may not go as high as it otherwise could, because it may price in an allowance for uncertainty over what the administration might do next. Time will tell.